Hrvatska Elektroprivreda d.d.(incorporated with limited liability in the Republic of Croatia)

U.S.$500,000,000 6.00% Notes due 2017Issue price: 100%

The U.S.$500,000,000 6.00% Notes due 2017 (the ‘‘Notes’’) are issued by Hrvatska Elektroprivreda d.d. (the ‘‘Issuer’’ or ‘‘HEP’’, andtogether with its subsidiaries, the ‘‘Group’’).

Interest on the Notes is payable semi-annually in arrear on 9 May and 9 November in each year and the first payment shall be made on9 May 2013. The rate of interest payable will be subject to adjustment from time to time in the event of a Step Up Rating Change or a StepDown Rating Change (as defined in Condition 5). All payments in respect of the Notes shall be made without withholding or deduction for,or on account of, taxes imposed or levied by or on behalf of the Republic of Croatia (‘‘Croatia’’) to the extent described under ‘‘Conditions ofthe Notes—Taxation’’.

The Issuer may, at its option, redeem all, but not some only, of the Notes at any time at par plus accrued interest, in the event of certain taxchanges as described under ‘‘Conditions of the Notes—Redemption and Purchase’’. The Notes mature on 9 November 2017.

On the occurrence of a Change of Control (as defined in the Conditions), each Noteholder shall have the option to give notice requiring theIssuer to redeem or, at the Issuer’s option, purchase (or procure the purchase of) each Note held by the relevant Noteholder on the Changeof Control Put Date (as defined in the Conditions), at 101% of the principal amount of the Note together with accrued interest (if any). See‘‘Conditions of the Notes—Redemption at the Option of the Noteholders upon a Change of Control’’. In addition, upon the occurrence of anOwnership Unbundling Event (as defined in the Conditions), each Noteholder shall have the option to give notice requiring the Issuer toredeem or, at the Issuer’s option, purchase (or procure the purchase of) each Note held by the relevant Noteholder on the OwnershipUnbundling Event Put Date (as defined in the Conditions) at its principal amount together with accrued interest (if any). See ‘‘Conditions ofthe Notes—Redemption at the Option of the Noteholders upon an Owndership Unbundling Event’’.

Application has been made to the Commission de Surveillance du Secteur Financier (the ‘‘CSSF’’) in its capacity as competent authority underthe Luxembourg Act dated 10 July 2005 on prospectuses for securities (the ‘‘Prospectus Act 2005’’) to approve this document as aprospectus. The CSSF assumes no responsibility as to the economic and financial soundness of the transaction or the quality or solvency ofthe Issuer in accordance with Article 7(7) of the Prospectus Act 2005. Application has also been made to the Luxembourg Stock Exchangefor the Notes to be admitted to trading on the Luxembourg Stock Exchange’s regulated market and to be listed on the Official List of theLuxembourg Stock Exchange.

References in this Offering Circular to Notes being listed (and all related references) shall mean that such Notes have been admitted totrading on the Luxembourg Stock Exchange’s regulated market and have been admitted to the Official List of the Luxembourg StockExchange. The Luxembourg Stock Exchange’s regulated market is a regulated market for the purposes of the Markets in FinancialInstruments Directive (Directive 2004/39/EC).

The Notes are expected to be rated Ba2 by Moody’s Investors Service Ltd. (‘‘Moody’s’’) and BB– by Standard & Poor’s Credit MarketServices Europe Limited (‘‘S&P’’). Each of Moody’s and S&P is established in the European Union (the ‘‘EU’’), domiciled in the UnitedKingdom, and is included in the list of credit rating agencies registered in accordance with Regulation (EC) No. 1060/2009 on Credit RatingAgencies as amended by Regulation (EU) No. 513/2011 (the ‘‘CRA Regulation’’). This list is available on the ESMA website(http://www.esma.europa.eu/page/list-registered-and-certified-CRAs) (last updated 30 July 2012). A rating is not a recommendation to buy, sellor hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating organisation.

The Notes have not been and will not be registered under the United States Securities Act of 1933, as amended, (the ‘‘Securities Act’’) or withany securities regulatory authority of any state or other jurisdiction of the United States and may not be offered, sold or delivered within theUnited States or to, or for the account or benefit or, any U.S. persons (as such terms are defined in Regulation S) except pursuant to anexemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws.Accordingly, the Notes are being offered, sold or delivered: (a) in the United States only to qualified institutional buyers (‘‘QIBs’’) (as definedin Rule 144A (‘‘Rule 144A’’) under the Securities Act) in reliance on, and in compliance with, Rule 144A; and (b) to persons (other thanU.S. Persons) (each as defined in Regulation S) outside the United States in reliance on Regulation S (‘‘Regulation S’’) under theSecurities Act. Each purchaser of the Notes will be deemed to have made the representations described in ‘‘Subscription and Sale’’ and ishereby notified that the offer and sale of Notes to it is being made in reliance on the exemption from the registration requirements of theSecurities Act provided by Rule 144A. In addition, until 40 days after the commencement of the offering, an offer or sale of any of the Noteswithin the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of theSecurities Act if the offer or sale is made otherwise than in accordance with Rule 144A.

The Notes will be issued in registered form in minimum denominations of U.S.$200,000 and integral multiples of U.S.$1,000 in excessthereof. The Notes will initially be represented by two global certificates in registered form (the ‘‘Global Certificates’’), one of which will beissued in respect of the Notes (‘‘Rule 144A Notes’’) offered and sold in reliance on Rule 144A (the ‘‘Restricted Global Certificate’’) and willbe registered in the name of Cede & Co., as nominee for DTC and the other of which will be issued in respect of the Notes (‘‘Regulation SNotes’’) offered and sold in reliance on Regulation S (the ‘‘Unrestricted Global Certificate’’) and will be registered in the name of BTGlobenet Nominees Limited, as nominee of a common depositary for Euroclear Bank SA/NV (‘‘Euroclear’’) and Clearstream Banking,societe anonyme (‘‘Clearstream, Luxembourg’’). Interests in the Restricted Global Certificate will be subject to certain restrictions ontransfer. See ‘‘Transfer Restrictions’’. Beneficial interests in the Global Certificates will be shown on, and transfers thereof will be effectedonly through, records maintained by DTC, Euroclear and Clearstream, Luxembourg and their participants. It is expected that delivery of theGlobal Certificates will be made on 9 November 2012 or such later date as may be agreed (the ‘‘Closing Date’’) by the Issuer and theManagers (as defined under ‘‘Subscription and Sale’’). Except in limited circumstances, certificates for Notes will not be issued in exchangefor beneficial interests in the Global Certificates.

An investment in Notes involves certain risks. Prospective investors should have regard to the factors described under the heading ‘‘RiskFactors’’ on page 12.

JOINT LEAD MANAGERS AND ARRANGERS

MORGAN STANLEY UNICREDIT/ZAGREBACKA BANKACO-MANAGER

RAIFFEISEN BANK INTERNATIONAL

The date of this Offering Circular is 7 November 2012.

TABLE OF CONTENTS

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IMPORTANT INFORMATION ABOUT THIS OFFERING CIRCULAR . . . . . . . . . . . . . . . iiNOTICE TO PROSPECTIVE INVESTORS IN THE UNITED STATES . . . . . . . . . . . . . . . . iiiNOTICE TO NEW HAMPSHIRE RESIDENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iiiFORWARD LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ivAVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vSERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES . . . . . . . . . . . . . vPRESENTATION OF FINANCIAL AND OTHER INFORMATION . . . . . . . . . . . . . . . . . . . viEXCHANGE RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ixOVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117CONDITIONS OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137THE GLOBAL CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155CLEARING AND SETTLEMENT ARRANGEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160SUBSCRIPTION AND SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162TRANSFER RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168GLOSSARY OF TERMS AND DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170INDEX TO THE FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1

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IMPORTANT INFORMATION ABOUT THIS OFFERING CIRCULAR

This Offering Circular comprises a prospectus for the purposes of Article 5.3 of Directive 2003/71/EC (the‘‘Prospectus Directive’’) and for the purposes of the Luxembourg Act.

The Issuer (the ‘‘Responsible person’’) accepts responsibility for the information contained in this OfferingCircular. To the best of the knowledge of the Issuer (having taken all reasonable care to ensure that such isthe case) the information contained in this Offering Circular is in accordance with the facts and does notomit anything likely to affect the import of such information.

The Issuer, having made all reasonable enquiries, confirms that this Offering Circular contains all materialinformation with respect to the Issuer and the Notes (including all information which, according to theparticular nature of the Issuer and of the Notes, is necessary to enable investors to make an informedassessment of the assets and liabilities, financial position, profits and losses and prospects of the Issuer andof the rights attaching to the Notes), that the information contained in this Offering Circular is true andaccurate in all material respects and is not misleading, that the opinions and intentions expressed in thisOffering Circular are honestly held and that there are no other facts the omission of which would makethis Offering Circular or any such information of the expression of any such opinions or intentionsmisleading.

Neither the Managers (as described under ‘‘Subscription and Sale’’, below) nor the Trustee haveindependently verified the information contained herein. Accordingly, no representation, warranty orundertaking, express or implied, is made and no responsibility or liability is accepted by the Managers orthe Trustee as to the accuracy or completeness of the information contained in this Offering Circular orany other information provided by the Issuer in connection with the offering of the Notes. No Manager orthe Trustee accepts any liability in relation to the information contained in this Offering Circular or anyother information provided by the Issuer in connection with the offering of the Notes or their distribution.The contents of this Offering Circular are not, are not to be construed as, and should not be relied on as,legal, business or tax advice and each prospective investor should consult its own legal and other advisersfor any such advice relevant to it.

No person is or has been authorised to give any information or to make any representation not containedin or not consistent with this Offering Circular or any other information supplied in connection with theoffering of the Notes and, if given or made, such information or representation must not be relied upon ashaving been authorised by the Issuer, any of the Managers or the Trustee.

Neither this Offering Circular nor any other information supplied in connection with the offering of theNotes (a) is intended to provide the basis of any credit or other evaluation or (b) should be considered as arecommendation by the Issuer, any of the Managers or the Trustee that any recipient of this OfferingCircular or any other information supplied in connection with the offering of the Notes should purchasethe Notes. Each investor contemplating purchasing any Notes should make its own independentinvestigation of the financial condition and affairs, and its own appraisal of the creditworthiness, of theIssuer. Neither this Offering Circular nor any other information supplied in connection with the offering ofthe Notes constitutes an offer or invitation by or on behalf of the Issuer, any of the Managers or theTrustee to any person to subscribe for or to purchase any Notes.

Neither the delivery of this Offering Circular nor the offering, sale or delivery of the Notes shall in anycircumstances imply that the information contained herein concerning the Issuer is correct at any timesubsequent to the date hereof or that any other information supplied in connection with the offering of theNotes is correct as of any time subsequent to the date indicated in the document containing the same. TheManagers and the Trustee expressly do not undertake to review the financial condition or affairs of theIssuer during the life of the Notes or to advise any investor in the Notes of any information coming to theirattention.

This Offering Circular does not constitute an offer to sell or the solicitation of an offer to buy the Notes inany jurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction.The distribution of this Offering Circular and the offer or sale of Notes may be restricted by law in certainjurisdictions. The Issuer, the Managers and the Trustee do not represent that this Offering Circular may belawfully distributed, or that the Notes may be lawfully offered, in compliance with any applicableregistration or other requirements in any such jurisdiction, or pursuant to an exemption availablethereunder, or assume any responsibility for facilitating any such distribution or offering. In particular, noaction has been taken by the Issuer, the Managers or the Trustee which is intended to permit a publicoffering of the Notes or the distribution of this Offering Circular in any jurisdiction where action for that

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purpose is required. Accordingly, no Notes may be offered or sold, directly or indirectly, and neither thisOffering Circular nor any advertisement or other offering material may be distributed or published in anyjurisdiction, except under circumstances that will result in compliance with any applicable laws andregulations. Persons into whose possession this Offering Circular or any Notes may come must informthemselves about, and observe, any such restrictions on the distribution of this Offering Circular and theoffering and sale of Notes. In particular, there are restrictions on the distribution of this Offering Circularand the offer or sale of Notes in the United States, the European Economic Area (including the UnitedKingdom), Japan and the Republic of Croatia, see ‘‘Subscription and Sale’’.

IN CONNECTION WITH THE ISSUE OF THE NOTES, MORGAN STANLEY & CO. INTERNATIONALPLC AS STABILISING MANAGER (THE ‘‘STABILISING MANAGER’’) (OR PERSON(S) ACTING ONBEHALF OF THE STABILISING MANAGER) MAY OVER-ALLOT NOTES OR EFFECTTRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT ALEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NOASSURANCE THAT THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THESTABILISING MANAGER) WILL UNDERTAKE STABILISATION ACTION. ANYSTABILISATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLICDISCLOSURE OF THE TERMS OF THE OFFER OF THE NOTES IS MADE AND, IF BEGUN, MAY BEENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THEISSUE DATE OF THE NOTES AND 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THENOTES. ANY STABILISATION ACTION OR OVER-ALLOTMENT MUST BE CONDUCTED BY THESTABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER)IN ACCORDANCE WITH ALL APPLICABLE LAWS AND RULES.

The Notes have not been approved or disapproved by the United States Securities and ExchangeCommission or any other securities commission or other regulatory authority in the United States, norhave the foregoing authorities reviewed or passed upon the accuracy or adequacy of this Offering Circular.Any representation to the contrary is a criminal offence.

This Offering Circular is being submitted on a confidential basis in the United States to a limited numberof QIBs for informational use solely in connection with the consideration of the purchase of the Notes. Itmay not be copied or reproduced in whole or in part nor may it be distributed or any of its contentsdisclosed to anyone other than the prospective investors to whom it is originally submitted.

Each purchaser or holder of interests in the Notes will be deemed, by its acceptance or purchase of anysuch Notes, to have made certain representations and agreements as set out in ‘‘Subscription and Sale’’.

NOTICE TO PROSPECTIVE INVESTORS IN THE UNITED STATES

NEITHER THE U.S. SECURITIES AND EXCHANGE COMMISSION NOR ANY STATESECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES ORDETERMINED IF THIS OFFERING CIRCULAR IS TRUTHFUL OR COMPLETE. ANYREPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THE NOTES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE ANDMAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THEU.S. SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS PURSUANT TOREGISTRATION OR EXEMPTION THEREFROM. AS A PROSPECTIVE INVESTOR, YOUSHOULD BE AWARE THAT YOU MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OFTHIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. PLEASE REFER TO THESECTIONS IN THIS OFFERING CIRCULAR ENTITLED ‘‘SUBSCRIPTION AND SALE’’ AND‘‘TRANSFER RESTRICTIONS.’’

NOTICE TO NEW HAMPSHIRE RESIDENTS

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR ALICENCE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISEDSTATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY ISEFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEWHAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEWHAMPSHIRE THAT ANY DOCUMENT FILED UNDER CHAPTER 421-B IS TRUE, COMPLETEAND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTIONOR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE

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SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONSOF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY ORTRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANYPROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATIONINCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.

FORWARD LOOKING STATEMENTS

Certain statements included herein may constitute ‘‘forward looking statements’’ within the meaning ofSection 27A of the Securities Act and Section 21E of the United States Securities Exchange Act of 1934, asamended (the ‘‘Exchange Act’’); however, this Offering Circular is not entitled to the benefit of the safeharbour created thereby. This Offering Circular contains certain forward-looking statements that reflectthe Issuer’s current views with respect to future events and financial and operational performance,including but not limited to risks specific to the Issuer’s business and the implementation of strategicinitiatives, as well as other statements relating to the Issuer’s future business development and economicperformance. Forward-looking statements are all statements in this Offering Circular that do not relate tohistorical facts and events. The words ‘‘will’’, ‘‘believes’’, ‘‘assumes’’, ‘‘intends’’, ‘‘estimates’’, ‘‘expects’’,‘‘may’’, ‘‘plans’’, ‘‘seeks’’, ‘‘approximately’’, ‘‘aims’’, ‘‘projects’’, ‘‘anticipates’’ or similar expressionsregarding indications or prognoses of future developments or trends, which are not statements based onhistorical facts, constitute forward-looking information. Forward-looking statements are set forth in anumber of places in this Offering Circular, including in the sections ‘‘Business’’ and ‘‘Management’sDiscussion and Analysis of Financial Condition and Results of Operations’’. While these forward-lookingstatements represent the Issuer’s judgments and future expectations concerning the development of itsbusiness, a number of risks, uncertainties and other important factors could cause actual developments andresults to differ materially from the Issuer’s expectations. In light of these risks, uncertainties andassumptions, it is possible that the future events referred to in this Offering Circular may not occur.Because these forward-looking statements involve known and unknown risks and uncertainties, theoutcome could differ materially from those set out in the forward-looking statements as a result of:

• any continuing impact of the global financial crisis and the European sovereign debt crisis, and thereactions of investors, national and transnational regulators and financial institutions to these crises;

• any decline in the availability of financing at acceptable prices;

• any declines in property values and asset quality;

• changes in general economic and business conditions;

• changes and fluctuations in interest rates, share prices and exchange rates;

• political, governmental and regulatory changes or changes in political or social conditions;

• changes in the competitive environment and competitive pressures;

• changes in the Issuer’s credit ratings;

• changes in economic conditions in the countries in which the Issuer operates;

• the extent and nature of future developments in the lending market and in other market segments thathave been affected by the global financial crisis and the European sovereign debt crisis;

• other market and macro-economic developments, including movements in local and internationalsecurities markets, credit spreads, currency exchange rates and interest rates, whether or not arisingdirectly or indirectly from the global financial crisis or the European sovereign debt crisis;

• changes in internal risk control;

• limitations in the effectiveness of the Issuer’s internal risk management processes, of its riskmeasurement, control and modelling systems, and of financial models generally;

• developments relating to the Issuer’s access to capital and funding, including the successfulcompletion of this offering of the Notes;

• changes in the financial position or creditworthiness of the Issuer’s customers, obligors andcounterparties, and developments in the markets in which they operate;

• the Issuer’s ability to increase market share for its products and services and control expenses;

• management changes and changes to the structure of the Issuer’s business group;

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• the occurrence of operational failures, such as fraud, unauthorised trading and systems failures;

• technological developments; and

• the impact of all such future developments on positions held by the Issuer.

Additional factors that could cause the Issuer’s actual business, results of operations or financial conditionto differ from the forward-looking statements include, but are not limited to, the other factors that theIssuer has indicated in other parts of this Offering Circular could materially adversely affect its businessand financial performance. For a more complete discussion of the factors that could potentially influencethe future performance of the Issuer’s business and the markets in which it operates, the Issuer advisesinvestors to read, in particular, the sections entitled ‘‘Risk Factors’’ and ‘‘Management’s Discussion andAnalysis of Financial Condition and Results of Operations’’. The forward-looking statements included in thisOffering Circular speak only as of the date of this Offering Circular. The Issuer undertakes no obligationto publicly update or revise any forward-looking statements, whether as a result of new information, futureevents or otherwise.

AVAILABLE INFORMATION

The Issuer is not currently required to file periodic reports under Section 13 or 15 of the Exchange Actwith the U.S. Securities and Exchange Commission. To permit compliance with Rule 144A in connectionwith any resales or other transfers of Notes that are ‘‘restricted securities’’ within the meaning of theSecurities Act, the Issuer has undertaken to furnish, upon the request of a holder of such Notes or anybeneficial interest therein, to such holder or to a prospective purchaser designated by him, the informationrequired to be delivered under Rule 144A(d)(4) under the Securities Act if, at the time of the request, theIssuer is neither a reporting Company under Section 13 or 15(d) of the Exchange Act nor exempt fromreporting pursuant to Rule 12g3-2(b) thereunder.

SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES

The Issuer is a corporation organised under the laws of the Republic of Croatia. All of the officers anddirectors named herein reside in the Republic of Croatia and all or a substantial portion of the assets of theIssuer and of such officers and directors are located in the Republic of Croatia. As a result, it may not bepossible for investors to effect service of process outside the Republic of Croatia upon the Issuer or suchpersons, or to enforce judgments against them obtained in courts outside the Republic of Croatiapredicated upon civil liabilities of the Issuer or such directors and officers under laws other than Croatianlaw, including any judgment predicated upon United States federal or state securities laws.

There is doubt as to the enforceability in Croatia of original actions, or actions for the enforcement ofjudgments of English courts or U.S. courts, of civil liabilities predicated solely upon the laws of England orthe federal laws of the United States. Croatia is not a party to any multilateral or bilateral treaty by whichthe judgments of English courts or U.S. courts would be recognised and enforced, and Croatian courtshave not established ‘‘factual reciprocity’’ with the English courts or U.S. courts. Therefore, the relevantCroatian conflict statutory laws will directly apply. In general, judgments of non-Croatian courts will havethe same status and legal effect as of Croatian court judgments if they are recognised by a Croatian court.Such a decision will be recognised unless (i) the issue involved falls within the exclusive jurisdiction of aCroatian court; (ii) a Croatian court or another tribunal has rendered a final binding decision on the sameissue, or if another foreign judicial decision rendered on the same issue has been recognised in Croatia;(iii) it is contrary to the public policy of Croatia; (iv) there is no reciprocity (currently, there is a rebuttablepresumption (praesumptio juris tanto) such reciprocity exists); or (v) it is found that there were proceduralirregularities in the proceedings before the non-Croatian court which are objected to by the party againstwhom judgment was made. As a result, it may be difficult to recover against the Issuer in Croatian courtsfor actions that are solely predicated upon the laws of England or the federal laws of the United States orto enforce judgments of English courts or U.S. courts in Croatia.

The Republic of Croatia is a party to the 1958 New York Convention on the Recognition and Enforcementof Foreign Arbitral Awards (the ‘‘New York Convention’’). Consequently, a foreign arbitral award obtainedin a state which is party to the New York Convention should be recognised and enforced by a Croatiancourt in accordance with the terms of the New York Convention. The conditions of the Notes and the TrustDeed contain a provision allowing for arbitration of disputes with London, England, designated as the seatof arbitration. Since the United Kingdom is a party to the New York Convention, arbitral awards inrelation to those disputes may be enforced in the Republic of Croatia in accordance with the terms of theNew York Convention.

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Financial Statements

The Issuer maintains its financial books and records and prepares its financial statements in HRK inaccordance with International Financial Reporting Standards (‘‘IFRS’’). The audited consolidatedfinancial statements included herein for the years ended 31 December 2009, 2010 and 2011 (the ‘‘AnnualFinancial Statements’’) were audited by Deloitte d.o.o., independent auditors (‘‘Deloitte’’) in accordancewith International Standards on Auditing. The reviewed condensed consolidated interim financialstatements for the six months ended 30 June 2012 (the ‘‘Interim Financial Statements’’ and together withthe Annual Financial Statements, ‘‘Financial Statements’’) included herein were prepared in accordancewith IFRS and IAS 34 have been reviewed by Deloitte. In 2012, Deloitte were not reappointed by theIssuer to perform the annual 2012 audit or the audits thereafter due to restrictions on such appointmentfollowing the enactment on 1 January 2012 of the Public Procurement Act by the Croatian Government.

Deloitte is a member of the Croatian Chamber of Auditors and has audited the Issuer’s FinancialStatements in accordance with International Standards on Auditing, as stated in its reports appearing inthis Offering Circular.

The Group has restated the Annual Financial Statements for the years ended 31 December 2009, 2010 and2011 in order to resolve two qualifications and other inaccuracies previously included in the Group’sAnnual Financial Statements for the years ended 31 December 2009, 2010 and 2011. For moreinformation, see ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Restatement of the Annual Financial Statements.’’

Certain amounts which appear in this Offering Circular have been subject to rounding adjustments;accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figureswhich precede them.

Qualified Audit Opinion as to Purchase of Electricity Facilities

In the Group’s Annual Financial Statements for the years ended 31 December 2009, 2010 and 2011,Deloitte issued its audit opinion subject to certain qualifications regarding a payment of HRK300,000 thousand made by the Group to Hrvatske autoceste d.o.o (‘‘HAC’’) in December 2006 for thepurchase of electricity facilities situated along the Croatian motorway network.

Basis for qualified opinion

Prepayments to Hrvatske autoceste d.o.o.

As described in Note 13 ‘‘Prepayments for Property, Plant and Equipment’’ of the Annual FinancialStatements, the Group advanced HRK 300 million to Hrvatske autoceste d.o.o. in December 2006 for thepurchase of electricity facilities on the Croatian motorways within two years from the date of the advancepayment. As of the date of the Annual Financial Statements, the legal title to these facilities had not yetbeen transferred to the Group. The Group is the economic beneficiary of the electricity facilities, which ituses for their intended economic purposes in the supply of electricity to customers. As of the date ofpreparation of the Annual Financial Statements, the Group did not classify the advance payment by type ofassets used in the Group’s business, and Deloitte received from the Management Board no calculation ofthe economic impact of the reclassification of those assets from prepayments to assets in use and of therelated depreciation. As a result, Deloitte was unable to assess the impact of this matter on the Group’sAnnual Financial Statements.

Qualified opinion

Deloitte stated in their audit opinion that, except for the potential effects of the matters discussed inparagraph above, the Annual Financial statements presented fairly, in all material respects, the financialposition of the Group at 31 December 2011, 31 December 2010 and 31 December 2009, the results of itsoperations and its cash flows for the years then ended in accordance with IFRS.

In December 2011, the Group and HAC arranged for the final transfer of the facilities to the Group, withthe signing of the formal agreements anticipated to take place by the end of 2012. For more information,see ‘‘Risk Factors—The Group’s Annual Financial Statements include a qualification.’’

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Deloitte has issued a qualified review report in respect of the Group’s Interim Financial Statements as atand for the six months ended 30 June 2012. The review report contains the same qualification describedabove.

Currencies

All references in this document to ‘‘Euro’’, ‘‘EUR’’ and ‘‘E’’ refer to the currency introduced at the start ofthe third stage of European economic and monetary union pursuant to the Treaty establishing theEuropean Community, as amended, ‘‘U.S. dollars,’’ ‘‘dollars,’’ ‘‘U.S.$’’ and ‘‘$’’ refer to United Statesdollars, and to ‘‘HRK’’ and ‘‘Kuna’’ refer to the lawful currency of the Republic Croatia. In addition,references to ‘‘SDR’’ refer to Special Drawing Rights, a reserve currency created by the InternationalMonetary Fund (the ‘‘IMF’’.)

Third-Party Information

The third-party information that has been included in this Offering Circular, has been accuratelyreproduced by the Issuer and, as far as it is aware and is able to ascertain from information published bysuch third party, no facts have been omitted that would render the reproduced information inaccurate ormisleading.

Non-IFRS Measures

In this Offering Circular, certain financial data and measures are presented which are not calculated inaccordance with IFRS, such as ‘‘Adjusted EBIT,’’ ‘‘Adjusted EBITDA’’ and the related ratios. As presentedherein:

• Adjusted EBIT represents profit/(loss) for the year excluding financial expense, financial income andincome tax (expense)/income;

• Adjusted EBITDA consists of profit/(loss) for the year excluding financial expense, financial income,income tax (expense)/income depreciation and amortisation;

• Adjusted EBITDA Margin consists of profit/(loss) for the year excluding financial expense, financialincome, income tax income/(expense), depreciation and amortisation, divided by operating income,expressed as a percentage.

Adjusted EBIT, Adjusted EBITDA, and Adjusted EBITDA Margin are supplemental measures ofperformance and liquidity that are not required by or presented in accordance with IFRS. Furthermore,Adjusted EBIT, Adjusted EBITDA, and Adjusted EBITDA Margin should not be considered as analternative to profit/(loss) before tax, profit/(loss) for the year or any other performance measures derivedin accordance with IFRS or as an alternative to cash flow from operating activities, as a measure ofliquidity or as a measure of cash available to invest in the growth of a business. The Group’s use of theterm Adjusted EBITDA may vary from others’ in the same industry.

The non-IFRS measures presented in this Offering Circular may not be comparable to other similarlytitled measures of other companies and have limitations as analytical tools and should not be considered inisolation or as a substitute for analysis of operating results as reported under IFRS. These non-IFRSmeasures and ratios are not measurements of performance or liquidity under IFRS and should not beconsidered as alternatives to operating income or net profit or any other performance measures derived inaccordance with IFRS or any other generally accepted accounting principles, or as alternatives to cash flowfrom operating, investing or financing activities.

Non-IFRS measures have limitations as analytical tools and should not be considered in isolation, or as asubstitute for analysis of the results as reported under IFRS as set out in the Financial Statements andundue reliance should not be placed on any non-IFRS measures.

Some of the limitations related to non-IFRS measures are:

• they do not reflect cash expenditures or future requirements for capital expenditures or contractualcommitments;

• they do not reflect changes in, or cash requirements for, working capital needs;

• they do not reflect the interest expense or cash requirements necessary to service interest or principalpayments on debt;

• they do not reflect gains or losses in hedging or foreign exchange contracts;

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• they do not reflect any cash income taxes that may require payment;

• they are not adjusted for all non-cash income or expense items that are reflected in statements of cashflows;

• they do not reflect the impact of earnings or charges resulting from certain matters that areconsidered not to be indicative of ongoing operations;

• assets are depreciated or amortised over differing estimated useful lives and often have to be replacedin the future, and these measures do not reflect any cash requirements for such replacements; and

• other companies in the same industry may calculate these measures differently than here, limitingtheir usefulness as comparative measures.

Because of these limitations, non-IFRS measures should not be considered as measures of discretionarycash available to invest in the growth of a business or as measures of cash that will be available to meet anyobligations. It is necessary to compensate for these limitations by relying primarily on IFRS results andusing these non-IFRS measures only as supplemental means for evaluating performance. Please see‘‘Selected Financial Information,’’ ‘‘Management’s Discussion and Analysis of Financial Condition and Resultsof Operations,’’ and the Financial Statements and the notes thereto, which are contained in this OfferingCircular.

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EXCHANGE RATES

The following table sets forth, for the periods indicated, information concerning the period average andperiod-end buying rates for U.S. dollars and Euros. The rates set forth below are provided solely for yourconvenience and were not used by the Issuer in the preparation of the Issuer’s Financial Statementsincluded elsewhere in this Offering Circular. No representation is made that Kuna could have been, orcould be, converted into U.S. dollars or Euros, as applicable, at that rate or at any other rate.

Exchange Rates

Period End Average Period End Average

(HRK per U.S.$1.00) (HRK per EUR 1.00)

Year2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.99 5.36 7.33 7.342008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.16 4.94 7.32 7.222009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.09 5.28 7.31 7.342010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.57 5.50 7.39 7.292011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.82 5.34 7.53 7.43

MonthJanuary 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.77 5.85 7.56 7.55February 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.63 5.73 7.58 7.58March 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.62 5.71 7.51 7.54April 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.70 5.69 7.53 7.49May 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.07 5.87 7.56 7.53June 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.97 6.03 7.51 7.55July 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.12 6.09 7.52 7.49August 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.96 6.04 7.48 7.49September 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.76 5.79 7.45 7.43October 2012 (through 12 October 2012) . . . . . . . . . . . . . . . . 5.81 5.76 7.49 7.46

Source: Croatian National Bank—midpoint exchange rates

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OVERVIEW

This Overview must be read as an introduction to this Offering Circular and any decision to invest in theNotes should be based on a consideration of this Offering Circular as a whole. This overview is indicativeonly, does not purport to be complete and is qualified in its entirety by the more detailed informationappearing elsewhere in this Offering Circular. See in particular ‘‘Conditions of the Notes’’.

Words and expressions defined in ‘‘Conditions of the Notes’’ shall have the same meanings in this Overview.

‘‘Issuer’’ . . . . . . . . . . . . . . . . . . . . . . Hrvatska Elektroprivreda d.d. was established on 9 August 1990as a public enterprise and was converted into a joint stockcompany in 1994 under the laws of Croatia as a joint stockcompany with unlimited duration. HEP is 100% owned by theRepublic of Croatia, represented by the Ministry of Economyand is registered in the Court’s Register administered by theCommercial Court in Zagreb with identification numbers MBS:080004306 and OIB: 28921978587. As at 30 June 2012, HEP hada registered share capital of HRK 19,792,159,200. The registeredoffice is Ulica grada Vukovara 37, Zagreb, Republic of Croatiawith telephone number +385 1 6322 111.

‘‘Description of Notes’’ . . . . . . . . . . . U.S.$500,000,000 6.00% Notes due 2017 (the ‘‘Notes’’), to beissued by the Issuer on or about 9 November 2012 (the ‘‘IssueDate’’).

‘‘Currency’’ . . . . . . . . . . . . . . . . . . . U.S. dollars

‘‘Final Redemption and MaturityDate’’ . . . . . . . . . . . . . . . . . . . . . . . . Unless previously redeemed in accordance with Condition 7 of

the Conditions of the Notes, the Notes will be redeemed at theirprincipal amount on 9 November 2017, (the ‘‘Maturity Date’’).

‘‘Yield’’ . . . . . . . . . . . . . . . . . . . . . . 6.00%

‘‘Risk Factors’’ . . . . . . . . . . . . . . . . . An investment in the Notes involves risks. Such risks include,but are not limited to, the risk factors summarised below andcertain other risk factors relating to the Notes are set out in fullin ‘‘Risk Factors’’. The Issuer is or may be exposed to some or allof the risks described in the section ‘‘Risk Factors’’ in its futureoperations. Any of these risk factors, as well as additional risksof which the Issuer is not aware, could also affect the businessoperations of the Issuer.

Investors should read carefully the risks described below and inmore detail in ‘‘Risk Factors’’ and all of the informationcontained in this Offering Circular before deciding whether ornot to purchase any Notes. The order in which these risks arepresented is not intended to provide an indication of thelikelihood of their occurrence or of their severity or significance.The risk factors summarised below and certain other risk factorsrelating to the Notes are described more fully in ‘‘Risk Factors’’.

This Offering Circular also contains forward-looking statementsthat are subject to future events, risks and uncertainties. Theactual outcome could differ materially from the outcomeanticipated in these forward-looking statements as a result ofmany factors, including but not limited to the risks describedbelow and elsewhere in this Offering Circular. See ‘‘Forward-looking statements’’.

‘‘Trustee’’ . . . . . . . . . . . . . . . . . . . . . Deutsche Trustee Company Limited

‘‘Managers’’ . . . . . . . . . . . . . . . . . . . Morgan Stanley & Co. International plc

UniCredit Bank AG

Raiffeisen Bank International AG

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‘‘Principal Paying Agent and TransferAgent’’ . . . . . . . . . . . . . . . . . . . . . . . Deutsche Bank AG, London Branch

‘‘Registrars, Paying Agents andTransfer Agents’’ . . . . . . . . . . . . . . . In respect of the Rule 144A Notes:

Deutsche Bank Trust Company Americas

In respect of the Regulation S Notes:Deutsche Bank Luxembourg S.A.

‘‘Interest’’ . . . . . . . . . . . . . . . . . . . . Subject to any interest rate adjustment, the Notes will bearinterest from and including the Issue Date at the rate of 6.00%per annum, payable semi-annually in arrear on 9 May and9 November in each year. The first payment (for the period fromand including the Issue Date to but excluding 9 May 2013 andamounting to U.S.$30 per U.S.$1,000 principal amount ofNotes) shall be made on 9 May 2013.

‘‘Interest Rate adjustment based onRatings Events’’ . . . . . . . . . . . . . . . . The rate of interest payable on the Notes will be subject to

adjustment from time to time in the event of a Step Up RatingChange or a Step Down Rating Change (as defined inCondition 5 of the Conditions of the Notes).

‘‘Redemption for TaxationReasons’’ . . . . . . . . . . . . . . . . . . . . . The Notes may be redeemed at the option of the Issuer in

whole, but not in part, at any time (subject to certainconditions), at their principal amount (together with interestaccrued to the date fixed for redemption) if, as a result of anychange in, or amendment to, the laws or regulations of aRelevant Jurisdiction (as defined in Condition 8), or any changein the application or official interpretation of the laws orregulations of a Relevant Jurisdiction, which change oramendment becomes effective after 9 November 2012, on thenext Interest Payment Date the Issuer would be required to payadditional amounts as provided or referred to in Condition 8and the requirement cannot be avoided by the Issuer takingreasonable measures available to it.

‘‘Redemption at the option of theNoteholders upon a Change ofControl’’ . . . . . . . . . . . . . . . . . . . . . If at any time a Change of Control occurs, each Noteholder shall

have the option to give notice requiring the Issuer to redeem or,at the option of the Issuer, purchase (or procure the purchaseof) that Noteholder’s Note(s) at 101% of the principal amountof the Note(s) together with interest (if any) accrued to (butexcluding) the Change of Control Put Date.

‘‘Redemption at the Option of theNoteholders upon an OwnershipUnbundling Event’’ . . . . . . . . . . . . . . If at any time an Ownership Unbundling Event (as defined in

the Conditions) occurs, each Noteholder shall have the option togive notice requiring the Issuer to redeem or, at the option ofthe Issuer, purchase (or procure the purchase of) thatNoteholder’s Note(s) at the principal amount of the Note(s)together with interest (if any) accrued to (but excluding) theOwnership Unbundling Event Put Date.

‘‘Events of Default’’ . . . . . . . . . . . . . Events of Default under the Notes include non-payment ofprincipal or premium for 7 days, non-payment of interest for14 days, breach of other obligations under the Notes or the TrustDeed (which breach is not remedied within 30 days), crossdefault and certain events related to insolvency or winding up ofthe Issuer or any Material Subsidiary.

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‘‘Covenants’’ . . . . . . . . . . . . . . . . . . . See Condition 4 of the Conditions of the Notes.

‘‘Status of the Notes’’ . . . . . . . . . . . . The Notes will constitute direct, general, unsubordinated,unconditional and (subject to the provisions of Condition 4 ofthe Conditions of the Notes) unsecured obligations of the Issuerand will rank pari passu among themselves and at least pari passuin right of payment (save for certain obligations required to bepreferred by law) equally with all other unsecured andunsubordinated obligations of the Issuer, present and future,but, in the event of insolvency, only to the extent permitted byapplicable laws relating to creditors’ rights.

‘‘Meetings of Noteholders’’ . . . . . . . . The Conditions of the Notes contain provisions for callingmeetings of Noteholders to consider matters affecting theirinterests generally. These provisions permit defined majoritiesto bind all Noteholders, including Noteholders who did notattend and vote at the relevant meeting and Noteholders whovoted in a manner contrary to the majority.

‘‘Modification and Waiver’’ . . . . . . . . The Trustee may agree, without the consent of Noteholders, toany modification of (subject to certain exceptions), or to thewaiver or authorisation of any breach or proposed breach of, anyof the provisions of Notes in the circumstances and subject tothe conditions described in Condition 14 of the Conditions ofthe Notes.

‘‘Withholding Tax and AdditionalAmounts’’ . . . . . . . . . . . . . . . . . . . . . All payments of principal and interest in respect of the Notes

made by or on behalf of the Issuer shall be made free and clearof, and without withholding or deduction for or on account of,any taxes, duties, assessments or governmental charges ofwhatsoever nature imposed, levied, collected, withheld orassessed by or within the Republic of Croatia, or any politicalsubdivision or any authority thereof or therein having power totax, unless such withholding or deduction is required by law. Inthat event, the Issuer shall pay such additional amounts as willresult in the receipt by the Noteholders of such amounts aswould have been received by them if no such withholding ordeduction had been required, except that no such additionalamounts shall be payable in the circumstances described underCondition 8 of the Conditions of the Notes.

‘‘Listing, approval and admission totrading’’ . . . . . . . . . . . . . . . . . . . . . . Application has been made to the CSSF to approve this

document as a prospectus and to the Luxembourg StockExchange for the listing of the Notes on the Official List of theLuxembourg Stock Exchange and admission to trading on theLuxembourg Stock Exchange’s regulated market. The Notes areexpected to be listed on or around 9 November 2012.

‘‘Governing Law’’ . . . . . . . . . . . . . . . The Notes, and any non-contractual obligations arising out of orin connection therewith, will be governed by, and construed inaccordance with, English law. See Condition 18 of theConditions of the Notes.

‘‘Form, Transfer and Denominations’’ The Notes will be issued in registered form in minimumdenominations of U.S.$200,000 and integral multiples ofU.S.$1,000 in excess thereof. The Notes will initially berepresented by two global certificates in registered form, one ofwhich will be issued in respect of the Notes offered and sold inreliance on Rule 144A, the Restricted Global Certificate, andthe other of which will be issued in respect of the Notes offeredand sold in reliance on Regulation S, the Unrestricted Global

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Certificate. The Unrestricted Global Certificate will be inregistered form, without interest coupons attached, will bedelivered to a common depositary for, and registered in thename of BT Globenet Nominees Limited as common nomineeof, Euroclear and Clearstream, Luxembourg. The RestrictedGlobal Certificate will be in registered form, without interestcoupons attached, will be deposited with a custodian for, andregistered in the name of Cede & Co. as nominee for, DTC.Except in limited circumstances, certificates for Notes will notbe issued in exchange for beneficial interests in the GlobalCertificates. See Condition 2 of the Conditions of the Notes.

Interests in the Rule 144A Notes will be subject to certainrestrictions on transfer. See ‘‘The Global Certificates’’ and‘‘Transfer Restrictions’’. Interests in the Global Certificates will beshown on, and transfers thereof will be effected only through,records maintained by Euroclear and Clearstream, Luxembourg,in the case of the Regulation S Notes, and by DTC and its directand indirect participants, in the case of Rule 144A Notes.

‘‘Credit Ratings’’ . . . . . . . . . . . . . . . The Notes are expected to be assigned on issue a rating of Ba2by Moody’s and BB– by S&P. Each of Moody’s and S&P isestablished in the EU and is registered under the CRARegulation. A credit rating is not a recommendation to buy, sellor hold securities and may be subject to suspension, reduction orwithdrawal at any time by the assigning rating agency. Neitherthe assigning rating agency nor the Issuer is obliged to providethe holders of the Notes with any notice of any suspension,change or withdrawal of any rating.

S&P is established in the EU, domiciled in the United Kingdomand is included in the list of credit rating agencies registered inaccordance with Regulation (EC) No. 1060/2009. Moody’s isestablished in the EU, domiciled in the United Kingdom and isincluded in the list of credit rating agencies registered inaccordance with Regulation (EC) No. 1060/2009. This list isavailable on the ESMA website (http://www.esma.europa.eu/page/list-registered-and-certified-CRAs) (last updated 30 July2012).

‘‘Selling Restrictions’’ . . . . . . . . . . . . The Notes have not been nor will be registered under theSecurities Act or any state securities laws and may not be offeredor sold within the United States or to, or for the account orbenefit of, any U.S. person (as defined in Regulation S under theSecurities Act), except to qualified institutional buyers inreliance on the exemption from the registration requirements ofthe Securities Act provided by Rule 144A or otherwise pursuantto an exemption from, or in a transaction not subject to, theregistration requirements of the Securities Act. The Notes maybe sold in other jurisdictions (including Croatia and MemberStates of the European Economic Area) only in compliance withapplicable laws and regulations. See ‘‘Subscription and Sale’’below.

‘‘Use of Proceeds’’ . . . . . . . . . . . . . . The net proceeds of the issue of the Notes will be applied by theIssuer to repay or prepay up to A260,000 thousand(approximately HRK 1,947,400 thousand) of existing debt. HEPintends to use the balance of such proceeds, together with fundsfrom other sources, to finance capital expenditures and for othergeneral corporate purposes.

‘‘Regulation S Security Codes’’ . . . . . • ISIN: XS0853036860• Common Code: 085303686

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‘‘Rule 144A Security Codes’’ . . . . . . . • ISIN: US443293AA30• Common Code: 085325086• CUSIP: 443293AA3

Operating and Other Information

Operating Overview

The Group is the leading power generation, transmission, distribution and supply company in Croatia. TheGroup is 100% owned by the Republic of Croatia and is a vertically integrated power utility company,operating across the entire electricity market spectrum from generation to end consumer distributionorganisation. As part of its operations, the Group is also engaged in thermal energy (heat) generation andgas distribution in Croatia, as well as in electricity trading. The Group operates under the trading name‘‘HEP’’.

According to Management’s estimates, the Group accounted for approximately 82% of electricitygenerated, approximately 95% of installed electricity generation capacity, 100% of electricity distribution(in terms of the number of connection points) and approximately 99% of all electricity sold in Croatia inthe year ended 31 December 2011.

In order to comply with EU regulation, the Group has implemented legal, financial, accounting andmanagerial barriers between its subsidiaries engaging in regulated activities, such as transmission anddistribution, and those engaging in other activities, such as generation and supply. Each subsidiary of theGroup is tasked with specific roles within the various energy segments of the market. The Group comprises14 wholly owned subsidiaries and two jointly controlled power plants. The power plants are the Krskonuclear plant, located in the Republic of Slovenia and co-owned with Gen Energija (‘‘GenE’’), and thePlomin II thermal power plant, located in Croatia and co-owned with RWE Energie Aktiengesellschaft(‘‘RWE’’). In addition, HEP also jointly owns, together with Plinacro d.o.o., LNG Hrvatska d.o.o. (‘‘LNGHrvatska’’), which joint venture was formed for the purpose of taking an 11% share in the Adria LNGconsortium, part of a total 25% holding in the Adria LNG consortium that was reserved for Croatiancompanies. The Adria LNG Consortium was set up to build a liquefied natural gas (‘‘LNG’’) regasificationterminal in Omisalj on the island of Krk, Croatia.

Electricity, thermal energy and gas consumption is seasonal and is mainly affected by weather conditions.In Europe, electricity consumption is generally higher during the autumn and winter months, and theGroup generally experiences higher demand during the colder months of October through March andlower demand during the warmer months of April through September.

Financial Overview

In the years ended 31 December 2009, 2010 and 2011 and the six months ended 30 June 2012, the Grouphad a total operating income of HRK 12,629,780 thousand, HRK 13,056,899 thousand,HRK 13,087,029 thousand and HRK 6,639,840 thousand, respectively and profit for the year ofHRK 145,328 thousand, HRK 1,574,651 thousand and HRK 7,077 thousand and total loss ofHRK 320,004 thousand, respectively.

As at 31 December 2011 and 30 June 2012, the Group had total assets of HRK 33,746,370 thousandand HRK 33,577,643 thousand, respectively. As at 31 December 2011 and 30 June 2012, the Group hadapproximately 13,762 employees and 13,641 employees, respectively.

Principal Activities

The Group’s principal activities are the generation, transmission, distribution and supply of electricity.

Generation

The Group owns and operates a portfolio of power generation assets with an aggregate installed capacityof 4,153 MW as at 31 December 2011. The Group’s electricity and thermal energy generation operationsare carried out by HEP-Proizvodnja d.o.o. (‘‘HEP-Generation’’), a wholly owned subsidiary of the Groupestablished on 23 June 2002, which is responsible for the generation of electricity and thermal (heat)energy.

The Group benefits from a diversified generation mix, which includes 26 hydro power plants with anaggregate total installed capacity of 2,133 MW and the Krsko nuclear plant which generates 696 MW ofinstalled capacity (of which 348 MW is allocated to the Group). The Group also operates eight thermalpower plants with total installed capacity of 1,672MW, of which 484 MW is natural gas, 891 MW is oil and

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297 MW is coal. The Group uses its oil-fired thermal power plants primarily to meet high electricitydemand or during adverse weather conditions, such as prolonged dry periods, during which the Group’shydro power plants are not operating at full capacity.

The following chart shows the Group’s electricity generation mix for the year ended 31 December 2011:

For 6 monthsFor the year ended Juneended 2011 2012

GWh % GWh %

Electricity Generation:Hydro power plants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,577 36.1 1,820 34.5Nuclear power plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,951 23.3 1,128 21.4Thermal power plants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,147 40.6 2,331 44.1

Total: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,675 100 5,279 100

Transmission

The Group’s transmission operations transfer electricity produced by Croatian power plants or importedfrom other countries to its Croatian customers and transfers Croatian-produced electricity for exportpurposes and non-HEP generated electricity to Non-Tariff Customers for other Market Suppliers. As of30 June 2012, the Group owned and operated 7,437 kilometres of 400/220/110 kV lines and 129accompanying sub-stations across Croatia. The Group’s transmission operations are principally carried outby HEP-Operator prijenosnog sustava d.o.o. (‘‘HEP-OPS’’), a wholly owned subsidiary of the Groupestablished on 23 March 2005* which manages the Croatian power system and is responsible for thenetwork’s maintenance and development.

Distribution

The Group’s distribution operations transfer electricity on its distribution network from sub-stations to endconsumers. The Group’s electricity distribution operations are run by HEP-Operator distribucijskogsustava d.o.o. (‘‘HEP-ODS’’), a wholly owned subsidiary of the Group established on 23 June 2002.HEP-ODS is also responsible for providing the Group’s public supply services to Tariff Customers,including Commercial Customers without a Market Supplier paying the Balancing Energy Tariff. See ‘‘KeyCustomers’’ below for further details.

In the year ended 31 December 2011, the Group distributed a total of approximately 15,585 GWh ofelectricity to end-consumers in Croatia and according to Management’s estimates, as of 31 December2011, the Group had a market share of 100% for the distribution of electricity to end-consumers inCroatia.

Supply

The Group supplies Non-Tariff Customers, all of whom are Commercial Customers, with electricitythrough its principal supply subsidiary, HEP Opskrba d.o.o. (‘‘HEP-Supply’’), a wholly owned subsidiary ofthe Group established on 27 February 2003.

Other Activities

The Group also has a trading platform in electricity, thermal and gas operations and other ancillarybusinesses related to energy services.

Trading

The Group’s trading platform, HEP-Trgovina d.o.o. (‘‘HEP Trade’’), a wholly owned subsidiary of theGroup established on 7 February 2007, buys and sells electricity and is responsible for the optimisation ofthe Group’s power plant operation and intermediation in the domestic and international markets. Itoperates only in the wholesale electricity market in Croatia and abroad, through its subsidiaries located inHungary and Slovenia, and does not engage in speculative trading for profit or otherwise.

* HEP-OPS merged with HEP Prijenos d.o.o.

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Thermal Energy (heat)

In addition to electricity, the Group is actively engaged in thermal energy generation, distribution andsupply through its subsidiary HEP-Toplinarstvo d.o.o. (‘‘HEP-Top’’), a wholly owned subsidiary of theGroup established on 8 June 2001. The Group has a total installed capacity of 1,951 MWheat. Thermalenergy is primarily generated as a by-product of electricity generation at the Group’s thermal power plantsand distributed to the cities of Zagreb, Osijek, Sisak, Zapresic, Velika Gorica and Samobor. According toManagement’s estimates, as of 31 December 2011, the Group distributes thermal energy to more than122,000 customers covering approximately 82% of the district heating market in Croatia, making theGroup the largest of 17 distributors of thermal energy in the country. In the year ended 31 December 2011,the Group distributed a total of approximately 2,311 GWh* of thermal energy to end consumers inCroatia.

For 6 monthsFor the year ended Juneended 2011 2012

GWh % GWh %

Thermal Energy Generation:Thermal Power Plants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,457 91.6 1,356 91.4District Boiler Stations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 8.4 128 8.6

Total: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,681 100 1,484 100

Gas

The Group is also engaged in gas distribution and supply through its subsidiary HEP-Plin d.o.o.(‘‘HEP-Plin’’), a wholly owned subsidiary of the Group established on 20 June 2001. In the year ended31 December 2011, the Group distributed a total of approximately 149.7 million m3 of gas to endconsumers in Croatia and according to Management’s estimates, as of 31 December 2011, the Group had amarket share of approximately 12.3% for the distribution of gas.

Other

The Group’s other businesses involve the preparation, construction and use of renewable energy sources(including wind, biofuel, small hydro and geothermal water), energy efficiency projects, environmentalprotection, tourism and hospitality services, infrastructure and entrepreneurial projects and training andeducation services. The revenues of these other companies account for less than 0.5% of the Group’s totalrevenues.

Unbundling of the Group’s operations

According to the energy laws that came into force on 1 January 2002, regulated energy activities(transmission and distribution) must be separate and independent from competitive market electricitybusinesses such as supply and production (‘‘unbundling’’). In accordance with such law, HEP restructuredits operations, forming separate companies for electricity generation, transmission, distribution, powersupply management, and electricity market management, all of which became operational on 1 July 2002.Subsequently, HEP has also set up companies for the trade of electricity, generation, distribution andsupply of thermal power and gas, as well as for the construction and use of renewable resources and energyefficiency projects. The Group also set up companies responsible for tourism and hospitality services,infrastructure and entrepreneurial projects and training and education. Further restructuring will benecessary due to the Accession and in order to comply with the Third Energy Package. For moreinformation, see ‘‘Regulation—Third Energy Package’’ and ‘‘Risk Factors—The Group may be subject tofurther restructuring due to compliance with EU energy regulation.’’

Tariff System and Classification of Customers

The energy sector has been fully liberalised since 2008. Nevertheless, certain activities, includingtransmission, distribution and public supply of electricity and the distribution of thermal energy and gas,are regulated activities. Such regulated activities are subject to fixed tariff rates which are set by theCroatian Government, or, with respect to thermal energy, by local municipalities, in each case onrecommendations provided by The Croatian Regulatory Agency for Energy (‘‘HERA’’). The Group’scustomers in Croatia can be split between ‘‘Commercial Customers’’, which includes commercial and

* The quantity of thermal energy generated is different to the quantity distributed to end consumers as a result of networklosses. Losses totalled 370 GWh for the year ended 31 December 2011.

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industrial entities and ‘‘Households’’, which are residential customers. As part of its Accession process, theCroatian Government has adopted EU regulations for the energy market which allow, pursuant to theElectricity Market Act, all electricity customers to choose a ‘‘Market Supplier’’ which offers non-tariffbased rates, rather than remaining with the public supply system (see ‘‘Regulation—Accession of theRepublic of Croatia to the EU’’ for further details). Commercial Customers who choose a Market Suppliertypically pay lower rates than the tariffed rates under the regulated public supply system, but they may bemore exposed to price fluctuations in market rates. In the event that a Commercial Customer fails tochoose a Market Supplier or its contract with a Market Supplier is terminated, such Commercial Customerwill be supplied by the public supply system where it is charged an energy balancing tariff which is based onelectricity consumption at prevailing tariff rates as set by the Croatian Government, on therecommendation of HERA, and which tariff is subject to a 20% increase if, after 30 days, the relevantCommercial Customer has failed to choose a Market Supplier (the ‘‘Balancing Energy Tariff’’).Households are not currently similarly incentivised to choose an alternative supply company and inpractice virtually all Households have opted to remain with and are supplied through the public supplysystem provided by HEP at the fixed tariffed rates. Only a negligible number of Households (less than0.01%) have changed their supplier to a Market Supplier. Customers who are supplied through the publicsupply system are referred to as ‘‘Tariff Customers’’ and customers who are supplied by Market Suppliers(including HEP-Supply (as defined below)) are referred to as ‘‘Non-Tariff Customers’’.

Strengths and Strategy

The Group’s key strengths

The Group has a number of key competitive strengths, which it believes benefit its current market positionand provide an opportunity for future growth.

Vertically integrated power utility with economies of scale

The Group is a vertically integrated power utility company, operating across the entire electricity marketspectrum from generation to end-user distribution. HEP, the parent company, is responsible for thecorporate management of the Group and can best allocate resources and make decisions to benefit theoverall profitability of the Group, in particular with respect to capital expenditure and investments. As aresult the Group is able to take advantage of a range of economies of scale, such as cost savings associatedwith purchasing of goods and services, and technology, taking advantage of returns to scale in theproduction function and cost savings associated with marketing, including advertising.

Dominant position in Croatian energy market benefitting from state ownership and support

The Group currently has a dominant position in the Croatian electricity market. In the past, entry into theCroatian energy sector by competitors has been relatively minimal, due to significant barriers to entry, suchas regulatory restriction and a tariff system that was not fully reflective of operating and generation costs,which impacted profit margins. Despite the liberalisation of the Croatian energy market in 2008 and thesubsequent entry of competitors into such market, the Group has not seen any significant loss of marketshare or an increase in competition, largely as a result of the tariff system and the significant costsassociated with entering a highly regulated sector.

In addition, as a state-owned organisation, the Group benefits from enhanced creditworthiness, includingaccess to state guarantees. Management believes that these factors can give the Group access to cheaperand more available credit, including government guarantees on new projects, which it is able to utilise toactively grow the Group’s operations and develop its core business lines. Furthermore, the CroatianGovernment has highlighted the energy sector as one of its strategic priorities by passing the EnergyDevelopment Strategy. The Energy Development Strategy is focused on the development and renovationof the generation, transmission and distribution grids, with significant investment capital allocated to theseprogrammes. As a result, Management believes that the Croatian Government intends to reinvest theprofits made by the Group back into the business to fund future growth and other strategic developmentand renovation programmes. Management believes that such growth and development capabilities willfurther benefit the Group and strengthen its dominant position in the Croatian energy market.

Stable and predictable revenue stream

The Croatian Government sets the tariff rates for electricity based on approved operational costs plusapproved capital rate of return (see ‘‘Regulation’’ section for further details) and current generation,transmission and distribution costs. As part of the tariff rate setting process, the Croatian Government,

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due to social and political reasons, aims to create a stable rate of return for the Group. As of 31 December2011, approximately 1,492 GWh, or 9.7%, of the Group’s electricity sold to end consumers was sold underthe public system to commercial and industry sector Tariff Customers. Virtually all Households in Croatiaare supplied by the Group and all Market Suppliers must use the Group’s transmission and distributionnetworks. Together, the revenues derived from such operations account for more than 70% of the Group’srevenues from sales of electricity. As a result, the Group has a stable and highly predictable revenuestream, as demonstrated by the steady revenues generated by the Group since 2009.

In the years ended 31 December 2009, 2010 and 2011 and the six months ended 30 June 2012, the Grouprecorded total revenues from electricity sales of HRK 10,798,272 thousand, HRK 10,851,054 thousand,HRK 10,769,900 thousand and HRK 5,539,533 thousand, respectively.

Favourable and diversified power generation mix with access to low-cost generation facilities

The Group is not solely reliant on any one form of electricity generation and therefore can ensure securityof supply while minimising its impact on the environment and keeping the cost of generation as low aspossible. The Group currently has 26 hydro power plants, eight thermal power plants and one nuclearpower plant. The Group’s hydro power plants and nuclear power plant provide low-cost electricitygeneration. The Group uses its oil-fired thermal power plants primarily to meet high electricity demand orduring adverse weather conditions, such as prolonged dry periods, during which the Group’s hydro powerplants are not operating at full capacity.

The Group is also not reliant on any one fuel type with respect to its thermal power plants, operating acombination of oil, coal, natural gas and fuel oil-fired thermal power plants.

As a result of its diversified generation and fuel mixes, the Group also has reduced exposure to commodityprices and as a result can minimise costs, reduce price volatility and prevent supply disruptions.

The Group’s ability to rely on hydro and nuclear power plants for electricity generation will be particularlyimportant starting in 2013 when the Group will be required to start purchasing quotas for greenhouse gasemissions produced its thermal power plants.

Strong commitment to social policies

The Group maintains a social policy that Management believes fosters positive relations with the Group’semployees, trade unions and the communities in which the Group operates. In 2011, the Group launched acompetition for registered associations, clubs and Croatian institutions to propose community projectsunder the categories of youth, art and cultural heritage, humanitarian action or the environment, thewinners of which would see their projects implemented with partial financing from the Group. Furtherexamples of the Group’s social projects include sponsoring eco-schools in Croatia, national mathematicsand physics contests and students attending vocational electrical schools. The Group believes that suchprojects increase its presence and brand-recognition in the community and help it to remain connected toits market, employees and customers.

Strategy

The Group’s overarching goal is to improve profitability and increase generation capacity in Croatia in themedium term, primarily in order to achieve self-sufficiency without a need for power imports. The Groupintends to achieve these goals through the following key strategies:

Construct new generation facilities and expand generation capacity of its existing assets

The Group intends to invest approximately HRK 4,236,700 thousand during the next five years in theconstruction of an additional four hydro power plants (at Ombla, Dubrovnik II, Senj and Kosinj), onethermal power plant (Plomin III) and one hydroelectric project on the Sava river to increase generationcapacity by up to 1,527 MW. In addition, construction is already underway for a natural gas combined-cyclecogenerating unit at Sisak thermal power plant, which is due to become operational in early 2014. It isexpected that the Sisak unit will increase the Group’s installed generation capacity by 250 MWel and 50MWheat. A number of further generation projects are also being considered. In addition, the Group intendsto invest approximately HRK 4,055,000 thousand over the next five years in a number of other projects toincrease the generation capacity and efficiency of its current facilities, including its existing hydro powerplants at Zakucac, Dubrovnik, Varazdin, Senj, Rijeka, Gojak, Orlovac and on the Krka river. The Groupaims to significantly increase its generation capacity across its diverse range of generation facilities,primarily to ensure security of supply and to enable the Group to generate sufficient excess electricity to be

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able to increase its cross-border sales to Serbia, Hungary, Slovenia and Bosnia and Herzegovina, therebyincreasing its profitability.

Improve and expand its distribution and transmission network

The Group will continue investing in the modernisation and expansion projects related to its transmissionnetwork. The Group intends to invest approximately HRK 2,575,900 thousand during the next five years inorder to further reduce network losses, ensure reliable and safe operation of its new and upgraded plantsand facilities as well as to ensure adequate levels of availability of interconnector capacity to access othermarkets. The Group also intends to modernise and expand its distribution network by investingapproximately HRK 5,352,400 thousand during the next five years in order to further reduce networklosses, meet the country’s growing need for electricity and connect new customers, in particular in themajor cities, tourist and industrial areas. The Group believes such projects will not only serve to enhancethe security and stability of the energy sector within Croatia but, together with the Group’s generationplans, will also stimulate the local economy during their construction.

Improve operating efficiencies and cost structure

The Group has implemented, and will continue to implement, measures to improve its corporate andoperating procedures and increase efficiency, in order to reduce maintenance and overhead costscompared to those costs currently budgeted. As part of the Group’s ongoing restructuring plans, it plans tosignificantly reduce the existing workforce, by approximately 3,500 employees (a 25.4% reduction based onemployee numbers as at 31 December 2011) over the next five years with a particular focus on reducing thenumbers of employees working in the distribution business, where the Group believes efficiency can beimproved and savings made with a restructuring of the workforce. At the same time, it plans to increase theoverall proportion of technical personnel employed by the Group by approximately 500 new engineers.

Management believes such restructuring will make the Group more efficient as well as reduce operatingcosts. The Group also plans to centralise certain functions, such as public procurement and purchasing (inparticular with regard to strategically important materials) and further decrease the scope of externalservices by better interior organisation, streamline and standardise its operations in order to achievewholesale cost savings, further improve staff training and education, outsource certain non-key operations,improve the IT network and introduce smart meters, all with a view to optimising cost and operationalsynergies across the Group’s businesses. Furthermore, the Group intends to improve operational efficiencywithin its heating and gas businesses and modernise and expand its existing generation and distributionoperations with a view to attain consistent profitability in these areas.

Improve customer service experience and introduce new services

Management believes that the Group’s continued success in maintaining its dominant place in the market,particularly following Croatia’s Accession, and further opening up of the energy market will be in partdependent on its ability to appeal to its customers. The Group intends to actively engage with its customer,put customer relations to the forefront of its operations and focus on bringing new products to theCroatian market including promoting the ‘‘energy service company model’’ (‘‘ESCM’’) under which itwould invest in and offer its customers energy efficient products to reduce energy consumption and CO2

emissions and renewable energy products such as solar collectors, cogeneration or biomass boilers. Inparticular the Group intends to streamline its billing process so that customers receive combined bills,introduce electronic billing and online payment options and develop and consolidate its existing callcentres into one centralised call centre to operate on a 24/7 basis. In addition, the Group plans to expandits sales into the Slovenian market, aiming to conclude its first contracts by the end of 2012.

Expand use of renewable energy sources

The Group is committed to expanding its use of renewable energy sources and is planning to build powerplants that generate electricity and thermal power from renewable energy sources. These new plants willinclude small hydro power plants (up to 10 MW), wind farms, biomass fuelled power plants andphotovoltaic and solar power collecting plants. The Group also plans to build photovoltaic and solar/thermal power collection systems at all of its existing plants and facilities in order to expand its generationcapacity. The Group believes that such expansion plans will further diversify the Group’s generation mix,thereby reducing the Group’s greenhouse gas emissions, and lower the Group’s dependency on fuelthereby reducing the impact of fuel price volatility, all of which will reduce operating expenses, and allowthe Group to increase profitability. Finally, the Group has started green certificate trading and willcommence trading in CO2 emissions allowances as additional sources of revenues.

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Recent Events

New Energy Act

The new Energy Act was adopted by the Croatian Parliament on 19 October 2012. The new Energy Acttransferred the control over the adoption of the tariff rates from the Croatian Government and localmunicipalities to HERA. Management believes that the new Energy Act will simplify the applicationprocess for rate increase. For additional information, see ‘‘Regulation—Republic of Croatia—New EnergyAct’’.

Thermal Energy Tariff Increase

HEP-Top has sent a request for thermal power tariff rate increases to local Croatian municipalities locatedin Zagreb, Osijek, Sisak, Velika Gorica, Samobor and Zapresic. The Group expects responses during thefourth quarter of 2012.

Post Fukushima Stress Tests Results

On 4 October 2012, the European Commission published a report following its completion of stress testsof Europe’s nuclear power plants. The report is based on the conclusions of peer reviews of nuclear powerplants, which were produced in April 2012 by the European Nuclear Safety Regulators Group (ENSREG).

Each power plant was assessed on the basis of 11 measures recognised as being useful and necessary tomitigate the effects of extreme natural and other disasters in the vicinity of a nuclear power plants.According to the European Commission’s report, the Krsko nuclear plant is the only power plant to havealready implemented, or be shortly implementing, all 11 measures.

Ratings

On 21 September 2012, Moody’s downgraded HEP from Ba1 with a negative outlook to Ba2 with anegative outlook. According to Moody’s, the downgrade reflects additional pressure on HEP’s liquidityarising from the high proportion of short-term debt in its total debt portfolio, the challenging maturityprofile of its long-term debt portfolio and its need for significant new financing to cover its sizeableinvestment programme.

On 3 October 2012, S&P downgraded HEP from BB with a developing outlook to BB- on credit watchwith negative implications. According to S&P, the downgrade reflects HEP’s inherent earnings volatility inthe context of unpredictable, politically determined, regulated tariffs, the Group’s ambitious investmentprogramme and the deterioration of HEP’s business prospects given poor hydrological conditions, risingcommodity prices and increased electricity imports which have resulted in aggressive use of short-termcredit lines and a deferral of investments.

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RISK FACTORS

The Issuer believes that the following factors may affect its ability to fulfil its obligations under the Notes. All ofthese factors are contingencies which may or may not occur and the Issuer is not in a position to express a viewon the likelihood of any such contingency occurring.

In addition, factors which the Issuer believes are material for the purpose of assessing the market risksassociated with the Notes are described below.

The Issuer believes that the factors described below represent the principal risks inherent in investing in theNotes, but the inability of the Issuer to pay interest, principal or other amounts on or in connection with theNotes may occur for other reasons which may not be considered significant risks by the Issuer based oninformation currently available to it or which it may not currently be able to anticipate. Prospective investorsshould also read the detailed information set out elsewhere in this Offering Circular and reach their own viewsprior to making any investment decision.

Risks Related to the Group’s Business

The Group has substantial debt and financing obligations, including long-term debt facilities that contain variousrestrictive covenants, some of which have been recently breached, but subsequently waived by the respective lenders,which could impair its ability to service its debt and fund its capital expenditures.

The Group has substantial current and non-current liabilities amounting to HRK 14,497,847 thousand asof 30 June 2012. The Group may not have sufficient cash flow from its operating activities to service itsdebt and meet other payment obligations or to fund its planned capital expenditures without the need foradditional external financing. The Group’s substantial debt and other financial obligations could limit itsflexibility in planning for, or reacting to, changes in its business or industry, which could have a materialadverse effect on the Group’s business, results of operations and financial condition.

The agreements that govern the Group’s long term debt contain certain restrictive covenants, including‘‘negative pledge’’ clauses, ‘‘material change’’ clauses and covenants requiring the maintenance ofparticular financial ratios. In certain instances, these covenants restrict the Group’s ability to acquire ordispose of assets or incur new debt. The Group’s failure to comply with any of these covenants couldconstitute an event of default, which could result in the immediate or accelerated repayment of its debt,lead to cross default under its other credit agreements or limit or reduce its ability to implement andexecute its key strategies.

In 2012, the Group was not in compliance with EBITDA—related financial and debt service covenantsunder the following loan agreements: Bayerische Landesbank (in respect of a loan for A30,000 thousandunder which the Group has agreed two tranches for A15,000 thousand and A12,000 thousand, of whichA8,438 thousand and A6,750 thousand, respectively, is still outstanding); Club deal (in respect of a loan forA125,000 thousand, of which A69,400 thousand is still outstanding), Deutsche Bank (in respect of a loan forA100,000 thousand, of which A64,706 thousand is still outstanding), EBRD (in respect of a loan forA123,200 thousand, of which no amounts have been drawn), Societe Generale—Splitska banka (in respectof a loan for A3,000 thousand, of which A1,588 thousand is still outstanding) and Societe Generale—Splitska banka (in respect of a loan for A10,000 thousand, of which A7,059 thousand is still outstanding),which breaches triggered defaults under such loan agreements and also caused a cross default under theDeutsche Bank loan agreement. The Group has breached covenants under such loans during thesix months ended 30 June 2012, primarily due to lower EBITDA and cash flow from its operating activitiesas a result of a 16.3% increase in operating costs in the six months ended 30 June 2012, compared to thesame period in the previous year. As of 30 June 2012, the outstanding balances under these loansamounted to 18.9% of the Group’s total outstanding debt portfolio. These financial covenants will next betested on 31 December 2012. As such loan agreements were in default as of 30 June 2012, a portion of theGroup’s long-term borrowing have been reclassified as current liabilities (see ‘‘Management’s Discussionand Analysis of Financial Condition and Results of Operations—Long Term Borrowings’’ and Note 10‘‘Long-Term Borrowings’’ of the Interim Financial Statements for further details).

As at the date of this Offering Circular, based on representations provided by the Group that it intends tobe in compliance with the financial covenants under all of its loan agreements by 31 December 2012, theGroup obtained waivers of the 30 June 2012 defaults from each of Bayerische Landesbank, the lendersunder its Club deal, Deutsche Bank and Societe Generale. Such covenants will next be tested on31 December 2012 and the Group has not obtained any waivers in respect thereof. Although the Groupwould not currently be in compliance with certain of those facilities if tested as of the date of the Offering

12

Circular, the Group currently expects that it will be in compliance with such covenants as of 31 December2012 and on subsequent testing dates thereafter or, in the event that compliance may not be possible as of31 December 2012, it will prepay such loans with the proceeds of this Issuance (see ‘‘Use of Proceeds’’). TheGroup may, however, not be in compliance with these covenants by 31 December 2012 and it may also notbe in compliance on subsequent testing dates thereafter, in particular if faced in 2013 with another highlydry year coupled with increased commodities prices, there is a significant risk that the Group may not be incompliance with these covenants at the end of 2013. If the Group continues to fail to comply with suchfinancial covenants or fails to prepay the relevant loans, the Group may not be able to obtain furtherwaivers for future defaults, which may result in the Group being in default.

With respect to the EBRD loan, the balance outstanding under this loan agreement is currently zero. TheEBRD has confirmed that based on the representations described above, the anticipated curing of suchdefault by 31 December 2012 and that such breach was a one-off breach, it is not EBRD’s practice to issuea formal waiver for a one-off breach of financial covenants or to declare a default on the basis of a one-offbreach of financial covenants alone. However, the Group is prevented from drawing down under theEBRD loan agreement while the breach of covenant remains uncured.

Any future breach by the Group of any of the financial or operating covenants under its outstanding loanagreements could result in one or more loans being declared due and payable, undrawn commitmentsthereunder being cancelled and/or result in cross defaults into other facilities held by the Group. Any suchevents may have a material adverse effect on the Group’s business, results of operations and financialcondition. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Borrowings-Long-term Borrowings’’ for a further description of the breaches.

Changes in regulated tariffs could have a material adverse effect on the Group’s results of operations and financialcondition.

Although the energy sector in Croatia has been fully liberalised since 2008, the Group is still subject to asubstantial degree of regulation particularly with respect to the tariffs it may charge. A significant portionof the Group’s revenue from electricity sales is derived from the regulated electricity tariff rates it chargesits customers (70% in 2011). The Croatian government (the ‘‘Croatian Government’’) currently determinesthe tariff rates that may be charged for the transmission and distribution of electricity for the Group’scustomers and the generation and supply of electricity to Tariff Customers, i.e. based on a recommendationby the Croatian Regulatory Agency for Energy (‘‘HERA’’). Similarly to electricity tariffs, the Governmentalso determines gas tariff rates for customers receiving the public supply service. Thermal energy tariffrates are regulated by individual local municipalities based on the recommendation of HERA in eachregion of Croatia. See ‘‘Regulation’’ for further details on the tariff system. As a result, the Group isaffected by the pricing decisions of the Croatian Government and HERA for electricity and gas prices, andCroatia’s local municipalities and HERA for thermal energy prices.

Tariff rates are vulnerable to political intervention. Regulatory authorities in Croatia acting on politicalconsiderations may decide to limit or even block tariff rate increases, without allowing any offsettingvariants in the quality of service provided by the Group or taking into account increased production,sourcing and distribution costs incurred by the Group.

The Group has in recent years made requests of both the Croatian Government and applicable localmunicipalities for tariff rates to be brought in line with increased operating costs in order to preservemargins and/or achieve profitability. Although certain increases have been approved by these entities,including increases for electricity and gas tariff rates in 2012, such increases have not always fully reflectedthe Group’s requests or have been granted following lengthy delays. For example, the Group’s thermalenergy generation costs have increased during the last three years ended 31 December 2011, primarily as aresult of higher fuel costs, but no increases in thermal energy tariff rates have been approved since 2009. Ifthe Group is unable to increase the electricity, thermal energy or gas tariff rates it charges customers inorder to cover increases in operating costs or capital investment requirements, this could have a materialadverse effect on its business, results of operations and financial condition.

The Group is in a negative working capital position and will require additional external sources of capital to meet itsshort-term liquidity needs, which may not be available.

As at 30 June 2012, the Group’s total current liabilities exceeded its total current assets byHRK 2,551,560 thousand and as at 31 December 2011, total current liabilities exceeded its total currentassets by HRK 1,490,281 thousand. Accordingly, the Group’s auditors have included a ‘‘Going Concern—

13

Liquidity Assessment’’ note in Note 3 ‘‘Going Concern’’ to the Interim Financial Statements and Note 1‘‘General—Going Concern’’ to the Annual Financial Statements. Consequently, the Group will be requiredto obtain sufficient short term funding to meet its current liquidity requirements through obtaining newfinancing, extending current loans and generating increased cash from operations. The Group may not beable to do so, especially in light of the Group’s recent covenant breaches (see ‘‘Management’s Discussionand Analysis of Financial Condition and Results of Operations—Long Term Borrowings’’). Banks and otherfinancial institutions have shown increased risk aversion since the onset of the financial crisis and havebeen reluctant to approve refinancing of existing debt or the issuance of new or additional debt tocompanies located in Europe and globally.

The Group’s ability to access domestic and international capital markets and other forms of financing (orrefinancing) and the costs connected with such activities has also been directly impacted by the ongoingfinancial crisis, in particular with regard to increased interest rates for its loan facilities. In addition, as aresult of the current economic crisis and political developments in Croatia, the current or future CroatianGovernment may not provide any sovereign guarantees to the Group on their future borrowings. Access tosteady financing sources is also important for the Group’s ability to carry out its operations and its abilityto complete its planned capital expenditure programmes, which includes the construction of new powerplants in Croatia. See ‘‘—The Group may not successfully implement its key strategies due to operational,political, economic and strategic risks.’’. The Group’s inability to obtain financing as it is needed wouldmean that it may be obliged to reduce or delay capital or other material expenditures or dispose ofmaterial assets or businesses. If the Group is not able to secure required funding, on the desired terms orat all, it could have a material adverse effect on its business, results of operation and financial condition.

The Group may be exposed to increased competition in the electricity, thermal energy and gas markets in Croatia.

The Energy Act (2001) and the Electricity Market Act (2004) established regulatory requirements for theCroatian electricity market and Croatian electricity companies. These and other secondary legislative actshave brought about the liberalisation of the Croatian electricity market; with the market becoming fullyliberalised on 1 July 2008.

Croatia currently has 13 suppliers which offer non-tariffed rates (‘‘Market Suppliers’’), but competition isexpected to increase after Croatia becomes a member of the EU on 1 July 2013 (the ‘‘Accession’’) whennon-Croatian Market Suppliers will be permitted to operate in Croatia without any additional licencingrequirements. As new competitors enter the Group’s key markets, the Group’s revenues and market sharemay decrease. The Group cannot be certain that it will be able to successfully operate in this new marketand its financial results may be affected by the increased competition. As a result, any significant increasein competition in any of the Group’s operating markets could have a material adverse effect on itsbusiness, results of operations and financial condition.

The Republic of Croatia, which owns 100% of the share capital of HEP, can control the Group’s policies by electingmembers of the Supervisory and Management Boards and may pursue decisions that reflect Croatian Governmentpolicy.

As the Group’s sole shareholder, the Republic of Croatia has the power to nominate and elect members ofthe Group’s Supervisory Board through proposals made to the Group’s General Assembly. SupervisoryBoard members are elected for a four year term and six out of the seven members can be replaced by theGeneral Assembly at any time. The seventh member is elected by the employees of HEP, in accordancewith the rules set out in the Labour Act, who can also replace such member. The Supervisory Board electsmembers of the Management Board. The Management Board is elected for a four year term and isreplaced after their four year term expires at the request of the Croatian Government through itsSupervisory Board members. Consequently, the Republic of Croatia, through the General Assembly andthe Supervisory Board, has and will continue to have, directly and indirectly, the power to significantlyinfluence the Group’s operations and strategic planning. As a result, certain of the Group’s decisions mayreflect Croatian Government policy, including Croatian energy policy. Accordingly the Group may makedecisions that are different from those that it would have made without this influence. Complying with anysuch decisions could lead to significant expenditures by the Group, including additional debt, which couldhave a material adverse effect on the Group’s ratings, business, results of operations and financialcondition.

In February 2012, at the request of the newly elected Croatian Government through the GeneralAssembly, the Group replaced its entire Management Board and six of the seven members of the

14

Supervisory Board. The employee’s representative remained unchanged. The Croatian Governmentrequested the change be made due to political reasons and as part of its economic developmentprogramme. The change to the Supervisory Board and the Management Board is, and may continue to be,disruptive to the Group’s operations. The loss of members of the Group’s senior executive team may resultin a loss of organisational focus, poor execution of the Group’s operations and financial strategy and aninability to identify and execute strategic initiatives. Any future changes to the Supervisory or ManagementBoards could have a material adverse effect on its business, results of operations and financial condition.

The Group’s generation capacity, revenues, costs and results of operations are significantly influenced by weatherconditions and seasonal variations that are not within its control.

Electricity, thermal energy and gas consumption is seasonal and is mainly affected by weather conditions.In Europe, electricity consumption is generally higher during the autumn and winter months, and theGroup generally experiences higher demand during the colder months of October through March andlower demand during the warmer months of April through September. As a result of these seasonalpatterns, the Group’s sales and results of operations are higher in the first and fourth quarters and lower inthe second and third quarters. Sales and results of operations for all of the Group’s energy operations canbe negatively affected by periods of unseasonably warm weather during the autumn and winter months.The Group expects seasonal and weather-related fluctuations in its sales and results of operations tocontinue in the future.

The Group’s hydro power electricity generation is largely determined by hydrological conditions which candramatically vary on a year to year basis, and conditions such as droughts or heat waves can significantlylimit the Group’s generation capacity. For example, in 2011, when hydrological conditions were historicallypoor the Group was only able to generate approximately 36% of its total electricity from its hydro powerplants, as compared to 53% that was generated in 2010, when hydrological conditions were historicallyhigh. Consequently, the Group may need to compensate for a reduction in the availability of electricitygenerated by its hydro power plants by using other means with a higher generation cost (such as increasinggeneration of electricity through its thermal power plants) and may also be required to access thewholesale markets to a greater extent and at higher prices, each of which could have a material adverseeffect on its business, results of operations and financial condition. The Group routinely imports electricityfrom other countries, primarily from Hungary and Bosnia and Herzegovina, and re-sells it to endconsumers in Croatia (36.5% or 5.6 TWh in 2011). As a result, the Group is exposed to fluctuations inelectricity market prices in those countries, as well as other local regulatory, economic and politicalconditions. If the Group is unable to generate a sufficient amount of electricity from its hydro power plantsand is unable to import the remaining amount from neighbouring countries there may be a materialadverse effect on the Group’s business, results of operations and financial condition.

The Group is vulnerable to any changes in demand for electricity, thermal energy and gas that may occur as a resultof the continuation or deepening of the current global economic crisis.

In the ordinary course of business, the Group is exposed to the risk of a reduction in demand for itselectricity, thermal energy and gas in particular by its commercial and industrial customer base. This mayoccur as a result of ongoing financial and economic uncertainty. The demand for the Group’s electricity,thermal energy and gas products is affected by the level of economic activity in Croatia and, to a certainextent, Europe. The recent crises in the global banking system and financial markets, together with otherfactors, have resulted in a significant fall in economic activity in Croatia and a corresponding reduction indemand for the Group’s products. The ongoing crisis has resulted in the first prolonged decrease inelectricity demand in particular by its commercial and industrial customer base in Croatia since 1992.According to the Group’s internal energy data, the reduction in electricity consumption started in thefourth quarter of 2008. Any additional decline in overall economic activity due to economic uncertaintymay lead to a further drop in demand for the Group’s electricity, thermal energy and gas, which could leadto lower sales and erosion of the Group’s profit margins. In the event that the current economic recessioncontinues for a significant period of time, or worsens, energy consumption may decrease in the Group’soperating markets, resulting in a material adverse effect on the Group’s business and prospects. Forecastsof future economic development and the related demand for energy are also essential components of theGroup’s projection of unit sales of electricity, thermal energy and gas and its investment plans. Anysignificant negative deviation between actual and projected economic development could materially impactthe Group’s operations.

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The Group may not successfully implement its key strategies due to operational, political, economic and strategicrisks.

One of the key goals of the Group is to improve profitability and increase generation capacity in Croatia inorder to achieve self-sufficiency. In line with this goal, the Group is actively investing in projects to furtherenhance supply in Croatia. The Group expects to invest approximately HRK 19,062,700 thousand by theend of 2016 in a number of generation, transmission and distribution projects, including the modernisationof its existing hydro power plants and the building of four hydro power plants, one thermal plant and onehydroelectric project on the Sava river. These investments are specifically intended to reduce Croatia’sdependence on energy imports from the neighbouring countries (in 2011, Croatia imported 32% of its totalpower consumption through the Group’s transmission network). By the end of 2016, the Group plans toinvest approximately HRK 7,928,400 thousand out of the HRK 19,062,700 thousand in developing itstransmission and distribution networks. In particular, the Group will focus on reducing network losses andensuring the reliable and safe operation of new and upgraded generation plants, meeting the country’sgrowing need for electricity and connecting new customers. The Group also intends to exploreopportunities in new markets and expand its customer base both domestically and internationally.However, the Group may face operational, political, economic and strategic risks that could adverselyaffect its ability to implement these strategies. Failure to implement the Group’s key strategies successfullycould have a material adverse effect on its business, results of operations and financial condition.

Potential risks may include availability and cost of funding, the willingness of international partners toinvest in the Croatian energy market, changes in electricity, thermal energy and gas demand in Croatia andinternationally, changes in emission allowance prices (applicable to the Group from 1 January 2013) andthe regulatory framework governing them, increases in generation and distribution costs, highercompetition in the markets in which the Group operates, political and economic developments affectingCroatia and Europe, as well as other legal and regulatory changes.

The Group’s ability to access credit and bond markets and its ability to raise additional financing are in partdependent on its credit ratings.

The Group’s ability to access the capital markets and other forms of financing (or refinancing), and thecosts connected with such activities, depend in part on its credit ratings. As of the date of this OfferingCircular, HEP has a credit rating of BB- on credit watch with negative implications by S&P and Ba2 with anegative outlook by Moody’s. Information about S&P and Moody’s rating agencies as required by the CRARegulation is provided in ‘‘Overview—Credit Ratings’’. These ratings reflect each agency’s opinion of theGroup’s financial strength, operating performance and ability to meet its debt obligations as they becomedue. On 21 September 2012, Moody’s downgraded HEP from Ba1 with a negative outlook to Ba2 with anegative outlook. According to Moody’s, the downgrade reflects additional pressure on HEP’s liquidityarising from the high proportion of short-term debt in its total debt portfolio, the challenging maturityprofile of its long-term debt portfolio and its need for significant new financing to cover its sizeableinvestment programme. On 3 October 2012, S&P downgraded HEP from BB with a developing outlook toBB- on credit watch with negative implications. According to S&P, the downgrade reflects HEP’s inherentearnings volatility in the context of unpredictable, politically determined, regulated tariffs, the Group’sambitious investment programme and the deterioration of HEP’s business prospects given poorhydrological conditions, rising commodity prices and increased electricity imports which have resulted inaggressive use of short-term credit lines and a deferral of investments.

The credit ratings currently assigned to HEP by S&P and Moody’s are based in part on the opinion of S&Pand Moody’s that Croatia may potentially provide support to it in the event of financial distress and thatHEP will not be privatised in the near future. Although the Group does not currently expect Croatia toprivatise HEP, any future Croatian Government may ultimately seek to undertake a partial or fullprivatisation of HEP. If HEP is fully or partially privatised and the Republic of Croatia is no longer acontrolling shareholder, it could affect the Group’s ratings or otherwise have a material adverse effect onits business, results of operations and financial condition.

The Group’s ability to maintain its current ratings is dependent on a number of factors, some of which maybe beyond the Group’s control. In the event that the Group’s credit or debt ratings are lowered by therating agencies, the Group may not be able to raise additional finance on terms similar to its existingfinance or at all, and its ability to access credit and bond markets and other forms of financing (orrefinancing) could be limited. See also ‘‘—The Group is in a negative working capital position and will requireadditional external sources of capital to meet its short-term liquidity needs which may not be available’’. This

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could have a material adverse effect on its business, results of operations and financial condition. Loweringof the Group’s credit rating may also result in interest rate increases for certain of the Group’s loanagreements which could have a material adverse effect on its business, results of operations and financialcondition.

The Group’s Annual and Interim Financial Statements include a qualification.

Deloitte have performed an audit of the Annual Financial Statements as at and for the years ended31 December 2009, 2010 and 2011. In the Annual Financial Statements, Deloitte issued its audit opinionsubject to certain qualifications regarding a payment of HRK 300,000 thousand made by the Group toHAC in December 2006 for the purchase of electricity facilities situated along the Croatian motorwaynetwork. Although the Group made this payment on the day of purchase, due to legal regulations andincomplete documentation, HEP was not able to take legal title and record the delivery in its FinancialStatements. As a result, the Group was unable to make the necessary classifications or provide relevantinformation to enable Deloitte to assess the impact of this advance payment on the Group and had toinclude a qualification in the Annual Financial Statements. In December 2011, the Group and HACagreed on the final transfer of the facilities to the Group, with the signing of the formal agreementsanticipated to take place by the end of 2012.

Deloitte has issued a qualified review report in respect of the Interim Financial Statements as at and forthe six months ended 30 June 2012. The review report contains the same qualification as described above.

The Group is vulnerable to increases in the levels of doubtful receivables as a result of the ongoing economic crisis.

In 2009 and 2010, Croatia witnessed a significant fall in economic activity as a result of the ongoingfinancial crisis. In 2011, the Croatian economy showed zero growth and, according to data issued by theCroatian Bureau of Statistics (the ‘‘CBS’’), during the first and second quarters of 2012, the Croatianeconomy was in recession. The economic difficulties facing the country have had a negative effect on theGroup’s customers as many companies have had balance sheet liquidity problems or have becomeinsolvent. In addition, based on data from the CBS, there has been a significant rise in unemployment inCroatia since 2009.

This has led to an increase in the number of doubtful receivables, particularly among the Group’scommercial sector Non-Tariff Customers. Comparing the Group’s impairment expense for bad anddoubtful receivables for the year ended 31 December 2011 to the year ended 31 December 2010, there wasan increase of 48.4%. For the six months ended 30 June 2012 compared to the six months ended 30 June2011, there was an increase of 6.6% in impairment expense for bad and doubtful receivables. The increasein impairment expense for bad and doubtful receivables is primarily due to difficult economic conditionsthat impacted the Group’s customers’ ability to pay and led to higher doubtful receivables.

In the event that Non-Tariff Customers are unable to pay their debts to the Group, under Croatian law, theGroup is prohibited from terminating electricity supply to these customers. Instead, defaulting Non-TariffCustomers are moved back to the public supply system and charged the Balancing Energy Tariff. See‘‘Business—Overview’’ for further details. The Group is able to take legal action against its defaultingcustomers to seek to recover amounts outstanding, although the timing and amount of such recovery isuncertain.

The number of company insolvencies and individual bankruptcies is anticipated to continue to grow fromcurrent levels in the wake of the ongoing economic crisis. Any material increase in doubtful receivables,increased delays in payment times or write-offs could have a significant effect on the Group’s business,results of operations and financial condition.

Default or delay in debt servicing by any of the Group’s counterparties (which include its partners, contractors,subcontractors and suppliers) may affect the Group’s financial condition.

The Group undertakes significant capital expenditures related to the modernisation, renewal andconstruction of energy power plants, transmission and distribution assets. The Group faces risks relating tothe construction of its electricity and heating generation facilities and electricity, heating and gastransmission and distribution facilities. These risks include access to equipment from reliable suppliers, thesteady supply of building materials and technical components, the availability of key personnel, includingqualified engineering personnel, delays in construction and budget constraints. The Group may alsoencounter various setbacks such as adverse weather conditions, difficulties in connecting to electricitytransmission grids, construction defects, unexpected delays in obtaining zoning and other permits or legalactions brought by third parties. In addition, the Group faces the risk of potential default or delay by itscounterparties (which include its partners, contractors, subcontractors and suppliers), especially in cases offinancial hardship or bankruptcy. Such risks may increase in the future if the economic conditions inCroatia do not improve in the short-to-medium term.

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Any default by the Group’s counterparties may affect the cost and completion of its projects, the quality ofits work and the supply of certain critical products or services to its customers. It may also expose it toreputational risk, business continuity risk and the loss of important contracts. In addition, the Group maybe required to pay contractual penalties or find alternative counterparties. Any such setbacks may result indelays in the completion of the Group’s projects and other unforeseen costs, which could have a materialadverse effect on its business, financial condition, prospects or results of operations.

Political developments in the EU, Croatia and in other countries where the Group has or plans to have a businesspresence could have a material adverse effect on its results of operations and financial condition.

Any political developments in the EU, Croatia and other countries in which the Group has or plans to havea business presence or changes in the economic policy, including changes in the composition of the EU andits institutions, such as the potential withdrawal of some member states from the EU, may have an adverseeffect on the overall economic stability of the region in which the Group’s assets and operations arelocated. Any changes in the political or economic stability of any of the countries in which the Groupoperates, as well as any political, economic, regulatory or administrative developments in these countries,over which the Group has no control, could have a material adverse effect on its business, results ofoperations and financial condition. Any political developments affecting the integration, integrity orstability of EU energy markets, could also have a material adverse effect on the Group’s business, resultsof operations and financial condition.

The Group’s business, results of operations and financial condition may be materially adversely affected byCroatia’s implementation of new energy laws and regulations in line with its forthcoming Accession to fullEU membership.

Croatia signed the EU Accession Treaty on 9 December 2011 (the ‘‘Accession Treaty’’) and ratified theTreaty in January 2012. Croatia is scheduled to become a member of the EU on 1 July 2013, but does notcurrently plan to become a member of the European Monetary Union. Prior to Accession, Croatia isexpected to go through the process of aligning its energy legislation with that of the EU. For moreinformation, see ‘‘Regulation—Accession of the Republic of Croatia to the EU’’. Some of these regulatorychanges are likely to have a significant effect on the Group’s results of operations and financial condition.

The Group may be subject to further restructuring due to compliance with EU energy regulation.

As a result of compliance by the Croatian energy sector with EU energy regulations, the Group has had tomake significant changes to its business structure and operations. See ‘‘Business—Unbundling’’ for moredetails. Further restructuring will be necessary due to the Accession and in order to comply with the ThirdEnergy Package. For more information, see ‘‘Regulation—Third Energy Package’’. New regulations and/oramendments to the existing regulations or new requirements could have a material adverse effect on theGroup’s business, results of operations and financial condition, especially if they require the Group torestructure or otherwise change its business, or if they affect electricity generation, transmission,distribution or supply prices. In particular, this legislation is expected to further affect the way the Groupstructures its generation, transmission and distribution operations, including the legal and functionalmanner of unbundling. Such legislation may potentially require the Group to divest its transmissionoperations such that they would no longer form a part of their results consolidated with the Group whichcould result in exclusion of the Group’s transmission business revenues from the total revenues. As at31 December 2011, the Group’s transmission business revenues, accounted for 10.2% of the Group’s totalrevenues. In addition, the Group may be unable to respond swiftly and appropriately to changes inapplicable laws and regulations or to changes in the energy industry generally, which could have a materialadverse effect on its business, results of operations and financial condition.

The Group is subject to differing regulatory regimes in all of the jurisdictions in which it operates and these regimesare complex and subject to change.

The Group is subject to the laws and regulation of the regulatory agencies of the various jurisdictions inwhich the Group operates, including Croatia, Slovenia, Hungary, Bosnia and Herzegovina and the EU.These laws and regulations affect many aspects of the Group’s business and, in many respects, determinethe manner in which the Group conducts its business. This includes the fees it charges or obtains for itsproducts and services, such as in respect of electricity generation (from both traditional and renewableenergy sources). In addition, as an owner and operator of hydro and thermal power plants and electricity,thermal energy and gas distribution and transmission facilities and part owner of a nuclear plant, the

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Group is subject to extensive regulation, whether governmental or otherwise. Any new regulation or anychanges in existing regulations may require significant changes in the Group’s business in ways that itcannot predict. This could have a material adverse effect on the Group’s business, financial condition,prospects or results of operations.

Changes in the EU’s renewable energy policy and an accelerated market shift towards renewable energy sourcescould have a material adverse effect on the Group’s results of operations and financial condition.

As a result of the forthcoming Accession, the Croatian electricity industry is becoming increasinglyinfluenced by the EU Climate and Energy Package implemented in 2008, which aims to increase the supplyof renewable energy in the EU. The EU Climate and Energy Package requires a 20% decrease ingreenhouse gas emissions and a 20% increase in energy efficiency by 2020. It also requires that renewableenergy sources provide at least 20% of the total energy consumed in the EU by 2020. Starting on 1 July2013, the Group will be obligated to reflect the EU Climate and Energy Package within its own operationsand business strategy. These additional costs may have a significant effect on the Group’s operatingexpenses, particularly if the Group is unable to pass on all, or some, of the additional costs to its customers.In addition, continued or increased support for renewable energy sources in the EU and in Croatia, mayadversely affect the profitability of the Group’s nuclear, coal-fired and oil-fired power plants by imposingadditional costs. As a result, the implementation of the EU Climate and Energy Package regulations andany future amendments to these targets could have a material adverse effect on the Group’s business,results of operations and financial condition.

The Group conducts its business in several different currencies and is exposed to foreign currency risks and interestrate risk.

The Group is exposed to transactional foreign currency risk in two main ways: (i) on expenses (particularlyfuel and purchased electricity costs) and, to a much lesser extent, on revenues that are denominated incurrencies other than Kuna; and (ii) because a significant portion of the Group’s debt (including theNotes) is denominated in currencies other than the Kuna and has floating interest rates, benchmarkedagainst LIBOR and the EURIBOR, among others. As a result, the Group is sensitive to domestic currencydepreciation or any changes to the floating interest rates. The Group is mainly exposed to changes in theEuro exchange rate. As at 30 June 2012, the Group’s exposure to currency risk accounted for 66% of itstotal debt.

After the Accession, Croatia might also choose to become a member of the European Monetary Union.However, as of the date of this Offering Circular, there is no official target date for Croatia to join theEuropean Monetary Union and the Group cannot predict if, or when, this might happen. Any significantchange or fluctuation in the Kuna’s exchange rate against the Euro, as a result of regular exchange ratefluctuations or due to any other factor, could have a material adverse effect on the Group’s business,results of operations and financial condition.

The Group also presents its consolidated results in Kuna. Accordingly, its reported financial results aresubject to movements in exchange rates, particularly with regard to the areas of the Group’s businesswhere the functional currency is not the Kuna. The translation effect resulting from fluctuations in theexchange rate between the Kuna and the other currencies to which it is exposed, such as Euro orU.S. dollar, may have a material adverse effect on the Group’s consolidated assets and liabilities that areinitially denominated in such other currency and which are translated back to Kuna for reporting purposes.

The Group may not successfully manage the risks associated with expanding its operations and integrating newlyacquired subsidiaries and may face significant risks and liabilities as a result of such acquisitions.

The Group regularly evaluates potential opportunities to expand its operations both internationally anddomestically by acquiring new power businesses or establishing additional offices, through strategicpartnerships or otherwise. This strategy depends on the Group’s ability to successfully identify, acquire,and integrate companies or identify and set up joint ventures and/or strategic partnerships that enhancethe Group’s operations. In order to obtain the necessary approvals for acquisitions, the Group may berequired to divest other parts of its operations or make concessions or undertakings that materially affectits business. The Group might not be able to manage all of the risks associated with expanding itsoperations, including compliance with new regulatory requirements, default by any joint-venture partners,issues with integrating existing and newly acquired operations and unexpected costs and time delays. In

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addition, the Group may not be able to achieve the expected benefits and financial returns from itsacquisitions or investments.

In particular, the Group faces many risks inherent in expanding its operations and doing business on aninternational level, including trade barriers, import and export controls, customs and duties, managementexperience and difficulties in staffing and managing foreign operations, political instability, political risks,such as expropriation, nationalisation and war, fluctuations in currency exchange rates and potentiallyadverse tax consequences. Any failure to manage the risks associated with expanding the Group’soperations could have a material adverse effect on its business, results of operations and financialcondition.

The Group’s activities require various administrative permits, authorisations and licences that may be difficult toobtain, maintain or renew or whose grant may be subject to conditions that may become significantly morestringent.

The Group’s activities of generation, transmission, distribution and supply of electricity and thedistribution and supply of thermal energy and gas require various administrative permits, authorisationsand licences, at local and national levels, in Croatia and in the other countries in which the Groupoperates. The procedures for obtaining and renewing these permits, authorisations and licences can beprotracted and complex. Obtaining these permits, authorisations and licences is not routine and theconditions attached to obtaining them are subject to change and may not be predictable. As a result, theGroup may incur significant expenses in order to comply with the requirements associated with obtainingor renewing these permits, authorisations and licences. Delays, extremely high costs or the suspension ofthe Group’s operating activities due to its inability to obtain, maintain, or renew permits, authorisationsand licences, may also have a negative impact on its business activities and profitability. In addition, theGroup often invests resources prior to obtaining the necessary permits and authorisations and licences,particularly in connection with feasibility studies and environmental studies, but may have to cancel orwithdraw from a project if it is unable to obtain such permits, authorisations or licences.

Licences for the generation and transmission of electricity in Croatia are granted for a maximum of30 years and a licence for distribution is granted for a maximum of 20 years. The license for the Krskonuclear plant is currently due to expire in 2023, subject to 10 year licence reviews, although managementcurrently plans to operate the plant until 2043 subject to the licence being renewed. Certain other materiallicences for the operation of the Group’s power plants are also due to expire within the next two tosix years and the Group’s concession licences are due to expire within the next three to six years. Forfurther information, see ‘‘Business—Licences’’ and ‘‘Regulation—Concession Licences’’. In particular, theGroup’s hydro power plants operate under various concession licences, which might not be extended forthe same period or at all by the Croatian Government. Any failure to obtain, maintain, renew or extend allthe necessary administrative permits, authorisations and licences necessary for the operation of theGroup’s business and execution of its strategy, could have a material adverse effect on its business, resultsof operations and financial condition.

The Group’s joint venture company, Nuklearna elektrana Krsko d.o.o. through which the Group owns NuclearPower Plant Krsko (‘‘NPPK’’) together with Gen Energija (‘‘GenE’’), may not be able to obtain the necessaryauthorisations to operate the Krsko nuclear power plant over a period at least equal to the current expected life.

In Slovenia, where the Group’s nuclear power plant is located, certain authorisations are required tooperate nuclear power plants. The operation of nuclear power plants is subject to overall EU and nationalregulatory requirements and political policies, which are in turn sensitive to public opinion andEU development risks. In particular, the nuclear disaster in Japan and the resulting decision of theGerman government to close outdated nuclear power plants, may trigger similar decisions in otherEuropean countries and the Group may not be able to obtain the necessary authorisations at theappropriate time, or at all, the duration of such authorisations may change, or NPPK may be subject toconditions that require it to make significant capital expenditures in order to keep the plant operational.Moreover, in the event of an incident affecting the safety or operation of the plant’s facilities, the plant’sexpected operating life may be reduced or operations may be stopped. If the Group’s nuclear power plantis closed before the end of its currently expected operating life, the Group may be required to makeadditional investments to replace the loss of generation capacity or purchase electricity on the wholesalemarket. The inability of the Group’s nuclear power plant to operate as expected could have a significantmaterial adverse effect on the Group’s profit margin and cash flow from operations. As a result, any failureto obtain all of the necessary authorisations and to operate its nuclear power plant for the duration of suchauthorisations, could have a material adverse effect on the Group’s business, results of operations andfinancial condition.

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The Group may become liable for increased decommissioning costs or be required to keep additional amounts asrestricted funds for the decommissioning of its nuclear power plant.

According to the Agreement between the Croatian and Slovenian Governments on Regulating the Statusand other Legal Relations in Respect of Investments in Exploitation and Decommissioning of, the NuclearPower Plant Krsko (Official Gazette No. 9/2002) (the ‘‘2001 Agreement’’), the Slovenian and CroatianGovernments are responsible for the decommissioning and disposal of radioactive waste and spent nuclearfuel (article 10). Both Governments are also responsible for financing the preparation and implementationof a decommissioning. Pursuant to the ratification of the 2001 Agreement on 28 April 2006, the CroatianGovernment issued a decree relating to the payment of funds for the decommissioning and disposal ofradioactive waste and spent nuclear fuel of NPPK. According to the 2001 Agreement, thedecommissioning costs of the NPPK are apportioned equally between GenE and HEP, with each partydepositing half of the expected costs into a decommissioning fund. As at the date of this Offering Circular,HEP is required to pay an annual fee of A14,250 thousand per year into the Croatian decommissioningfund, but this amount may change in the future due to higher than expected decommissioning costs, anextension of the collection period until 2043 (in line with the plant’s lifetime extension), revisions ofnational radioactive waste policies or other regulatory changes. In addition, if such amounts are notsufficient to meet future decommissioning costs or the NPPK is closed earlier than anticipated, the Groupmay be required to pay additional amounts and/or make payments sooner. This could have a materialadverse effect on its business, results of operations and financial condition.

Failures, breakdowns, planned or unplanned outages as well as natural disasters or sabotage at the Group’s powerplants or damage to the distribution infrastructure may harm the Group’s business and reputation or could causesignificant harm to the environment and local populations.

The Group’s power plants (including its thermal, hydro and nuclear power plants), distribution andtransmission infrastructure and the information systems controlling these facilities could be subject tofailure, breakdowns, unplanned outages, capacity limitations, system loss, breaches of security or physicaldamage due to natural disasters (such as storms, floods or earthquakes), sabotage, terrorism, computerviruses, fuel interruptions and other causes. The occurrence of any such events could negatively impactgeneration levels, the Group’s ability to provide service to its customers, result in loss of life or injury to theGroup’s employees or third parties or damage to the Group’s facilities, lead to disruption or stoppage tooperations or otherwise disrupt the business. The condition of some of the Group’s equipment and thecomponents of its power plants may also be affected by their continuous operation, as well as processessuch as erosion and corrosion. The impact of such operation and processes tends to increase as the plant,equipment and components grow older. The Group may need to temporarily shut down some of the powerplants and may incur expenses in connection with inspections, maintenance or repair activities in additionto the periodic planned inspections, maintenance and repair that the Group currently conducts, includingsuch additional activities that governmental authorities may require it to conduct.

The Group’s business and its ability to generate revenue depends on the availability and operatingperformance of the equipment necessary to operate its power plants and distribution networks. Mechanicalfailures or other defects in equipment, or accidents that result in non-performance or underperformanceof a power plant or distribution network may have a direct impact on the profitability of the Group’soperations. In addition, if the Group suffers a reduction in electricity generation, it may be required topurchase greater amounts of electricity in the open market, which may be at unfavourable prices.Moreover, any insurance coverage, warranties or guarantees provided by equipment suppliers in favour ofthe Group that purport to cover additional expenses incurred by the Group as a result of any failures, maynot fully compensate the Group for any increased costs and any resulting decrease in revenues. This couldmean that any significant expenses incurred as a result of failures, defects or accidents involving theGroup’s operating equipment and infrastructure could have a material adverse effect on the Group’sbusiness, financial condition, prospects or results of operations.

Disruptions in the supply of coal, fuel, gas or other raw materials, or an unexpected increase in their cost, couldmaterially and adversely affect the Group’s results of operations and financial condition.

In the ordinary course of the Group’s business, it is exposed to the risk of disruptions in the supply of fueloil, coal, nuclear fuel, gas or other raw materials and to increases in their cost. The Group’s generationoperations depend upon obtaining deliveries of an adequate supply of raw materials on a timely basis andat adequate prices. In addition, the Group has fixed contracts with a limited number of suppliers for its fuel(see ‘‘Business—Commodities’’). As a result the Group may be exposed to the risk of its suppliers not being

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able to provide the agreed amount of products on a timely basis, or at all, due to contractual defaults,bankruptcies or other reasons. Any significant shortage or an interruption in the supply of raw materials orany significant price increases could disrupt the Group’s generation operations, which could have amaterial adverse effect on the Group’s business, results of operations and financial condition. Suchincreased costs if passed through to the Group’s customers, together with a worsening of the overalleconomic environment, may make it more difficult for the Group’s customers to make their requiredpayments, which may increase the Group’s doubtful receivables and damage its financial condition andresults of operations.

A significant portion of the Group’s expenses are made up of commodity costs, which are heavilyinfluenced by prices in the world market for gas, fuel oil and coal. The prices for such commodities havehistorically been volatile and there is no guarantee that prices will remain within projected levels. Inparticular, oil prices have risen in recent years reaching a high of over U.S.$123 per barrel in early 2012.The Group does not undertake any hedging transactions with regards to the commodities it uses and anysignificant increases in commodity prices could have an adverse effect on the Group’s operating results andfinancial condition.

The Group is unable to insure itself against all potential accidents and may become subject to higher insurancepremiums.

The Group’s business is exposed to risks associated with the construction and operation of power plants,electricity, heating and gas distribution and transmission grids and other energy related facilities, such asmechanical breakdowns, manufacturing defects, natural disasters, terrorist attacks, sabotage, personalinjury and other interruptions in service resulting from events outside of the Group’s control. The Group isalso exposed to environmental risks, in particular that certain environmental conditions that may destroy,damage or impair any of its facilities. These events may result in increased costs and other losses, whichcould have a material adverse effect on the Group’s business, financial condition, prospects or results ofoperations.

NPPK maintains insurance coverage for the Krsko nuclear plant, which is in line with applicable Slovenianregulations and international conventions. However, the Group does not have any insurance coverage forthe Krsko nuclear plant and must rely on insurance coverage obtained by NPPK. NPPK has insurancecoverage for property, employees and third party liability and is in compliance with the applicablelegislation in force in Slovenia and the practices of the nuclear industry. However, the Group cannot becertain that these insurance policies will fully insure it against all risks and losses that may arise in thefuture. The Group may incur substantial losses as a result of a nuclear accident or failure at the Krskonuclear plant, including loss of generation capacity, repair and clean-up expenses, legal liabilities,reputational losses and legislative and regulatory reforms by Slovenia or the EU, which could substantiallyaffect the Group’s operations.

Malfunctions or interruptions of service at the Group’s facilities could also expose it to legal challengesand sanctions. Therefore, the Group may be adversely affected by the costs of accidents or otherunexpected occurrences at its facilities for which insurance coverage is not available, has not been obtainedor is not sufficient, which could have a material adverse effect on the Group’s business, results ofoperations and financial condition. In addition, the Group’s insurance policies are subject to annual reviewby its insurers and may not be renewed or may not be renewed on similar terms, particularly should theGroup have made any significant claims under previous such policies. If the Group were to incur asubstantial uninsured loss or a loss that significantly exceeded the limits of its insurance policies, or if theGroup’s insurance policies are renewed on less favourable terms or premium significantly increase, suchfactors could have a material adverse effect on the Group’s business, financial condition, prospects orresults of operations.

The Group is subject to environmental, health and safety laws and regulations and must maintain environmental,health and safety regulatory approvals and may be exposed to significant liabilities if it fails to comply with suchlaws or maintain such approvals.

The Group is subject to various environmental, health and safety laws and regulations governing, amongother things: the generation, storage, handling, release, use, disposal and transportation of waste orhazardous and radioactive materials; the emission and discharge of hazardous materials into the ground,air or water; the decommissioning and decontamination of its facilities; and the health and safety of theGroup’s employees. The Group is also required to obtain environmental and safety permits from various

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governmental authorities for its operations. Certain permits require periodic renewal or review of theirconditions as well as continuous monitoring and compliance reporting. The Group may not be able torenew such permits or there may be material changes to its permits requiring significant expenditure.Violations of these laws, regulations or permits could result in plant shutdowns, fines or legal proceedingsbeing commenced against the Group or other sanctions, in addition to negative publicity and significantdamage to the Group’s reputation.

Although environmental laws and regulations have an increasing impact on the Group’s activities in all ofthe countries in which it operates, it is impossible to predict accurately the effect of future developments insuch laws and regulations on the Group’s future earnings and operations. While the Group has budgetedfor future capital and operating expenditures to comply with current environmental and health and safetylaws, it is possible that any of these laws may change or become more stringent in the future or that newlaws may be adopted. Some risk of environmental costs and liabilities is inherent in the Group’s particularoperations and products, as it is with other companies engaged in similar businesses, and there can be noassurance that material costs and liabilities will not be incurred. For more information on environmentalmatters, see ‘‘Regulation—Environmental Matters.’’

The Group’s facilities could be or have been the source of industrial accidents or environmental and public healthimpacts.

The Group operates or has operated certain facilities which, as currently operated, could be or have beenthe source of industrial accidents or environmental and public health impacts, such as inadequatelycontrolled emissions, leakages in electricity supply lines insulated with oil under pressure, asbestos andpolychlorobiphenyls. In particular, large quantities of hazardous materials (mainly explosive or flammable,such as gas and fuel oil) are stored in certain facilities. These facilities may be located in industrial areaswhere other activities facing similar risks are carried out, such that the Group’s facilities may be impactedby accidents occurring at neighbouring facilities that are not within its control. In addition, the labour-intensive requirements of the Group’s businesses and the wide geographical disbursement of the Group’semployees in the field (in particular, on public roads and at customer sites), as well as difficult workingconditions, make the increase in the frequency and severity of work accidents and the increasing incidenceof work-related illnesses a risk. All of these factors could expose the Group to litigation and significantcosts, including costs incurred in connection with adopting more stringent safety and security measures forthe operation or construction of its generation facilities and transmission or distribution networks, whichcould have a material adverse effect on the Group’s business, results of operations and financial condition.

Questions with respect to the risks to human health as a result of exposure to electromagnetic fields(‘‘EMFs’’), in particular, from power lines operated by the Group, have been raised within Croatia, theEU and elsewhere internationally. Based on studies completed over the past 20 years, numerousinternational health organisations (including the World Health Organisation (‘‘WHO’’) and theInternational Agency for Research on Cancer (‘‘IARC’’)) consider, given currently available scientificinformation, that the existence of health risks, if any, were low. However, medical knowledge about healthrisks related to exposure to EMFs may evolve, public sensitivity about such risks could increase, or theprinciple of precaution could be applied very broadly. In the EU, new regulations aimed at understandingthe risks associated with EMFs are being developed. As per other EU legislation, Croatia is under anobligation to implement all such changes domestically. In addition, Croatia has also implemented the Acton Protection from Non-Ionising Radiation (OG 91/2010) and the Rules on Protection fromElectromagnetic Radiation (OG 98/2011), which aim to protect against potential risks associated withelectromagnetic radiation. The risks associated with EMFs could expose the Group to litigation andsignificant costs, including costs incurred in connection with the adoption of more stringent securitymeasures for the operation or construction of the Group’s generation facilities and distribution networks,which could have a material adverse effect on its business, results of operations and financial condition.

A strike or other labour disruption at the Group’s facilities could adversely affect its business.

As at 1 January 2012, all of the Group’s employees in Croatia were covered by a collective bargainingagreement (the ‘‘Collective Agreement’’) in accordance with Croatian law, which is valid until 31 December2012. The Collective Agreement determines the framework for the Group’s dealings with its employersand limit its ability to implement plant closures and perform reductions in its workforce. Managementbelieves that partly as a result of the collective agreements that the Group has executed in the years, sinceits inception, it has not experienced any strikes, threats of strikes, or other resistance or work stoppages.However any such action by the Group’s employees could impair the Group’s ability to implement further

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measures to reduce costs and improve production efficiencies in furtherance of its strategy such as areduction in personnel, which could have a material adverse effect on its business, results of operations andfinancial condition.

The Group may not be able to hire, train or retain a sufficient number of qualified staff.

The Group transacts a variety of businesses requiring a wide range of continually evolving skills, so it cankeep up with changes in its sector of the market, in particular its environment-related businesses. The needto constantly seek out new technical experts, train staff in new techniques and recruit and train managerscreates a risk for the Group if it is not able to mobilise in a timely manner the skills required at all of itslocations. Experienced and capable personnel in the energy industry are in high demand and the Groupfaces significant competition in its principal markets to recruit such personnel. Moreover, as a result of ahigh average age of the Group’s employees (48 as of 31 December 2011), the Group expects a significantnumber of retirements in the next several years. Consequently, when the Group’s experienced employeesleave, the Group may have difficulty, and incur additional costs, in replacing them. In particular, asignificant percentage of the Group’s employees are scheduled to retire in the next three to five years andthe Group has embarked on a restructuring programme with a view to increasing the proportion oftechnical employees working for the Group. The Group has implemented various programmes to ensure asmooth transition between the retiring employees and their replacements and is improving employeetraining schemes, but any failure to transfer the relevant financial, technical or operating knowledgebetween these two groups, could have a material adverse effect on the Group’s business, results ofoperations and financial condition.

The Group in particular might have a problem recruiting qualified employees after Croatia joins the EU.This is likely to lead to higher migration of workers from Croatia to other EU countries that might payhigher wages or provide better employment benefits. In addition, the loss of any member of the Group’ssenior management team may result in a loss of organisational focus, poor execution of its operations andcorporate strategy and an inability to identify and execute potential strategic initiatives in the future,including strategies relating to the growth of its business. The Group’s failure to hire, train or retain asufficient number of experienced, capable and reliable personnel, especially senior and middlemanagement with appropriate professional qualifications, or to recruit skilled professional and technicalstaff in pace with its growth, could have a material adverse effect on its business, results of operations andfinancial condition.

The Group may not be able to keep pace with the technological changes in the energy sector or properly maintain itsIT systems.

The technologies used in the energy sector have changed and may change and evolve rapidly in the future.In order for the Group to maintain its competitiveness and to expand its business, it must effectively adjustto these changes. In particular, technologies related to power generation and electricity transmission areconstantly improving and becoming more complex. If the Group is unable to modernise its technologiesquickly and regularly and to take advantage of industry trends, it could face increased pressure fromcompetitors and lose customers in the markets in which it operates. The Group could also lose valuableopportunities to expand its operations in existing and new markets due to insufficient integration of newtechnologies in its operations. As a result, the Group’s failure to respond to current and futuretechnological changes in the energy sector in an effective and timely manner could have a material adverseeffect on the Group’s business, financial condition, prospects or results of operations.

Information and communication technology plays an important role in the Group’s operation, inparticular, innovative and efficient IT systems are a key success factor for the Group. For example, theGroup is routinely exposed to IT risks in connection with the development, implementation andapplication of its IT systems. In addition, there is a risk that there might be unauthorised access to theGroup’s sensitive data by third-parties and improper use of such data, which may lead to the loss ofcompany secrets and may result in a breach of Croatian data protection regulations. As a result, any breachor unauthorised use of the Group’s IT systems may have material adverse effects on the Group’s business,financial condition, prospects or results of operations.

The Group is subject to a variety of litigation and regulatory proceedings in the ordinary course of business.

In the ordinary course of its business, the Group is subject to numerous civil, administrative and arbitrationproceedings. For more information, see ‘‘Business—Legal Proceedings’’. The Group’s Annual Financial

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Statements show accrued provisions for contingent liabilities relating to particular proceedings, calculatedbased on the advice of the Group’s internal and external legal counsel. However, the Group has notrecorded provisions in respect of all legal, regulatory and administrative proceedings to which it is a partyor in which it may become a party. In particular, the Group has not recorded provisions in cases in whichthe financial outcome is uncertain or which the Group currently expects to be ruled in its favour. TheGroup’s failure to record sufficient provisions or to properly assess the likely outcome of any proceedingsagainst it, could have a material adverse effect on its business, results of operations and financial condition.

The Group could incur unforeseen taxes, tax penalties and sanctions which could adversely affect its results ofoperations and financial condition.

Due to the recent economic crisis, a number of EU member states and other countries in the region havefaced significant budget deficits and, as a result, have imposed additional taxes on the utilities sector, suchas the nuclear tax in Germany and the power sales tax in Hungary. There is also an ongoing discussion inCroatia on a new property tax which could affect the Group. However, the legislation necessary for such atax is still being drafted and the methodology for calculating any such new tax has not yet been decided.The imposition of any new taxes in the countries in which the Group operates, changing interpretations orapplication of existing tax regulations by the tax authorities, harmonisation of the Croatian and EU taxlegislation and regulation after the Accession and the possible imposition of retroactive penalties and othersanctions due to new tax liabilities, could have a material adverse effect on the Group’s business, results ofoperations and financial condition.

Risks Related to Croatia

An investment in a developing country such as Croatia is subject to substantially greater risks than an investment ina more developed country.

An investment in a country such as Croatia, which achieved independence in 1991 and whose economy isstill in transition, is subject to substantially greater risks than an investment in a country with a moredeveloped economy and more developed political and legal systems. Although progress has been made inreforming Croatia’s economy and political and legal systems, the development of Croatia’s legalinfrastructure and regulatory framework is still continuing. As a consequence, an investment in Croatiacarries risks that are not typically associated with investing in more mature markets. Accordingly, investorsshould exercise particular care in evaluating the risks involved and must decide for themselves whether, inlight of those risks, such an investment is appropriate.

In addition, international investors’ reactions to the events occurring in one country sometimes appear todemonstrate a ‘‘contagion’’ effect. This may result in an entire region or class of investment beingdisfavoured by international investors. Furthermore, if one or more of the countries that compriseCroatia’s major trading partners (many of whom are in the EU) were to experience further negativeconsequences as a result of the global financial and economic crisis, or the sovereign debt crisis, this couldadversely affect the Croatian economy. There can be no assurance that conditions resulting from any crisessimilar to the global financial and economic crisis that started in 2008, the sovereign debt crisis or therecent political turmoil in countries in Northern Africa and the Middle East will not negatively affect theeconomic performance of, or investor confidence in, developing markets, including Croatia.

Croatia may not succeed in implementing its proposed economic, financial and other reforms and policies whichmay adversely affect the Croatian economy.

Since declaring independence in 1991, Croatia has undergone substantial political transformation from aconstituent republic in a federal socialist state to an independent sovereign democracy. In parallel with thistransformation, Croatia has been pursuing a programme of economic structural reform with the objectiveof establishing a market-based economy through privatisation of state enterprises and deregulation of theeconomy. However, this process is not yet complete. Croatia may be unable to complete plannedprivatisations or may experience difficulties implementing budget or other reforms. Croatia has madeprogress in the transition to a functioning market-based economy, but the rebuilding of Croatia’s economicand institutional infrastructure to a Western European standard requires further investment and maytake years to complete. In addition, the economic and financial initiatives and the reforms described in thisOffering Circular may not continue, may be reversed or may not achieve their intended aims in a timelymanner or at all. Failure of the Croatian Government to implement its proposed economic, financial andother reforms and policies may negatively affect the Croatian economy which may in turn impact the

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Group and have a material adverse effect on the Group’s business, results of operations and financialcondition.

Croatia’s economy remains vulnerable to external shocks which could have an adverse effect on Croatia’s economicgrowth.

Croatia’s economy remains vulnerable to external shocks, including those stemming from the globalfinancial and economic crisis that started in 2008, the ongoing sovereign debt crisis or the recent politicalturmoil in certain emerging markets. Although in recent years Croatia has made significant gains instabilising its currency, increasing its GDP, decreasing inflation and increasing real wages, the globalfinancial and economic crisis negatively affected the Croatian economy. In recent years, Croatia hasexperienced negative trends in GDP, a mixed trend in foreign direct investment and an increase in the netlending/borrowing of the consolidated general government. Croatia may not return to the growth patternexperienced in the period from 2001 to 2008 given that it relied heavily on substantial inflows of foreigncapital during this period.

According to the CBS, Croatia’s real GDP remained flat in 2011 after contracting 1.2% in 2010 and 6.9%in 2009. After experiencing a significant decline in 2010, net foreign direct investment recovered in 2011and amounted to A1,000,000 thousand (mostly associated with debt-equity swaps and retained earnings).However, net foreign direct investment still remains low compared to pre-crisis levels. Net foreign directinvestment in 2011, amounted to only 29.7% of net foreign direct investment in 2007 and 31.5% of netforeign direct investment in 2008, according to CBS. Capital inflows decreased by 20.4% in 2009 and thisnegative trend continued during 2010, primarily as a result of the global financial and economic crisis,increased risk aversion by international investors and declining international liquidity, while external debtcontinued to rise, but at a much slower pace. In 2011, Croatia recorded an improvement to capital inflows,which grew by 27.5% to A1.7 billion (excluding international reserve charges). According to CBS, the grossexternal debt (including both public and private debt) grew to A45.2 billion (99.1% of GDP) in 2009 andamounted to A46.5 billion (101.2% of GDP) as at 31 December 2010 and A45.7 billion (99.6% of GDP) asat 31 December 2011. Even as the global economy recovers in the future, the positive economic trends ofrecent years in Croatia may not continue over the longer term and may reverse. These economic factorscould have a material adverse effect on the Group’s business, results of operations and financial condition.

Croatia’s current account deficit may increase.

Croatia’s current account deficit tripled between 2004 and 2008, mainly due to the widening trade deficit,and even though it has declined since 2008, may increase again in the future. The current account deficitincreased by 207.0% from A1.4 billion (4.1% of GDP) in 2004 to A4.3 billion (8.9% of GDP) in 2008. Thecurrent account deficit decreased by 46.5% in 2009 and amounted to A2.3 billion (5.0% of GDP). Thedecrease was mainly attributable to a narrowing of the deficit in trade in goods. In 2010, the currentaccount produced a deficit of A0.48 billion (1.1% of GDP), a 79.4% decrease compared to 2009. In 2011,based on preliminary data, the current account deficit further declined by 9.3% to A0.44 billion (1.0% ofGDP).

Croatia’s exports as a percentage of GDP remained flat over the past decade while imports have grownsteadily as a result of rising consumption. As a result, the trade deficit increased by 62.7% from A6.7 billionin 2004 to A10.9 billion in 2008. However, due to the effects of the global financial and economic crisis onboth domestic and foreign demand, the trade deficit subsequently decreased by 32.1% in 2009 compared to2008 and amounted to A7.4 billion. This trend continued in 2010, with the trade deficit decreasing furtherby 18.9% to A6.0 billion from A7.4 billion in 2009. The trend was reversed in 2011, based on preliminarydata, and the trade deficit increased by 6.1% in 2011, reaching A6.4 billion. The decrease in the tradedeficit and corresponding decrease in the current account deficit in 2009 were largely attributable toimports falling at a more rapid pace than exports as a result of decreased private consumption due toslowing economic activity. Similarly, in 2010, the falling current account deficit was caused by a lower tradedeficit, due to rising exports while imports stagnated. The trade deficit increased in 2011, primarily due toan increase in imports and a growth in the prices of oil and energy commodities. In addition, the exportsector has benefited little from the strong capital inflows (including foreign direct investment) experiencedin recent years as most capital inflows were used in consumption and non-tradable sectors such asconstruction, real estate and wholesale and retail trade, resulting in increased imports and a wideningcurrent account deficit.

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The existing current account deficit and any future increases therein may have an adverse effect on theCroatian economy and thus on the Group’s business, results of operations and financial condition.

Croatia may not join the EU by the target date, or at all, and EU membership may have adverse effects on certainsectors of the economy.

Croatia commenced formal negotiations on EU accession in October 2005. As a prerequisite toEU accession, Croatia had to harmonise its national law with the body of EU law (the ‘‘acquiscommunautaire’’). Following completion of negotiations, Croatia signed the Accession Treaty with the EU.On 22 January 2012, EU accession was approved in a national referendum and on 9 December 2011, theCroatian Parliament ratified the Accession Treaty. Full EU membership is expected on 1 July 2013. Priorto accession, the parliament of each EU member state must ratify the Accession Treaty before it can comeinto effect. As of the date hereof, six out of the 27 EU member states have ratified the Accession Treaty.

The remaining 21 EU member states may not ratify the Accession Treaty prior to 1 July 2013 and it ispossible that domestic political developments in certain member states could lead to delays. In addition,Croatia is subject to ongoing monitoring by the EU with regards to compliance with the acquiscommunautaire and the Pre-Accession Economic Programme. As a result of these factors, there is apossibility that Croatia will not join the EU by the target date or at all. Delays or other adversedevelopments in Croatia’s accession to the EU may have a negative effect on Croatia’s economicperformance and as a result on the Group’s business, results of operations and financial condition.

If Croatia joins the EU in 2013, its economy will become part of the EU internal market and would beexposed to increased competition which could have adverse effects on sectors of the economy that areunable to compete. In addition, Croatia would be required to significantly reduce the level of domesticsubsidies to the agriculture sector which amounted to 1.01% of GDP for the year ended 31 December2011. As a result of EU membership, Croatia expects to receive financial assistance from EU structuralfunds pursuant to the EU Cohesion Policy. However, there is no guarantee that Croatia will meet thecriteria to receive disbursements under these funds or that such funds would be available.

If Croatia joins the EU in 2013, it will seek to enter the Exchange Rate Mechanism (‘‘ERM II’’). UnderERM II, the exchange rate of a non-Euro area Member State is fixed against the Euro and is only allowedto fluctuate within set limits. Entry into ERM II is based on an agreement between the ministers andcentral bank governors of the non-Euro area Member States and the Euro-area Member States, and theEuropean Central Bank. Entry into ERM II will be a step towards the full adoption of the Euro in Croatia,in line with Croatia’s commitment pursuant to the Accession Treaty. Croatia’s date of entry into ERM IIwould primarily depend on Croatia’s macroeconomic indicators (i.e. the ability to fulfil a set ofmembership criteria which are more stringent than those applied to previous candidates). The policymeasures required to meet such criteria could each result in adverse macroeconomic effects on Croatia’seconomy and lead to lower rates of economic growth any and all of which could have a material adverseeffect on the Group’s business results of operations and financial conditions.

Deterioration in Croatia’s relations with its major energy suppliers may adversely affect the supply of energyresources and therefore have a negative effect on the Croatian economy.

Croatia’s economy depends on trade flows with certain other countries largely because Croatia imports alarge percentage of its energy requirements. If bilateral trade relations with Croatia’s major energysuppliers were to deteriorate or if supplies of oil or natural gas to Croatia were to be restricted or if theprice of oil were to significantly increase, Croatia’s economy could be adversely affected. In addition, anincrease in the price of oil or natural gas could adversely affect the pace of economic growth in Croatia.Furthermore, although higher gas prices have increased pressure for reforms in the energy sector, formodernisation of major energy-consuming industries of Croatia through the implementation of energy-efficient technologies and for the modernisation of production facilities, there can be no assurance thatthese reforms and modernisations will be implemented or will succeed. Any major changes in relationswith major energy suppliers to Croatia, in particular any such changes adversely affecting supplies ofenergy resources to Croatia, may have adverse effects on the Group’s business, results of operations andfinancial condition.

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If government revenue decreases, some or all of the Croatian Government’s expenditure reduction plans proveinsufficient, and state-owned enterprises’ dependence on public finances is not reduced, Croatia may not be able toservice its public debt and, as a result, may impact upon the Group’s business, results of operations and financialcondition.

According to the consolidated general government budget for 2012, general government revenue isexpected to be HRK 125.1 billion, an increase of 1.7% over planned general government revenue for 2011.The level of general government revenue continues to be impacted by the difficult macroeconomicenvironment.

The general government budget expects to raise HRK 2.0 billion from the privatisation of two state-ownedenterprises, Croatia Osiguranje (an insurance company) and Hrvatska Postanska Banka (a bank).However, there is no guarantee that these privatisations will be successful or that the CroatianGovernment will be able to raise the full expected amount. Despite reduction efforts, Croatia also facessubstantial expenses relating to public wages, social benefits (including healthcare and pensions) andinterest payments, which represented 26.5% of Croatia’s GDP in 2011. In the absence of adequate reform,the risk of increases in expenses relating to pensions and healthcare over the long-term is compounded bythe fact that the old-age dependency ratio (the proportion of the working age population (people aged 15to 64) to people aged 65 or older remains high (1:0.254 in 2011).

Further pressure on the budget is added by expenses related to general government subsidies. Even thoughsuch expenses decreased from HRK 6.5 billion to HRK 7.6 billion between 2007 and 2011, they still remainrelatively high. In addition, the level of compensation to government employees remains high, amountingto HRK 30.3 billion or 9.3% of GDP according to the budget for 2011. The 2012 budget has introducedmeasures to reduce the level of compensation (by reducing special supplements to salaries relating topart-time work, overtime work and special working conditions), with the aim of saving 0.6% of GDP.However, there can be no guarantee that the Croatian Government would be able to implement suchmeasures successfully or that they would achieve the projected amount of savings and thus make it difficultfor Croatia to achieve the targets set under the Fiscal Responsibility Law.

Without sufficient structural reforms aimed at reducing the dependence of state-owned enterprises onpublic finances and at fostering greater economic efficiency through broader private sector participation,revenue raising measures could prove inadequate to cover the continued increases in public debt andinterest payments. As a result, the current account deficit could become greater and debt servicing in turnmore demanding. Croatian Government payment capacity may become further affected by economiccyclical trends and the risk of a delayed recovery of key economic sectors. Actual economic growth in 2012may be lower than Government projections and assumptions used for the 2012 budget. Lower thanexpected growth would have a negative impact on budget revenue and negative implications in adhering tothe Fiscal Responsibility Law. Lower than expected growth would increase the share of expenditure toGDP (with an unchanged level of expenditure) thereby making it more likely that the Government will failto meet the targets set in the Fiscal Responsibility Law to reduce the expenditure-to-GDP ratio by1% per year. In a lower growth environment, additional expenditure reduction measures may be requiredto adhere to the Fiscal Responsibility Law. This would add pressure to the existing fiscal consolidationplan.

Taken as a whole, reduced revenues, coupled with high expenses related to public wages, social benefits,interest payments, healthcare system, pensions and subsidies, may adversely affect the Group’s business,results of operations and financial condition.

Private Croatian borrowers may not be able to repay or reschedule their debt which may have a material adverseeffect on the Croatian banking system and the Croatian economy.

Private debt in Croatia has grown rapidly since the mid-2000s as corporate and household sectorsaccumulated a heavy debt burden. Household debt in Croatia as a share of GDP is one of the highestamong Central and Eastern European countries. Non-publicly guaranteed private sector external debtrelates almost entirely to foreign borrowing by the corporate sector and banks. Non-publicly guaranteedprivate sector external debt has remained flat in recent years and amounted to A31.7 billion (70.0% of 2011GDP) as at 31 December 2011, A32.1 billion as at 31 December 2010 (70.0% of 2010 GDP) and as at31 December 2009 A32.4 billion (71.0% of 2009 GDP). (These figures do not include the effects of round-tripping transactions, which involve Croatian equity investment abroad to companies which then lend backto the investing company in Croatia). Non-performing loans have been increasing continuously during the

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economic crisis, from 4.9% in 2008 to 12.4% in 2011 and may continue to rise. Non-performing loans toenterprises have experienced the greatest increase, from 7.2% in 2008 to 20.1% in 2011.

Failure of private borrowers to repay or reschedule their debt may have a material adverse effect on theCroatian banking system and the Croatian economy. In turn, this may affect the Group’s business, resultsof operations and financial condition.

Depreciation in the Kuna may adversely affect the Croatian economic and financial condition.

A significant portion of Croatia’s public external debt and domestic debt is denominated in or linked toforeign currencies. Foreign-currency and foreign currency-linked debt accounts for 75.7% of Croatia’sgeneral government debt as at 31 March 2012, according to the Croatian National Bank (‘‘CNB’’). Inaddition, according to the CNB, majority of the Croatian Government’s guarantees are denominated in orlinked to foreign currency. In the event of foreign currency fluctuations, and a devaluation of the Kunarelative to the U.S. dollar or the Euro, the negative impact on the service obligations in respect of the debtdenominated in foreign currencies may have an adverse effect on Croatia’s ability to repay its debtdenominated in foreign currencies.

In addition, according to the CNB, as at 31 March 2012, approximately 83% of Croatia’s corporate debtand approximately 75.3% of household debt was denominated in, or linked to, foreign currency. Only asmall fraction of this debt is hedged. In 2011, as in 2010 and 2009, almost all new lending was linked toforeign currencies. Despite the fact that foreign currency deposits now account for approximately 80% ofall deposits and that large foreign currency deposits by households reduce currency mismatches at theaggregate level, this does not eliminate macro-level mismatches and there are likely to be mismatches atthe individual level between borrowers and depositors as well. In 2011 and 2012, the CNB has intervenedin the foreign currency market a number of times in an effort to stabilise the Euro/Kuna exchange rate.The devaluation of the Kuna against foreign currencies may negatively affect the capacity of corporate andhousehold borrowers to repay their debt and as a result adversely affect the financial and economiccondition of Croatia.

The further proliferation of the Euro in the Croatian economy may adversely affect the CNB’s ability to implementits monetary policies.

In recent years, the role of the Euro in the Croatian economy and circulation of the Euro in Croatiasubstantially increased as a result of sizeable Euro capital inflows from abroad, including from personsworking abroad who send money to their families in Croatia; the tourism industry, in particular thepopulation’s willingness to accept Euro from tourists; and the fact that a majority of corporate andhousehold loans are Euro-denominated or Euro-indexed. The further proliferation of the Euro in theCroatian economy and widespread use of Euro by the Croatian population may weaken the Kuna andundermine the ability of the CNB to implement its monetary policy. Similarly, the policies of the EuropeanCentral Bank affecting the Euro may indirectly impact the Croatian economy. Any limitations on theability of the CNB to implement its monetary policies may have an adverse effect on the Croatian economyand thus on the Group’s business, results of operations and financial condition.

Croatia may enter ERM II following the Accession, subject to certain criteria being met. The policymeasures required to meet such criteria, Croatia’s entry into ERM II and the adoption of the Euro couldeach result in adverse macroeconomic effects on Croatia’s economy and lead to lower rates of economicgrowth.

Corruption and money laundering issues may hinder the growth of the Croatian economy, delay or forecloseEU accession and otherwise have a material adverse effect on Croatia.

Independent analysts have identified corruption and money laundering as problems in Croatia. In the 2011Transparency International Corruption Perceptions Index, Croatia fell four spots to be ranked 66 out of182 countries under review (indicating that there were 65 countries with lower perceived levels ofcorruption). In 2008, Croatia commenced a reform of the judicial system in order to combat corruptionand restore confidence in the judicial system.

The Act on Prevention of Money Laundering and Financing of Terrorism (OG 87/08) came into force on1 January 2009 and is aimed at harmonising Croatian law on the prevention of money laundering andfinancing of terrorism with the provisions of the Third EU Money Laundering Directive(Directive 2005/60/EC). However, there is no certainty as to the success of these measures. Any future

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allegations or evidence of corruption or money laundering in Croatia may have an adverse effect on theCroatian economy, in particular on Croatia’s ability to attract foreign investment, and thus could negativelyaffect the Group’s business, results of operations and financial condition.

Croatia’s legal system is not fully developed and presents greater risks and uncertainties than a more developed legalsystem.

Since Croatia declared independence in 1991, the Croatian legal system has been evolving to support thecountry’s transition to a market-based economy. New laws have been introduced and revisions have beenmade with respect to, amongst others, company, property, competition, public procurement, securities,labour and taxation laws in order to harmonise them with EU laws. However, Croatia’s legal systemremains in transition and is therefore subject to greater risks and uncertainties than a more mature legalsystem. In particular, risks associated with the Croatian legal system include: (i) potential inconsistenciesbetween the Constitution and various laws, governmental, ministerial and local orders, decisions,resolutions and other acts; (ii) provisions in the laws and regulations that are ambiguously worded or lackspecificity and thereby raise difficulties when implemented or interpreted; (iii) difficulty in predicting theoutcome of judicial application of Croatian legislation; and (iv) the fact that not all Croatian resolutions,orders and decrees and other similar acts are readily available to the public or available in anunderstandable, organised form.

These and other factors that may impact Croatia’s legal system, lead to an investment in the Notes beingsubject to greater risks and uncertainties than an investment in a country with a more mature legal system.

The uncertainties relating to the Croatian judicial system could have a negative effect on the economy and thus onthe Group’s business, results of operations and financial condition.

The independence of the judicial system and its immunity from economic and political interference inCroatia remains questionable. The application and interpretation of Croatia’s constitution remainscomplicated and, accordingly, it is difficult to ensure smooth and effective resolution of discrepanciesbetween Croatia’s constitution and applicable Croatian legislation on the one hand and among variouslaws of Croatia on the other hand.

The court system is underfunded compared to more mature jurisdictions. As Croatia is a civil lawjurisdiction, judicial decisions under Croatian law generally have no precedential effect and the courts aregenerally not bound by earlier court decisions taken under the same or similar circumstances. This mayresult in an inconsistent application of Croatian legislation to resolve the same or similar disputes. Becauselegislation in a number of areas was adopted following independence and is still fairly recent, relevantjudicial decisions may not be publicly available and, therefore, the role of judicial decisions as guidelines ininterpreting applicable Croatian legislation to the public at large may be generally limited.

In 2008, the Republic commenced a reform of the judicial system. Despite these efforts, judicial decisionsin Croatia remain difficult to predict. The uncertainties of the Croatian judicial system could have anegative effect on the economy and thus on the Group’s business, results of operations and financialcondition.

Croatia’s official economic data may not be accurate.

Although a range of government ministries including the Ministry of Finance, along with the CNB and theCBS, produce statistics on Croatia and its economy, there can be no assurance that these statistics are asaccurate or as reliable as those compiled in more developed countries. Prospective investors in the Notesshould be aware that figures relating to Croatia’s GDP and many other aggregate figures cited in thisOffering Circular may be subject to some degree of uncertainty and may not be prepared in fullaccordance with international standards. Furthermore, standards of accuracy of statistical data may varyfrom ministry to ministry or from period to period due to the application of different methodologies. Inthis Offering Circular, data are presented as provided by the relevant ministry to which the data areattributed, and no attempt has been made to reconcile such data to the data compiled by other ministriesor by other organisations, such as the International Monetary Fund (the ‘‘IMF’’) or World Bank. Since2005, Croatia has produced data in accordance with the IMF’s Special Data Dissemination Standard.However, there is a possibility that the IMF standard has not been fully implemented or correctly applied.The existence of a sizeable unofficial or unobserved economy may also affect the accuracy and reliability ofstatistical information. Prospective investors should be aware that none of the statistical information in thisOffering Circular has been independently verified.

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Risks Related to the Notes

The Notes may not be a suitable investment for all investors.

Each potential investor in the Notes must determine the suitability of that investment in light of its owncircumstances. In particular, each potential investor should:

(i) have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the meritsand risks of investing in the Notes and the information contained in this Offering Circular or anyapplicable supplement;

(ii) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of itsparticular financial situation, an investment in the Notes and the impact the Notes will have on itsoverall investment portfolio;

(iii) have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes,including where the currency for principal or interest payments is different from the potentialinvestor’s currency;

(iv) understand thoroughly the terms of the Notes and be familiar with the behaviour of any relevantfinancial markets; and

(v) be able to evaluate (either alone or with the help of a financial adviser) possible scenarios foreconomic, interest rate and other factors that may affect its investment and its ability to bear theapplicable risks.

The Notes are complex financial instruments. Sophisticated institutional investors generally do notpurchase complex financial instruments as stand-alone investments. They purchase complex financialinstruments as a way to reduce risk or enhance yield with an understood, measured, appropriate additionof risk to their overall portfolios. A potential investor should not invest in the Notes unless it has theexpertise (either alone or with a financial adviser) to evaluate how the Notes will perform under changingconditions, the resulting effects on the value of the Notes and the impact this investment will have on thepotential investor’s overall investment portfolio.

The conditions of the Notes contain modification and waiver provisions.

The conditions of the Notes contain provisions for calling meetings of Noteholders to consider mattersaffecting their interests generally. These provisions permit defined majorities to bind all Noteholders,including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted ina manner contrary to the majority.

The conditions of the Notes also provide that the Trustee may, without the consent of Noteholders, agreeto (i) any modification of, or to the waiver or authorisation of any breach or proposed breach of, any of theprovisions of Notes or (ii) determine without the consent of the Noteholders that any Event of Default orpotential Event of Default shall not be treated as such, in the circumstances described in Condition 14 ofthe Conditions of the Notes.

Tax may be required to be withheld under the EU Savings Directive in respect of which no gross up payments will bemade.

Under EC Council Directive 2003/48/EC on the taxation of savings income (the ‘‘Savings Directive’’),Member States are required, from 1 July 2005, to provide to the tax authorities of another Member Statedetails of payments of interest (or similar income) paid by a person within its jurisdiction to, or collected bysuch a person for, an individual resident in that other Member State. However, for a transitional period,Luxembourg and Austria are instead required (unless during that period they elect otherwise) to operate awithholding system in relation to such payments (the ending of such transitional period being dependentupon the conclusion of certain other agreements relating to information exchange with certain othercountries). A number of non-EU countries and territories, including Switzerland, have adopted similarmeasures (a withholding system in the case of Switzerland).

The European Commission has proposed certain amendments to the Savings Directive which may, ifimplemented, amend or broaden the scope of the requirements described above.

If a payment were to be made or collected through a Member State which has opted for a withholdingsystem and an amount of, or in respect of, tax were to be withheld from that payment, neither the Issuer

31

nor any Agent nor any other person would be obliged to pay additional amounts with respect to anyNote as a result of the imposition of such withholding tax. If a withholding tax is imposed on paymentmade by a Paying Agent in accordance with the Savings Directive, the Issuer will be required to maintainan Agent in a Member State that will not be obliged to withhold or deduct tax pursuant to the SavingsDirective.

Noteholders’ rights may be adversely affected by a change of law.

The conditions of the Notes are based on English law in effect as at the date of this Offering Circular. Noassurance can be given as to the impact of any possible judicial decision or change to English law oradministrative practice after the date of this Offering Circular.

Croatian insolvency laws to which the Issuer is subject may not be as favourable to the holders of the Notes as U.S. orother insolvency laws.

The Issuer is incorporated and organised under the laws of the Republic of Croatia. Any insolvencyproceedings relating to the Issuer, even if brought in the United States, might involve Croatian insolvencylaws, the procedural and substantive provisions of which may differ from comparable provisions ofU.S. federal bankruptcy law. If the Issuer becomes insolvent, there is a risk that holders of Notes may notbe able to fully enforce their rights under the Notes and that any claims may be considerably delayed. TheCroatian insolvency laws may not be as favourable as insolvency laws in the United States or in any otherjurisdiction with which the investors may be familiar.

Investors may experience difficulties in enforcing foreign judgments under laws other than Croatian law, includingunder U.S. federal securities laws.

The Issuer is a corporation organised under the laws of the Republic of Croatia. All of the officers anddirectors of the Issuer are residents of the Republic of Croatia and all or a substantial portion of the assetsof the Issuer and its officers and directors are located in the Republic of Croatia. As a result, it may not bepossible for an investor to effect service of process outside the Republic of Croatia upon the Issuer or suchpersons, or to enforce any judgments against them obtained in courts outside the Republic of Croatiapredicated upon civil liabilities of the Issuer or such directors and officers under laws other than Croatianlaw, including any judgments predicated upon United States federal or state securities laws.

There is doubt as to the enforceability in Croatia of original actions, or actions for the enforcement ofjudgments of English courts or U.S. courts, of civil liabilities predicated solely upon the laws of England orfederal laws of the United States. Croatia is not a party to any multilateral or bilateral treaty by which thejudgments of English courts or U.S. courts would be recognised and enforced, and Croatian courts havenot established ‘‘factual reciprocity’’ with the English courts or the U.S. courts. See ‘‘Service of Process andEnforcement of Civil Liabilities.’’

An active trading market for the Notes may not develop.

The Notes may not have an established trading market when issued and the Issuer cannot assure investorsthat an active trading market for the Notes will develop or be maintained. In addition, there may be alimited number of buyers when an investor decides to sell the Notes, which can affect the price an investorreceives for such Notes or the ability to sell such Notes at all. Therefore, investors may not be able to selltheir Notes easily or at prices that will provide them with a yield comparable to similar investments thathave a developed secondary market. Illiquidity may have a severely adverse effect on the market value ofthe Notes.

Furthermore, the Notes have not been, and will not be, registered under the Securities Act or any otherapplicable securities laws and are being offered pursuant to an exemption from the registrationrequirements of the Securities Act. Accordingly, the Notes are subject to certain transfer restrictions andwill bear a legend regarding those restrictions. See ‘‘Subscription and Sale’’ and ‘‘Notice to Purchasers andHolders of Notes and Transfer Restrictions.’’ These restrictions may limit the ability of investors to resell theNotes.

Investors may be exposed to exchange rate risks and exchange controls.

The Issuer will pay principal and interest on the Notes in U.S. dollars. This presents certain risks relatingto currency conversions if an investor’s financial activities are denominated principally in a currency or

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currency unit (the ‘‘Investor’s Currency’’) other than U.S. dollars. These include the risk that exchangerates may significantly change (including changes due to devaluation of the U.S. dollar or revaluation ofthe Investor’s Currency) and the risk that authorities with jurisdiction over the Investor’s Currency mayimpose or modify exchange controls. An appreciation in the value of the Investor’s Currency relative to theU.S. dollar, would decrease (i) the Investor’s Currency-equivalent yield on the Notes, (ii) the Investor’sCurrency-equivalent value of the principal payable on the Notes and (iii) the Investor’s Currency-equivalent market value of the Notes.

Government and monetary authorities may impose (as some have done in the past) exchange controls thatcould adversely affect an applicable exchange rate. As a result, investors may receive less interest orprincipal than expected, or no interest or principal.

Investors may be exposed to interest rate risks.

Investment in Notes bearing interest at a fixed rate involves the risk that subsequent changes in marketinterest rates may adversely affect the value of the Notes.

Any credit ratings assigned to the Issuer or the Notes may not reflect all the risks of an investment in the Notes.

One or more independent credit rating agencies may assign credit ratings to the Notes. The ratings maynot reflect the potential impact of all risks related to structure, market, additional factors discussed above,and other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy,sell or hold securities and may be revised, suspended or withdrawn by the assigning rating agency at anytime.

In general, European regulated investors are restricted under the CRA Regulation from using creditratings for regulatory purposes, unless such ratings are issued by a credit rating agency established in theEU and registered under the CRA Regulation (and such registration has not been withdrawn orsuspended), subject to transitional provisions that apply in certain circumstances whilst the registrationapplication is pending. Such general restriction will also apply in the case of credit ratings issued bynon-EU credit rating agencies, unless the relevant credit ratings are endorsed by an EU-registered creditrating agency or the relevant non-EU rating agency is certified in accordance with the CRA Regulation(and such endorsement action or certification, as the case may be, has not been withdrawn or suspended).The list of registered and certified rating agencies published by the European Securities and MarketsAuthority (‘‘ESMA’’) on its website in accordance with the CRA Regulation is not conclusive evidence ofthe status of the relevant rating agency included in such list, as there may be delays between certainsupervisory measures being taken against a relevant rating agency and the publication of the updatedESMA list. Certain information with respect to the credit rating agencies and ratings is set out on the coverof this Offering Circular

Legal investment considerations may restrict certain investments.

The investment activities of certain investors are subject to legal investment laws and regulations, or reviewor regulation by certain authorities. Each potential investor should consult its legal advisers to determinewhether and to what extent (i) the Notes are legal investments for it, (ii) the Notes can be used ascollateral for various types of borrowing and (iii) other restrictions apply to its purchase or pledge of anyNotes. Financial institutions should consult their legal advisers or the appropriate regulators to determinethe appropriate treatment of the Notes under any applicable risk-based capital or similar rules.

Reliance on DTC, Euroclear and Clearstream, Luxembourg procedures.

The Rule 144A Notes will be represented by the Restricted Global Certificate, which will be deposited witha nominee for DTC. Except in the circumstances described in the Restricted Global Certificate, investorswill not be entitled to receive Notes in definitive form. DTC and its direct and indirect participants willmaintain records of beneficial interests in the Restricted Global Certificate. While the Notes arerepresented by the Restricted Global Certificate, investors will be able to trade their beneficial interestonly through DTC and its participants, including Euroclear and Clearstream, Luxembourg.

The Regulation S Notes will be represented by the Unrestricted Global Certificate, which will be depositedwith a common depositary for Euroclear and Clearstream, Luxembourg. Except in the circumstancesdescribed in the Unrestricted Global Certificate, investors will not be entitled to receive Notes in definitiveform. Euroclear and Clearstream, Luxembourg and their respective direct and indirect participants will

33

maintain records of beneficial interests in the Unrestricted Global Certificate. While the Notes arerepresented by the Unrestricted Global Certificate, investors will be able to trade their beneficial interestonly through Euroclear and Clearstream, Luxembourg and their respective participants.

While the Notes are represented by the relevant Global Certificate(s), the Issuer will discharge its paymentobligations under the Notes by making payments through the relevant clearing systems(s). A holder of abeneficial interest in a Global Certificate must rely on the procedures of the relevant clearing system andits participants to receive payments under the Notes. The Issuer has no responsibility or liability for therecords relating to, or payments made in respect of, beneficial interests in any Global Certificate.

Holders of beneficial interests in a Global Certificate will not have a direct right to vote in respect of theNotes. Instead, such holders will be permitted to act only to the extent that they are enabled by therelevant clearing system and its participants to appoint appropriate proxies.

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SELECTED FINANCIAL INFORMATION

The following tables set forth, for the periods indicated, selected consolidated financial information of theIssuer and its subsidiaries derived from the Group Annual Financial Statements and Interim FinancialStatements included elsewhere in this Offering Circular.

Prospective investors should read the following information in conjunction with the Annual FinancialStatements and the Interim Financial Statements.

Consolidated Income Statement Data

Year ended 31 December Six months(Restated) ended 30 June(Audited) (Unaudited)

2009 2010 2011 2012

(HRK thousands)

Revenue from electricity sales . . . . . . . . . . . . . 10,798,272 10,851,054 10,769,900 5,539,533Revenue from thermal power sales . . . . . . . . . . 553,732 569,784 582,352 323,386Revenue from gas sales . . . . . . . . . . . . . . . . . . 294,262 394,182 381,177 206,848Other operating income . . . . . . . . . . . . . . . . . 983,514 1,241,879 1,353,600 570,073

Total operating income . . . . . . . . . . . . . . . . . . 12,629,780 13,056,899 13,087,029 6,639,840

Electricity purchase cost . . . . . . . . . . . . . . . . . (3,078,977) (2,011,535) (3,259,984) (2,045,794)Fuel costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,385,583) (2,077,105) (2,870,113) (1,722,670)Staff cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,954,350) (1,895,205) (1,890,228) (935,395)Depreciation and amortisation expense . . . . . . (1,688,750) (1,721,472) (1,749,518) (871,420)Other operating expenses . . . . . . . . . . . . . . . . (2,937,066) (2,992,271) (2,850,790) (1,248,716)

Total operating expenses . . . . . . . . . . . . . . . . . (12,044,726) (10,697,588) (12,620,633) (6,823,995)

Profit/(loss) from operations . . . . . . . . . . . . . . 585,054 2,359,311 466,396 (184,155)

Financial revenue . . . . . . . . . . . . . . . . . . . . . . 81,101 91,187 57,718 29,904Financial costs . . . . . . . . . . . . . . . . . . . . . . . . (450,414) (439,224) (428,989) (170,361)

Net financial expense . . . . . . . . . . . . . . . . . . . (369,313) (348,037) (371,271) (140,457)

Profit/(loss) before tax . . . . . . . . . . . . . . . . . . 215,741 2,011,274 95,125 (324,612)

Income tax (expense)/income . . . . . . . . . . . . . . (70,413) (436,623) (88,048) 4,608

Profit/(loss) for the year . . . . . . . . . . . . . . . . . 145,328 1,574,651 7,077 (320,004)

Consolidated Statement of Financial Position Data

Year ended 31 December Six months(Restated) ended 30 June(Audited) (Unaudited)

2009 2010 2011 2012

(HRK thousands)

Total non-current assets: . . . . . . . . . . . . . . . . . . . 30,040,689 29,997,355 30,364,386 30,436,252

Total current assets: . . . . . . . . . . . . . . . . . . . . . . 2,771,103 3,753,220 3,381,984 3,141,391

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,811,792 33,750,575 33,746,370 33,577,643

Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,387,846 19,941,517 19,420,359 19,079,796

Long-term borrowings . . . . . . . . . . . . . . . . . . . . . 3,113,467 2,883,554 2,534,489 1,980,071Long-term liabilities to the state . . . . . . . . . . . . . 59,713 33,734 30,466 28,978Long-term provisions . . . . . . . . . . . . . . . . . . . . . 559,017 799,945 778,629 801,253Bonds issued . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,150,887 1,058,042 965,202 918,780Other long-term liabilities . . . . . . . . . . . . . . . . . . 4,878,280 5,008,205 5,144,960 5,075,814Total non-current liabilities . . . . . . . . . . . . . . . . . 9,761,364 9,783,480 9,453,746 8,804,896

Total current liabilities . . . . . . . . . . . . . . . . . . . . 4,662,582 4,025,578 4,872,265 5,692,951

Total Capital and liabilities . . . . . . . . . . . . . . . . . 32,811,792 33,750,575 33,746,370 33,577,643

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Consolidated Statement of Cash Flow Data

Year ended 31 December Six months(Restated) ended 30 June(Audited) (Unaudited)

2009 2010 2011 2012

(HRK thousands)

Net cash from operating activities . . . . . . . . . . . . . 2,709,773 2,887,928 2,540,201 151,844Net cash used in investing activities . . . . . . . . . . . . (2,396,083) (1,658,559) (2,180,879) (906,761)Net cash used in financing activities . . . . . . . . . . . (364,069) (611,046) (714,356) 588,284

Other Financial Data

TwelveYear ended 31 December months

(Restated) ended 30 June(Unaudited) (Unaudited)

2009 2010 2011 2012

(HRK thousands)

Profit/(loss) for the year . . . . . . . . . . . . . . . . . . . . . . 145,328 1,574,651 7,077 (703,589)Financial expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 450,414 439,224 428,989 468,935Financial income . . . . . . . . . . . . . . . . . . . . . . . . . . . (81,101) (91,187) (57,718) (46,602)Income tax expense/(income) . . . . . . . . . . . . . . . . . . 70,413 436,623 88,048 (50,124)Depreciation and amortisation . . . . . . . . . . . . . . . . . 1,688,750 1,721,472 1,749,518 1,753,304Adjusted EBITDA(1) . . . . . . . . . . . . . . . . . . . . . . . . . 2,273,804 4,080,783 2,215,914 1,421,924

TwelveYear ended months

31 December ended 30 June

2009 2010 2011 2012

(%)

Adjusted EBITDA Margin(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.1 31.3 16.9 10.7

Adjusted EBITDA and Adjusted EBITDA Margin are supplemental measures of performance andliquidity that are not required by or presented in accordance with IFRS. Furthermore, Adjusted EBITDAand Adjusted EBITDA Margin should not be considered as an alternative to profit/(loss) before tax, profit/(loss) for the year or any other performance measures derived in accordance with IFRS or as an alternativeto cash flow from operating activities, as a measure of liquidity or as a measure of cash available to investin the growth of a business. The Group’s use of the term Adjusted EBITDA may vary from others’ in thesame industry.

(1) Adjusted EBITDA consists of profit/(loss) for the year excluding financial expense, financial income, income tax (expense)/income depreciation and amortisation.

(2) Adjusted EBITDA Margin consists of profit/(loss) for the year excluding financial expense, financial income, income tax(expense)/income depreciation and amortisation, divided by total operating income, expressed as a percentage.

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USE OF PROCEEDS

HEP will receive net proceeds of the issuance of the Notes of approximately U.S.$497,655,000 afterdeducting the Managers’ commissions and certain estimated expenses to be incurred in connection withthis offering including legal, accounting and other professional fees incurred in connection therewith thatare to be borne by the Issuer.

HEP shall use these net proceeds to repay or prepay up to A260,000 thousand (approximatelyHRK 1,947,400 thousand) of existing debt, including indebtedness outstanding under its A30,000,000 creditfacility with Bayersische Landesbank; A125,000,000 credit facility with Privredna Banka Zagreb-DionickoDrustvo; A3,000,000 credit facility with Societe Generale-Splitska Banka d.d.; A100,000,000 credit facilitywith Deutsche Bank Luxembourg S.A.; and A10,000,000 credit facility with Societe Generale-SplitskaBanka d.d. (each as more particularly described in Condition 4 of the Conditions of the Notes). HEPintends to use the balance of such proceeds, together with funds from other sources, to finance capitalexpenditures and for other general corporate purposes.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS

The following is a discussion and analysis of the results of operations and financial condition based upon theAnnual Financial Statements of the Group as of and for the years ended 31 December 2009, 2010 and 2011and Interim Financial Statements of the Group as of and for the six months ended 30 June 2012, in accordancewith IFRS and IAS 34 as adopted by the EU.

The following discussion should be read in conjunction with the Financial Statements and related notes whichare annexed to this Offering Circular. The statements in this discussion regarding industry outlook, the Group’sexpectations regarding its future performance, liquidity and capital resources and other non-historicalstatements in this discussion are forward-looking statements. These forward-looking statements are subject tonumerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in the‘‘Risk Factors’’ and ‘‘Forward-Looking Statements’’ sections of this Offering Circular. The Group’s actualresults may differ materially from those contained in, or implied by, any forward-looking statements.

Overview

The Group is the leading power generation, transmission, distribution and supply company in Croatia. TheGroup is 100% owned by the Republic of Croatia and is a vertically integrated power utility, operatingacross the entire electricity market spectrum from generation to end consumer distribution organisation.As part of its operations, the Group is also engaged in thermal energy (heat) generation and gasdistribution in Croatia, as well as electricity trading.

According to Management’s estimates, the Group accounted for approximately 82% of electricitygenerated, approximately 95% of installed electricity generation capacity, 100% of electricity distribution,in terms of the number of connection points, and approximately 99% of electricity sold to end consumersin Croatia in the year ended 31 December 2011.

The Group comprises 14 wholly-owned subsidiaries and two jointly controlled power plants, Krsko nuclearplant, located in the Republic of Slovenia and co-owned with GenE and Plomin II thermal Power Plant(‘‘Plomin II’’), located in Croatia and co-owned with RWE Energie Aktiengesellschaft (‘‘RWE’’). Inaddition, HEP also jointly owns, together with Plinacro d.o.o., LNG Hrvatska d.o.o. (‘‘LNG Hrvatska’’),which joint venture was formed for the purpose of taking an 11% share in the Adria LNG consortium, partof a total 25% holding in the Adria LNG consortium that was reserved for Croatian companies. The AdriaLNG Consortium was set up to build a liquefied natural gas (‘‘LNG’’) regasification terminal in Omisalj onthe island of Krk, Croatia.

Factors that Affect the Group’s Results of Operations

Tariffs

A significant portion of the Group’s revenues derived from electricity sales is derived from the regulatedelectricity tariff rates it charges its Tariff Customers (approximately 70% as at 31 December 2011) withremaining revenue derived from Non-Tariff Customers and other operations.

The Group’s customers in Croatia can be split between ‘‘Commercial Customers’’, which includescommercial and industrial entities and ‘‘Households’’, which are residential customers. As part of itsAccession process, the Croatian Government has adopted EU regulations for the energy market whichallow, pursuant to the Electricity Market Act, all electricity customers to choose a ‘‘Market Supplier’’which offers non-tariff based rates, rather than remaining with the public supply system (see ‘‘Regulation—Accession of the Republic of Croatia to the EU’’ for further details). Commercial Customers who choose aMarket Supplier typically pay lower rates than the tariffed rates under the regulated public supply system.In the event that a Commercial Customer fails to choose a Market Supplier or its contract with a MarketSupplier is terminated, such Commercial Customer will be supplied by the public supply system where it ischarged an energy balancing tariff which is based on electricity consumption at prevailing tariff rates as setby the Croatian Government, on the recommendation of HERA, and which tariff is subject to a 20%increase if, after 30 days, the relevant Commercial Customer has failed to choose a Market Supplier (the‘‘Balancing Energy Tariff’’). Households are not currently similarly incentivised to choose an alternativesupply company and in practice virtually all Households have opted to remain with and are suppliedthrough the public supply system provided by HEP at the fixed tariffed rates. Only a negligible number ofHouseholds (less than 0.01%) have changed their supplier to a Market Supplier. Customers who are

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supplied through the public supply system are referred to as ‘‘Tariff Customers’’ and customers who aresupplied by Market Suppliers are referred to as ‘‘Non-Tariff Customers’’.

As a result of the complicated tariff approval system, the Group is unable to make rapid changes to theprices it charges from its Tariff Customers and may be required to provide its products at below marketprices. Since the Group is required to supply all Tariff Customers at the pre-set tariff rates, it is unable torespond to changes in demand or pass on any increases in its operating costs to these customers. Inaddition, since the Group has a relative monopoly in the Croatian energy market, it is unable to vary theprices it charges its Non-Tariff Customers and might not be able to raise prices as a result of increase indemand or higher operating costs. The Group is also unable to switch its operational focus betweendifferent products, such as electricity, thermal energy or gas, and must meet the existing demand of allTariff Customers. At times, this means that the Group is required to supply its products with only a limitedprofit margin or at a significant loss, which could have an adverse impact on the Group’s financialperformance and results of operations. In particular, during a period of increasing operating costs,increases to electricity tariff rates for tariff customers were not granted from 2009 until 1 May 2012, whenan average 18.9% increase (including distribution and transmission charges) granted in April 2012 cameinto force. The Group’s reserve margin (which is calculated as installed dependable generation capacityless peak load divided by peak load, shown as a percentage) has shown an increase over the period underreview; from 17% in 2009, to 20% in 2010 and 23% in 2011. No increases to thermal energy tariffs havebeen granted since January 2009, however the Group has requested a tariff increase from local Croatianmunicipalities located in Zagreb, Osijek, Sisak, Velika Gorica, Samobor and Zapresic.

Weather Conditions

The Group’s electricity generation operations are materially impacted by weather conditions andcommodity prices. Weather conditions, such as droughts or heat waves, can significantly reduce theGroup’s hydro plants electricity generation, which typically represents between 31% and 53% of theGroup’s total electricity generation based on observation of the last ten years. For example, in the courseof 2011 and 2012, Croatia has experienced long periods of drought and historically low water inflows.

In the year ended 31 December 2011, the Group generated 12,675 GWh of electricity, representing adecrease of 3,111 GWh, or 19.7%, from 15,786 GWh in the year ended 31 December 2010, of which 77%was generated in Croatia. In the year ended 31 December 2011, 4,577 GWh, or 36%, of the Group’s totalelectricity generated was generated by its hydro power plants, 2,951 GWh, or 23%, was generated by itsnuclear power plant and the remaining 5,147 GWh, or 41%, was generated by its thermal power plantscompared with 8,309 GWh, or 53%, 2,690 GWh, or 17%, and 4,787 GWh, or 30%, respectively, in the yearended 31 December 2010. The decrease in electricity generation in 2011, was primarily due to a decreaseof 3,732 GWh, or 45%, in hydro electricity generated in 2011, as a result of a long period of drought inCroatia and historically low water inflows. This decrease was offset by an increase of 621 GWh, or 8%, inelectricity generated by the Group’s thermal and nuclear power plants and by an increase of 1,742 GWh, or45%, in imports of electricity by the Group.

As discussed above, in ‘‘—Tariffs’’, the inability to raise rates resulted in relatively flat revenues between2009 and 2011, although profitability suffered significantly, as operating costs increased, particularly in2011 and 2012 due to increased imports of electricity and production from higher cost generation plantsand contributed to the Group’s breach of certain financial covenants under six of its facility agreements in2012 (all of the resultant defaults under such facility agreements have since been waived by the relevantlenders). See ‘‘—Long-term borrowings’’ for further details.

In the first half of 2012, this trend continued. In the six months ended 30 June 2012, the Group generated5,279 GWh of electricity, representing a decrease of 1,298 GWh, or 19.7%, from 6,577 GWh in thesix months ended 30 June 2011, of which 79% was generated in Croatia. In the six months ended 30 June2012, 1,820 GWh, or 35%, of the Group’s total electricity generated was generated by its hydro powerplants, 1,128 GWh, or 21%, was generated by its nuclear power plant and the remaining 2,331 GWh, or44%, was generated by its thermal power plants compared with 2,888 GWh, or 44%, 1,444 GWh, or 22%,and 2,245 GWh, or 34%, respectively, in the six months ended 30 June 2011. The decrease in electricitygeneration in the first half of 2012, was primarily due to a decrease of 1,068 GWh, or 37%, in hydroelectricity generated in the first half 2012, as a result of the ongoing drought in Croatia and historically lowwater inflows. This decrease was offset by an increase of 1,082 GWh, or 42%, in imports of electricity bythe Group. Electricity generated by the Group’s thermal and nuclear power plants decreased by 230 GWh,

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or 6%, predominantly due to NPPK remaining offline for four days longer than anticipated as a result ofplanned maintenance overrunning in the six months ended 30 June 2012.

The cost of electricity on an open market is affected by similar factors that affect the Group operations andopen market prices are likely to increase during the periods of drought or other unfavourable conditions.Consequently, if the Group will be unable to obtain a sufficient amount of electricity from its hydro powerplants and will be forced to purchase additional electricity on an open market it is likely that it will berequired to pay higher market prices. Accordingly, volatility in the prices of electricity purchased on themarket may have a significant effect on the Group’s financial performance and results of operations.

Commodity Prices

The Group has a mix of electricity generation assets, with hydro and nuclear power plants being the mostefficient and lower cost options. In particular, hydro power plants are a significantly less expensive sourceof energy than thermal power plants, which requires fuel to operate (principally fuel, oil, coal and naturalgas). A significant portion of the Group’s expenses are made up of commodity costs, which are heavilyinfluenced by prices in the world market for gas, fuel oil and coal. The prices for such commodities havehistorically been volatile and there is no guarantee that prices will remain within projected levels. Inparticular, the price of fuel oil and natural gas, on which the Group is dependent for most of its thermalpower plants and for its district boiler rooms, have risen in recent years, with oil prices based on figuresfrom the Bloomberg Brent Index averaging U.S. $112 in 2011 and reaching a high of over U.S.$123 perbarrel in early 2012. These high oil costs negatively impacted the Group in 2011 and the first half of 2012as the Group purchased significant quantities of fuel during these periods as a result of weather conditions(see ‘‘—Weather Conditions’’ above).

The Group does not undertake any hedging transactions with regards to the commodity products and anysignificant increases in commodity prices could have an adverse effect on the Group’s operating results andfinancial condition, especially if the Group is not able (or not permitted by regulatory authorities) to shiftproduction to lower-cost commodities or to adjust its rates to offset such increases in prices. As the Groupdoes not typically enter into long-term commodity supply agreements, its annual results are subject tosubstantial variation depending on its ability to generate electricity through its hydro power plants and theneed to purchase significant amount of oil, fuel, gas and other commodities in order to power its thermaland nuclear power plants. In addition, from 2013, generation of energy through thermal power plants willbe subject to the increased costs associated with emissions allowances. Accordingly, during the years wherethe weather conditions are sub-optimal for hydro electricity generation, the Group might be required toswitch its operations to less cost effective production methods and incur significant additional costs.

Geographical and Operating Segments

The Group generates the vast majority of its income from its operations in Croatia. The Group also hasgenerating facilities in Slovenia (where it has a 50% holding in the Krsko nuclear plant) and Bosnia andHerzegovina where it has a pumping station. The Group’s trading subsidiary, HEP Trade, carries outtrading activities through subsidiaries located in Slovenia and Hungary. HEP Trade has further subsidiariesin each of Serbia and Bosnia and Herzegovina, however neither of these are currently undertaking tradingoperations.

The Group’s principal activities are the generation, transmission, distribution and supply of electricity. Inaddition to these principal activities, the Group also deals with the generation, distribution and supply ofthermal energy, i.e. heat, through the district heating systems in Zagreb, Osijek, Sisak, Samobar, Zapresicand Velika Gorica and the distribution and supply of gas in Osijek-Baranja County, Pozega-SlavoniaCounty and Virovitica-Podravina County.

Joint Ventures and Associated Companies

The Group jointly owns two of its power plants, thermal power plant Plomin II, which HEP holds(together with RWE) through a 50% holding in TE Plomin d.o.o. (‘‘TE Plomin’’) and nuclear power plantKrsko, which HEP holds (together with GenE) through a 50% holding NPPK. TE Plomin is fullyconsolidated into the Group’s accounts, but NPPK is an associated company and is accounted at cost. Inaddition, HEP also jointly owns, together with Plinacro d.o.o., LNG Hrvatska d.o.o. (‘‘LNG Hrvatska’’),which joint venture was formed for the purpose of taking an 11% share in the Adria LNG consortium, partof a total 25% holding in the Adria LNG consortium that was reserved for Croatian companies. The Adria

40

LNG Consortium was set up to build a liquefied natural gas (‘‘LNG’’) regasification terminal in Omisalj onthe island of Krk, Croatia.

Restatement of the Annual Financial Statements

The Group prepared separate financial statements for each of the years ended 31 December 2009, 2010and 2011. As a result of certain information not being available at the time the financial statements werefinalised, the audit opinions provided by Deloitte in respect of such financial statements were issuedsubject to the qualifications and reclassifications as described below. The Group restated the financialstatements for each of the years ended 31 December 2009, 2010 and 2011 in order to resolve suchqualifications and as a result has issued the restated consolidated Annual Financial Statements covering allthree years. Deloitte has issued an audit opinion in respect of the Annual Financial Statements in whichsuch qualifications have now been resolved, except for one outstanding qualification which is describedbelow (see ‘‘—Qualified Audit Opinion as to Purchase of Electricity Facilities’’)

Restatement of the investment in the Krsko nuclear power plant

The Group’s investment in the Krsko nuclear power plant was denominated in Euros and was translated toKunas at each balance sheet date using the middle exchange rate of the Croatian National Bank. Thistranslation was not compliant with the International Accounting Standards 28 and was restated to theinitial amount determined at historical cost in the Annual Financial Statements.

The restatement made at 31 December 2009 resulted in an increase of the investment in Krsko nuclearpower plant by HRK 148,826 thousand in 2009 and an increase in capital reserves by the same amount.The amount of HRK 148,826 thousand comprises the restatement of the opening balance for the year as at1 January 2009 in the amount of HRK 144,821 thousand. This restatement resulted in an adjustmentof HRK 4,005 thousand to other comprehensive income recorded during the year ended 31 December2009.

The restatement made at 31 December 2010 in amount of HRK 17,354 thousand relates to the restatementof other comprehensive income recorded during the year ended 31 December 2010, which resulted indecrease of other comprehensive income and investment in NPPK by HRK 17,354 thousand. Thecumulative effect of the restatement is an increase of the investment in NPPK by HRK 131,472 thousandand an increase in capital reserves by the same amount.

This restatement had no impact as of or for the year ended 31 December 2011.

Impairment allowance for bad and doubtful receivables

In 2010, the Group recognised an impairment allowance for bad and doubtful receivables in the amountof HRK 60,110 thousand. As it was determined that the circumstances prompting the making of suchimpairment allowance, such as poor liquidity and accumulating debts of certain of the Group’s customers,existed as at 31 December 2009, the Group’s Financial Statements for the year ended 31 December 2009were restated to reflect the impairment allowance as at the earlier date.

The restatement made to these financial statements regarding impairment allowance on bad and doubtfulreceivables as at 31 December 2009 resulted in a decrease of the balance of trade receivables as at31 December 2009 by HRK 60,110 thousand and an increase in other operating expenses by the sameamount. Since the amount restated represents a temporary difference, the restatement resulted in anincrease in deferred tax assets in the amount of HRK 12,022 thousand, and a decrease of income taxexpense by the same amount. The net effect of the above described restatement on the statement ofcomprehensive income for the year ended 31 December 2009 amounts to HRK 48,088 thousand.

The previously reported receivables balance at 31 December 2010 remains unchanged. However, theCompany previously inappropriately recorded the impairment during the year ended 31 December 2010.In conjunction with the restatement of the financial statements for the year ended 31 December 2009, theCompany reversed the entry recorded in the year ended 31 December 2010, which resulted in an increasein receivables and decrease of other operating expenses of HRK 60,110 thousand, an increase in incometax by HRK 12,022 thousand, and a decrease in retained earnings by HRK 48,088 thousand.

This restatement had no impact as of or for the year ended 31 December 2011.

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Adoption of IFRIC 18

The Group is required to apply IFRIC 18 ‘‘Transfer of Assets from Customers’’, which specifies theaccounting treatment for assets transferred from customers, whereby revenue from such assets is to berecognised in the income statement immediately upon transfer, rather than deferred over the useful life ofthe asset concerned (the ‘‘Interpretation’’). IFRIC 18 has been in effect since 1 July 2009. TheManagement Board of the Company first adopted the Interpretation to assets transferred from customerssubsequent to 1 January 2010.

In these financial statements, the Group restated the balances for the six-month period beginning on 1 July2009 and ending 31 December 2009 to which the Interpretation applies. As a result of the restatement,other long-term liabilities at 31 December 2009 decreased by HRK 48,742 thousand, and other incomeincreased by the same amount, and, consequently, income tax expense and taxes and contributions payableincreased by HRK 9,748 thousand. The restatement made at 31 December 2010 with respect to the timelyadoption of IFRIC 18 resulted in an increase in other income by HRK 113,996 thousand and a decrease inother long-term liabilities by the same amount. The cumulative effect on long term liabilities as at31 December 2010 amounts to a total decrease of HRK 162,738 thousand. As at 31 December 2010, theimpact of the correction on the tax balances was an increase in the balance of current tax payable and ofthe income tax by HRK 22,799 thousand each. The current tax balance as at 31 December 2010 alsoreflects the correction regarding the adoption of IFRIC 18 in 2009, and as a result, the cumulative effecton the current tax payable is an increase of HRK 32,547 thousand.

The restatement made at 31 December 2011 with respect to the adoption of IFRIC 18 resulted in anincrease in other income by HRK 12,978 thousand and a decrease in other long-term liabilities by the sameamount. Total cumulative effect on other long-term liabilities, inclusive of the restatement of the precedingtwo periods, amounts to a decrease of HRK 175,716 thousand.

The impact of the correction on the tax balances as at 31 December 2011 was an increase in the balance ofcurrent tax and of the income tax by HRK 2,595 thousand each. The current tax balance reflects thecorrection regarding the adoption of IFRIC 18 in 2009 and 2010 as well, and as a result, the cumulativeeffect on the current tax payable is an increase by HRK 35,143 thousand as at 31 December 2011.

Reclassification of income statement items

As of 31 December 2009 the Group reclassified HRK 28,772 thousand from other operating expenses tofinancial cost, because the balance related to the unrealised exchange rate differences on a loan. Forcomparability purposes, the Group reclassified HRK 19,748 thousand as of 31 December 2009 from otheroperating expenses to operating income.

Reclassification of deferred tax liability

For the year ended 31 December 2010, the Group reclassified a deferred tax liability ofHRK 1,874 thousand by offsetting it against deferred tax assets.

Qualified Audit Opinion as to Purchase of Electricity Facilities

In the Group’s Annual Financial Statements for the years ended 31 December 2009, 2010 and 2011,Deloitte issued its audit opinion subject to certain qualifications regarding a payment ofHRK 300,000 thousand made by the Group to HAC in December 2006 for the purchase of electricityfacilities situated along the Croatian motorway network. The basis for the qualification is as follows:

Prepayments to Hrvatske autoceste d.o.o.

As described in Note 13 ‘‘Prepayments for Property, Plant and Equipment’’ of the Annual FinancialStatements, the Group advanced HRK 300 million to Hrvatske autoceste d.o.o. in December 2006 for thepurchase of electricity facilities on the Croatian motorways within two years from the date of the advancepayment. As of the date of the Annual Financial Statements, legal title to these facilities had not yet beentransferred to the Group. The Group is the economic beneficiary of the electricity facilities, which it usesfor their intended economic purposes in the supply of electricity to customers. As of the date ofpreparation of the Annual Financial Statements, the Group did not classify the advance payment by type ofassets used in the Group’s business, and Deloitte received from the Management Board no calculation ofthe economic impact of the reclassification of those assets from prepayments to assets in use and of the

42

related depreciation. As a result, Deloitte was unable to assess the impact of this matter on the Group’sAnnual Financial Statements.

Qualified opinion

Deloitte stated in their audit opinion that, except for the potential effects of the matters discussed inparagraph above, the Annual Financial Statements presented fairly, in all material respects, the financialposition of the Group at 31 December 2011, 31 December 2010 and 31 December 2009, the results of itsoperations and its cash flows for the years then ended in accordance with IFRS.

In December 2011, the Group and HAC arranged for the final transfer of the facilities to the Group, withthe signing of the formal agreements anticipated to take place by the end of 2012. For more information,see ‘‘Risk Factors—The Annual Financial Statements include restatements and qualifications.’’

Deloitte has issued a qualified review report in respect of the Group’s Interim Financial Statements as atand for the six months ended 30 June 2012. The review report contains the same qualification as set outabove.

Acquisitions and Divestitures

The Group did not have any material acquisitions or divestitures during the period from 1 January 2009through to 30 June 2012 and no material acquisitions or divestitures are currently pending or planned.

Explanation of Key Income Statement Items

Revenues

The Group presents revenues divided into three main areas: (i) electricity—generation, transmission,distribution and sale of electricity; (ii) thermal power—distribution and sale of thermal power; and(iii) gas—distribution and sale of gas.

Revenue from electricity sales

The Group derives a substantial portion of its annual revenue from the sale of electricity to Tariff andNon-Tariff customers within Croatia. A small portion of revenue is derived from the sale of electricity toneighbouring markets, primarily Bosnia and Herzegovina and Slovenia. In the year ended 31 December2011, approximately 94% of the Group’s revenue was from electricity sales to domestic customers, ascompared with approximately 89% and 89% for the year ended 31 December 2010 and 2009, respectively.In 2011, the Group sold approximately 15,449 GWh of electricity domestically and 1,033 GWhinternationally, as compared with 15,715 GWh and 1,917 GWh in 2010, respectively, and 15,651 GWh and1,899 GWh in 2009, respectively. In the six months ended 30 June 2012, approximately 95% of the Group’srevenue was from electricity sales to domestic customers, as compared with approximately 94% for thesix months ended 30 June 2011. In the first half of 2012, the Group sold approximately 7,565 GWh ofelectricity domestically and 505 GWh internationally, as compared with 7,770 GWh and 522 GWh in thefirst half of 2011.

Revenue from the sale of electricity is estimated based on anticipated consumption which is derived fromhistorical consumption, and on energy data available from the Group’s internal records, and applicabletariff rates or market prices, depending on the type of customer. Any variation between estimatedconsumption and actual consumption which is determined on a periodic basis is recognised in revenue inthe following period (once meter and other relevant readings are available). For additional information onthe Group’s tariffs, see ‘‘—Factors that Affect the Group’s Results of Operations—Tariffs’’.

Electricity sales to Non-Tariff Customers are based on the prevailing market rates, with prices set by theGroup. Sales and tariff rates for Tariff Customers are regulated by Croatian Government, based onrecommendations by HERA. At the request of the Group, the Croatian Government approved tariff ratesincreases for the transmission, distribution and supply of electricity in June 2008 (applicable from 1 July2008) and for generation, transmission, distribution and supply in April 2012 (applicable from 1 May 2012)(see ‘‘Regulation—Regulatory Authorities’’). In April 2012, Croatian Government approved an average18.9% (including distribution and transmission charges) increase in the tariff rates.

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Revenue from thermal power sales

The Group derives a portion of its annual revenue from the sale of thermal power (generated from steamand hot water in the Group’s power plants) to customers located in Zagreb, Osijek, Sisak, Zapresic, VelikaGorica and Samobor. Revenue from the sale of thermal power is estimated based on energy data availablefrom the Group’s internal records, and applicable tariff rates or market prices, depending on the type ofcustomer.

The Group’s thermal power customers can be divided into Tariff Customers and Non-Tariff Customers.Thermal power sales to Non-Tariff Customers are based on the prevailing market rates, with prices set bythe Group. Sales and tariff rates for Tariff Customers are regulated by local Croatian municipalities, basedon recommendations by HERA. The current tariff rates have been in effect since January 2009, withprevious requests for increases rejected (in 2010).

HEP-Top has sent a request for thermal power tariff rate increases to local Croatian municipalities locatedin Zagreb, Osijek, Sisak, Velika Gorica, Samobor and Zapresic. The Group expects responses during thefourth quarter of 2012.

Revenue from gas sales

The Group derives a portion of its annual revenue from the sale of gas to customers located in Osijek-Baranja County, Pozega-Slavonia County and Virovitica-Podravina County. Revenue from the sale of gas isestimated based on energy data available from the Group’s internal records, and applicable tariff rates ormarket prices, depending on the type of customer..

The Group’s gas customers can be divided into Tariff Customers and Non-Tariff Customers. Gas sales toNon-Tariff Customers are based on the prevailing market rates, with prices set by the Group. Sales andtariff rates for Tariff Customers are regulated by the Croatian Government, based on recommendations byHERA. From 1 May 2012, the tariff rates for natural gas distribution were increased by approximately20%, in conjunction with an increase of approximately 25% in the tariff rate for supply services. TheCroatian Government last increased the gas tariff rates for supply and distribution in 2012 (coming intoforce from 1 May 2012).

Other Operating Income

In addition to the three main revenue generating segments described above, the Group also derivesoperating income from various other ancillary sources, in particular network connection fees. Until 1 July2009, connection fees received from customers were deferred and recognised as income over the expecteduseful life of the asset (typically over a 20 year period). This policy was applied for connection feesreceived before 1 July 2009. Starting on 1 July 2009, the connection fees received from customers arerecognised as income on the date the fees are received.

Other ancillary sources of operating income include: grid connection services, income from assets receivedfree of charge, collection of receivables previously provided against, services rendered (including servicesprovided by the Group’s power plants), capitalised assets (including capitalised costs of personnel workingon the Group’s investments), late-payment interest (in relation to outstanding receivables for electricity,thermal energy and gas paid after maturity), reversal of vacation accrual, income from the sale ofmaterials, income from the sale of cross-border transmission capacity, income from the sale of electricity intransit—foreign, reversal of long-term provisions for retirement benefits and jubilee bonuses, reversal oflong-term provisions—court costs, income in respect of the electricity bill reminders, income frombalancing energy, income in respect of court costs on claims, gains on fair valuation of investmentproperties, inventory surpluses—fixed assets, income from sale of tangible assets, recovery of receivablespreviously written off, income from reversal of long-term decommissioning provisions and certain otherincome sources.

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Operating Expenses

Operating expenses comprise the expenses the Group incurs in the course of operating its business, andincludes the following:

Electricity purchase cost

Costs of electricity purchases include the cost of electricity purchased from third parties for resale to theGroup’s customers in Croatia. Electricity is purchased from wholesalers based on international tenders. Inaddition, these costs include the repurchase of 50% electricity generated at the Krsko nuclear plant andelectricity generated from renewable energy sources. This is done in accordance with Croatian regulationson cross-border transmission of electricity to/from Croatia.

Fuel costs

Fuel costs include gas, coal and fuel oil used as fuel at the Group’s thermal power plants and districtboilers for the generation of electrical and thermal energy. It also includes costs of additional materials andchemicals used in the production process and costs of transport and quality control.

Staff costs

Staff costs include employee salaries and wages, remuneration of the board members, taxes and othercontributions, expense reimbursements, employee benefits and pension contributions. Salaries and otheremployee benefits are governed by the Collective Agreement (see ‘‘Business—Employees’’ for furtherdetails).

Depreciation and amortisation expense

The depreciation and amortisation costs include the depreciation and amortisation of tangible andintangible assets, except for land which is not amortised or depreciated. Intangible assets are amortisedover their useful lives using the straight-line method. At the end of each business year, the Group reviewsthe residual values, useful lives and methods of amortisation and adjusts these estimates as appropriate.The impact of each change in the estimation is disclosed in the Income Statement, however there havebeen no such changes in the years ended 31 December 2009, 2010 and 2011.

Other operating expenses

The Group incurs various other ancillary expenses including maintenance costs (service and materials),provisions for doubtful receivables, gas sourcing costs (for the distribution and supply of gas), general andadministrative expenses, reimbursement of costs to employees, other employee benefits, cost of material,decommissioning expense relating to the Krsko nuclear power plant, contributions, fees and duties payableto the State, litigation provisions, water contributions and concession fees, accrual of unused vacation days,fees for the usage of power plant facilities, write-off of tangible assets, cost of sold materials, calculationand collection costs, provisions for retirement and jubilee bonuses, gas storage fees, insurance premiums,fees for environmental protection, damages and indemnities, impairment allowance on inventories,provision for delivered electricity from wind power plants, provisions for contractual damages, provisionfor the investment in HE Lesce, additional decommissioning costs and certain other expenses.

Financial revenue, foreign exchange differences and interest income

Financial revenue includes foreign exchange gains, interest income and revenue derived from receipt ofthe Jadranski Naftovod d.d. (‘‘JANAF’’) (a Croatian oil transportation company) dividend. Foreignexchange differences includes differences on foreign exchange accounts and deposits with banks, onaccounts of foreign buyers and suppliers and on loans denominated in currencies other than Kuna. Interestincome includes interest income on deposits with banks and interest income due to payment delays.

Financial cost

Financial costs include interest expense (interest paid on capital assets and working capital loans, issuedbonds and suppliers’ accounts), foreign exchange losses (losses from capital assets and working capitalloans and exchange rate losses on accounts with foreign suppliers), amortisation of deferred interest, fairvalue of interest rate swaps and permanent impairment of JANAF shares less capitalised borrowing costsallocated to property, plant and equipment.

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Income Taxes

Income taxes include the Group’s current taxes and deferred income taxes relating to the origination andreversal of temporary differences. Temporary differences, which increase or decrease the tax base, includecosts of provisioning for severance pays and jubilee awards, provisioning for receivables of customersagainst whom no legal action has been taken and other temporary differences.

Current tax liability is based on the taxable profit for the year. Taxable profit is not disclosed in the IncomeStatement, because it is not included in the income and expense items in other years. The same applies toitems that are not taxable or deductible.

Deferred income tax is provided, using the liability method, on all temporary differences at the balancesheet date between the taxable assets and liabilities and their carrying amounts for financial reportingpurposes. Deferred income tax is determined using tax rates (and laws) that have been enacted by thebalance sheet date and are expected to apply when the related deferred income tax asset is realised or thedeferred income tax liability is settled.

Results of Operations

The following table contains the Group’s consolidated income statement data for the periods indicated:

Six monthsYear ended 31 December ended

(Restated) 30 June(Audited) (Unaudited)

2009 2010 2011 2012

(HRK thousands)

Revenue from electricity sales . . . . . . . . . . . . . . 10,798,272 10,851,054 10,769,900 5,539,533Revenue from thermal power sales . . . . . . . . . . . 553,732 569,784 582,352 323,386Revenue from gas sales . . . . . . . . . . . . . . . . . . . 294,262 394,182 381,177 206,848Other operating income . . . . . . . . . . . . . . . . . . . 983,514 1,241,879 1,353,600 570,073

Total operating income . . . . . . . . . . . . . . . . . . . 12,629,780 13,056,899 13,087,029 6,639,840

Electricity purchase cost . . . . . . . . . . . . . . . . . . (3,078,977) (2,011,535) (3,259,984) (2,045,794)Fuel costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,385,583) (2,077,105) (2,870,113) (1,722,670)Staff cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,954,350) (1,895,205) (1,890,228) (935,395)Depreciation and amortisation expense . . . . . . . . (1,688,750) (1,721,472) (1,749,518) (871,420)Other operating expenses . . . . . . . . . . . . . . . . . . (2,937,066) (2,992,271) (2,850,790) (1,248,716)

Total operating expenses . . . . . . . . . . . . . . . . . . (12,044,726) (10,697,588) (12,620,633) (6,823,995)

Profit/(loss)from operations . . . . . . . . . . . . . . . . 585,054 2,359,311 466,396 (184,155)

Financial revenue . . . . . . . . . . . . . . . . . . . . . . . 81,101 91,187 57,718 29,904Financial costs . . . . . . . . . . . . . . . . . . . . . . . . . (450,414) (439,224) (428,989) (170,361)

Net financial expense . . . . . . . . . . . . . . . . . . . . (369,313) (348,037) (371,271) (140,457)

Profit/(loss) before tax . . . . . . . . . . . . . . . . . . . . 215,741 2,011,274 95,125 (324,612)

Income tax (expense)/income . . . . . . . . . . . . . . . (70,413) (436,623) (88,048) 4,608

Profit/(loss) from operations . . . . . . . . . . . . . . . 145,328 1,574,651 7,077 (320,004)

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Six Months Ended 30 June 2012 Compared with the Six Months Ended 30 June 2011

Revenues

Six monthsended 30 June

(Unaudited)

2011 2012

(HRK thousands)

Revenue from electricity sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,373,462 5,539,533Revenue from thermal power sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315,149 323,386Revenue from gas sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,755 206,848Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 598,191 570,073

Total operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,482,557 6,639,840

Revenue from electricity sales

Revenue from electricity sales has marginally increased by HRK 166,071 thousand, or 3.1%, fromHRK 5,373,462 thousand for the six months ended 30 June 2011 to HRK 5,539,533 thousand for thesix months ended 30 June 2012. While revenue has remained relatively flat during the period, primarilydue to the stable tariff rates and market prices and relatively stable customer base. The marginal increasewas primarily due to the impact of the increased tariff rates that came into force on 1 May 2012.

Revenue from thermal power sales

Revenue from thermal power sales has marginally increased by HRK 8,237 thousand, or 2.6%, fromHRK 315,149 thousand for the six months ended 30 June 2011 to HRK 323,386 thousand for thesix months ended 30 June 2012. While revenue has remained relatively flat during the period, primarilydue to the lack of an increase in tariff rates and relatively stable customer base. The marginal increase wasprimarily due to higher prices charged by the Group on its Non-Tariff Customers.

Revenue from gas sales

Revenue from gas sales has marginally increased by HRK 11,093 thousand, or 5.7%, fromHRK 195,755 thousand for the six months ended 30 June 2011 to HRK 206,848 thousand for thesix months ended 30 June 2012. While revenue has remained relatively flat during the period, primarilydue to the stable tariff rates and relatively stable customer base. The marginal increase was primarily dueto the impact of the increased tariff rates that came into force on 1 May 2012.

Revenue from other operating income

Revenue from other operating income has marginally decreased by HRK 28,118 thousand, or 4.7%, fromHRK 598,191 thousand for the six months ended 30 June 2011 to HRK 570,073 thousand for thesix months ended 30 June 2012. The decrease was primarily due to a decrease in income from a reversal oflong-term provisions.

Total Operating Income

Total operating income increased by 2.4% from HRK 6,482,557 thousand for the six months ended 30 June2011 to HRK 6,639,840 thousand for the 6 months ended 30 June 2012.

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Operating Expenses

Six monthsended 30 June

(Unaudited)

2011 2012

(HRK thousands)

Electricity purchase cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,434,243) (2,045,794)Fuel costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,190,023) (1,722,670)Staff cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (936,487) (935,395)Depreciation and amortisation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (867,634) (871,420)Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,440,549) (1,248,716)

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,868,936) (6,823,995)

Electricity purchase cost

Electricity purchase cost increased by HRK 611,551 thousand, or 42.6%, from HRK 1,434,243 thousandfor the six months ended 30 June 2011 to HRK 2,045,794 thousand for the six months ended 30 June 2012.The increase was primarily due to the Group purchasing additional electricity on the market at higherprices and with less favourable exchange rates, as a result of an ongoing and prolonged dry period since2011 that has resulted in decreased electricity generation by the Group’s hydro power plants.

Fuel costs

Fuel costs increased by HRK 532,647 thousand or 44.8% from HRK 1,190,023 thousand for the six monthsended 30 June 2011 to HRK 1,722,670 thousand for the six months ended 30 June 2012. The increase wasprimarily due to higher fuel prices, in particular gas prices, and an increase in the amount of fuel used bythe thermal power plants (mostly fuel oil) as a result of the ongoing and prolonged dry period in Croatia,which has resulted in decreased hydro electricity generation.

Staff cost

Staff costs have decreased by HRK 1,092 thousand by 0.1% from HRK 936,487 thousand for thesix months ended 30 June 2011 to HRK 935,395 thousand for the six months ended 30 June 2012. Staffinglevels have marginally decreased during the period.

Depreciation and Amortisation expense

Depreciation and amortisation expense increased by HRK 3,786 thousand or 0.4% fromHRK 867,634 thousand for the six months ended 30 June 2011 to HRK 871,420 thousand for thesix months ended 30 June 2012. This marginal increase was primarily due to a larger asset pool as a resultthe Group’s continued investment in replacing and refurbishing its existing facilities and construction ofnew facilities.

Other Operating Expenses

Other operating expenses decreased by HRK 191,833 thousand or 13.3% from HRK 1,440,549 thousandfor the six months ended 30 June 2011 to HRK 1,248,716 thousand for the six months ended 30 June 2012.The decrease was primarily due to impairment recognised on receivables from one of the Group’s metalcustomers and the cost of provisioning for maintenance costs recorded in the six months ended 30 June2011 but which provisioning was not recorded in 2012.

Total Operating Expenses

Total operating expenses increased by 16.3% to HRK 6,823,995 thousand for the six months ended 30 June2012, compared to HRK 5,868,936 thousand for the six months ended 30 June 2011.

(Loss)/Profit from Operations

The Group recorded a loss from operations of HRK 184,155 thousand for the six months ended 30 June2012 as compared with a profit of HRK 613,621 thousand for the six months ended 30 June 2011. This wasprimarily due to an increase in costs as discussed in ‘‘—Operating Expenses’’.

48

Financial Revenue

Financial revenue decreased by 27.1% from HRK 41,020 thousand for the six months ended 30 June 2011to HRK 29,904 thousand for the six months ended 30 June 2012. The decrease was largely due to adecrease in foreign exchange gains realised on receivables from foreign customers.

Financial Costs

Financial costs increased by 30.6% from HRK 130,415 thousand for the six months ended 30 June 2011to HRK 170,361 thousand for the six months ended 30 June 2012. The increase was primarily due to anincrease in interest rates under the short term loans that were utilised for general corporate purposes andan increase in foreign exchange loss mainly derived from long-term liabilities, primarily including clearingsystem debt which is denominated in U.S. dollars.

Income tax income/(expense)

The Group recorded income tax expense in the amount of HRK 133,564 thousand in the six months ended30 June 2011 corresponding to recorded profit before tax in the first six month period of 2011. The Grouprecorded income tax income in the amount of HRK 4,608 thousand for the six months ended 30 June 2012.The decrease in income tax expense was due to an increase in fuel and electricity purchase costs, which hasresulted in decreased profit in the six months ended 30 June 2012, and therefore a decrease income tax forthe period.

Year Ended 31 December 2011 Compared with the Year Ended 31 December 2010 and Year Ended31 December 2010 Compared with Year Ended 31 December 2009

Year ended 31 December(Restated)(Audited)

2009 2010 2011

(HRK thousands)

Revenue from electricity sales . . . . . . . . . . . . . . . . . . . . . . . . . 10,798,272 10,851,054 10,769,900Revenue from thermal power sales . . . . . . . . . . . . . . . . . . . . . . 553,732 569,784 582,352Revenue from gas sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294,262 394,182 381,177Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 983,514 1,241,879 1,353,600

Total operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,629,780 13,056,899 13,087,029

Revenue from electricity sales

Revenue from electricity sales has marginally increased by HRK 52,782 thousand, or 0.5%,from HRK 10,798,272 thousand for the year ended 31 December 2009 to HRK 10,851,054 thousand forthe year ended 31 December 2010 and decreased by HRK 81,154 thousand, or 0.8%, toHRK 10,769,900 thousand for the year ended 31 December 2011. The revenue from electricity sales hasremained relatively flat during the period, primarily due to the stable tariff rates and market prices andrelatively stable customer base. The increase in 2010 was primarily due to slightly higher electricityconsumption both domestically (increased by 0.5%) and internationally (increased by 1.5%) as a result of aparticularly cold winter in 2010. The marginal decrease in 2011 is due to lower electricity consumptionduring the year as compared with the previous period following a milder winter and the economic crisis inCroatia, which resulted in customers reducing their monthly expenditures.

Revenue from thermal power sales

Revenue from thermal power sales increased marginally by HRK 16,052 thousand, or 2.9%,from HRK 553,732 thousand for the year ended 31 December 2009 to HRK 569,784 thousand for the yearended 31 December 2010 and increased marginally by HRK 12,568 thousand, or 2.2%, toHRK 582,352 thousand for the year ended 31 December 2011. This increase was primarily due to higherprices being charged by the Group to its Non-Tariff Customers. This was partially offset by a 2.4% decreasein consumption due to the milder weather during the 2011 winter.

49

Revenue from gas sales

Revenue from gas sales increased by HRK 99,920 thousand, or 34.0%, from HRK 294,262 thousand forthe year ended 31 December 2009 to HRK 394,182 thousand for the year ended 31 December 2010 anddecreased by HRK 13,005 thousand, or 3.3%, to HRK 381,177 thousand for the year ended 31 December2011. The increase in 2010 was primarily due to the increase in gas tariff rates in 2010 and stable volumesof gas sold to both Tariff and Non-Tariff Customers. The decrease in 2011 was due to a 7.6% decrease inconsumption as compared to the previous period following a milder winter, which resulted in customersreducing their monthly expenditures. This was partially offset by the higher prices charged by the Groupfrom its Non-Tariff Consumers.

Revenue from other operating income

Revenue from other operating income increased by HRK 258,365 thousand, or 26.3%, fromHRK 983,514 thousand for the year ended 31 December 2009 to HRK 1,241,879 thousand for the yearended 31 December 2010 and increased by HRK 111,721 thousand, or 9.0%, to HRK 1,353,600 thousandfor the year ended 31 December 2011.

For the years ended 31 December 2009 and 2010

The increase in 2010 as compared with 2009 was primarily due to HRK 253,241 thousand received fromnetwork connection services fees in the year ended 31 December 2010, which was primarily due to theIFRIC 18 ‘‘Transfer of Assets from Customers’’ regulation being applied from 1 July 2009 (see ‘‘—Revenuefrom connection fees’’). There was also a gain of HRK 19,865 thousand in 2010 compared to a lossof HRK 19,748 thousand in 2009 on fair valuation of investment property, due to the Group eliminatingdiscounts for apartments sold by the Group, which led to an increase in asset values. In addition, there was47.8% increase in the collection of receivables, previously provided against, from HRK 91,033 thousandfor the year ended 31 December 2009 to HRK 134,531 thousand 31 December 2010, as a result of theGroup implementing additional collection measures for outstanding receivables. There was an increase of16.5% in late-payment interest from HRK 68,808 thousand for the year ended 31 December 2009 toHRK 80,126 thousand for the year ended 31 December 2010, due to longer delays in payments bycustomers. The Group also had 137.7% increase in income from sale of materialsfrom HRK 20,411 thousand for the year ended 31 December 2009 to HRK 48,512 thousand 31 December2010, which was due to an increase in waste materials produced by the Group’s plants as a result of higherelectricity generation. The Group also had a 52.1% increase in income from electricity in foreign transitfrom HRK 30,049 thousand for the year ended 31 December 2009 to HRK 45,715 thousand 31 December2010 due to lower electricity imports as a result of increased hydro production, as well as a higher level ofelectricity flows through the Group’s electricity network caused by increased flows of electricity fromsouth-east Europe to Italy through Croatia.

The increase in 2010 as compared with 2009, was offset by 37.2% decrease in services renderedfrom HRK 239,454 thousand in the year ended 31 December 2009 to HRK 150,423 thousand for the yearended 31 December 2010, which was due to the Group losing some of its maintenance contracts tocompetitors and due to strategic decisions by the Group’s management. There was also a reduction of28.1% in income from sale of cross-border transmission capacity from HRK 30,032 thousand in the yearended 31 December 2009 to HRK 21,584 thousand for the year ended 31 December 2010 due to changesin auction procedures and prices obtained from the cross-border electricity auctions.

For the years ended 31 December 2010 and 2011

The increase in 2011 compared with 2010 was primarily due the Group recording income in the amountof HRK 64,477 thousand in respect of a reversal of vacation accrual, as a result of it revising a policy ofprovisioning unused vacations. There was also an increase of 131.6% in income from the sale of cross-border transmission capacity from HRK 21,584 thousand for the year ended 31 December 2010to HRK 49,997 thousand for the year ended 31 December 2011, primarily due to higher electricity importsas a result of lower electricity generation by the Group’s hydro power plants due to a dry period in 2011. Inaddition, there was an increase of 16.3% in the late payment interest from HRK 80,126 thousand forthe year ended 31 December 2010 to HRK 93,220 thousand for the year ended 31 December 2011,primarily due to longer delays in payments by customers.

The increase in 2011 as compared with 2010, was offset by a 21.0% reduction in services renderedfrom HRK 150,423 thousand in the year ended 31 December 2010 to HRK 118,859 thousand for the year

50

ended 31 December 2011, which was due to the Group losing some of its maintenance contracts tocompetitors. In addition, there was a reduction of 25.9% in income from electricity in transit—foreignfrom HRK 45,715 thousand for the year ended 31 December 2010 compared to HRK 33,877 thousand forthe year ended 31 December 2011 due to a decreased level of electricity flows in the HEP-OPS controlarea, caused by technological changes in neighbouring grids, and higher level of electricity imports, causedby very low levels of hydro power production.

Total Operating Income

Total operating income has remained relatively stable during the 2009 to 2011 period, increasing by 3.4%from HRK 12,629,780 thousand for the year ended 31 December 2009 to HRK 13,056,899 thousand forthe year ended 31 December 2010 and increasing by 0.2% to HRK 13,087,029 thousand for the year ended31 December 2011. The increase was primarily due to a small increase in income from electricity, thermalenergy and gas sales.

Operating Expenses

Year ended 31 December(Restated)(Audited)

2009 2010 2011

(HRK thousands)

Electricity purchase cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,078,977) (2,011,535) (3,259,984)Fuel costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,385,583) (2,077,105) (2,870,113)Staff cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,954,350) (1,895,205) (1,890,228)Depreciation and amortisation expense . . . . . . . . . . . . . . . . . (1,688,750) (1,721,472) (1,749,518)Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,937,066) (2,992,271) (2,850,790)

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,044,726) (10,697,588) (12,620,633)

Electricity purchase cost

Electricity purchase cost decreased by 34.7% from HRK 3,078,977 thousand for the year ended31 December 2009 to HRK 2,011,535 thousand for the year ended 31 December 2010 and increased by62.1% to HRK 3,259,984 thousand for the year ended 31 December 2011. The decrease in 2010 wasprimarily due to the unusually favourable hydrological conditions resulting in record electricity generationby hydro power plants, which allowed the Group to use less fuel fired power plants (electricity generationby thermal power plants was 8.0% lower in 2010), 31.0% lower electricity prices and 17.0% lower totalamount of electricity purchased by the Group in 2010. The increase in 2011 was primarily due to the Grouppurchasing additional electricity on the market at higher prices and with less favourable exchange rates, asa result of a prolonged dry period in 2011 that led to decreased electricity generation by the hydro powerplants.

Fuel costs

Fuel costs decreased by 12.9% from HRK 2,385,583 thousand for the year ended 31 December 2009 toHRK 2,077,105 thousand for the year ended 31 December 2010 and increased by 38.2% toHRK 2,870,113 thousand the year ended 31 December 2011. The decrease in 2010 was due to lower fuelcosts incurred by the Group due to the record electricity generation by its hydro power plants and lowergeneration by its thermal power plants. The increase in 2011 was primarily due to higher fuel prices, inparticular gas prices, and increase in the amount of fuel used by the thermal power plants (mostly coal andfuel oil) following a prolonged dry period in Croatia, which resulted in decreased hydro electricitygeneration.

Staff cost

Staff costs decreased by 3.0% from HRK 1,954,350 thousand for the year ended 31 December 2009 toHRK 1,895,205 thousand for the year ended 31 December 2010 and decreased by 0.3% toHRK 1,890,228 thousand for the year ended 31 December 2011. The decrease in 2010, as compared with2009, was primarily due to the Group decreasing its employee base and payroll costs in order comply withthe Croatian Government’s request to reduce staffing costs and other operating expenses. In addition, in2010, annexes to the Collective Agreement were signed that reduced or modified certain employment

51

rights and resulted in lower staff costs. See ‘‘Business—Employees’’. In 2011, there was an additionalreduction in staff costs as a result of the Group further reducing its employee base.

Depreciation and amortisation expense

Depreciation and amortisation expense increased by 1.9% from HRK 1,688,750 thousand for the yearended 31 December 2009 to HRK 1,721,472 thousand for the year ended 31 December 2010 and increasedby 1.6% to HRK 1,749,518 thousand for the year ended 31 December 2011. The increase is primarily dueto a larger asset pool as a result the Group’s continued investment in replacing and refurbishing its existingfacilities and construction of new facilities.

Other operating expenses

Other operating expenses increased by 1.9% from HRK 2,937,066 thousand for the year ended31 December 2009 to HRK 2,992,271 thousand for the year ended 31 December 2010 and decreased by4.7% to HRK 2,850,790 thousand for the year ended 31 December 2011.

For the years ended 31 December 2009 and 2010

The increase in operating expenses in 2010 was due to an increase of 11.5% in maintenance costs (serviceand material) from HRK 578,792 thousand in the year ended 31 December 2009 toHRK 645,098 thousand in the year ended 31 December 2010 due to the Group re-starting variousmaintenance projects of power plants and facilities that were postponed in 2008 and 2009 as a result of therecession. There was an increase of 38.8% in gas costs from HRK 256,454 thousand in the year ended31 December 2009 to HRK 355,869 thousand in the year ended 31 December 2010 following a decision bythe Croatian Government to increase gas distribution prices. There was an increase of 42.3% in provisionsfor retirement and jubilee bonuses from HRK 60,964 thousand in the year ended 31 December 2009 toHRK 86,762 thousand in the year ended 31 December 2010, primarily due to an increase in staff-relatedcosts and expected increase in retirements. There was an accrual of HRK 64,477 thousand for unusedvacation days, which were zero for the year ended 31 December 2009, due a change in the Group’sprovisioning policy. The Group made provisions for NPPK—additional decommissioning in 2010 ofHRK 53,838 thousand, due to an expected increase in decommissioning costs for the Krsko nuclear plantas a result of a revised decommissioning programme. There was an increase of 288.4% in damages andindemnities from HRK 9,643 thousand in the year ended 31 December 2009 to HRK 37,449 thousand inthe year ended 31 December 2010 due to the Group making provisions for damages incurred as a result ofits investment the Zakucac hydro power plant. There was an increase of 136.2% in cost of sold materialsfrom HRK 17,233 thousand in the year ended 31 December 2009 to HRK 40,710 thousand in the yearended 31 December 2010, largely the result of a substantial increase in the amount of waste materialsproduced during the generation process and coal sold to third parties. Finally, there were provisions madefor investment in HE Lesce of HRK 39,286 thousand in 2010, which were zero for the year ended31 December 2009, due to the infrastructure facilities (roads and bridges) which were transferred, withoutcharge to the applicable local municipalities, pending signing of the final contract in 2011.

The increase in operating expenses in 2010 was partially offset by a decrease of 20.5% in general andadministrative expenses from HRK 478,113 thousand in the year ended 31 December 2009 toHRK 380,020 thousand in the year ended 31 December 2010 due to a decrease in expenditure fortelecommunication costs, promotion and sponsorship costs and other costs due to the implementation ofcost-cutting measures. There was a decrease of 18.8% in provisions for doubtful receivables fromHRK 335,116 thousand in the year ended 31 December 2009 to HRK 272,029 thousand in the year ended31 December 2010, primarily due to difficult economic conditions that impacted the Group customers’ability to pay and led to higher doubtful receivables. There was a decrease of 28.1% in litigation provisionsfrom HRK 105,689 thousand in the year ended 31 December 2009 to HRK 75,986 thousand in the yearended 31 December 2010, due to a decrease in the number of lawsuits in 2010. There was a decrease of44.2% in fees for environmental protection from HRK 48,943 thousand in the year ended 31 December2009 to HRK 27,299 thousand in the year ended 31 December 2010, due to decreased electricitygeneration which resulted in decreased environmental protection fees payable by the Group to theGovernment. There was a decrease of 72.9% in write-off of non-current assets from HRK 79,310 thousandin the year ended 31 December 2009 to HRK 21,462 thousand in the year ended 31 December 2010 due tothe non-current assets being written off in the normal course of business and further write-offs ofinvestment plans and projects which are unlikely to be completed, such additional thermal and hydrogeneration facilities. Finally, there was a decrease of 86.4% in impairment allowance on inventories from

52

HRK 110,648 thousand in the year ended 31 December 2009 to HRK 15,070 thousand in the year ended31 December 2010, due to a change in the inventory provisioning applied from 2009.

For the years ended 31 December 2010 and 2011

The decrease in operating expenses in 2011 was due to a 10.2% decrease in general and administrativeexpenses from HRK 380,020 thousand in the year ended 31 December 2010 to HRK 341,278 thousand inthe year ended 31 December 2011, due to the Group implementing a series of cost cutting measures,including decreasing telecommunication and advertising costs and professional services costs. In addition,there was a 58.8% decrease in provisions for retirement and jubilee bonuses from HRK 86,762 thousand inthe year ended 31 December 2010 to HRK 35,721 thousand in the year ended 31 December 2011,primarily due to the reduction of staff costs and changes to the actuarial calculations. There was a reversalin full of the HRK 39,286 thousand provision for investment in HE Lesce 2011, due to the infrastructurefacilities (roads and bridges) which were transferred, without charge to the applicable local municipalities,pending signing of the final contract in 2011. There was a reversal in full of the HRK 53,838 thousandprovisions for additional decommissioning costs of the Krsko nuclear plant, which were no longernecessary in 2011. Finally, there were provisions for contractual damages of HRK 52,179 thousand inthe year ended 31 December 2010, which were not repeated in 2011, for damages incurred with respect tothe Group’s contractual investments in the Zakucac hydro power plant.

The decrease in operating expenses in 2011 was partially offset by an increase of 48.4% in provisions fordoubtful receivables from HRK 272,029 thousand in the year ended 31 December 2010 toHRK 403,568 thousand in the year ended 31 December 2011, primarily due to difficult economicconditions that impacted the Group customers’ ability to pay and led to higher doubtful receivables. Therewas an increase of 40.5% in other employee benefits from HRK 77,055 thousand in the year ended31 December 2010 to HRK 108,285 thousand in the year ended 31 December 2011 due to an increase inChristmas allowances paid by the Group. In addition, there was an increase of 123.0% in write-off ofnon-current assets from HRK 21,462 thousand in the year ended 31 December 2010 toHRK 47,854 thousand in the year ended 31 December 2011, primarily due to the Group transferring assetsto local government without charge, such transfers included new infrastructure facilities constructed by theGroup and some additional investments made for the new hydro power plants. Finally, there was anincrease in gas storage fees of HRK 30,753 thousand in the year ended 31 December 2011 as a result of theintroduction of new fees in that year.

Total Operating Expenses

Total operating expenses decreased by 11.2% from HRK 12,044,726 thousand for the year ended31 December 2009 to HRK 10,697,588 thousand for the year ended 31 December 2010 and increased by18.0% to HRK 12,620,633 thousand for the year ended 31 December 2011.

Profit from Operations

Profit from operations increased by 303.3% from HRK 585,054 thousand for the year ended 31 December2009 to HRK 2,359,311 thousand for the year ended 31 December 2010 and decreased by 80.2%to HRK 466,396 thousand for the year ended 31 December 2011. The increase in profit was primarilydriven by favourable hydrological conditions and consequently lower fuel costs and electricity purchasecosts. The decrease in profit from operations in 2011 was primarily due to an increase in costs as discussedin ‘‘—Operating Expenses’’.

Financial income

Financial income increased by 12.4% from HRK 81,101 thousand for the year ended 31 December 2009 toHRK 91,187 thousand for the year ended 31 December 2010 and decreased by 36.7% toHRK 57,718 thousand for the year ended 31 December 2011.

The increase in 2010, as compared with 2009, was largely due to the 92.3% increase in interest incomefrom HRK 7,529 thousand in the year ended 31 December 2009 to HRK 14,480 thousand for the yearended 31 December 2010, due to an increase of interest received in respect of term deposits and interestaccrued on outgoing invoices. The decrease in 2011 was primarily due to the decrease of 45.9% in foreignexchange gains from HRK 76,707 thousand in the year ended 31 December 2010 to HRK 41,515 thousandin the year ended 31 December 2011, due to an increase of in the middle exchange rate of the Croatiannational bank EUR/HRK by approximately 2.0% and an increase in the middle exchange rate of Croatian

53

national bank USD/HRK by approximately 5.0% from 31 December 2010 to 31 December 2011. This waspartially offset by the HRK 3,224 thousand dividend payment received from the JANAF shares in 2011.

Financial Costs

Financial cost decreased by 2.5% from HRK 450,414 thousand for the year ended 31 December 2009 toHRK 439,224 thousand for the year ended 31 December 2010 and decreased by 2.3% toHRK 428,989 thousand for the year ended 31 December 2011.

The decrease in financial costs in 2010 was primarily due to a decrease of 24.1% in interest expensefrom HRK 358,907 thousand for the year ended 31 December 2009 to HRK 272,471 thousand for the yearended 31 December 2010 due to a decrease in outstanding long and short term indebtedness and adecrease in the value of EURIBOR on the market. This was partially offset by an increase of 50.2% inforeign exchange losses from HRK 111,191 thousand for the year ended 31 December 2009to HRK 167,029 thousand for the year ended 31 December 2010 due to an increase in the middle exchangerate of Croatian national bank EUR/HRK by approximately 1.0% and an increase in the middle exchangerate of Croatian national bank USD/HRK by approximately 9.0% from 31 December 2009 to 31 December2010.

The decrease in financial costs in 2011 was primarily due to a decrease of 11.0% in interest expensefrom HRK 272,471 thousand for the year ended 31 December 2010 to HRK 242,560 thousand for the yearended 31 December 2011 due to a decrease in the outstanding long and short term indebtedness. Thisdecrease was partially offset by the fair valuation adjustment of JANAF shares in the amountof HRK 30,769 thousand in the year ended 31 December 2011, as a result of JANAF’s shares decreasing invalue from HRK 3,000 per share in 2010 to HRK 2,230 per share in 2011.

Income tax expense

Income tax expense increased by 520.1% from HRK 70,413 thousand for the year ended 31 December2009 to HRK 436,623 thousand for the year ended 31 December 2010 and decreased by 79.8%to HRK 88,048 thousand for the year ended 31 December 2011.

The increase in income tax expense in 2010 was primarily due to a 239.0% increase in current taxes fromHRK 136,218 thousand for the year ended 31 December 2009 to HRK 461,805 thousand for the yearended 31 December 2010 as a result of higher total income, which was primarily due to higher electricitygeneration by hydro power plants, due to favourable hydrological conditions, reduced electricitygeneration by more expensive thermal power plants and decreased purchases of electricity by the Group.The increase in 2010 was partially offset by a decrease in deferred tax income relating to the originationand reversal of temporary differences from HRK 65,805 thousand for the year ended 31 December 2009to HRK 25,182 thousand for the year ended 31 December 2010, due to the first application of valueadjustment of obsolete inventories and materials accounting policy during 2009 in total amountof HRK 110,648 thousand which also affected deferred tax income..

The decrease in income tax expense in 2011 was largely due a 76.3% decrease in current taxes fromHRK 461,805 thousand for the year ended 31 December 2010 to HRK 109,395 thousand for the yearended 31 December 2011, primarily due to a decrease in profit before tax during the period.

Liquidity and Capital Resources

The Group’s financial condition and liquidity is and will continue to be influenced by a variety of factors,including:

• the ability to generate cash flows from its operations;

• the level of outstanding indebtedness, and the interest it is obligated to pay on such indebtedness,which affects its finance costs;

• prevailing interest rates, which affect its debt service requirements;

• ability to continue to borrow funds from banks and international debt capital markets;

• capital expenditure requirements and development projects; and

• ability to collect receivables from its customers.

54

The Group’s cash requirements consist mainly of the following:

• funding capital expenditures;

• operating costs and working capital;

• servicing its indebtedness and the indebtedness of its subsidiaries; and

• paying taxes.

The Group’s sources of liquidity consist mainly of the following:

• cash generated from its operating activities;

• existing cash and external borrowings; and

• potential future borrowings.

At 30 June 2012 the total current liabilities exceed the total current assets by HRK 2,551,560 thousand.The Group’s principal sources of liquidity are cash flow from its current operations and proceeds ofmaturing financial assets together with borrowings from third parties. Operating expenses, capitalexpenditures, development projects and acquisition projects are financed from a combination of theGroup’s own liquidity and bank loans and borrowings under debt securities.

The Group is currently in a negative working capital position and is expected to require additional externalfunding in order to meet its short-term and long-term financing requirements (see ‘‘Risk Factors- TheGroup is in a negative working capital position and will require additional external sources of capital to meet itsshort-term liquidity needs which may not be available.’’, Note 3 ‘‘Going Concern’’ to the Interim FinancialStatements and Note 1 ‘‘General—Going Concern’’ to the Annual Financial Statements).

See ‘‘—Borrowings-Short-term borrowings’’ for details as to the available commitment under the Group’sfacility agreements as at 30 June 2012.

Cash Flow Data

Six Months Ended 30 June 2012 Compared with the Six Months Ended 30 June 2011

The following is a discussion and analysis of the Group’s cash-flow data for the six months ended 30 June2012 and 2011, which has been derived from the consolidated statement of cash flows contained in itsrespective of its Interim Financial Statements.

The following table summarises the Group’s consolidated cash flow statement for the periods indicated.

Six months ended30 June

2011 2012

(Unaudited)(HRK in thousands)

Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,141,024 151,844Net cash (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (728,523) (906,761)Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . (778,377) 588,284

Net (decrease)/increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . (365,876) (166,633)

Cash and cash equivalents at the beginning of the year . . . . . . . . . . . . . . . . . . . 762,157 407,123Cash and cash equivalents at the end of the year . . . . . . . . . . . . . . . . . . . . . . . 396,281 240,490

Net cash from operating activities

The Group’s consolidated operating activities generated HRK 151,844 thousand in net cash fromoperating activities in the six months ended 30 June 2012, a decrease of HRK 989,180 thousand from thesix months ended 30 June 2011, when the Group generated HRK 1,141,024 thousand in net cash providedby operating activities. This was primarily the result of a significant sum paid in respect of income tax in anamount of HRK 460,232 thousand, in the six months ended 30 June 2011 as compared with the Groupreceiving HRK 85,395 thousand by way of a refund of income tax in the six months ended 30 June 2012.This was due to an increase of fuel and electricity purchase costs which resulted in decreased profit in thesix months ended 30 June 2012, and in decreased income tax expense for the period ended 30 June 2012.

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Net cash used in investing activities

The Group’s net cash used in investing activities increased by HRK 178,238 thousand, or 24.5%,to HRK 906,761 thousand in the six months ended 30 June 2012 from HRK 728,523 thousand in the sixmonths ended 30 June 2011. This increase was primarily attributable to a 28.6% increase in expenditurefor property plant and equipment, which was part of the Group’s investment plan for 2012. See ‘‘—CapitalExpenditures and Acquisitions’’ for further details. This was particularly offset by an increase in othernon-current assets amounting to HRK 27,411 thousand in the six months ended 30 June 2012 as comparedwith a decrease during the equivalent period in 2011 of HRK 5,597 thousand.

Total cash used in financing activities

Total cash received by the Group in respect of financing activities amounted to HRK 588,284 thousand inthe six months ended 30 June 2012 compared with HRK 778,377 thousand of total cash used in financingactivities in the six months ended 30 June 2011.

The change in the balance between borrowings and payments during the six months ended 30 June 2012 ascompared to the equivalent period in 2011, was primarily attributable to an increase in amounts received inrespect of long- and short-term borrowings. The overall increase in amounts received in respect oflong-and short-term borrowings was due to an increase in operating costs relating to electricity productioncost and purchase of the electricity as a result of continued unfavourable hydrological conditions, whichwere partially financed by additional short term funds.

Year Ended 31 December 2011 Compared with the Year Ended 31 December 2010 and Year Ended31 December 2010 Compared with Year Ended 31 December 2009

The following is a discussion and analysis of the Group’s cash-flow data for the years ended 31 December2009, 2010 and 2011, which has been derived from the consolidated statement of cash flows contained in itsrespective Annual Financial Statements.

The following table summarises the Group’s consolidated cash flow statement for the periods indicated.

Year ended 31 December(Restated)(Audited)

2009 2010 2011

(HRK in thousands)

Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . 2,709,773 2,887,928 2,540,201Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . (2,396,083) (1,658,559) (2,180,879)Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . (364,069) (611,046) (714,356)

Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . (50,379) 618,323 (355,034)

Cash and cash equivalents at the beginning of the year . . . . . . . . 194,213 143,834 762,157Cash and cash equivalents at the end of the year . . . . . . . . . . . . 143,834 762,157 407,123

Net cash from operating activities

The Group’s consolidated operating activities generated HRK 2,540,201 thousand in net cash in the yearended 31 December 2011, a decrease of HRK 347,727 thousand from the year ended 31 December 2010,when the Group generated HRK 2,887,928 thousand in net cash provided by operating activities. This wasprimarily the result of an increase in income tax paid of HRK 439,736 thousand, or 272.9%,from HRK 161,137 thousand in the year ended 31 December 2010 to HRK 600,873 thousand in the yearended 31 December 2011. Income tax was HRK 461,805 thousand, which was mainly paid in 2011. In 2011,the Group also made advance payments for 2011 income tax, calculated on the basis of 2010 income.

During the year ended 31 December 2010, the Group’s net cash generated from operating activitiesincreased by HRK 178,155 thousand, or 6.6%, from HRK 2,709,773 thousand for the year ended31 December 2009 to HRK 2,887,928 thousand for the year ended 31 December 2010. This increase waslargely the result of an increase in cash generated from operations of HRK 196,233 thousand, or 6.2%,from HRK 3,157,358 thousand for the year ended 31 December 2009 to HRK 3,353,591 thousand forthe year ended 31 December 2010. There was also a decrease in interest paid of HRK 16,589 thousand, or5.2%, from HRK 304,526 thousand in the year ended 31 December 2010 to HRK 321,115 thousand in

56

the year ended 31 December 2009, due to a decrease in indebtedness and improved liquidity as a result ofimproved business conditions and higher profits.

The increase in net cash generated in 2010, was partially offset by a HRK 34,667 thousand, or 27.4%,increase in income taxes paid during the course of 2010, primarily as a result of a corresponding increase inrevenues during the period. Income tax expense recognised in profit and loss was HRK 70,413 thousand,with the substantial portion of the 2009 income tax paid in 2009 through advance payments. In 2010, theGroup also made advance payments for 2010 income tax, calculated on the basis of 2009 income.

Net cash used in investing activities

The Group’s net cash used in investing activities increased by HRK 522,320 thousand, or 31.5%, toHRK 2,180,879 thousand in the year ended 31 December 2011 from HRK 1,658,559 thousand in the yearended 31 December 2010. This increase was primarily attributable to a 27.0% increase in expenditure forthe increase of property plant and equipment, which was part of the Group’s investment plan for 2011. In2009 and 2010, the Group undertook a number of anti-recession measures, including a decrease inoperating expenses and liquidity improvements, which reduced planned investments for the construction,replacement and reconstruction of power plants, distribution networks and other facilities. In 2011, suchanti-recession measures were reversed as the Group was encouraged by the Croatian Government toincrease its investment programme.

The Group’s net cash used in investing activities decreased by HRK 737,524 thousand, or 30.8%, toHRK 1,658,559 thousand for the year ending 31 December 2010 from HRK 2,396,083 thousand forthe year ended 31 December 2009. This was primarily due to a 29.7%, decrease in expenditures for theacquisition, construction, replacement and reconstruction of property plant and equipment, as the Grouptook certain anti-recession measures (described above). As part of these anti-recession measures, theGroup extended some of its long-term projects and cancelled and/or rescheduled other projects for whichthe work had not yet commenced. In addition, there was a HRK 24,002 thousand increase in othernon-current assets due to a decrease in prepayments for non-current assets.

Net cash used in financing activities

Net cash used in financing activities increased by HRK 103,310 thousand, or 16.9%, toHRK 714,356 thousand in the year ended 31 December 2011 from HRK 611,046 thousand in the yearended 31 December 2010, with an increase of HRK 246,977 thousand, or 67.8%, compared toHRK 364,069 thousand in the year ended 31 December 2009.

The change in the balance between borrowings and payments during the year ended 31 December 2010, ascompared to 2009, was primarily attributable to a decrease in proceeds received in respect of long- andshort-term loans. This was due to the Group requiring lower funding in 2010, as a result of goodhydrological conditions that decreased electricity generation costs and reduced the need to purchaseelectricity on the market. Due to the favourable liquidity position, there was less of a need for short-termborrowings compared to 2009.

The change in the balance between borrowings and payments during the year ended 31 December 2011, ascompared to 2010, was relatively constant and insignificant. However, in 2011, following a number of yearswithout dividend payments, the Croatian Government passed a decision requiring HEP to issue a dividendequal to at least 50% of its profit after taxes. HEP declared a dividend in the amount ofHRK 493,376 thousand in 2011. The Croatian Government did not request a similar dividend for 2012. Asa result, on 24 May 2012, HEP’s management decided to allocate HEP’s 2011 net profit ofHRK 470,098 thousand to legal reserves (HRK 23,505 thousand), capital reserves(HRK 438,958 thousand) and retained profit (HRK 7,635 thousand).

The Croatian Government has identified the energy sector as one of its top priorities and has approved anEnergy Development Strategy (the ‘‘Energy Strategy’’). The Energy Strategy is primarily focused on thedevelopment and renovation of the generation, transmission and distribution grids, with significantinvestment capital allocated to these programmes. As a result, Management believes that the CroatianGovernment intends to reinvest the profits made by the Group back into the business to fund futuregrowth and into other strategic development and renovation programmes. Management believes that thisdividend retention policy will decrease the Group’s need to incur additional indebtedness and have apositive effect on its liquidity. The Energy Strategy and dividend retention policy were taken intoconsideration in developing the Group’s financial projections.

57

Borrowings

The following table sets forth the Group’s gross indebtedness for the periods indicated:

As at 31 December As at(Restated) 30 June(Audited) (Unaudited)

2009 2010 2011 2012

(HRK in thousands)

Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . 3,113,467 2,883,554 2,534,489 1,980,071Long-term liabilities to the state . . . . . . . . . . . . . . . . . 59,713 33,734 30,466 28,978Long-term provisions . . . . . . . . . . . . . . . . . . . . . . . . . 559,017 799,945 778,629 801,253Bonds issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,150,887 1,058,042 965,202 918,780Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . 4,878,280 5,008,205 5,144,960 5,075,814

Total non-current liabilities . . . . . . . . . . . . . . . . . . . . . 9,761,364 9,783,480 9,453,746 8,804,896

Trade payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,179,323 1,553,211 2,427,184 1,844,693Current portion of long-term bonds issued . . . . . . . . . . 46,690 93,380 93,380 93,380Current portion of long-term borrowings . . . . . . . . . . . 947,747 1,184,921 1,174,713 1,612,897Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . 767,805 292,493 603,163 1,340,059Taxes and contributions payable . . . . . . . . . . . . . . . . . . 180,828 477,532 75,898 88,095Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,301 30,489 23,192 32,566Liabilities to employees . . . . . . . . . . . . . . . . . . . . . . . . 143,132 134,226 127,934 162,852Other short-term liabilities . . . . . . . . . . . . . . . . . . . . . 332,756 259,328 346,801 518,409

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 4,662,582 4,025,578 4,872,265 5,692,951

The following table illustrates the Group’s long-term borrowings as at 30 June 2012.

Long-term borrowings

As at30 June

2012(Unaudited)

(HRK inthousands)

Domestic bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,091,892Foreign bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,513,873Loan from RWE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,828Total long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,614,593

Deferred loan origination fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,625)Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,612,897)Long-term portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,980,071

The following table illustrates the maturity profile for the Group’s long-term borrowings as at 30 June2012.

(HRK inthousands)

Twelve months ended 30 June (Unaudited)

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 737,9232014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748,7122015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613,5162016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401,092Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,113,350

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,614,593

The Group’s long-term borrowings decreased during the 2009 to 2011 period fromHRK 3,113,467 thousand as at 31 December 2009 to HRK 2,883,554 thousand as at 31 December 2010and HRK 2,534,489 thousand as at 31 December 2011. This was primarily due to a combination of goodbusiness results, particularly in 2010, reduced expenditure on investments as a result of the Groupimplementing cost cutting measures which allowed the Group to make increased repayments in respect of

58

its long-term borrowings and resulted in a decreased need for long-term borrowings by the Group. As at30 June 2012, the Group’s total outstanding balance on long-term borrowings wasHRK 3,614,593 thousand.

As at 31 December 2009, 2010 and 2011 and 30 June 2012, 0.9%, 0%, 0% and 0%, respectively, of theGroup’s total long-term borrowings were denominated in U.S. dollars and 99.1%, 100%, 100% and 100%,respectively, of the Group’s total long-term borrowings, including the current portion, was denominated inEuro.

Long-term borrowings from domestic banks made up 26.5%, 25.7%, 45% and 57.9% of the Group’s totallong-term borrowings, as at 31 December 2009, 2010 and 2011 and 30 June 2012, respectively, and weresecured by bills of exchange and promissory notes. Long-term borrowings from foreign banks made up73.5%, 74.3%, 55.0% and 42.1%, as at 31 December 2009, 2010 and 2011 and 30 June 2012, respectively,and are partly secured by state guarantees and Plomin’s total assets. Approximately 19.1% of totallong-term borrowings are state-guaranteed, which include most of the credit lines granted by thedevelopment banks. The remaining long-term borrowings relate to the bonds issued by the Group on thedomestic market.

As of 30 June 2012, 3.4% and 96.6% of the Group’s total long-term borrowings bore interest at fixed andfloating interest rates, respectively.

As at 30 June 2012, the aggregate amount available under the Group’s long term existing bank facilities(domestic and foreign) was HRK 1,275,285 thousand. This includes the full amount of the EBRD loanfacility and the balance of the KFW loan facility (of which HRK 25,464.8 thousand was drawn as at 30 June2012). However, until such time as the Group is back in compliance with the financial covenants in therelated loan agreements (as further described below) and subject to satisfying certain other conditionsprecedent, the Group may be unable to draw down such amounts.

Some of the Group’s loan agreements contain financial covenants, including requirements for the Groupto meet certain prescribed ratio levels based on the Financial Statements, including operating ratio, debtservice coverage, internal cash generation, tangible net worth capital interest cover, total net borrowings totangible net worth, total net borrowings to total assets and total net borrowings to EBITDA ratios. Most ofthe existing financial covenants are required to be calculated under IFRS. Calculating methods in thoseagreements may differ from those implemented by the Group for its internal purposes, including forreporting in the Financial Statements.

In 2012, the Group was not in compliance with financial covenants under the following loan agreements:*

• Bayerische Landesbank (in respect of a loan for up to A30,000 thousand (equivalent to HRK 225,303thousand), HEP has agreed to take the loan in two tranches of A15,000 thousand (equivalent toHRK 112,652 thousand) and A12,000 thousand (equivalent to HRK 90,121 thousand). Theoutstanding amount as at 30 June 2012 was A8,438 thousand (equivalent to HRK 63,366 thousand)and A6,750 thousand (equivalent to HRK 50,693 thousand), respectively. Pursuant to such loanagreement HEP must ensure that the ratio of EBITDA (profit before interest, depreciation,amortisation and tax) to Net Finance Charges is not at any time less than 8:1. As at 30 June 2012, theratio was 5.64:1.

• Club deal (in respect of a loan for A125,000 thousand (equivalent to HRK 938,763 thousand), of whichA69,400 thousand (equivalent to HRK 521,201 thousand) was outstanding as at 30 June 2012.Pursuant to such loan agreement HEP must ensure that the ratio of total net borrowings to EBITDA(profit before interest, depreciation, amortisation and tax) is not at any time greater than 3.5:1. As at30 June 2012, the ratio was 4.87:1.

• Deutsche Bank (in respect of a loan for A100,000 thousand (equivalent to HRK 751,010 thousand), ofwhich A64,706 thousand (equivalent to HRK 485,948 thousand) was outstanding as at 30 June 2012.Pursuant to such loan agreement, HEP must ensure that the ratio of the aggregate of cashflow, cashand cash equivalent instruments to net debt service shall not at any time be less than 1.05:1. As at30 June 2012, the ratio was �0.05:1.

• European Bank for Reconstruction and Development (‘‘EBRD’’) (in respect of a loan forA123,200 thousand (equivalent to HRK 925,244 thousand), of which none was outstanding as at30 June 2012. Pursuant to such loan agreement, HEP must ensure that the ratio of total debt to

* Equivalent figures in Kuna are as at 30 June 2012 based on an exchange rate of 7.5101 Kuna to one Euro.

59

EBITDA (profit before interest, depreciation, amortisation and tax) is not at any time greater than3.5:1. As at 30 June 2012, the ratio was 5.07:1.

• Societe Generale—Splitska banka d.d. (in respect of a loan for A10,000 thousand (equivalent toHRK 75,101 thousand), of which A7,059 thousand (equivalent to HRK 53,012 thousand) wasoutstanding as at 30 June 2012. Pursuant to such loan agreement, HEP must ensure that the ratio oftotal net borrowings to EBITDA (profit before interest, depreciation, amortisation and tax) is not atany time greater than 3.50:1. As at 30 June 2012, the ratio was 4.87:1.

• Societe Generale—Splitska banka d.d. (in respect of a loan for A3,000 thousand (equivalent toHRK 22,530 thousand), of which A1,588 thousand (equivalent to HRK 11,928 thousand) wasoutstanding as at 30 June 2012. Pursuant to such loan agreement, HEP must ensure that the ratio oftotal net borrowings to EBITDA (profit before interest, depreciation, amortisation and tax) is not atany time greater than 3.50:1. As at 30 June 2012, the ratio was 4.87:1.

The Group has breached all of these covenants during the six months ended 30 June 2012, primarily due tolower EBITDA and cash flow from its operating activities as a result of a 16.3% increase of operating costsin the six months ended 30 June 2012, compared to the same period the previous year. The increase incosts related to electricity and thermal energy production costs and purchase of electricity which rose by43.6% in the six months ended 30 June 2012 as compared to the same period the previous year due to thecontinued drought in Croatia which has resulted in historically low water inflows. In addition there was asignificant increase in fuel prices in the six months ended 30 June 2012 as compared to the same period theprevious year; 44.3% for gas, 15.7% for fuel oil and 10.9% for coal and the price of electricity importsincreased by 12.5% over the same period. These factors contributed to a decrease of EBITDA.

As of 30 June 2012, the outstanding balances under these loans amounted to 18.9% of the Group’s totaloutstanding debt portfolio.

The above breaches triggered defaults under such loan agreement and also triggered a cross default underthe Deutsche Bank loan agreement. As of the date of this Offering Circular, based on representationsprovided by the Group that it intends to be in compliance with such financial covenants by 31 December2012, the Group has obtained temporary waivers for these defaults from each of Bayerische Landesbank,the lenders under its Club deal, Deutsche Bank (including in relation to the cross default) and SocieteGenerale. Such representations have been provided based on the expected rise in revenues as a result ofthe electricity tariff rate increases which came into effect on 1 May 2012 and through managing operatingexpenses, improving inventory, equipment and spare parts management, consolidating and improvingprocurement policy, reducing electricity grid losses and enhancing its policy for electricity marketpurchases. Such covenants will next be tested on 31 December 2012 and the Group has not obtained anywaivers in respect thereof. The Group currently expects that it will be in compliance with such covenants asof 31 December 2012 or, in the event that compliance may not possible, it will prepay such loans with theproceeds of this issuance. See ‘‘Use of Proceeds’’ and ‘‘Risk Factors—The Group has substantial debt andfinancing obligations, including long-term debt facilities that contain various restrictive covenants, some ofwhich have been recently breached, but subsequently waived by the respective lenders, which could impair itsability to service its debt and fund its capital expenditures’’.

With respect to the EBRD loan, the balance outstanding under this loan agreement is currently zero. TheEBRD has confirmed that based on the representations described above, the anticipated curing of suchdefault by 31 December 2012 and that such breach was a one-off breach, as it is not EBRD’s practice toissue a formal waiver for a one-off breach of financial covenants or to declare a default on the basis of aone-off breach of financial covenants alone.

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As a result of the breaches as at 30 June 2012, the non-current portions of these loans have beenreclassified as current liabilities as set out in the table below.

Non-current portion asat 30 June 2012

Approved amount Amount used as at reclassified toin currency 30 June 2012 current portion

EUR ’000 HRK ’000 HRK ’000Unaudited Unaudited Unaudited

BankDeutsche bank . . . . . . . . . . . . . . . . . . . . . . . . 100,000 485,948 309,239Societe Generale—Splitska banka . . . . . . . . . . 10,000 53,012 35,342Societe Generale—Splitska banka . . . . . . . . . . 3,000 11,928 6,626Club deal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000 521,201 354,176Bayerische Landesbank . . . . . . . . . . . . . . . . . . 15,000 63,366 35,204Bayerische Landesbank . . . . . . . . . . . . . . . . . . 12,000 50,693 28,163EBRD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,200 — —

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 768,750

See also ‘‘Risk Factors—The Group has substantial debt and financing obligations, including long-term debtfacilities that contain various restrictive covenants, some of which have been recently breached, but subsequentlywaived by the respective lenders, which could impair its ability to service its debt and fund its capitalexpenditures.’’

For the description of the Group’s material loan agreements and the financial covenants in thoseagreements, see ‘‘—Material Contracts’’.

Long term liabilities to the State

The Group’s long-term liabilities to the state decreased during the 2009 to 2011 period from HRK59,713 thousand as at 1 January 2010, HRK 33,734 thousand as at 31 December 2010, HRK30,466 thousand as at 31 December 2011 and HRK 28,978 thousand as at 30 June 2012. This outstandingindebtedness primarily relates to mortgage receivables on houses originally owned by the Group and thatwere sold under a Croatian Government programme to the Group’s employees. This programme wasdiscontinued in 1996. The mortgages were typically for a period of 20-35 years and are payable monthly. Inaccordance with applicable laws regulating such housing sales, 65.0% of the proceeds from the house saleswere payable to the state on the date the proceeds were collected. According to the law, the Group has noliability to remit the funds unless and until they are collected from the employee.

Bonds Issued

In November 2006, the Group issued HRK 500,000 thousand 5.0% bonds maturing on 29 November 2013and in December 2007, the Group issued HRK 700,000 thousand 6.5% bonds maturing on 7 December2017. The 2013 bonds are repayable on maturity and the 2017 bonds are repayable in 15 semi-annualinstalments, the first of which was due in December 2010. Both series of bonds are listed on the Zagrebstock exchange. As at 30 June 2012, the principal amount outstanding in respect of such bonds wasHRK 500,000 thousand and HRK 513,240 thousand, respectively.

Short-term borrowings

Short-term borrowings from domestic banks made up 62.6%, 1.2%, 98.7% and 99.5% of the Group’s totalshort-term borrowings, as at 31 December 2009, 2010 and 2011 and 30 June 2012, respectively, and aresecured by bills of exchange. The Group uses its short-term loans for working capital purposes and for thesettlement of trade payables.

In order to meet the current liquidity requirements in the next period, the Group intends to extend all theexisting short-term credit lines and facilities, as well as raise new short-term loans.

As at 30 June 2012, the Group had drawn down an aggregate amount of HRK 1,340,059 thousand underits short-term financing facilities. A balance of HRK 4,470 thousand remains undrawn and, subject tosatisfaction of relevant conditions precedent, available for drawing.

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The following table sets forth the Group’s short-term borrowings as at 30 June 2012.

Short Term Borrowings:

As at 30 June 2012(Unaudited)

Original Outstanding AvailableCurrency amount amount

(HRK in thousands)

Domestic bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HRK 295,530 4,470Domestic bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HRK 300,000 0Domestic bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR 300,404 0Club deal—domestic banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HRK 400,000 0Domestic bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR 37,551 0Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR 6,574 0

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,340,059 4,470

Capital Expenditures and Acquisitions

The following table sets forth the Group’s capital expenditures by subsidiary and operating segment for theperiods indicated:

Year endedYear ended 31 December 31 December

2009 2010 Change 2011 Change

(HRK in thousands) % (HRK in %thousands)

HEP Proizvodnja (generation) . . . . . . . . . . . . 772,835 483,257 (37.5) 862,142 78.4HEP OPS (transmission) . . . . . . . . . . . . . . . . 443,760 242,733 (45.3) 250,588 3.2HEP ODS (distribution) . . . . . . . . . . . . . . . . 955,778 709,138 (25.8) 872,752 23.1HEP Toplinarstvo (thermal generation/

distribution) . . . . . . . . . . . . . . . . . . . . . . . 122,470 97,004 (20.8) 68,293 (29.6)HEP Plin (gas distribution) . . . . . . . . . . . . . . 22,118 17,097 (22.7) 17,343 1.4HEP d.d. and other companies . . . . . . . . . . . 77,843 144,496 85.6 65,593 (54.6)

Total (Group) . . . . . . . . . . . . . . . . . . . . . . . . 2,394,804 1,693,725 (29.3) 2,136,711 26.2

In response to the global financial crisis, the Group took measures to significantly reduce its capitalexpenditures and acquisition programmes in 2009 and 2010. Priority was given to important constructionprojects already in progress, development of new power plants and investments necessary for the safetyand reliability of the Group’s energy facilities. Nevertheless, the Group made significant investments in itscapital expenditures programme by investing HRK 2,394,804 thousand, HRK 1,693,725 thousand andHRK 2,136,711 thousand during the years ended 31 December 2009, 2010, 2011, respectively. During thelast three years, significant investment has been made in the replacement and reconstruction of existingpower plants and the construction of new facilities for the transmission and distribution networks,particularly in larger Croatian cities. In addition, the Group has renovated of its thermal energydistribution networks in Zagreb and Osijek, as well as invested in the information and telecommunicationinfrastructure.

The Group’s most important investments include the completion of Ombla hydro power plant which isscheduled to be completed within the next five years and Plomin III thermal power plant, which isscheduled to be completed by the end of 2018. The Group is also in the process of developing andpreparing for the construction of two new hydro power plants on the rivers Lika and Gacka (Senj andKosinj) and a multipurpose hydro generation system on the river Sava, work on which is expected to beginin 2014. In addition, the Group is undertaking a renovation of the Dubrovnik I hydro power plant. TheGroup also expects to invest in building a new gas fired thermal power plant, a multi-purpose hydropowersystem at Osijek and a 120 MW cogeneration system in Zagreb and Osijek. A significant portion of theGroup’s planned capital expenditure programme is focused on increasing the quality of the transmissionand distribution network and electricity supply systems. In particular, the Group is committed to therenovation of the transmission facilities in Zagreb, Rijeka, Split and Osijek and new 110/x kV and 35/x kVdistribution network. The Group is also investing into smart meters and developing a new distributionstrategy, as well as a number of other projects that are still in the research phase.

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During the next five years, the Group plans to invest approximately HRK 4,055,000 thousand towards thereplacement, reconstruction and revitalisation of the existing power plants, HRK 2,575,900 thousand toimprove its electricity transmission network, HRK 5,352,400 thousand to improve its electricity distributionnetworks and HRK 2,842,700 thousand towards improving its thermal energy and gas distribution network,operating efficiency and information and telecommunication infrastructure. The Group also plans to investapproximately HRK 4,236,700 thousand towards the construction of new hydro and thermal power plants.The Group estimates that its capital expenditure programme through the end of 2016 will beapproximately HRK 19,062,700 thousand which includes capital expenditure for generation, transmissionand distribution. This figure does not include the potential acquisitions of subsidiaries, associates and jointventures, which will depend on the future available investment opportunities. The Group’s constructionprogrammes are subject to periodic reviews and actual construction may vary from the above estimates.The Group expects to finance the related capital expenditures through a combination of debt issuancesand operating cash flow, as well as joint ventures with strategic partners. At 30 June 2012, significantpurchase commitments were outstanding in connection with the construction programme.

The table below sets out the Group’s planned capital expenditure from 2012 through to 2016.

HRK (thousands) 2012 2013 2014 2015 2016 Total 2012-2016

Generation . . . . . . . . . . . . . 1,220,000 1,516,000 1,533,000 1,923,000 2,100,000 8,292,000

Transmission . . . . . . . . . . . . 588,000 523,000 529,000 474,000 463,000 2,576,000

Distribution . . . . . . . . . . . . 1,322,000 1,020,000 1,050,000 970,000 990,000 5,352,000

Other companies . . . . . . . . 314,000 553,000 867,000 635,000 473,000 2,843,000

Total . . . . . . . . . . . . . . . . . 3,445,000 3,611,000 3,978,000 4,002,000 4,026,000 19,063,000

Contingent Liabilities and Commitments

The table below sets out the Group’s contingent liabilities and commitments as at 30 June 2012.

As at 30 June 2012

(unaudited)(HRK in thousands)

Liabilities under given letters of credit under accepted payment and insuranceinstruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,686

Other given payment instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,772Received payment instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,448Funds invested in Republic of Serbia and Bosnia . . . . . . . . . . . . . . . . . . . . . . . . . . 1,243,970

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,431,876

The Group also has long-term financial investments in Bosnia and Herzegovina and Serbia, which in 1994had a historical cost of HRK 1,243,970 thousand. When HEP was transformed into a joint stock company,this amount was excluded from the net asset value.

As at 30 June 2012, the Group had unrealised contract value for significant investment projects relating tothe construction of facilities and other investments for HEP Generation, HEP-OPS and HEP-ODS ofapproximately HRK 1,743,670 thousand (compared with HRK 1,670,904 thousand as at 31 December 2011and HRK 1,986,175 thousand as at 31 December 2010).

Material Contracts

The following are the Group’s material long and short-term agreements as of the date of this OfferingCircular, with the outstanding loan amounts given as of 30 June 2012.

Long-Term Loan Agreements(1)

Loan agreement with EBRD

On 25 November 2011, HEP entered into a loan agreement with the EBRD for an amount not exceedingA123,200 thousand (equivalent to HRK 925,244 thousand), consisting of two tranches. Currently no

(1) Equivalent figures in Kuna are as at 30 June 2012 based on an exchange rate of 7.5101 Kuna to one Euro.

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amounts have been drawn under this loan agreement. The purpose of the loan is to fund the constructionof the 68MW hydro power plant and the development of a water supply system for that plant. The firsttranche of the loan is to be repaid by 15 November 2026 and the second by 15 November 2023. The loanagreement includes a range of operating and financial covenants and an event of default provision. HEPwas in breach of the ratio of total debt to EBITDA on the most recent calculation date, 30 June 2012. Untilsuch time as the Group is back in compliance with such ratio and subject to satisfying certain otherconditions precedent, the Group will be unable to drawdown under this loan agreement. For moreinformation, see ‘‘—Borrowings—Long-Term Borrowings’’ and ‘‘Risk Factor—The Group has substantial debtand financing obligations, including long-term debt facilities that contain various restrictive covenants, some ofwhich have been recently breached, but subsequently waived by the respective lenders, which could impair itsability to service its debt and fund its capital expenditures.’’

Club loan agreement with Privredna banka Zagreb d.d., Raiffeisen Bank Austria d.d. Zagreb and Zagrebackabanka d.d.

On 4 October 2011, HEP entered into a club loan agreement with Privredna banka Zagreb d.d., RaiffeisenBank Austria d.d. Zagreb and Zagrebacka banka d.d as the lenders and Privredna banka Zagreb d.d. as thefacility agent for A150,000 thousand (equivalent to HRK 1,126,515 thousand), the entire amount beingoutstanding. The loan is for the general corporate purposes of the Group and for the implementation ofthe 2011 investment plan. The loan agreement includes certain financial covenants, such as consolidatednet tangible assets value, a ratio of EBITDA to net financial expenses and a ratio of indebtedness toconsolidated net tangible assets covenants.

Facility agreement with Deutsche Bank A.G., London Branch and others

On 18 March 2010, HEP entered into a facility agreement with Deutsche Bank, among others, forA100,000 thousand (equivalent to HRK 751,010 thousand) of which A64,706 thousand (equivalent toHRK 485,948 thousand) is still outstanding. HEP is required to apply all funds borrowed under this facilityin accordance with the mandate of the Croatian Competition Authority. The loan agreement includes arange of operating and financial covenants and an event of default provision. HEP was in breach of theratio of the aggregate of cashflow, cash and cash equivalent instruments to net debt service on the mostrecent calculation date, 30 June 2012. However, a waiver was obtained on 21 September 2012 in respect ofthe default arising from such breach. In addition, equivalent breaches under the Group’s other loanagreements resulted in defaults which also triggered a cross default under the Deutsche Bank loanagreement. A waiver for such cross default was obtained on 8 October 2012. For more information, see ‘‘—Borrowings—Long-Term Borrowings’’ and ‘‘Risk Factor—The Group has substantial debt and financingobligations, including long-term debt facilities that contain various restrictive covenants, some of which havebeen recently breached, but subsequently waived by the respective lenders, which could impair its ability toservice its debt and fund its capital expenditures.’’

Loan agreement no. 193/10 with Societe Generale—Splitska banka d.d.

On 15 April 2010, HEP entered into a loan agreement with Societe Generale—Splitska banka d.d. forA10,000 thousand (the equivalent of HRK 75,101 thousand) of which A7,059 thousand (equivalent toHRK 53,012 thousand) is still outstanding. This loan is used for the general corporate purposes of theGroup and is subject to certain financial covenants, such as maintaining a material net value, an EBITDAratio to net financial expenses, a ratio of total net indebtedness to EBITDA and a ratio of total netindebtedness to material net value covenants. HEP was in breach of the ratio of total net borrowings toEBITDA on the most recent calculation date, 30 June 2012. However, a waiver was obtained on3 September 2012 in respect of the default arising from such breach. For more information, see ‘‘—Borrowings—Long-Term Borrowings’’ and ‘‘Risk Factor—The Group has substantial debt and financingobligations, including long-term debt facilities that contain various restrictive covenants, some of which havebeen recently breached, but subsequently waived by the respective lenders, which could impair its ability toservice its debt and fund its capital expenditures.’’

Club loan credit facility with Banca Infrastrutture Innovazione E Sviluppo S.P.A. Rome, Erste Group Bank AGVienna, Privredna Banka Zagreb-Dionicko Drustvo and Societe Generale and others

On 16 December 2008, HEP entered into the agreement with Banca Infrastrutture Innovazione ESviluppo S.P.A. Rome, Erste Group Bank AG Vienna, Privredna Banka Zagreb-Dionicko Drustvo andSociete Generale, among others, for A125,000 thousand (equivalent to HRK 938,763 thousand) of whichA69,400 thousand (equivalent to HRK 521,201 thousand) is still outstanding. The facility consists of two

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tranches, the first of A42,000 thousand (equivalent to HRK 315,424 thousand) and the second ofA83,000 thousand (equivalent to HRK 623,338 thousand). The purpose of the facility is to finance theconstruction of a new block C at TPP Sisak. For the second tranche, it is possible to use the funds for otherprojects of any members of the Group or for the general corporate purposes of HEP. The loan agreementincludes a range of operating and financial covenants and an event of default provision. Under the loan,HEP and its material subsidiaries are prevented from making any loans or giving any guarantee withoutthe consent of the lenders. HEP was in breach of the ratio of total net borrowings to EBITDA on the mostrecent calculation date, 30 June 2012. However, a waiver was obtained on 21 September 2012 in respect ofthe default arising from such breach. For more information, see ‘‘—Borrowings—Long-Term Borrowings’’and ‘‘Risk Factor—The Group has substantial debt and financing obligations, including long-term debtfacilities that contain various restrictive covenants, some of which have been recently breached, but subsequentlywaived by the respective lenders, which could impair its ability to service its debt and fund its capitalexpenditures.’’

Loan agreement with Privredna banka Zagreb d.d.

On 26 August 2009, HEP entered into a long term loan agreement with Privredna banka Zagreb d.d. forA30,000 thousand (equivalent to HRK 225,303 thousand) of which A18,000 thousand (equivalent toHRK 135,182 thousand) is still outstanding. The loan was to be used for the general corporate purposes ofthe Group. The loan agreement includes certain financial covenants, such as net material assets, a ratio ofEBITDA to net financial income/outcome and a ratio of net debt to net material asset. For moreinformation, see ‘‘—Borrowings—Long-Term Borrowings’’ and ‘‘Risk Factor—The Group has substantial debtand financing obligations, including long-term debt facilities that contain various restrictive covenants, some ofwhich have been recently breached, but subsequently waived by the respective lenders, which could impair itsability to service its debt and fund its capital expenditures.’’

Loan Agreement no. ZC-338/09 with Societe Generale—Splitska banka d.d.

On 23 July 2009, HEP entered into a long term loan agreement with Societe Generale—Splitska banka d.d.for A3,000 thousand (equivalent to HRK 22,530 thousand) of which A1,588 thousand (equivalent toHRK 11,928 thousand) is still outstanding. The purpose of the loan is for an energy efficiency project runby HEP—ESCO. The loan is subject to certain financial covenants, such as maintaining a material netvalue, an EBITDA ratio to net financial expenses, a ratio of total net borrowings to EBITDA and a ratio oftotal net indebtedness to material net value covenants. HEP was in breach of the ratio of total netindebtedness to EBITDA on the most recent calculation date, 30 June 2012. However, a waiver wasobtained on 24 September 2012 in respect of the default arising from such breach. For more information,see ‘‘—Borrowings—Long-Term Borrowings’’ and ‘‘Risk Factor—The Group has substantial debt andfinancing obligations, including long-term debt facilities that contain various restrictive covenants, some ofwhich have been recently breached, but subsequently waived by the respective lenders, which could impair itsability to service its debt and fund its capital expenditures.’’

Loan agreement with Croatian Bank for Reconstruction and Development

On 13 March 2002, HEP entered into a loan agreement with the Croatian Bank for Reconstruction andDevelopment for A123,000 thousand (equivalent to HRK 923,742 thousand) of which A74,093 thousand(equivalent to HRK 556,442 thousand) is still outstanding. The original issued amount was decreased byAnnex no. 2 to A118,762 thousand (equivalent to HRK 891,915 thousand). This agreement has beenamended several times: (i) Annex no.1 dated 4 April 2002; (ii) Annex no. 2 dated 20 July 2005;(iii) Annex no. 3 dated 31 March 2006 and (iv) Annex no. 4 dated 20 June 2007.

The funds borrowed are to be used for the reconstruction and development of the transmission network.The loan agreement contains periodic information covenants however it does not contain financial oroperating covenants.

Credit agreement with Chase Manhattan Bank and Export-Import Bank of the United States

On 16 July 1998, HEP entered into a credit agreement for A63,346 thousand (equivalent toHRK 475,735 thousand). The credit facility is to be used for the purchase of equipment whether locallybought or imported from the United States. The loan is to be repaid in equal bi-annual instalments withthe last instalment falling 12 years after the loan is taken out. This facility has been repaid in full.

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Loan Agreement with KfW

On 17 December 2008, HEP entered into a loan agreement with KfW, governed by German law, forA50,000 thousand (equivalent to approximately HRK 375,505 thousand), of which A46,609 thousand(equivalent to HRK 350,038 thousand) is still undrawn. The availability period for the loan expires on30 December 2013 and A3,391 thousand (equivalent to approximately HRK 25,465 thousand) has currentlybeen utilised. The agreement contains a negative pledge and a pari passu security interests undertaking,with a basket of A5,000 thousand, which must be complied with at all times up until full repayment of theloan. The loan is to be repaid in equal bi-annual instalments up until 30 December 2023. There are alsoevents of default, such as an event of default if negotiations are entered into with any third party creditorfor the waiver of the debts of HEP and a cross default provision on any financial indebtedness exceedingA5,000 thousand.

Financing Agreement with KfW

On 3 February 2009, HEP entered into a financing agreement with KfW, governed by German law, forA600 thousand (equivalent to HRK 4,506 thousand). This agreement provides for financial contributions toHEP by KfW which are only repayable if the funds are not applied in accordance with the terms of theagreement. These are to use the funds for advisory services in relation to the Croatian Climate ProtectionProgramme, to contribute their own funds in relation to these services and to ensure the funds providedunder the agreement are not applied to any taxes and public charges payable by HEP.

Loan Agreement with Bayerische Landesbank

On 27 July 2009, HEP entered into a loan agreement with Bayerische Landesbank, governed by Germanlaw for up to A30,000 thousand (equivalent to HRK 225,303 thousand). HEP has agreed to take the loan intwo tranches, of A15,000 thousand and A12,000 thousand (equivalent to HRK 112,652 thousand andHRK 90,121 thousand), respectively. The outstanding amount as at 30 June 2012 was A8,438 thousand(equivalent to HRK 63,366 thousand) and A6,750 thousand (equivalent to HRK 50,693 thousand),respectively. Both tranches are to be used for the general operational purposes of the Group and tofinance planned investments. The agreement includes several financial covenants, breaches of whichconstitute an event of default as well as a negative pledge clause and a range of other market standardevents of default. Repayment of the loan is made in sixteen equal quarterly instalments, with the lastpayment falling on 27 July 2014. HEP was in breach of the ratio of EBITDA to net finance charges on themost recent calculation date, 30 June 2012. However, a waiver was obtained on 10 September 2012 inrespect of the default arising from such breach. For more information, see ‘‘—Borrowings—Long-TermBorrowings’’ and ‘‘Risk Factor—The Group has substantial debt and financing obligations, including long-termdebt facilities that contain various restrictive covenants, some of which have been recently breached, butsubsequently waived by the respective lenders, which could impair its ability to service its debt and fund itscapital expenditures.’’

Short-Term Loan Agreements(2)

Revolving loan agreement with Privredna banka Zagreb d.d.

On 2 August 2012, HEP entered into a revolving loan agreement with Privredna banka Zagreb d.d.,for HRK 300,000 thousand (equivalent to approximately A39,946 thousand) of which the entire amount isstill outstanding. The purpose of the facility is to help maintain liquidity within the Group. All fundsborrowed under this loan agreement are to be repaid on 30 June 2013. There are no financial or operatingcovenants under this loan agreement, however it contains standard operating covenants and events ofdefault.

Agreement on mutual relations regarding purchase of receivables

On 30 July 2012, HEP entered into an agreement with Zagrebacka banka. The agreement regulates therelations of the contracting parties regarding the purchase by Zagrebacka banka of the debts of supplierswhether currently due or not owed to the Group. Zagrebacka banka has undertaken to purchase individualreceivables up to the framework revolving amount of HRK 300,000 thousand (equivalent to approximatelyA39,946 thousand), whereby the currently purchased due and undue receivables shall be included in thestated amount. According to the agreement, the final deadline for the purchase of receivables is 30 July

(2) Equivalent figures in Kuna are as at 30 June 2012 based on an exchange rate of 7.5101 Kuna to one Euro.

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2013. All funds borrowed under this loan agreement are to be repaid on 30 June 2013. There are nofinancial or operating covenants under this loan agreement.

Club loan agreement with Hrvatska Postanska Banka d.d., Privredna banka Zagreb d.d. and RaiffeisenbankAustria d.d

On 4 June 2012, HEP entered into an agreement with a group of lenders, Hrvatska Postanska Banka d.d.,Privredna banka Zagreb d.d. and Raiffeisenbank Austria d.d. as the lenders with Privredna banka Zagrebd.d. acting as an agent for HRK 400,000 thousand (equivalent to approximately A53,262 thousand). Theentire amount borrowed under this agreement is outstanding. This loan is for the general corporatepurposes of the Group. Repayment is to be made in one instalment, due on 4 June 2013. The loanagreement includes certain financial covenants, such as consolidated net value of material assets, a ratio ofEBITDA to net financial expenses and a ratio of indebtedness to net value of material assets covenants.

Related Party Transactions

The following table sets forth balances due to and from related parties as at 30 June 2012 and31 December 2009, 2010 and 2011:

Sales revenue Purchases

Year ended 31 December June 30 Year ended 31 December June 30(Audited) (Unaudited) (Audited) (Unaudited)

2009 2010 2011 2012 2009 2010 2011 2012

(HRK ’000)Enterprises controlled by the GovernmentHrvatske Zeljeznice . . . . . . . . . . . . . . 92,624 123,627 108,259 53,237 15,746 16,260 9,279 5,284INA d.d. . . . . . . . . . . . . . . . . . . . . . 156,242 135,772 121,110 78,993 1,812,967 1,480,394 1,419,311 94,890Prirodni Plin . . . . . . . . . . . . . . . . . . . — 134 — — — 427,615 1,011,225 1,342,063Plinacro . . . . . . . . . . . . . . . . . . . . . . — 1,102 1,975 1,056 — 38,508 34,296 13,789Hrvatske telekomunikacije . . . . . . . . . . 75,011 77,854 83,937 41,175 19,337 29,382 27,400 8,608Croatia osiguranje . . . . . . . . . . . . . . . 4,754 6,181 6,481 3,296 15,558 15,842 16,924 7,486Hrvatska posta . . . . . . . . . . . . . . . . . 17,480 21,115 22,062 9,496 48,853 51,251 54,523 25,387Hrvatske sume . . . . . . . . . . . . . . . . . 5,959 6,572 5,785 4,343 14,364 13,784 12,113 2,898Jadrolinija . . . . . . . . . . . . . . . . . . . . 1,202 1,107 727 622 398 603 787 404Narodne novine . . . . . . . . . . . . . . . . . 2,081 2,081 2,855 1,242 4,963 5,667 6,236 2,863Croatian radio and television . . . . . . . . 13,898 12,763 12,441 6,020 1,060 1,124 1,079 582Plovput . . . . . . . . . . . . . . . . . . . . . . 559 543 551 349 210 163 230 34Croatia Airlines . . . . . . . . . . . . . . . . . 772 807 788 461 63 110 2 159Petrokemija Kutina . . . . . . . . . . . . . . . 9,965 8,311 9,428 6,216 6,834 133 46 104Ministry of Foreign Affairs . . . . . . . . . . 598 621 563 292 — — — —Ministry of Defence . . . . . . . . . . . . . . 34,743 31,172 17,597 15,723 58 — — —Ministry of Interior . . . . . . . . . . . . . . . 24,100 25,621 24,862 15,951 38 — — —Elementary and secondary schools . . . . . 80,008 78,697 79,120 57,737 1,027 — — —Judicial institutions . . . . . . . . . . . . . . . 11,004 10,563 10,506 8,352 69 — — —Colleges and universities . . . . . . . . . . . 32,138 29,715 30,649 20,429 15,785 4,869 3,160 1,611Legislative, executive and other bodies of

the Republic of Croatia . . . . . . . . . . 63,850 48,470 29,169 18,104 12,115 7,648 5,848 3,690Health institutions and organisations . . . . 112,586 92,427 81,711 56,358 4,906 4,027 3,502 1,913Other users . . . . . . . . . . . . . . . . . . . 94,142 109,474 70,472 9,292 145,011 14,202 15,883 3,368

833,716 824,729 721,048 408,744 2,119,362 2,111,582 2,621,844 1,515,133

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Receivables Payables

Year ended 31 December June 30 Year ended 31 December June 30(Audited) (Unaudited) (Audited) (Unaudited)

2009 2010 2011 2012 2009 2010 2011 2012

(HRK ’000)Enterprises controlled by the GovernmentHrvatske Zeljeznice . . . . . . . . . . . . . . . . . . 20,229 34,957 22,615 32,166 5,091 3,238 866 1,053INA d.d. . . . . . . . . . . . . . . . . . . . . . . . . 15,602 8,483 14,709 20,829 218,667 210,541 206,061 7,507Prirodni Plin . . . . . . . . . . . . . . . . . . . . . . — 7 — — — 76,652 371,656 100,119Plinacro . . . . . . . . . . . . . . . . . . . . . . . . . — 32 351 297 — 9,631 4,380 2,907Hrvatske telekomunikacije . . . . . . . . . . . . . 8,407 8,761 8,092 9,037 6,485 8,879 8,179 2,801Croatia osiguranje . . . . . . . . . . . . . . . . . . . 469 668 582 589 — — — 3,297Hrvatska posta . . . . . . . . . . . . . . . . . . . . . 3,301 3,156 3,380 2,997 7,966 4,637 4,568 4,753Hrvatske sume . . . . . . . . . . . . . . . . . . . . . 1,287 2,017 1,262 875 235 925 1,288 25Jadrolinija . . . . . . . . . . . . . . . . . . . . . . . . 195 242 57 123 487 561 761 344Narodne novine . . . . . . . . . . . . . . . . . . . . 259 246 284 329 1,641 1,397 1,790 1,311Croatian radio and television . . . . . . . . . . . . 1,636 2,233 2,006 1,769 275 143 231 162Plovput . . . . . . . . . . . . . . . . . . . . . . . . . 64 68 64 53 49 49 49 33Croatia Airlines . . . . . . . . . . . . . . . . . . . . 176 150 149 108 113 64 — 51Petrokemija Kutina . . . . . . . . . . . . . . . . . . 797 668 266 575 — — — —Ministry of Defence . . . . . . . . . . . . . . . . . 11,455 4,531 4,209 2,473 — — — —Ministry of Interior . . . . . . . . . . . . . . . . . . 6,274 7,442 7,286 3,440 — — — —Elementary and secondary schools . . . . . . . . 13,477 15,135 15,096 9,125 — — — —Judicial institutions . . . . . . . . . . . . . . . . . . 2,148 2,983 2,599 1,697 — — — —Colleges and universities . . . . . . . . . . . . . . 4,411 4,516 4,136 3,554 — — — —Legislative, executive and other bodies of the

Republic of Croatia . . . . . . . . . . . . . . . . 7,046 7,038 5,183 3,613 — — — —Health institutions and organisations . . . . . . . 25,895 34,970 35,810 26,671 — — — —Other users . . . . . . . . . . . . . . . . . . . . . . . 17,060 16,245 5,842 3,519 12,865 9,888 11,008 —

140,188 154,548 133,978 123,839 253,874 326,605 610,837 124,363

HEP’s transactions with related parties relate to receivables and income from the sale of electricity,thermal energy and gas, as well as to the Group’s obligations and costs incurred on the basis of servicesrendered and goods delivered. Delivery of goods principally includes the deliveries by Industrija Nafte(‘‘INA Group’’) (the national oil company), Prirodni plin and Plinacro for motor fuel and natural gas for theGroup’s generation facilities and gas distribution. The most significant service values relate to Hrvatsketelekomunikacije for telecoms; Hrvatske poste for postal services and Croatia osiguranje for insurancecosts.

The Group has a 50% holding in the Krsko nuclear plant and as a result receives 50% of total electricitythat it produces. The price for such electricity is set according to the total generation costs incurred byKrsko.

Recent Events

New Energy Act

The new Energy Act was adopted by the Croatian Parliament on 19 October 2012. The new Energy Acttransferred the control over the adoption of the tariff rates from the Croatian Government and localmunicipalities to HERA. Management believes that the new Energy Act will simplify the applicationprocess for rate increase. For additional information, see ‘‘Regulation—Republic of Croatia—New EnergyAct’’.

Thermal Energy Tariff Increase

HEP-Top has sent a request for thermal power tariff rate increases to local Croatian municipalities locatedin Zagreb, Osijek, Sisak, Velika Gorica, Samobor and Zapresic. The Group expects responses during thefourth quarter of 2012.

Post Fukushima Stress Tests Results

On 4 October 2012, the European Commission published a report following its completion of stress testsof Europe’s nuclear power plants. The report is based on the conclusions of peer reviews of nuclear powerplants, which were produced in April 2012 by the European Nuclear Safety Regulators Group (ENSREG).

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Each power plant was assessed on the basis of 11 measures recognised as being useful and necessary tomitigate the effects of extreme natural and other disasters in the vicinity of a nuclear power plants.According to the European Commission’s report, the Krsko nuclear plant is the only power plant to havealready implemented, or be shortly implementing, all 11 measures.

Ratings

On 21 September 2012, Moody’s downgraded HEP from Ba1 with a negative outlook to Ba2 with anegative outlook. According to Moody’s, the downgrade reflects additional pressure on HEP’s liquidityarising from the high proportion of short-term debt in its total debt portfolio, the challenging maturityprofile of its long-term debt portfolio and its need for significant new financing to cover its sizeableinvestment programme.

On 3 October 2012, S&P downgraded HEP from BB with a developing outlook to BB- on credit watchwith negative implications. According to S&P, the downgrade reflects HEP’s inherent earnings volatility inthe context of unpredictable, politically determined, regulated tariffs, the Group’s ambitious investmentprogramme and the deterioration of HEP’s business prospects given poor hydrological conditions, risingcommodity prices and increased electricity imports which have resulted in aggressive use of short-termcredit lines and a deferral of investments.

Quantitative and Qualitative Disclosures about Market Risk

Market Risk

Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuatebecause of changes in market prices. Market prices comprise two types of risk: currency risk and interestrate risk. Market risk exposures are supplemented by sensitivity analysis—for additional information aboutmarket risk and certain sensitivity information relating to the risks discussed below, see Note 37 ‘‘FinancialInstruments’’ to the Annual Financial Statements.

Currency Risk

The Group is exposed to transactional foreign currency risk in two main ways: (i) on expenses (particularlyin relation to costs for fuel and purchased electricity) and, although to a much lesser extent, on revenuesthat are denominated in currencies other than Kuna; and (ii) because a significant portion of the Group’sdebt (including the Notes) is denominated in currencies other than the Kuna, the Group is sensitive todomestic currency depreciation and an increase in loan pricing.

The Group also presents its consolidated results in Kuna. Accordingly its reported financial results aresubject to movements in exchange rates on the translation of financial information of areas of the Group’sbusiness where the functional currency is not the Kuna.

The Group is mainly exposed to changes in the Euro exchange rate however it considers its Eurodenominated debt to be a partly strategic decision in view of Croatia’s accession to full EU membership on1 July 2013. As at 30 June 2012, the Group’s exposure to currency risk accounted for 66% of its total debt.Exchange rate exposures are managed within approved policy parameters utilising forward foreignexchange contracts. Further, Management considers the risk of potential depreciation of the Kuna againstthe Euro to be low due to the Croatian National Bank’s strong position on maintaining Kuna stabilitytowards the Euro. Please see ‘‘—Liquidity and Capital Resources—Borrowings’’.

With respect to its exposure to other key currencies, the Group has also diversified its portfolio anddecreased total currency risk exposure. In view of the high U.S. dollar and Swiss franc volatility seen duringthe 2009 to 2011 period, in its credit portfolio the Group is no longer exposed to the risk of thesecurrencies. However the cost of commodities such as fuel oil, gas and coal, all of which the Group uses tofire its power plants, are closely tied to the U.S. dollar and therefore the Group is exposed to the volatilityof such currency with respect to the prices it must pay on the market. The price of fuel oil and natural gas,on which the Group is dependent for most of its thermal power plants and for its district boiler rooms,have risen significantly in recent years; oil in particular reached a high of over 123 U.S. dollars per barrel inearly 2012.

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Interest Rate Risk

The Group’s exposure to interest rate risk relates primarily to the costs of its floating rate borrowingsbenchmarked against LIBOR and EURIBOR, amongst others. 81% of the Group’s external borrowings(HRK 4,823,988 thousand) as of 30 June 2012 were issued with a variable interest rate. Although a rise inreference rates will result in increased interest costs on floating rate borrowings, the current referencerates on the market are at historic lows. However, Management has approved the conclusion of frameworkagreements with which may be entered into with appropriate financial institutions in the future for thepurpose of financial risk hedging should it be required to act swiftly to counter any increased exposure as aresult of interest rate movements. Management has also agreed that new long-term loans and bonds will beentered into on the basis of a fixed rate interest rate to further reduce the Group’s exposure to variableinterest rates.

The Group has one interest rate swap contract which hedges the Group’s exposure to variable interest ratedebt. The contract matures on 25 October 2012.

Capital Risk

The Group’s objective when managing capital is to safeguard the Group’s ability to be able to continue as agoing concern.

The Group monitors capital using a gearing ratio, which is net debt divided by equity. The Group includeswithin net debt its interest-bearing loans and borrowings less cash. Management monitors the capitalstructure on a semi-annual basis and may adjust its capital management policies and targets followingchanges in its operating environment, market sentiment or its development strategy. The Group’s policy isto keep the gearing ratio below 45%. For further information in relation to capital risk, see Note 37‘‘Financial Instruments’’ to the Annual Financial Statements.

Commodity Risk

The Group’s exposures to changes in commodity prices are primarily associated with the purchase of fuelfor its power plants and the purchase and sale of electricity at variable prices.

Currently the Group does not use any financial derivatives to combat commodity risk due to the lack of aneffective derivatives market in the region. Instead the Group uses long-term bilateral contracts (mostfrequently annual and quarterly contracts) to fix the price for the purchase of electricity.

However, as majority of the Group’s electricity is sold under the public tariff system (52% as at31 December 2011) and a stable revenue stream arises also from public tariffs collected for the regulatedactivities of transmission and distribution of electricity, the Group is able to predict consumption levels andtherefore plan for its fuel consumption requirements for any year and in so doing be able to purchaserequired fuel on the market at optimal times and prices.

Further, the Group’s annual contracts allow for the ability to cancel the delivery of electricity which allowsthe Group to manage price, quantity and, to a certain extent, given the Group’s reliance on output from itshydro power plants, weather related factors. The Group covers approximately 50% of its balance sheetneeds by way of annual contracts with the remaining portion covered by purchase on a quarterly, monthly,weekly or daily basis.

In addition the Group seeks to protect itself from fluctuations in electricity prices by choosing the optimalmoment to call for tenders for the purchase of necessary quantities of electricity.

Credit Risk

Credit risk is the risk that the Group will incur a loss because its customers or counterparties fail todischarge their contractual obligations. The Group is the sole supplier of electric energy in the Republic ofCroatia to Tariff Customers and as such it has a public responsibility to provide services to all users andlocations across the country, regardless of the credit risks associated with particular customers.

Although trade receivables, net, are spread across a wide geographical area and across industries andcustomer bands resulting in the Group being largely protected from any significant credit risk exposure toany single counterparty or any Group of counterparties having similar characteristics, the ongoingeconomic crisis, the condition of the Croatian economy and consequential illiquidity and unemployment,

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has resulted in the Group being exposed to increasing levels of bad and doubtful debts and the Group hasfaced increasing difficulty in debt recovery.

In addition, there are restrictions under Croatian law with respect to disconnecting non-paying customers,which in particular impacts the Group’s subsidiaries that supply the Non-Tariff Customers. Under Croatianlaw, HEP-Supply is not permitted to disconnect its non-tariffed customers in the event of non-payment ofinvoices. In the event that a customer fails to pay for its electricity in a timely fashion, the only recourse ofHEP-Supply is the termination of the supply contract with such customer. In the event that a customer’scontract is terminated, such customer will return to the tariffed supply system where it will be charged theBalancing Energy Tariff, however it will still receive electricity. The customer may only be disconnectedwhilst in the public system. The result of this situation is that debt collection is more difficult and theprocess is relatively time-consuming.

The Group has had greater success with debt collection from Households than Commercial Customers.Low liquidity of Commercial Customers, coupled with frequent instances of accounts being blockedresulting from historic payment issues have slowed business activities and with many CommercialCustomers operating at a loss, this has had a significant impact on debt collection.

The Group has been continuously implementing measures aimed at improving the collection of receivablesby using already existing methods and instruments for improved collection, including regular supervision ofbill collection, supervision of due dates to avoid their statute of limitations being passed, regularsubmission of reminders, providing extended time periods for settling debt under the threat ofdisconnection (where legally possible), disconnections (where legally possible), compensation claims, filinglegal charges, debt reprogramming and other instruments for collecting payments. In addition, the Grouphas also started requiring its Commercial Customers to enter into payment insurance instruments (such asblank promissory notes) and implemented a policy of maintaining regular and close contact with seniormanagement within such customers in order to ensure timely collection of receivables.

Despite the less than favourable economic situation, the collection period is currently considered byManagement to be satisfactory (at on average 56 days as at 30 June 2012) thanks to these measures andactivities for improving and enhancing debt collection.

For further information relating to the impact on the Group of credit risks, see Note 37 ‘‘FinancialInstruments’’ to the Group’s Annual Financial Statements.

Liquidity Risk

Going Concern—Liquidity Assessment

At 30 June 2012 the total current liabilities exceed the total current assets by HRK 2,551,560 thousand. Asat 31 December 2011, the Group’s total current liabilities exceeded its total current assets byHRK 1,490,281 thousand.

In order to meet the current liquidity requirements in the next period, the Group intends to extend all theexisting short-term credit lines and facilities, as well as raise new short-term loans. A short-term loan in theamount of HRK 400 million was agreed in June 2012 with a consortium of domestic banks. See also Note 3‘‘Going Concern’’ to the Interim Financial Statements and Note 1 ‘‘General—Going Concern’’ to theAnnual Financials.

Liquidity Risk—General

The Group is subject to liquidity risk to the extent that its current assets and available sources of funds maynot be sufficient to meet current liabilities. Liquidity risk has been intensified since 2008 as banks andother sources of funding have adopted more stringent lending requirements in response to thedeteriorating condition of global financial markets. Further, the Croatian Government has introduced newregulations requiring the Group to shorten payment periods in contracts with suppliers from 90 days to60 days and requiring the Group to pay advance deposits for construction work in the amount of 10% ofthe contract value upon construction commencement. While the full impact of these changes have yet to befelt, the Group anticipates that these changes will impact its liquidity. In addition, the Group is subject to arelatively long tendering process pursuant to the Public Procurement Act (which provides an exception forthe procurement of financial services in connection with the issuance, sale, purchase or transfer ofsecurities or other financial instruments, especially for acquiring loans or capital, as well as for servicesprovided by the Croatian National Bank). Consent must be obtained from the Croatian Government prior

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to entering into new loan agreements. The process usually takes at least 2 months and therefore the Groupwould be restricted from moving quickly to fill potential liquidity gaps should existing lines of credit not beavailable.

However, despite these constraints, the Group does not anticipate any funding gaps, given its businessarea, its position in the market and the security of return ensured by the Group’s investments whencompared with other industry sectors.

The Group’s main source of liquidity has been cash flow from its current operations and proceeds ofmaturing financial assets together with borrowings from third parties. As at 30 June 2012, the Group hadaccess to financing facilities in an aggregate amount equal to HRK 1,344,529 thousand, ofwhich HRK 4,470 thousand remain unused.

Critical Accounting Policies and Estimates

The Group prepares its Financial Statements in compliance with IFRS as adopted by the EU. As such, itsmanagement is required to make certain estimates, judgments and assumptions that it believes arereasonable based on the information available. These estimates and assumptions affect the reportedamounts of assets and liabilities at the date of the Financial Statements, the reported amounts of incomeand expenses during the periods presented and the related disclosure of contingent assets and liabilities.

The Group evaluates its estimates on an ongoing basis, using previous experience, consultation withexperts and other methods considered reasonable in the particular circumstances to ensure full compliancewith IFRS and best practice. Actual results may differ significantly from the Group’s estimates, the effectof which is recognised in the period in which the facts that gave rise to the revision became known.

The Group’s material accounting policies are set out in full in Note 2 ‘‘Summary of Significant AccountingPolicies’’ to its Annual Financial Statements for the years ended 31 December 2009, 2010 and 2011. Certainof the Group’s accounting policies have been identified as critical accounting policies including thosepolicies involving particularly complex or subjective decisions or assessments, and these are discussedbelow. The discussion below should be read in conjunction with the full statement of accounting policies.

Impairment of property, plant and equipment and intangible assets

Items of property, plant and equipment, and intangible assets are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is chargedto the income statement.

At the end of each reporting period, the Group reviews the carrying amounts of its property, plant andequipment, and intangible assets to determine whether there is any indication that those assets havesuffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimatedin order to determine the extent of the impairment loss (if any).

Trade debtors and prepayments

Trade receivables are carried at invoiced amount less any impairment for doubtful accounts.

Management provides for doubtful receivables based on a review of the overall ageing of all receivablesand a specific review of significant individual amounts receivable.

As the collectability of certain receivables over a longer period is not certain, the Group makes anassessment of allowance for unrecoverable amounts, based on a reasonable estimate and past experience,in order to write down or write off those amounts as follows:

2010 and 2011Allowance

(%)

Past Due Amounts31-60 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.561-90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391-180 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9181-365 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Over 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

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2009Allowance

(%)

Past Due Amounts61-90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 591-180 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10181-365 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Over 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Outstanding receivables claimed through the courts and those included in bankruptcy estate (the debtprincipal and interest) are fully provided, regardless of the number of past due days and the provision ischarged to expenses.

Inventories

Inventories comprise mainly materials and small items and are carried at the lower of cost, determinedusing the weighted average price less allowance for obsolete and excessive inventories, and the netrealisable value. Management provides for inventories based on a review of the overall ageing structure ofinventories and non-recurring transfers over the years, as well as of individual significant amounts ofinventories.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets,which are assets that necessarily take a substantial period of time to get ready for their intended use orsale, are added to the cost of those assets, until such time as the assets are substantially ready for theirintended use or sale. Investment income earned on the temporary investment of specific borrowingspending their expenditure on qualifying assets is deducted from the borrowing costs eligible forcapitalisation.

All other borrowing costs are recognised in the statement of income in the period in which they areincurred.

Short-term borrowings and supplier loans are recorded at original amount granted less repayment. Interestexpense is charged to income statement on an accrual basis.

Taxation—Current tax

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit asreported in the income statement because it excludes items of income or expense that are taxable ordeductible in other years and it further excludes items that are never taxable or deductible. The Group’sliability for current tax is calculated using tax rates that have been enacted or substantively enacted by theend of reporting period.

Financial assets available for sale

Unlisted shares held by the Group that are traded in an active market are classified as being available forsale and are stated at fair value. Gains and losses arising from changes in fair value are recognised directlyin equity in the investments revaluation reserve with the exception of impairment losses, interest calculatedusing the effective interest method and foreign exchange gains and losses on monetary assets, which arerecognised directly in profit or loss. Where the investment is disposed of or is determined to be impaired,the cumulative gain or loss previously recognised in the investments revaluation reserve is included inprofit or loss for the period.

Investments

Investments in immaterial non-consolidated companies are generally recorded at cost less provisions forany impairment.

Provisions

Provisions are recognised only when the Group has a present obligation (legal or constructive) as a resultof a past event and it is probable (i.e. more likely than not) that an outflow of resources will be required tosettle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are

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reviewed at the end of each reporting period and adjusted to reflect the current best estimate. Where theeffect of discounting is material, the amount of the provision is the present value of the expendituresexpected to be required to settle the obligation.

Revenue recognition

Revenue is earned primarily from the sale of electricity to Households and Commercial Customers withinCroatia.

These sales constitute the main source of operating income.

Revenue from the sale of electricity is recognised according to the best management estimate of the actualenergy consumed based on the energy data and tariff items under the cost-recovery models calledElectricity Generation Tariff Model with No Tariff Amounts Excluding Eligible Customers, ElectricityTransmission Tariff Model With No Tariff Amounts, The Electricity Distribution Tariff Model With NoTariff Amounts; and the Electricity Supply Tariff Model With No Tariff Amounts Excluding EligibleCustomers. Revenue recognition is based on the Decision of the Croatian Government on the level oftariff items from June 2008, August 2009 and April 2012.

Revenue from connection fees

As of 1 July 2009, the Group has applied IFRIC 18 ‘‘Transfers of Assets from Customers’’.

IFRIC 18 clarifies the requirements of IFRS for agreements in which an entity receives from a customerasset (item or property, plant and equipment or cash) that the entity must then use either to connect thecustomer to a network or to provide the customer with ongoing access to a supply of goods or services.When the item of property, plant and equipment transferred from a customer meets the definition of anasset the Company must recognise the asset in its financial statements.

Actuarial estimates used in determining the retirement bonuses

The cost of defined benefits is determined using actuarial estimates. Actuarial estimates involveassumptions about discount rates, future salary increases and the mortality or fluctuation rates. Because ofthe long-term nature of those plans, there is uncertainty surrounding those estimates. Provisions for jubileeawards and retirement bonuses amounted to HRK 357,632 thousand at 31 December 2011, at31 December 2010 amounted to HRK 348,425 thousand and at 31 December 2009 amounted toHRK 287,849 thousand.

Consequences of certain legal actions

There are a number of legal actions involving the Group, which have arisen from the regular course oftheir operations. If there is a present obligation as a result of a past event (taking into account all availableevidence, including the opinion of law experts) for which is probable that outflow of resources will berequired to settle the obligation and if a reliable estimate can be made of the amount of the obligation,provisions are recorded.

New Accounting Standards

The Group did not adopt any new accounting policies coming into effect for the relevant period duringthe years ended 31 December 2011 or 31 December 2010 that had a material impact on the Group’sfinancial position or performance.

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BUSINESS

Overview

The Group is the leading power generation, transmission, distribution and supply company in Croatia. TheGroup is 100% owned by the Republic of Croatia and is a vertically integrated power utility company,operating across the entire electricity market spectrum from generation to end-consumer distributionorganisation. As part of its operations, the Group is also engaged in thermal energy (heat) generation andgas distribution in Croatia, as well as in electricity trading. The Group operates under the trading name‘‘HEP’’.

According to Management’s estimates, the Group accounted for approximately 82% of electricitygenerated, approximately 95% of installed electricity generation capacity, 100% of electricity distribution(in terms of the number of connection points) and approximately 99% of all electricity sold in Croatia inthe year ended 31 December 2011.

In order to comply with EU regulation, the Group has implemented legal, financial, accounting andmanagerial barriers between its subsidiaries engaging in regulated activities, such as transmission anddistribution, and those engaging in other activities, such as generation and supply. Each subsidiary of theGroup is tasked with specific roles within the various energy segments of the market. The Group comprises14 wholly owned subsidiaries and two jointly controlled power plants. The power plants are the Krskonuclear plant, located in the Republic of Slovenia and co-owned with Gen Energija (‘‘GenE’’), and thePlomin II thermal power plant, located in Croatia and co-owned with RWE Energie Aktiengesellschaft(‘‘RWE’’). In addition, HEP also jointly owns, together with Plinacro d.o.o., LNG Hrvatska d.o.o. (‘‘LNGHrvatska’’), which joint venture was formed for the purpose of taking an 11% share in the Adria LNGconsortium, part of a total 25% holding in the Adria LNG consortium that was reserved for Croatiancompanies. The Adria LNG Consortium was set up to build a liquefied natural gas (‘‘LNG’’) regasificationterminal in Omisalj on the island of Krk, Croatia.

Electricity, thermal energy and gas consumption is seasonal and is mainly affected by weather conditions.In Europe, electricity consumption is generally higher during the autumn and winter months, and theGroup generally experiences higher demand during the colder months of October through March andlower demand during the warmer months of April through September.

Financial Overview

In the years ended 31 December 2009, 2010 and 2011 and the six months ended 30 June 2012, the Grouphad a total operating income of HRK 12,629,780 thousand, HRK 13,056,899 thousand,HRK 13,087,029 thousand and HRK 6,639,840 thousand, respectively and profit for the year ofHRK 145,328 thousand, HRK 1,574,651 thousand and HRK 7,077 thousand and total loss ofHRK 320,004 thousand, respectively.

As at 31 December 2011 and 30 June 2012, the Group had total assets of HRK 33,746,370 thousand andHRK 33,577,643 thousand, respectively. As at 31 December 2011 and 30 June 2012, the Group hadapproximately 13,762 employees and 13,641 employees, respectively.

Principal Activities

The Group’s principal activities are the generation, transmission, distribution and supply of electricity.

Generation

The Group owns and operates a portfolio of power generation assets with an aggregate installed capacityof 4,153 MW as at 31 December 2011. The Group’s electricity and thermal energy generation operationsare carried out by HEP-Proizvodnja d.o.o. (‘‘HEP-Generation’’), a wholly owned subsidiary of the Groupestablished on 23 June 2002, which is responsible for the generation of electricity and thermal (heat)energy.

The Group benefits from a diversified generation mix, which includes 26 hydro power plants with anaggregate total installed capacity of 2,133 MW and the Krsko nuclear plant which generates 696 MW ofinstalled capacity (of which 348 MW is allocated to the Group). The Group also operates eight thermalpower plants with total installed capacity of 1,672MW, of which 484 MW is natural gas, 891 MW is oil and297 MW is coal. The Group uses its oil-fired thermal power plants primarily to meet high electricity

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demand or during adverse weather conditions, such as prolonged dry periods, during which the Group’shydro power plants are not operating at full capacity.

The following chart shows the Group’s electricity generation mix for the year ended 31 December 2011:

ForFor the year six months

ended ended2011 June 2012

GWh % GWh %

Electricity Generation:Hydro power plants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,577 36.1 1,820 34.5Nuclear power plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,951 23.3 1,128 21.4Thermal power plants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,147 40.6 2,331 44.1

Total: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,675 100 5,279 100

Transmission

The Group’s transmission operations transfer electricity produced by Croatian power plants or importedfrom other countries to its Croatian customers and transfers Croatian-produced electricity for exportpurposes and non-HEP generated electricity to Non-Tariff Customers for other Market Suppliers. As of30 June 2012, the Group owned and operated 7,437 kilometres of 400/220/110 kV lines and129 accompanying sub-stations across Croatia. The Group’s transmission operations are principally carriedout by HEP-Operator prijenosnog sustava d.o.o. (‘‘HEP-OPS’’), a wholly owned subsidiary of the Groupestablished on 23 March 2005*, which manages the Croatian power system and is responsible for thenetwork’s maintenance and development.

Distribution

The Group’s distribution operations transfer electricity on its distribution network from sub-stations to endconsumers. The Group’s electricity distribution operations are run by HEP-Operator distribucijskogsustava d.o.o. (‘‘HEP-ODS’’), a wholly owned subsidiary of the Group established on 23 June 2002.HEP-ODS is also responsible for providing the Group’s public supply services to Tariff Customers,including Commercial Customers without a Market Supplier paying the Balancing Energy Tariff. See ‘‘KeyCustomers’’ below for further details.

In the year ended 31 December 2011, the Group distributed a total of approximately 15,585 GWh ofelectricity to end-consumers in Croatia and according to Management’s estimates, as of 31 December2011, the Group had a market share of 100% for the distribution of electricity to end-consumers inCroatia.

Supply

The Group supplies Non-Tariff Customers, all of whom are Commercial Customers, with electricitythrough its principal supply subsidiary, HEP Opskrba d.o.o. (‘‘HEP-Supply’’), a wholly owned subsidiary ofthe Group established on 27 February 2003.

Other Activities

The Group also has a trading platform in electricity, thermal and gas operations and other ancillarybusinesses related to energy services.

Trading

The Group’s trading platform, HEP-Trgovina d.o.o. (‘‘HEP Trade’’), a wholly owned subsidiary of theGroup established on 7 February 2007, buys and sells electricity and is responsible for the optimisation ofthe Group’s power plant operation and intermediation in the domestic and international markets. Itoperates only in the wholesale electricity market in Croatia and abroad, through its subsidiaries located inHungary and Slovenia, and does not engage in speculative trading for profit or otherwise.

* HEP-OPS merged with HEP Prijenos d.o.o.

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Thermal Energy (heat)

In addition to electricity, the Group is actively engaged in thermal energy generation, distribution andsupply through its subsidiary HEP-Toplinarstvo d.o.o. (‘‘HEP-Top’’), a wholly owned subsidiary of theGroup established on 8 June 2001. The Group has a total installed capacity of 1,951 MWheat. Thermalenergy is primarily generated as a by-product of electricity generation at the Group’s thermal power plantsand distributed to the cities of Zagreb, Osijek, Sisak, Zapresic, Velika Gorica and Samobor. According toManagement’s estimates, as of 31 Decemnber 2011, the Group distributes thermal energy to more than122,000 customers covering approximately 82% of the district heating market in Croatia, making theGroup the largest of 17 distributors of thermal energy in the country. In the year ended 31 December 2011,the Group distributed a total of approximately 2,311 GWh* of thermal energy to end consumers inCroatia.

ForFor the year six months

ended ended2011 June 2012

GWh % GWh %

Thermal Energy Generation:Thermal Power Plants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,457 91.6 1,356 91.4District Boiler Stations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 8.4 128 8.6

Total: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,681 100 1,484 100

Gas

The Group is also engaged in gas distribution and supply through its subsidiary HEP-Plin d.o.o.(‘‘HEP-Plin’’), a wholly owned subsidiary of the Group established on 20 June 2001. In the year ended31 December 2011, the Group distributed a total of approximately 149.7 million m3 of gas to endconsumers in Croatia and according to Management’s estimates, as of 31 December 2011, the Group had amarket share of approximately 12.3% for the distribution of gas.

Other

The Group’s other businesses involve the preparation, construction and use of renewable energy sources(including wind, biofuel, small hydro and geothermal water), energy efficiency projects, environmentalprotection, tourism and hospitality services, infrastructure and entrepreneurial projects and training andeducation services. The revenues of these other companies account for less than 0.5% of the Group’s totalrevenues.

Unbundling of the Group’s operations

According to the energy laws that came into force on 1 January 2002, regulated energy activities(transmission and distribution) must be separate and independent from competitive market electricitybusinesses such as supply and production (‘‘unbundling’’). In accordance with such law, HEP restructuredits operations, forming separate companies for electricity generation, transmission, distribution, powersupply management, and electricity market management, all of which became operational on 1 July 2002.Subsequently, HEP has also set up companies for the trade of electricity, generation, distribution andsupply of thermal power and gas, as well as for the construction and use of renewable resources and energyefficiency projects. The Group also set up companies responsible for tourism and hospitality services,infrastructure and entrepreneurial projects and training and education. Further restructuring will benecessary due to the Accession and in order to comply with the Third Energy Package. For moreinformation, see ‘‘Regulation—Third Energy Package’’ and ‘‘Risk Factors—The Group may be subject tofurther restructuring due to compliance with EU energy regulation.’’

Tariff System and Classification of Customers

The energy sector has been fully liberalised since 2008. Nevertheless, certain activities, includingtransmission, distribution and public supply of electricity and the distribution of thermal energy and gas,are regulated activities. Such regulated activities are subject to fixed tariff rates which are set by the

* The quantity of thermal energy generated is different to the quantity distributed to end consumers as a result of network losses.Losses totalled 370 GWh for the year ended 31 December 2011.

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Croatian Government, or, with respect to thermal energy, by local municipalities, in each case onrecommendations provided by The Croatian Regulatory Agency for Energy (‘‘HERA’’). The Group’scustomers in Croatia can be split between ‘‘Commercial Customers’’, which includes commercial andindustrial entities and ‘‘Households’’, which are residential customers. As part of its Accession process, theCroatian Government has adopted EU regulations for the energy market which allow, pursuant to theElectricity Market Act, all electricity customers to choose a ‘‘Market Supplier’’ which offers non-tariffbased rates, rather than remaining with the public supply system (see ‘‘Regulation—Accession of theRepublic of Croatia to the EU’’ for further details). Commercial Customers who choose a Market Suppliertypically pay lower rates than the tariffed rates under the regulated public supply system, but they may bemore exposed to price fluctuations in market rates. In the event that a Commercial Customer fails tochoose a Market Supplier or its contract with a Market Supplier is terminated, such Commercial Customerwill be supplied by the public supply system where it is charged an energy balancing tariff which is based onelectricity consumption at prevailing tariff rates as set by the Croatian Government, on therecommendation of HERA, and which tariff is subject to a 20% increase if, after 30 days, the relevantCommercial Customer has failed to choose a Market Supplier (the ‘‘Balancing Energy Tariff’’).Households are not currently similarly incentivised to choose an alternative supply company and inpractice virtually all Households have opted to remain with and are supplied through the public supplysystem provided by HEP at the fixed tariffed rates. Only a negligible number of Households (less than0.01%) have changed their supplier to a Market Supplier. Customers who are supplied through the publicsupply system are referred to as ‘‘Tariff Customers’’ and customers who are supplied by Market Suppliers(including HEP-Supply (as defined below)) are referred to as ‘‘Non-Tariff Customers’’.

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12OCT201212242464

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The below chart shows the Group’s organisational structure as at the date of this Offering Circular.

The table below sets forth certain information relating to the Group’s generation, distribution and supplybusinesses for the periods indicated.

For six monthsFor the year ended ended

31 December 30 June

Unit 2009 2010 2011 2011 2012

Electricity:Installed capacity . . . . . . . . . . . . . . . . . . . MW 3,990 4,153 4,153 4,153 4,153Electricity generated . . . . . . . . . . . . . . . . . GWh 14,674 15,786 12,675 6,577 5,279Electricity distributed to end consumers(1) . GWh 15,651 15,716 15,585 7,804 7,666Electricity sold . . . . . . . . . . . . . . . . . . . . . GWh 17,510 17,600 16,449 8,278 8,027

Thermal energy:Installed capacity . . . . . . . . . . . . . . . . . . . MWheat 1,633 1,868 1,951 1,951 1,951Thermal energy generated(2) . . . . . . . . . . . GWh 2,590 2,742 2,681 1,488 1,484Thermal energy distributed to end

consumers(3) . . . . . . . . . . . . . . . . . . . . . GWh 2,280 2,367 2,311 1,336 1,340Thermal energy sold . . . . . . . . . . . . . . . . . GWh 2,280 2,367 2,311 1,336 1,340

Gas:Gas distributed to end consumers . . . . . . . m3 (million) 157.3 162.0 149.7 80.0 78.0Gas sold . . . . . . . . . . . . . . . . . . . . . . . . . . m3 (million) 157.3 162.0 149.7 80.0 78.0

(1) Data relates to all end-consumers, including those connected directly to high voltage transmission network (with 814 GWh, 852GWh and 751 GWh total capacity in 2009, 2010 and 2011 respectively and for the six months ended 30 June 2011 and 2012, 406GWh and 274 GWh, respectively).

(2) Includes thermal energy generated in district boiler rooms of city neighbourhoods totalling 2,590 GWh, 2,742 GWh and 2,681GWh and 1,484 GWh for the years ended 31 December 2009, 2010 and 2011 and six months ended 30 June 2012, respectively.

(3) The quantity of thermal energy generated is different to the quantity distributed to end consumers as a result of network losses.Losses totalled 310 GWh, 375 GWh, 370 GWh and 144 GWh for the years ended 31 December 2009, 2010 and 2011 and thesix months ended 30 June 2012, respectively.

Strengths and Strategy

The Group’s key strengths

The Group has a number of key competitive strengths, which it believes benefit its current market positionand provide an opportunity for future growth.

Vertically integrated power utility with economies of scale

The Group is a vertically integrated power utility company, operating across the entire electricity marketspectrum from generation to end-user distribution. HEP, the parent company, is responsible for thecorporate management of the Group and can best allocate resources and make decisions to benefit theoverall profitability of the Group, in particular with respect to capital expenditure and investments. As aresult the Group is able to take advantage of a range of economies of scale, such as cost savings associatedwith purchasing of goods and services, and technology, taking advantage of returns to scale in theproduction function and cost savings associated with marketing, including advertising.

Dominant position in Croatian energy market benefitting from state ownership and support

The Group currently has a dominant position in the Croatian electricity market. In the past, entry into theCroatian energy sector by competitors has been relatively minimal, due to significant barriers to entry, suchas regulatory restriction and a tariff system that was not fully reflective of operating and generation costs,which impacted profit margins. Despite the liberalisation of the Croatian energy market in 2008 and thesubsequent entry of competitors into such market, the Group has not seen any significant loss of marketshare or an increase in competition, largely as a result of the tariff system and the significant costsassociated with entering a highly regulated sector.

In addition, as a state-owned organisation, the Group benefits from enhanced creditworthiness, includingaccess to state guarantees. Management believes that these factors can give the Group access to cheaperand more available credit, including government guarantees on new projects, which it is able to utilise to

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actively grow the Group’s operations and develop its core business lines. Furthermore, the CroatianGovernment has highlighted the energy sector as one of its strategic priorities by passing the EnergyDevelopment Strategy. The Energy Development Strategy is focused on the development and renovationof the generation, transmission and distribution grids, with significant investment capital allocated to theseprogrammes. As a result, Management believes that the Croatian Government intends to reinvest theprofits made by the Group back into the business to fund future growth and other strategic developmentand renovation programmes. Management believes that such growth and development capabilities willfurther benefit the Group and strengthen its dominant position in the Croatian energy market.

Stable and predictable revenue stream

The Croatian Government sets the tariff rates for electricity based on approved operational costs plusapproved capital rate of return (see ‘‘Regulation’’ section for further details) and current generation,transmission and distribution costs. As part of the tariff rate setting process, the Croatian Government,due to social and political reasons, aims to create a stable rate of return for the Group. As of 31 December2011, approximately 1,492 GWh, or 9.7%, of the Group’s electricity sold to end consumers was sold underthe public system to commercial and industry sector Tariff Customers. Virtually all Households in Croatiaare supplied by the Group and all Market Suppliers must use the Group’s transmission and distributionnetworks. Together, the revenues derived from such operations account for more than 70% of the Group’srevenues from sales of electricity. As a result, the Group has a stable and highly predictable revenuestream, as demonstrated by the steady revenues generated by the Group since 2009.

In the years ended 31 December 2009, 2010 and 2011 and the six months ended 30 June 2012, the Grouprecorded total revenues from electricity sales of HRK 10,798,272 thousand, HRK10,851,054 thousand, HRK 10,769,900 thousand and HRK 5,539,533 thousand, respectively.

Favourable and diversified power generation mix with access to low-cost generation facilities

The Group is not solely reliant on any one form of electricity generation and therefore can ensure securityof supply while minimising its impact on the environment and keeping the cost of generation as low aspossible. The Group currently has 26 hydro power plants, eight thermal power plants and one nuclearpower plant. The Group’s hydro power plants and nuclear power plant provide low-cost electricitygeneration. The Group uses its oil-fired thermal power plants primarily to meet high electricity demand orduring adverse weather conditions, such as prolonged dry periods, during which the Group’s hydro powerplants are not operating at full capacity.

The Group is also not reliant on any one fuel type with respect to its thermal power plants, operating acombination of oil, coal, natural gas and fuel oil-fired thermal power plants.

As a result of its diversified generation and fuel mixes, the Group also has reduced exposure to commodityprices and as a result can minimise costs, reduce price volatility and prevent supply disruptions.

The Group’s ability to rely on hydro and nuclear power plants for electricity generation will be particularlyimportant starting in 2013 when the Group will be required to start purchasing quotas for greenhouse gasemissions produced its thermal power plants.

Strong commitment to social policies

The Group maintains a social policy that Management believes fosters positive relations with the Group’semployees, trade unions and the communities in which the Group operates. In 2011, the Group launched acompetition for registered associations, clubs and Croatian institutions to propose community projectsunder the categories of youth, art and cultural heritage, humanitarian action or the environment, thewinners of which would see their projects implemented with partial financing from the Group. Furtherexamples of the Group’s social projects include sponsoring eco-schools in Croatia, national mathematicsand physics contests and students attending vocational electrical schools. The Group believes that suchprojects increase its presence and brand-recognition in the community and help it to remain connected toits market, employees and customers.

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Strategy

The Group’s overarching goal is to improve profitability and increase generation capacity in Croatia in themedium term, primarily in order to achieve self-sufficiency without a need for power imports. The Groupintends to achieve these goals through the following key strategies:

Construct new generation facilities and expand generation capacity of its existing assets

The Group intends to invest approximately HRK 4,236,700 thousand during the next five years in theconstruction of an additional four hydro power plants (at Ombla, Dubrovnik II, Senj and Kosinj), onethermal power plant (Plomin III) and one hydroelectric project on the Sava river, to increase generationcapacity by up to 1,527 MW. In addition, construction is already underway for a natural gas combined-cyclecogenerating unit at Sisak thermal power plant, which is due to become operational in early 2014. It isexpected that the Sisak unit will increase the Group’s installed generation capacity by 250 MWel and50MWheat. A number of further generation projects are also being considered. In addition, the Groupintends to invest approximately HRK 4,055,000 thousand over the next five years in a number of otherprojects to increase the generation capacity and efficiency of its current facilities, including its existinghydro power plants at Zakucac, Dubrovnik, Varazdin, Senj, Rijeka, Gojak, Orlovac and on the Krka river.The Group aims to significantly increase its generation capacity across its diverse range of generationfacilities, primarily to ensure security of supply and to enable the Group to generate sufficient excesselectricity to be able to increase its cross-border sales to Serbia, Hungary, Slovenia and Bosnia andHerzegovina, thereby increasing its profitability.

Improve and expand its distribution and transmission network

The Group will continue investing in the modernisation and expansion projects related to its transmissionnetwork. The Group intends to invest approximately HRK 2,575,900 thousand during the next five years inorder to further reduce network losses, ensure reliable and safe operation of its new and upgraded plantsand facilities as well as to ensure adequate levels of availability of interconnector capacity to access othermarkets. The Group also intends to modernise and expand its distribution network by investingapproximately HRK 5,352,400 thousand during the next five years in order to further reduce networklosses, meet the country’s growing need for electricity and connect new customers, in particular in themajor cities, tourist and industrial areas. The Group believes such projects will not only serve to enhancethe security and stability of the energy sector within Croatia but, together with the Group’s generationplans, will also stimulate the local economy during their construction.

Improve operating efficiencies and cost structure

The Group has implemented, and will continue to implement, measures to improve its corporate andoperating procedures and increase efficiency, in order to reduce maintenance and overhead costscompared to those costs currently budgeted. As part of the Group’s ongoing restructuring plans, it plans tosignificantly reduce the existing workforce, by approximately 3,500 employees (a 25.4% reduction based onemployee numbers as at 31 December 2011) over the next five years with a particular focus on reducing thenumbers of employees working in the distribution business, where the Group believes efficiency can beimproved and savings made with a restructuring of the workforce. At the same time, it plans to increase theoverall proportion of technical personnel employed by the Group by approximately 500 new engineers.

Management believes such restructuring will make the Group more efficient as well as reduce operatingcosts. The Group also plans to centralise certain functions, such as public procurement and purchasing (inparticular with regard to strategically important materials) and further decrease the scope of externalservices by better interior organisation, streamline and standardise its operations in order to achievewholesale cost savings, further improve staff training and education, outsource certain non-key operations,improve the IT network and introduce smart meters, all with a view to optimising cost and operationalsynergies across the Group’s businesses. Furthermore, the Group intends to improve operational efficiencywithin its heating and gas businesses and modernise and expand its existing generation and distributionoperations with a view to attain consistent profitability in these areas.

Improve customer service experience and introduce new services

Management believes that the Group’s continued success in maintaining its dominant place in the market,particularly following Croatia’s Accession, and further opening up of the energy market will be in partdependent on its ability to appeal to its customers. The Group intends to actively engage with its customer,

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put customer relations to the forefront of its operations and focus on bringing new products to theCroatian market including promoting the ‘‘energy service company model’’ (‘‘ESCM’’) under which itwould invest in and offer its customers energy efficient products to reduce energy consumption and CO2

emissions and renewable energy products such as solar collectors, cogeneration or biomass boilers. Inparticular the Group intends to streamline its billing process so that customers receive combined bills,introduce electronic billing and online payment options and develop and consolidate its existing callcentres into one centralised call centre to operate on a 24⁄7 basis. In addition, the Group plans to expand itssales into the Slovenian market, aiming to conclude its first contracts by the end of 2012.

Expand use of renewable energy sources

The Group is committed to expanding its use of renewable energy sources and is planning to build powerplants that generate electricity and thermal power from renewable energy sources. These new plants willinclude small hydro power plants (up to 10 MW), wind farms, biomass fuelled power plants andphotovoltaic and solar power collecting plants. The Group also plans to build photovoltaic and solar/thermal power collection systems at all of its existing plants and facilities in order to expand its generationcapacity. The Group believes that such expansion plans will further diversify the Group’s generation mix,thereby reducing the Group’s greenhouse gas emissions, and lower the Group’s dependency on fuelthereby reducing the impact of fuel price volatility, all of which will reduce operating expenses, and allowthe Group to increase profitability. Finally, the Group has started green certificate trading and willcommence trading in CO2 emissions allowances as additional sources of revenues.

History and Development of the Group

HEP was incorporated as a joint stock company with unlimited duration under the laws of Croatia on31 December 1994. HEP is 100% owned by the Republic of Croatia, represented by the Ministry ofEconomy and is registered in the Court’s Register administered by the Commercial Court in Zagreb withidentification numbers MBS: 080004306 and OIB: 28921978587. As at 30 June 2012, HEP had a registeredshare capital of HRK 19,792,159,200. The registered office is Ulica grada Vukovara 37, Zagreb, Republicof Croatia with telephone number +385 1 6322 111. The Group operates under various licences that areroutinely renewed. See ‘‘—Licences’’ and ‘‘Regulation’’ sections for further details.

Principal events during the Group’s history and development include:

1990 Public enterprise Hrvatska elektroprivreda, s potpunom odgovornoscu, is established on9 August 1990, the consolidation of formerly state-owned power generation and distributionentities into a single Croatian state-owned company charged with the generation,transmission and distribution of electricity.

1994 HEP becomes a joint stock company in accordance with the 1994 amendment to the Act onElectric Power Industry.

1995 HEP was re-organised in accordance with the new Companies Act, which entered into forceon 1 January 1995. The Companies Act introduced new structural requirements for Croatiancompanies and resulted in HEP instituting a new management structure and creating aSupervisory Board.

1997 HEP obtains a credit rating from S&P and becomes one of the first Croatian companies toreceive an international investment credit ratings.

2000 Plomin II thermal power plant becomes operational.

2001 HEP becomes an independent member of the Union for the Coordination of theTransmission of Electricity.

2002 The Law on the Privatisation of HEP was passed by the Croatian Parliament on 19 March2002 and entered into force on 5 April 2002. However, the law was never enforced and wasrepealed on 5 February 2010.

In accordance with the requirements of the 2001 Energy Act and 2001 Energy Market Act,which came into force on 1 January 2002, HEP restructures its operations, forming separatecompanies for each of its main business operations. As a result of the restructuring, thecompany starts trading as ‘‘HEP’’.

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2003 All of the Group’s hydro power plants receive a ‘‘green certificate’’ (certifying that 100% ofelectricity generated by these plants comes from renewable energy sources).

2004 On 3 December 2004, the Croatian Parliament approves amendments to the Energy Law,the Law on Electricity Market and the Law on the Regulation of Energy Activities.

Croatia reconnects to the synchronous grid of Continental Europe.

2005 Croatia signs the Energy Community Treaty and promises to align its legislation with theEU Energy Directives.

2008 The Croatian Government promulgates an official decision on the Electricity GenerationTariff Model, the Electricity Transmission Tariff Model, the Electricity Distribution TariffModel and the Electricity Supply Tariff Model and fully liberalises the Croatian energymarket for all customers from 1 July 2008. The Group has been applying the tariff model inits operations since 1 July 2008.

2011 HEP obtains a credit rating from Moody’s.

2012 HEP appoints a team to prepare proposals aimed at restructuring the Group in line withEU energy regulations in anticipation of the Accession, including a detailed list ofundertakings which must be completed during the restructuring process.

Croatia

In recent years, Croatia has made significant gains in stabilising its currency, increasing its GDP, decreasinginflation and increasing real wages. The new Croatian Government has announced a more flexibleapproach to privatisation, including potential sale of state-owned businesses that are not strategicallyimportant to Croatia. While macroeconomic stabilisation has largely been achieved, there is still a need forstructural reforms. As a result, Croatia is likely to continue facing significant financial and politicalpressure as a result of the global financial crisis, reduced exports and lower capital inflows. The WorldBank has urged the new Croatian Government to cut spending.

The Croatian power system comprises electricity generation, transmission and distribution plants and otherfacilities located in Croatia. The Croatian power system is interconnected with the systems of neighbouringcountries and together with them it is connected into the synchronous grid of Continental Europe, whichallows for exchange of electricity. This provides access to alternative sources of electricity fromneighbouring countries. Customers in Croatia are supplied with electricity from power plants in Croatia,power plants built in the neighbouring countries, but owned or co-owned by Croatian entities, and withelectricity purchased abroad. In terms of size, based on electric power consumption figures from Eurostat,the Croatian power system is one of the smallest power systems in Europe.

By putting into operation the newly constructed 400/220/110 kV Zerjavinec sub-station and thereconstructed 400/110 kV Ernestinovo sub-station, the restoration and construction work for which wascompleted in 2003, the Group was able to increase the transmission capacity, security and reliability of thepower system. By reconnecting to the synchronous grid of Continental Europe in 2004, the Croatianelectricity system has become a transit system, capable of transferring electricity across borders. TheCroatian power system is a control area operated by HEP-OPS. Together with the Slovenian power systemand the power system of Bosnia and Herzegovina it constitutes the control block SLO—HR—BIH withinthe synchronous grid of Continental Europe.

The Energy Act 2001 sets out a framework for the electricity market in Croatia with secondary legislationregulating the conditions for the operation of such market. As at the date of this Offering Circular, a singleelectricity market exists in Croatia and the market has been fully open since 1 July 2008. See ‘‘Regulation—The Republic of Croatia—General Overview’’ for further details.

Croatia signed the EU Accession Treaty in December 2011 and ratified the Treaty in January 2012. Croatiais scheduled to become a member of the EU on 1 July 2013, but does not currently plan to become amember of the European Monetary Union. Before such date, Croatia is expected to go through theprocess of aligning its energy laws with the third energy package of EU Directives. See ‘‘Regulation—Accession of the Republic of Croatia to the EU—Third Energy Package’’ for further details.

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Business Activities

The Group’s core business activities include the generation of electricity and thermal power in Croatia, thetransmission of electricity, distribution and supply of electricity, thermal power and gas to end-consumersin Croatia and the trading of electricity in the wholesale market for sale to the Group’s end-consumers.

The following map shows the location of the Group’s power plants.

In the year ended 31 December 2011, 92.0% of the Group’s total installed electricity generation capacity,77.0% of its total electricity generated, 100% of its total electricity distributed to end-consumers and97.0% of its total sales of electricity to end-consumers was in Croatia. In the year ended 31 December2011, the Group’s electricity operations in Croatia contributed approximately HRK 10,582,154 thousand,or 90%, to its revenues.

According to the Group’s internal energy data, electricity consumption by end-consumers decreased by271 GWh, or 0.8%, to 15,585 GWh for the year ended 31 December 2011 from 15,716 GWh for the yearended 31 December 2010. Starting from the fourth quarter of 2008, there has been a decrease in electricityconsumption growth rate in Croatia, primarily due to the global and domestic economic crisis.

The Group also generates, distributes and sells thermal power in Croatia, primarily in Zagreb, Osijek,Sisak, Zapresic, Velika Gorica and Samobor, and is Croatia’s biggest producer and supplier of thermalpower. In the year ended 31 December 2011, the Group’s thermal energy operations contributed 4.4% tothe operating revenues of the Group.

In addition, the Group also distributes and sells gas in Croatia, primarily in Osijek-Baranja County,Pozega-Slavonija County and Virovitica-Podravina County and is the second largest gas distributor inCroatia. In the year ended 31 December 2011, the Group’s gas operations contributed 2.9% to itsoperating revenues.

Electricity Generation

Overview

The Group has a diversified mix of power plants, but primarily relies on low-cost hydro and nuclear powerplants for electricity generation. As at 30 June 2012, the Group owned and operates 26 hydro power plantswith total installed electricity generation capacity of 2,133 MW, eight thermal power plants with totalinstalled generation electricity capacity of 1,672 MW and jointly owned the Krsko nuclear plant with a total

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installed electricity generation capacity of 696 MW (with 348 MW allocated to the Group). As at31 December 2011, the total installed electricity generation capacity of the Group’s generation facilitieswas 4,153 MW. As at 31 December 2011, 3,805 MW, or 91.6%, of the Group’s total installed electricitygenerating capacity was in Croatia. As at 31 December 2011, 2,133 MW, or 51.3%, was from hydropowered plants, and 1,672 MW, or 40.3%, was from thermal oil, gas and coal powered plants, 348 MW, or8.4%, was from the Krsko nuclear plant located in Slovenia.

The following table sets forth a breakdown of the total installed electricity generation capacity of theGroup’s power plants for the periods indicated.

As at 31 December

2009 2010 2011

(MW) (%) (MW) (%) (MW) (%)

Hydro power plants:Generation Area North(1) . . . . . . . . . . . . . . . . . . . . . 242 6.1 248 5.97 248 5.97Generation Area West(2) . . . . . . . . . . . . . . . . . . . . . . 430 10.8 475 11.43 475 11.43Generation Area South(3) . . . . . . . . . . . . . . . . . . . . . 1,192 29.85 1,192 28.65 1,192 28.65Dubrovnik(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216 5.4 216 5.20 216 5.20Zavrelje . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 0.05 2 0.05 2 0.05

Total installed hydro capacity . . . . . . . . . . . . . . . . . . . . 2,082 52.2 2,133 51.3 2,133 51.3

Nuclear power plant:Krsko(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348 8.7 348 8.38 348 8.38

Thermal power plants:Sisak . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 9.9 396 9.54 396 9.54Rijeka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 7.6 303 7.30 303 7.30Plomin I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 2.6 105 2.53 105 2.53Plomin II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 4.8 192 4.62 192 4.62KTE Jertovec . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 1.9 74 1.78 74 1.78TE TO Zagreb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310 7.8 422 10.16 422 10.16EL TO Zagreb . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 2.3 90 2.17 90 2.17TE TO Osijek . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 2.3 90 2.17 90 2.17

Total installed thermal capacity . . . . . . . . . . . . . . . . . . 1,560 39.1 1,672 40.27 1,672 40.27

(1) Includes three hydro power plants that were built on the Drava river: Varazdin (1975), Cakovec (1982) and Dubrava (1989).They are multi-purpose hydro power plants, the main purposes being: electricity generation, water supply, flood control, landerosion protection, irrigation, drainage, transport.

(2) Includes six hydro power plants which utilise water of the rivers Krka (Ozalj hydro power plant), Ogulinska Dobra andZagorska Mreznica (Gojak hydro power plant), Lokvarka, Kriz stream, Licanka, Lepenica, Kostanjevica, Potkosa and Benkovacstream (Vinodol hydro power system), Rjecina (Rijeka), Lika and Gacka (Senj hydro power system). In 2011, on the DobraRiver, Lesce, a 42.3 MW hydro power plant, was put into commercial operation.

(3) Includes 10 hydro power plants in the basin of the river Cetina (Peruca, Orlovac, D– ale, Zakucac, Kraljevac hydro power plantsand Busko Blato pumping station), the basin of the river Krka (Golubic, Krcic, Miljacka, Jaruga) and on the Gracac Plateau(Velebit pumped storage hydro power plant).

(4) One unit of Dubrovnik hydro power plant operates for Bosnia and Herzegovina.

(5) Total capacity provided in the table is only for the Group’s portion of the generation capacity (the total generation capacity ofthe Krsko nuclear plant is 696 MW).

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The following table sets forth a breakdown of the Group’s total electricity generated by its power plants forthe periods indicated.

For the year ended 31 December

2009 2010 2011

(GWh) (%) (GWh) (%) (GWh) (%)

Hydro power plants:Generation Area North(1) . . . . . . . . . . . . . . . . . . . 1,428 9.7 1,276 8.07 1,038 8.2Generation Area West(2) . . . . . . . . . . . . . . . . . . . 1,457 9.9 1,896 12.0 899 7.1Generation Area South(3) . . . . . . . . . . . . . . . . . . . 3,190 21.76 4,342 27.5 2,394 18.88Dubrovnik(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 686 4.7 786 4.97 243 1.9Zavrelje . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 0.04 9 0.06 3 0.02

Total electricity generated by hydro power plants . . . 6,767 46.1 8,309 52.6 4,577 36.1

Nuclear power plant:Krsko . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,730 18.6 2,690 17.0 2,951 23.3

Thermal power plants:Sisak . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544 3.7 0 0 100 0.8Rijeka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,022 7.0 50 0.3 141 1.1Plomin I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 716 4.9 641 4.1 786 6.2Plomin II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 796 5.4 1,511 9.6 1,545 12.2KTE Jertovec . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 0.6 70 0.4 45 0.4TE TO Zagreb . . . . . . . . . . . . . . . . . . . . . . . . . . 1,553 10.6 2,027 12.9 2,057 16.2EL TO Zagreb . . . . . . . . . . . . . . . . . . . . . . . . . . 354 2.4 369 2.3 359 2.8TE TO Osijek . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 0.7 119 0.8 114 0.9

Total electricity generated by thermal power plants . 5,177 35.3 4,787 30.4 5,147 40.6

Total generated energy . . . . . . . . . . . . . . . . . . . . . . 14,674 100 15,786 100 12,675 100

(1) Includes three hydro power plants that were built on the Drava river: Varazdin (1975), Cakovec (1982) and Dubrava (1989).They are multi-purpose hydro power plants, the main purposes being: electricity generation, water supply, flood control, landerosion protection, irrigation, drainage, transport.

(2) Includes six hydro power plants which utilise water of the rivers Krka (Ozalj hydro power plant), Ogulinska Dobra andZagorska Mreznica (Gojak hydro power plant), Lokvarka, Kriz stream, Licanka, Lepenica, Kostanjevica, Potkosa and Benkovacstream (Vinodol hydro power system), Rjecina (Rijeka), Lika and Gacka (Senj hydro power system) and Dobra River (Lescepower system).

(3) Includes 10 hydro power plants in the basin of the river Cetina (Peruca, Orlovac, D– ale, Zakucac, Kraljevac hydro power plantsand Busko Blato pumping station), the basin of the river Krka (Golubic, Krcic, Miljacka, Jaruga) and on the Gracac Plateau(Velebit pumped storage hydro power plant).

(4) One unit of Dubrovnik hydro power plant operates for Bosnia and Herzegovina.

Hydro power plants

The Group owns and operates all 26 of Croatia’s hydro power plants. The Group’s hydro power plantsinclude 11 reservoir power plants, two pumped storage units, one reversible pump turbine, one pumpingstation and five small-scale hydro power plants. The Group’s hydro power plants are situated in variouslocations throughout Croatia, the largest concentration being in Generation Area South (which includesten hydro power plants located on the Cetina and Krka rivers and on the Gracac Plateau). In 2011, theGroup’s hydro power plants generated 36.1% of the total electricity generated by the Group and 47.1% ofthe total electricity generated in Croatia.

The Group’s hydro power plants have installed capacity of 2,133 MW as at 31 December 2011. In the yearended 31 December 2011, the Group’s hydro power plants generated 4,577 GWh of electricity as comparedto 8,309 GWh generated in the year ended 31 December 2010, representing a decrease of 44.9%. Thisdecrease was primarily due to lower water inflows as compared to 2010.

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The following table sets forth a breakdown of the Croatian hydrological conditions and hydro electricitygeneration for the years ended periods indicated.

For the years ended

2009 2010 2011

GWh

Generation by hydro power plants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,767 8,309 4,577Energy value of water inflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,456 8,947 3,548

The following table sets out total accumulation levels for the Group’s hydro power plants.

The following table sets forth certain information regarding the Group’s 26 hydro power plants for theperiods indicated.

Installedcapacity Generated Electricityas at For the years ended31 December Start of Licence

2011 2009 2010 2011 operation Type of plant expires

MW GWhGeneration Area North:Varazdin . . . . . . . . . . . . . . . . . . . . . . . . . 92.5 551 498 405 1975 run of river 2018Cakovec . . . . . . . . . . . . . . . . . . . . . . . . . . 77.4 440 403 308 1982 run of river 2018Dubrava . . . . . . . . . . . . . . . . . . . . . . . . . . 77.8 437 375 325 1989 run of river 2018Generation Area West:Ozalj . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 19 26 17 1908 run of river 2018Gojak . . . . . . . . . . . . . . . . . . . . . . . . . . . 55.5 155 280 126 1959 run of river 2018HPP System Vinodol(1)(2) . . . . . . . . . . . . . . 97.1 131 201 106 1952 storage 2018Rijeka . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.2 80 141 53 1968 run of river 2018HPP System Senj(1)(3) . . . . . . . . . . . . . . . . 238.5 1,072 1,217 545 1965 storage 2018Lesce . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.3 — 31 52 2010 storage 2018Generation Area South:Peruca . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 161 203 86 1960 storage 2018Kraljevac . . . . . . . . . . . . . . . . . . . . . . . . . 46.4 67 112 39 1961 storage 2018Zakucac . . . . . . . . . . . . . . . . . . . . . . . . . . 486 1,742 2,430 1,119 1962 storage 2018HPP System Orlovac(1)(4) . . . . . . . . . . . . . . 244.5 441 576 420 1973 storage 2018D- ale . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.8 154 208 103 1989 storage 2018Velebit . . . . . . . . . . . . . . . . . . . . . . . . . . . 276 468 628 533 1984 pumping 2018Golubic . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 20 29 13 1981 run of river 2018Krcic . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 1 1 1 1988 run of river 2018Miljacka . . . . . . . . . . . . . . . . . . . . . . . . . . 24 102 122 63 1906 run of river 2018Jaruga . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 34 33 17 1903 run of river 2018Other:Dubrovnik(5) . . . . . . . . . . . . . . . . . . . . . . . 216 686 786 243 1965 storage 2018Zavrelje . . . . . . . . . . . . . . . . . . . . . . . . . . 2 6 9 3 1953 storage 2018

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,132.5 6,767 8,309 4,577

(1) HPP production system consisting of several hydro power plans joined in one generator system.

(2) Comprising Vinodol, PS Fuzine, PS Lepenica and Zeleni Vir.

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(3) Comprising Senj and Sklope.

(4) Comprising Orlovac and PS Busko Blato (the latter of which is situated on the Busko Blatoin lake in Bosnia and Herzegovina.

(5) One unit of Dubrovnik hydro power plant operates for Bosnia and Herzegovina.

Description of operations

Hydro power plants have a high degree of flexibility in the regulation of their output. The ability to controlhydro power plants centrally permits the Group to commence operation rapidly thereby facilitating theregulation of electricity output. In addition, neither conventional storage nor pump storage hydro powerplants produce greenhouse gas emissions, which will be particularly important starting in 2013 when theGroup will have to purchase quotas for greenhouse gas emissions produced by its power plants. Theseplants also represent an inexpensive source of electricity, particularly in periods of peak demand. Inaddition, pump storage power plants allow the productive use of excess electricity generated by base loadplants by operating storage pumps in periods of low demand.

The Group’s hydro power plants have a diversified age profile that is affected by various factors, includingthe availability of steady water supply, scheduled maintenance projects and regulatory and concessionlicences, among others. The Group’s hydro power plants are located throughout Croatia and theirgeneration capacity directly correlates with the amount of available water. Lower river flows couldsignificantly reduce the amount of water available for electricity generation and the risk of flow shortagemay increase as a result of climate change or other weather patterns. For additional information on watersupply, see ‘‘—Electricity generation—Overview’’. Since 1 January 2009, the Group has investedapproximately HRK 2,118,000 thousand towards increasing its generation capacity and improving itsoperational efficiency, HRK 937,000 thousand to improve its electricity transmission network,HRK 2,538,000 thousand to improve its electricity distribution networks and HRK 632,000 thousandtowards improving its thermal energy and gas distribution network and information andtelecommunication infrastructure. For information on the Group’s capital expenditures, please see‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity andCapital Resources—Capital Expenditures and Acquisitions’’.

The Group’s hydro power plants operate under various concession licences, with different expiration dates.These concession licences include maritime licences, water usage licences and fish and farming concessionlicences (with regards to the Group impact on these activities). For additional information, see‘‘Regulation—Concession Licences’’. In addition, all of the Group’s hydro power plants have been issued acertificate for electricity generation from renewable sources and its hydro power plants located inGeneration Area North and Generation Area West have received certificates for quality assurance(ISO 9001) and environmental protection (ISO 14001). The Group aims to receive similar certification forTE Plomin, TE Rijeka and TE TO Osijek by the end of 2013 and for Generation Area South, Dubrovnikand Zavrelje by the end of 2014.

Geographic location

The Group’s hydro power plants located in Generation Area North were built on the river Drava inCroatia. They are multi-purpose hydro power plants, primarily focused on electricity generation, watersupply, flood control, land erosion protection, irrigation, drainage and transport. These power plantsoperate by diverting the water supply and have small electricity generating units located at the dam. Allthree power plants are controlled by a control centre situated in Varazdin, which optimises electricitygeneration across the three power plants. The Generation Area North plants have a total installedgeneration capacity of 248 MW and generated 1,428 GWh, 1,276 GWh and 1,038 GWh of electricity forthe year ended 31 December 2009, 2010 and 2011, respectively.

The Group’s hydro power plants located in Generation Area West were built on 14 western Croatianrivers. They are multi-purpose hydro power plants and are primarily focused on electricity generation.Most of these plants operate as part of a large power system and include primarily run-of-the-river turbineplants. These power plants are controlled by a control centre situated in Zagreb. The Generation AreaWest plants have a total installed generation capacity of 475 MW and generated 1,457 GWh, 1,896 GWhand 899 GWh of electricity for the year ended 31 December 2009, 2010 and 2011, respectively.

The Group’s hydro power plants located in Generation Area South were built on the Croatian riversCetina and Krka and on the Gracac Plateau. This power system contains the Peruca reservoir, which is partof the Cetina River power system, the Zakucac hydro power plant, which is the largest plant in the CetinaRiver basin and the largest hydro power plant in Croatia by its installed capacity and potential power

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generation, the Orlovac hydro power plant, which is a high pressure diversion plant whose facilities aresituated in Bosnia and Herzegovina and Croatia, as well as other hydro power plants, water pumps andreservoirs. These power plants are controlled by a control centre situated in Zagreb. The Generation AreaSouth plants have a total installed generation capacity of 1,192 MW and generated 3,190 GWh, 4,342 GWhand 2,394 GWh of electricity for the year ended 31 December 2009, 2010 and 2011, respectively.

Dubrovnik and the Zavrelje power plants are the last step in the Trebisnjica River hydro system and areboth storage plants. Dubrovnik and Zavrelje use the waters of the Trebisnjica River from the Bilecareservoir situated in Bosnia and Herzegovina and which was created by the construction of the Grancarevodam. These power plants are controlled by a control centre situated in Zagreb. The Dubrovnik and theZavrelje power plants have a total generation capacity of 218 MW and generated 692 GWh, 795 GWh and246 GWh of electricity for the year ended 31 December 2009, 2010 and 2011, respectively.

The Group expects to start construction of the Ombla hydro power plant in 2012, which will add capacityof 68 MW, and plans to invest approximately HRK 936,100 thousand during the next five years, which willbe principally financed by a loan from EBRD. The Group is also in preparatory stages for constructing anew Dubrovnik II power plant, which will add capacity of 304 MW, and plans to invest approximatelyHRK 388,300 thousand during the next five years. In addition, the Group is in the process of constructingtwo new hydro power plants on the rivers Lika and Gacka and a multipurpose hydro generation system onthe river Sava, which will add capacity of 380 MW and up to 120 MW, respectively, with an estimatedinvestment of HRK 1,253,900 thousand and HRK 708,800 thousand, respectively, during the nextfive years. The Group also plans to invest approximately HRK 4,055,000 thousand during the nextfive years in a number of other projects to increase the generation capacity and efficiency of its currentfacilities, including its existing hydro power plants located at Zakucac, Dubrovnik, Varazdin, Senj, Rijeka,Gojak, Orlovac and on the Krka river, with the aim of increasing total generation capacity of these plantsby 155 MW to 1,509 MW from 1,354 MW.

Nuclear power plant

Overview

The Group, together with GenE, operates one nuclear power plant, the Krsko nuclear power plant, locatedin Slovenia. In the year ended 31 December 2011, nuclear electricity generation accounted forapproximately 23% of the total electricity generated by the Group, compared with approximately 17%during the year ended 31 December 2010. Every 18 months, the power plant is required to discontinue itsoperations for one month in order to replace nuclear fuel, allow for maintenance, repair of its facilities andfuel replacement. The last scheduled shutdown occurred in April 2012 and the next scheduled shutdown isdue in October 2013. The Krsko nuclear plant has a total generation capacity of 696 MW (with 348 MWallocated to the Group as part of its 50% holding in the plant) and has generated 2,730 GWh, 2,690 GWhand 2,951 GWh (amounts allocated to the Group) of electricity for the year ended 31 December 2009, 2010and 2011, respectively. In the year ended 31 December 2011, the Group’s nuclear power plant accountedfor 8.4% of the Group’s total generation capacity.

Historical

The construction of the Krsko nuclear power plant commenced in 1975. The plant was connected to thepower grid on 2 October 1981 and went into commercial operation on 15 January 1983. It was built as ajoint venture by the Slovenian and Croatian Governments, which were then both part of the formerYugoslavia. The legal status of the Krsko nuclear plant was regulated by an inter-republic agreement andvarious agreements between the founders from 1974 to 1982. Pursuant to the stated agreements, HEP hada 50% interest in the Krsko nuclear plant and the other 50% was held by ELES GEN d.o.o. (renamed GenEnergija in 2006) which was the legal successor to the Slovenian power utility. GenE was founded in June2001 as a subsidiary of Elektro-Slovenija d.o.o. (‘‘ELES’’). In 2006, GenE, following a decision of theSlovenian Government, broke away from ELES and ownership was transferred directly to the state.

Under the current agreement, the generated electricity is divided equally between GenE and the Groupand the price of the electricity is determined based on the total generation costs. HEP started to receiveelectricity from Krsko on 19 April 2003, and expects to receive approximately 2,550 GWh annually until2023, representing approximately 16% of total electricity consumption in Croatia. The operational licencefor the Krsko nuclear plant is valid until 2023, which the Group anticipates will be extended to 2043.

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Description of operations

In 2011, the Krsko nuclear plant was analysed and rated by the World Association of Nuclear Operatorsand was rated 98.3 out of 100. These results place Krsko in the top quartile of the nuclear plants currentlyin operation around the world and are comparable to the results achieved by top rated American nuclearfacilities.

The projected lifetime of the Krsko nuclear plant is 40 years (up to 2023), however in June 2012 theSlovenian Nuclear Safety Administration (the Slovenian nuclear regulatory body) confirmed that the vitalcomponents of the power plant, in particular, the reactor vessel could continue to safely operate until 2043.It is currently the intention that the nuclear plant will continue operating until 2043. In line with thepractices adopted by the majority of the European countries, the plant will undergo a Periodical SafetyReview (‘‘PSR’’) every ten years in order to receive a renewed licence for the next ten year period. As ofthe date of this Offering Circular, there have been no material incidents affecting the environment and theKrsko nuclear plant, and all safety recommendations identified during the most recent PSR for theten years period ended in 2010 have been implemented.

Safety practices

HEP and GenE have implemented routine modernisation and refurbishment programmes of the Krskonuclear plant and have strengthened inspection and maintenance practices, including proactively repairingor replacing equipment and components before they fail. In the year 2011, the Group and GenEjointly contributed approximately A54,200 thousand (A27,100 thousand each) (approximatelyHRK 405,958 thousand or HRK 202,979 thousand each) towards technical upgrades at the Krsko nuclearplant, which included the replacement/repair of an alternate current power source, and the replacement ofthe reactor head and main generator rotor replacement, among others. The Group and GenE jointlyintend to invest a further A220,000 thousand (approximately HRK 1,647,800 thousand) over the course ofthe next five years towards upgrading nuclear safety and operating procedures at the plant. The funding forsuch capital expenditure programme will be financed by a loan in the amount of A60,000 thousand(approximately HRK 449,400 thousand) at the NPPK level with the remainder coming from sales ofelectricity during the period 2012 through 2016. It is not expected that the Group will be required to payany additional amounts in respect of such planned capital expenditures, however the Group anticipatesthat prices for electricity generated at the nuclear plant will slightly increase over the five year period.

The principal reason for the significant investment in routine modernisation and nuclear safety upgradingis to prepare the plant for an additional 20 years lifetime extension. The projected lifetime of the Krskonuclear plant is 40 years (up to 2023), however in June 2012 the Slovenian Nuclear Safety Administration(the Slovenian nuclear regulatory body) confirmed that the vital components of the power plant, inparticular, the reactor vessel could continue to safely operate until 2043. It is currently the intention ofNPPK and its shareholders that the nuclear plant will continue operating until 2043. In line with thepractices adopted by the majority of the European countries, the plant will undergo a PSR every ten yearsin order to receive a renewed licence for the next ten year period.

Post Fukushima Stress Tests Results

On 4 October 2012, the European Commission published a report following its completion of stress testsof Europe’s nuclear power plants. The report is based on the conclusions of peer reviews of nuclear powerplants, which were produced in April 2012 by the European Nuclear Safety Regulators Group (ENSREG).

Each power plant was assessed on the basis of 11 measures recognised as being useful and necessary tomitigate the effects of extreme natural and other disasters in the vicinity of a nuclear power plants.According to the European Commission’s report, the Krsko nuclear plant is the only power plant to havealready implemented, or be shortly implementing, all 11 measures.

Decommissioning

According to the Krsko agreement between Slovenia and Croatia, the decommissioning of Krsko nuclearplant and disposal of radioactive waste and used nuclear fuel from the Krsko nuclear plant is a jointobligation of Slovenia and Croatia. Accordingly, the decommissioning costs of the Krsko nuclear plant willbe a joint obligation of GenE and HEP, with each party paying half of the expected costs into a specialdecommissioning fund held within their respective country. As of the date of this Offering Circular, HEP isrequired to pay an annual fee of A14,250 thousand (approximately HRK 106,735.5 thousand) per year intothe decommissioning account, but this amount may change in the future due higher expected

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decommissioning costs, an extension of the collection period until 2043 (in line with the plant’s lifetimeextension), revisions of national radioactive waste policies or other regulatory changes.

The total nominal costs of the disposal of radioactive waste, used nuclear fuel and the decommissioning ofthe Krsko nuclear plant (for both the Croatian and Slovenian owners) were evaluated to be in the range ofapproximately A1,149,000 thousand to A1,689,000 thousand (approximately HRK 8,606,010 thousand toHRK 12,650,610 thousand), while the corresponding discounted cost fluctuates somewhere betweenapproximately A338,000 thousand and A345,000 thousand (approximately HRK 2,531,620 thousand andHRK 2,584,050 thousand), at 2002 prices. This evaluation was done by a joint Slovenian and CroatianProject Team and Advisory Board and reviewed by independent experts from Electricite de France (EDF).It is expected that the total discounted cost will be secured through 19 equal annuities in the amount ofA28,500 thousand paid during the period from 2004 until 2022.

As at 30 June 2012, HEP had paid a total of approximately HRK 889,662 thousand (equivalent toA121,130 thousand) into the fund. In order to accumulate an adequate amount of funds to cover theultimate costs of decommissioning of the plant, expert organisations nominated by both the Croatian andSlovenian Governments periodically review the decommissioning cost estimates and update theirdecommissioning provisions. The second audit of the decommissioning programme is currently in processand due to publish its findings in 2013.

Thermal power plants

The Group owns and operates all eight of Croatia’s thermal power plants. The Group’s thermal powerplants comprise one oil fired plant (TPP Rijeka), two coal fired plants (TPP Plomin I and II), two oil andnatural gas fired PP (TPP Sisak and TE TO Osijek), one natural gas and oil fired plants (CCGT—EL TOZagreb), one oil and natural gas or extra light oil fired plant (CCCGT- TE TO Zagreb) and one natural gasor extra light fuel fired plant (CC- KTE Jertovec) and are situated in various locations throughout Croatia,the largest concentration being in the Zagreb area. In 2011, the Group’s thermal power plants generated40.6% of the total electricity generated by the Group.

Oil-fired power plants are primarily used to meet high electricity demand or during periods when theGroup’s hydro power plants are not operating at full capacity, such as during prolonged dry spells ordroughts. In addition, the Group has access to a diversified fuel mix and can choose which type ofgeneration method to use in order to minimise costs, reduce price volatility and prevent supply disruptions.

The following table sets forth certain information regarding the Group’s thermal power plants electricitygenerating capacity for the periods indicated.

Installedelectricity Generated Generated Generated Start of Licence

Plant capacity Electricity Electricity Electricity operation Type of plant Fuel(1) expires

2011 2009 2010 2011(MW) GWh

TE Sisak . . . . . . . 396 544 0 100 1970 Condensation Oil and gas 2018TE Rijeka . . . . . . 303 1,022 50 141 1978 Condensation Oil 2018TE Plomin I . . . . 105 716 641 786 1969 Condensation Coal 2018TE Plomin II . . . . 192 796 1,511 1,545 2000 Condensation Coal 2018KTE Jertovec . . . . 74 84 70 45 1956 CCGT Gas or EL Oil 2018TE TO Zagreb . . . 422 1,553 2,027 2,057 1979 CCCGT CHP Oil and Gas or EL Oil 2018EL TO Zagreb . . . 90 354 369 359 1970 CHP Oil and Gas 2018TE TO Osijek . . . 90 108 119 114 1976 CHP Oil and Gas 2018

Total . . . . . . . . . . 1,672 5,177 4,787 5,147

(1) ‘‘Oil and Gas’’ indicates usage of both fuel types simultaneously; ‘‘Gas or El fuel oil’’ indicates alternative usage. The primaryfuel is gas.

In the year ended 31 December 2011, the Group’s power plants in Croatia consumed 149 thousand tons ofheavy fuel oil and one thousand tons of extra light fuel oil. For information on the Group’s purchases of oilfrom third parties, please see ‘‘—Fuel—Fuel Oil.’’ In the year ended 31 December 2011, the Group’s powerplants in Croatia consumed 957 thousand tons of black coal. For information on the Group’s purchases ofcoal from third parties, please see ‘‘—Fuel—Fuel Coal.’’ In the year ended 31 December 2011, the Group’spower plants in Croatia consumed 699 million m3 of gas. For information on the Group’s purchases of gasfrom third parties, please see ‘‘—Fuel—Gas.’’

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Plomin II

Plomin II was connected to the power grid in 1999 and went into commercial operation in the April of2000. Plomin II is jointly owned by HEP and RWE through a joint venture in which each holds a 50%interest, TE Plomin. Plomin II has a 192 MW generation capacity and uses coal for its generationoperations. The power plant is connected to the power grid by a 220 kilovolt switchyard. Connectionbetween 220 kilovolt and 110 kilovolt networks is performed by regulating autotransformers.

As part of the Group’s investment programme to increase its generating capacity, the Group intends toreplace older thermal power plants in Croatia with new, more efficient and cleaner thermal power plants.The Group is in the process of building a new thermal power plant, Plomin III, and a natural gascombined-cycle cogenerating unit, Sisak thermal power plant, which are due to become operational in2018 and early 2014, respectively and will increase the Group’s electricity generation capacity by 500 MWand 250 MW, respectively.

Thermal Energy (heat) Generation

The Group owns four thermal energy plants in Croatia capable of producing thermal energy. The Group’sthermal energy (heat) generation power plants had a total installed capacity of 1,569 MW as at31 December 2011 and its district boiler rooms had a total installed capacity of 382 MW. The Group’sthermal energy is generated as a by-product of the generation of electricity from the Group’s thermalpower plants. The thermal energy supplied by the Group’s power plants in Croatia is sold to municipalitiesand to Tariff and Non-Tariff Customers. Thermal energy is supplied to customers through steam/hot waterpipelines that are owned and operated by the Group. In the year ended 31 December 2011, the Group’sthermal power plants generated 2,457 GWh of thermal energy and 224 GWh in district boiler rooms of cityneighbourhoods. In 2011, the Group’s thermal power plants generated 92% of the total thermal energygenerated by the Group for that year. For additional information on the thermal energy producingfacilities, please see ‘‘—Electricity Generation—Thermal Power Plants’’.

The following table sets forth certain information regarding the Group’s thermal power plants thermalenergy generating capacity.

InstalledthermalGenerated thermalcapacityenergyinstalledFor the year ended as at31 December 31 December Start of Licence

2009 2010 2011 2011 operation Type of plant Fuel expires

GWh (MWheat)TE TO Zagreb . . . . . . . 1,078 1,153 1,096 850 1979 CCCGT/CHP Oil and Gas or EL Oil 2018EL TO Zagreb . . . . . . . 915 938 927 517 1970 CHP Oil and Gas 2018TE TO Osijek . . . . . . . 298 319 309 182 1976 CHP Oil and Gas 2018TE Sisak . . . . . . . . . . . 68 83 125 20 1989 Steam Boiler Oil and Gas 2018District boiler rooms(1) . . 231 249 224 382

Total . . . . . . . . . . . . . . 2,590 2,742 2,681 1,951

(1) Comprises date from 29 district boiler rooms in Zagreb, 14 in Velika Gorica, 4 in Samobor, 8 in Zapresic, 1 in Sisak and 2 inOsijek.

Renewables

HEP Obnovljivi izvori energije d.o.o. (‘‘HEP-OIE’’) is the Group’s subsidiary responsible for its renewableenergy business. HEP-OIE is investing in a range of renewable energy projects and is involved indeveloping innovative energy programmes within Croatia which the Group anticipates will, uponcompletion, result in HEP-OIE being granted ‘‘eligible producer’’ status. Once it has achieved this status itwill be able to apply the tariff system for electricity production from renewable energy sources andcogeneration. HEP-OIE is involved in the ‘‘Solution’’ project, which is part of the Concerto III Initiative ofthe European Commission. The project is focused on achieving energy self-sufficiency through the use ofavailable local renewable energy resources such as developing solar power plants. In addition, HEP-OIE isworking on developing numerous rooftop solar power systems (both photovoltaic and solar thermal) onthe buildings of existing power plants in the Group. HEP-OIE is also involved in a developing of certainnumber of wind farm projects, as well as considering partnerships with other investors in joint ventureprojects of power plants construction in renewable energy sector in region of South-East Europe.

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Transmission of Electricity

Overview

The Group provides electricity transmission services within the Croatian power system to network userswithin Croatia. This transmission service is provided by HEP-OPS, which is the only authorisedtransmission system operator (‘‘TSO’’) in Croatia. As a result, all suppliers, including the Group’scompetitors, must use the Group’s transmission network. All network users connected directly to the highvoltage transmission network pay an initial connection fee. All users pay transmission tariffs which aredetermined by the Croatian Government based on the recommendations of HERA in line with prescribedmethodology. See ‘‘Regulation—Electricity Sector—Electricity Transmission Tariff Model’’ for further details.

The Croatian transmission network is also connected to the neighbouring systems of Serbia, Bosnia andHerzegovina, Slovenia and Hungary, which together, have a total capacity that exceeds the Croatian peakload by several times. All electricity transits that are carried through HEP-OPS’ and other EU and EnergyCommunity TSO transmission grids are regulated by Regulation (EU) 838/2010 which came into force on3 March 2011 and replaced the previous transmission agreements. HEP—OPS has all of the requiredregulatory licences to carry out electricity transmission operations in Croatia.

The following tables set forth certain information regarding the Group’s two way capacity of itstransmission network for the periods indicated:

Average Network Average NetworkCapacity import Capacity export

For the year ended 31 December

2009 2010 2011 2009 2010 2011

MW MW

BorderSerbia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 370 412 258 366 425Bosnia and Herzegovina . . . . . . . . . . . . . . . . . . . . . . . . 590 631 662 505 531 448Slovenia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762 808 975 762 791 900Hungry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 958 958 1,075 575 583 725

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,580 2,767 3,124 2,100 2,271 2,498

Volume Transferred Volume Transferredimport export

For the year ended 31 December

2009 2010 2011 2009 2010 2011

TWh TWh

BorderSerbia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 1.6 1.0 0.6 0.3 0.4Bosnia and Herzegovina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 4.0 2.4 1.7 2.4 1.9Slovenia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0 4.0 5.4 2.5 3.5 4.5Hungry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0 3.1 6.7 0.6 1.9 1.1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 12.7 15.5 5.4 8.1 7.9

Available Transmission Capacities trading

The transmission system operators of neighbouring countries coordinate the allocation and use of availabletransmission capacities (‘‘ATC’’). The transmission system operators have at their disposal 50% of thedetermined capacity in the direction of import and export, unless otherwise agreed by mutual bilateralRules.

HEP-OPS carries out unilateral and bilateral auctions for the ATC. At the border with Bosnia andHerzegovina HEP-OPS carries out yearly, monthly and daily unilateral auctions, and at the border withSerbia yearly and monthly unilateral auctions. At the border with Slovenia, HEP-OPS and ELES carry outbilateral yearly, monthly and daily auctions for the ATC in accordance with the Slovenia-CroatiaInterconnection Capacity Access Rules. Furthermore, HEP-OPS and Hungarian TSO MAVIR carry outbilateral yearly, monthly and daily auctions for the ATC in accordance with the Yearly and MonthlyAuction Rules on Croatia-Hungary Interconnection Capacity Rules and Daily Auction Rules. HEP-OPS isalso involved in a project to set up a South East Europe Co-ordinated Auction Office (‘‘SEEC Auction

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Office’’), in order to streamline and facilitate cross-border auctions within the region. In June 2012, aninterim company was created to commence ATC auctions, but a permanent SEEC Auction Office isexpected to open in 2013.

In December 2011 CAO Freising (Germany) and HEP-OPS supported by ELES and MAVIR informed themarket participants about the intention to integrate the borders Hungary—Croatia and Slovenia—Croatiainto the electricity transmission capacity allocation process organized by CAO using the principles and thesolution already applied among eight TSOs from the Central East Europe region in order to contribute tothe creation of an EU Internal Electricity Market.

ELES, MAVIR, HEP-OPS and CAO have agreed to introduce this process for the year 2013 starting withthe yearly auction and continuing with monthly and daily auctions. The initiative is also supported by allother CEE TSOs. Process will be organized based on separate Rules for Coordinated Auction ofTransmission Capacity on HU-HR and SI-HR Border which are fully consistent with the rules applied inthe CEE Region. Auction Rules and other important information in connection to the introduction of thenew procedure will be published and distributed by CAO within the following weeks.

The Transmission Network

HEP-OPS is the only operator of the Croatian electricity transmission system and is responsible for itsmaintenance, development and further construction costs. HEP-OPS aims to provide high qualityelectricity service, while minimising transmission costs and guaranteeing reliability and security. In order tosatisfy the transmission requirements of the network users and to achieve a high quality reliabletransmission service, the network needs to be continuously maintained in accordance with prescribedstandards and developed, built and extended to meet increasing electricity demand. This maintenanceincludes the repair and replacement of overhead lines and underground cables, primary and secondaryequipment, auxiliary plants, telecommunications equipment and building structures in sub-stations andswitchyards.

The Group intends to continue to modernise and expand the transmission network with an estimatedinvestment of approximately HRK 2,575,900 thousand by 2016 and to further reduce network losses. TheGroup is in the process of constructing additional two sub-stations in Dubrovnik, implementing the‘‘Transmission Lines Renewal Project’’ that includes replacing or repairing approximately 800 kilometres ofcable lines by 2016, replacing the whole operation system, including national and regional dispatchingcentres, a project which is expected to be completed in 2013, and completing the 220kV Mraclin—Prijedorline to connect the Sisak thermal power plant to the network. In addition, the Group is in the preparationstages for the construction of the 400 kV Plomin—Melina line to integrate TPP Plomin III with thenetwork, the TS 400/110 kV Licki Osik line to improve cross-border capacity and connect renewableenergy facilities, the 110 kV Zakucac-Meterize 3 line for the Zakucac HPP and installing attenuators whichlower voltage and dissipate power as part of a safety system at TS Konjsko and TS Ernestinovo. HEP-OPSis also implementing the Wide Area Monitoring System Technology in order to increase operatingefficiency of the network.

Distribution and Sale of Electricity, Thermal Energy and Gas

Overview

The Group is the sole distributor of electricity, the biggest distributor of thermal energy and one of theleading distributors of gas in Croatia. All suppliers, including the Group’s competitors, must use theGroup’s distribution network for distribution of electricity, gas and thermal energy. The distribution ofelectricity, thermal energy and gas is regulated by the Croatian Government and local municipalities. TheCroatian Government sets distribution tariff rates for electricity while local municipalities set the tariffrates for thermal power and gas. Both the Croatian Government and the local municipalities set ratesbased on the recommendation of HERA, in line with prescribed methodology. See ‘‘Regulation—ElectricitySector—Price of Electricity’’ ‘‘Regulation—Thermal Energy Sector—Thermal Energy Prices’’ and‘‘Regulation—Gas Sector—Price of Gas’’ for further details.

As at 31 December 2011, the Group owned and operated 135,360 kilometres of high-, medium- andlow-voltage electricity distribution lines, 351 kilometres of insulated pipelines for thermal energydistribution and 2,390 kilometres of low pressure gas pipelines.

As part of the Group’s planned restructuring, it is expected that certain distribution functions, includingpublic procurement, will be centralised in the Group’s headquarters in Zagreb. As result, the number of

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employees working in the Group’s distribution sector will be reduced (see ‘‘—Employees’’ for furtherdetails).

Distribution and Sale of Electricity

As at 31 December 2011, the Group has been the sole distributor of electricity to more than 2.3 millioncustomers in Croatia, covering an area of approximately 57,000 square kilometres. The Group’s supplybusiness sells electricity (procured by its trading business and generated by the Group’s power plants) toend-consumers in Croatia through its subsidiaries HEP-Supply and HEP-ODS, and to a lesser extent to theneighbouring countries, through its subsidiary HEP Trade (see ‘‘—Trading’’ for further information on theGroup’s trading operations).

The Group is currently the only electricity supplier operating in the public supply system and supplyingelectricity services to Tariff Customers.

HEP-Supply supplies commercial and industry sector Non-Tariff Customers (such customers ‘‘CommercialNon-Tariff Customers’’) and a negligible number of Households (less than 0.01%) that have opted for aMarket Supplier. HEP-Supply executes approximately 47% of all electricity sales in Croatia andapproximately 98% of total sales to Commercial Non-Tariff Customers sector. According to Management’sestimates, Market Suppliers not part of the Group held approximately 0.9% of the electricity market as at31 December 2011 and 1.5% in the first half of 2012.

Similar to transmission activities, the distribution of electricity in Croatia is a regulated activity, withdistribution tariffs approved by the Croatian Government, on the recommendation of HERA. In order toobtain a change in the tariff rates, the Group is required to submit a request to the Croatian Governmentand propose a new tariff rate. All requests must be approved by HERA as being in line with prescribedmethodology before they are then approved by the Croatian Government. See ‘‘Regulation—ElectricitySector—Price of Electricity’’ for further details.

The Group is the largest out of 13 registered Market Suppliers of electricity currently operating in Croatia(three Market Suppliers are part of the Group), in terms of volume of electricity sold to end-consumers.The Group’s share of the electricity sold to end-consumers in Croatia was 100%, 99.9% and 99.1% forthe years ended 31 December 2009, 2010 and 2011. In the year ended 31 December 2011, the Group sold15,585 GWh of electricity to end-consumers of which 57.8% was sold to Commercial Customers (28.3% tohigh and medium voltage customers, predominantly industrial customers and 29.5% to low-voltagecustomers) and 42.2% to Households (low-voltage). The Group’s distribution grid losses were 1,325 GWhof electricity in the year ended 31 December 2011, representing a decrease of 99 GWh, or 7.0%, from1,424 GWh in the year ended 31 December 2010.

Commercial Non-Tariff Customers generally purchase their electricity through annual contracts. However,the Non-Tariff Customers that need to comply with public procurement rules typically sign four yearagreements, which are subject to an annual price review. In the year ended 31 December 2011,approximately 48% of the Group’s total electricity sold to end-consumers, was sold to CommercialNon-Tariff Customers on one year contracts.

The Group’s top 10 customers account for 18.2% of sales of electricity to Commercial Non-TariffCustomers by the Group, however the Group does not believe that the loss of any of these customers to acompetitor would have a material adverse effect on the Group’s revenues.

Tariff system and Classification of Customers

The Group’s customers can be split between Commercial Customers and Households. CommercialCustomers who choose a Market Supplier typically pay lower rates than the tariffed rates under theregulated public supply system. In the event that a Commercial Customer fails to choose a Market Supplieror its contract with a Market Supplier is terminated, such Commercial Customer will be supplied by thepublic supply system where it is charged the Balancing Energy Tariff. Households are not currentlysimilarly incentivised to choose an alternative supply company and in practice virtually all Households haveopted to remain with and are supplied through the public supply system provided by HEP at the fixedtariffed rates. Only a negligible number of Households (less than 0.1%) have changed their supplier to aMarket Supplier.

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The table below sets forth the volume of electricity sold by type of end-consumer for the years ended31 December 2009, 2010 and 2011.

For thesix months

For the year ended ended

2009 2010 2011 2012

GWh % GWh % GWh % GWh %

Households:Tariff Customers . . . . . . . . . . . . . . . . . . . . . . . 6,608 100 6,697 100 6,540 100 3,363 100Non-Tariff Customers(1) . . . . . . . . . . . . . . . . . . 0 0 0 0 0 0 0 0Total Households . . . . . . . . . . . . . . . . . . . . . . 6,608 100 6,697 100 6,540 100 3,363 100

Commercial Customers:Tariff Customers . . . . . . . . . . . . . . . . . . . . . . . 2,575 28 1,444 16 1,492 17 652 16Non-Tariff Customers . . . . . . . . . . . . . . . . . . . 6,469 72 7,574 84 7,413 83 3,540 84

Total Commercial Customers . . . . . . . . . . . . . 9,044 100 9,018 100 8,905 100 4,192 100

(1) Only a negligible number of Households (less than 0.01% of all Households) have opted to change their supplier to a MarketSupplier.

Due to the tariff system, there is currently virtually no competition for Tariff Customers and limitedcompetition for Non-Tariff Customers. While the Group does not believe that competition in this area ofits business will present a significant issue in the short-term, the Group expects higher competition in themedium to long-term for Commercial Non-Tariff Customers. Currently, the Group competes primarilywith an affiliate of GenE, the co-owner of the Krsko nuclear plant.

Electricity Prices

Electricity prices in Croatia are lower than in most other countries in Europe. This is especially the casewith regard to prices for domestic consumers, with prices for industrial consumers also being lower thanmany other European countries. Electricity prices for both industrial and domestic consumers are set outin the tables below, comparing Croatia to other major countries in Europe.

Half-yearly electricity prices—industrial consumers

2007 2008 2009 2010 2011

December 31 June 30 December 31 June 30 December 31 June 30 December 31 June 30 December 31

EUR per KwhCroatia . . . . . . . 0.0779 0.0784 0.0989 0.0975 0.1014 0.1058 0.1031 0.1037 0.1015Belgium . . . . . . . 0.1079 0.1303 0.1290 0.1213 0.1162 0.1159 0.1173 0.1269 0.1297Czech Republic . . 0.1092 0.1306 0.1335 0.1319 0.1386 0.1341 0.1379 0.1446 0.1406Germany . . . . . . 0.1094 0.1115 0.1138 0.1158 0.1137 0.1096 0.1107 0.1099 0.1100Spain . . . . . . . . 0.1105 0.1112 0.1197 0.1252 0.1270 0.1326 0.1316 0.1311 0.1389France . . . . . . . . 0.0666 0.0772 0.0714 0.0834 0.0759 0.0844 0.0794 0.0885 0.0845Italy . . . . . . . . . 0.1174 0.1326 0.1400Hungary . . . . . . 0.1118 0.1329 0.1344 0.1276 0.1205 0.1075 0.1028 0.1071 0.1035Netherlands . . . . 0.0980 0.1010 0.1030 0.1080 0.1049 0.0983 0.0961 0.1026 0.0982Austria . . . . . . . 0.1008 0.1074 0.1044Poland . . . . . . . . 0.1003 0.0966 0.1005 0.1000 0.1068 0.1123 0.1141 0.1154 0.1096Slovenia . . . . . . . 0.1066 0.1200 0.1250 0.1284 0.1238 0.1105 0.1094 0.1058 0.1055UK . . . . . . . . . . 0.1159 0.1067 0.1126 0.1136 0.1117 0.1124 0.1145 0.1107 0.1153

Source: Eurostat—half yearly prices. These indicators present electricity prices charged to final consumers. Electricity prices forhousehold consumers are defined as follows: average national price in Euro per Kwh without taxes applicable for the first semester ofeach year for medium size household consumers.

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Half-yearly electricity prices—domestic consumers

2007 2008 2009 2010 2011

December 31 June 30 December 31 June 30 December 31 June 30 December 31 June 30 December 31

EUR per KwhCroatia . . . . . . . 0.0793 0.0798 0.0961 0.0935 0.0932 0.0934 0.0930 0.0918 0.0925Belgium . . . . . . . 0.1286 0.1500 0.1619 0.1431 0.1390 0.1449 0.1460 0.1572 0.1595Czech Republic . . 0.0895 0.1060 0.1080 0.1102 0.1161 0.1108 0.1146 0.1232 0.1208Germany . . . . . . 0.1279 0.1299 0.1341 0.1401 0.1359 0.1381 0.1370 0.1406 0.1395Spain . . . . . . . . 0.1152 0.1124 0.1277 0.1294 0.1381 0.1417 0.1492 0.1597 0.1684France . . . . . . . . 0.0924 0.0914 0.0910 0.0908 0.0908 0.0940 0.0995 0.0994 0.1017Italy . . . . . . . . . 0.1387 0.1397 0.1412Hungary . . . . . . 0.0957 0.1277 0.1281 0.1227 0.1320 0.1349 0.1247 0.1336 0.1192Netherlands . . . . 0.1290 0.1270 0.1320 0.1440 0.1386 0.1266 0.1259 0.1300 0.1343Austria . . . . . . . 0.1255 0.1271 0.1268 0.1380 0.1380 0.1427 0.1396 0.1442 0.1444Poland . . . . . . . . 0.1069 0.0965 0.1005 0.0883 0.1010 0.1049 0.1082 0.1145 0.1052Slovenia . . . . . . . 0.0861 0.0911 0.0919 0.1056 0.1050 0.1057 0.1058 0.1079 0.1149UK . . . . . . . . . . 0.1411 0.1394 0.1530 0.1399 0.1340 0.1321 0.1380 0.1365 0.1509

Source: Eurostat—half yearly prices

Planned capital expenditures

In order to prevent any potential loss of customers to competitors, the Group plans to focus on a numberof supply projects. The Group intends to offer new products and energy services to its customers, includingrenewable energy products. Due to its dominant position in the market, the Group is required to offer thesame rates to all of its Non-Tariff Customers. However, the Group has introduced a bonus system for itscommercial Non-Tariff Customers that takes account of individual customer’s consumption pattern andprice plan. By tailoring the pricing plans to the individual customer’s needs, the Group hopes to providebetter service and provide other cost benefits to its customers and to strengthen its competitive position.Further, the Group intends to actively engage with its customers, put customer relations to the forefront ofits operations and focus on bringing new products to the Croatian market including promoting the ESCMunder which it would invest in and offer its customers energy efficient products to reduce energyconsumption and CO2 emissions and renewable energy products such as solar collectors, cogeneration orbiomass boilers. In particular, the Group intends to streamline its billing process so that customers receivecombined bills, introduce electronic billing and online payment options and develop and consolidate itsexisting call centres into one centralised call centre to operate on a 24/7 basis.

The Group also plans on replacing its aging network assets, ensure reliable and safe operation of newgeneration plants, connect new customers, in particular in major cities, tourist and industrial areas, andexpand existing lines. In particular, the Group is currently working on the ‘‘Smart Grid Project’’ that aimsto introduce smart meters at customers’ locations. The new meters will allow the Group, through the grid’sinformation and communications system, to gather information on the behaviour patterns of its consumers,improve efficiency of its distribution network (including reducing network losses), increase reliability, andprofitability and sustainability of its generation and distribution system.

Distribution and Sale of Thermal Energy

The Group’s supply business sells thermal energy generated by the Group’s thermal power plants anddistrict boiler rooms to end-consumers in Croatia. Sales of thermal energy to customers are regulated, withthe tariff rates approved by the local municipalities based on the recommendation of HERA. In order toobtain a change in tariff rates, the Group is required to submit a request to the applicable localmunicipality and propose a new tariff rate. All requests must be approved by HERA as being in line withprescribed methodology before they are then approved by the applicable local municipality. The Grouphowever is petitioning the Croatian Government to change this approval process and revert to the formersystem whereby the Croatian Government approves thermal tariffs, based on recommendations fromHERA. See ‘‘Regulation—Thermal Energy Sector—Thermal Energy Tariff Model’’ for further details.HEP-Top has sent a request for thermal power tariff rate increases to local Croatian municipalities locatedin Zagreb, Osijek, Sisak, Velika Gorica, Samobor and Zapresic. The Group expects responses during thefourth quarter of 2012.

The Group distributes thermal energy to more than 122,000 customers covering approximately 82% of thedistrict heating market in Croatia (according to the most recent report published by HERA, for 2009),making the Group the largest of 17 distributors of thermal energy in the country. In the year ended

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31 December 2011, the Group distributed a total of 2,311 GWh of thermal energy to customers, of which100% was distributed to end consumers in Croatia. The Group’s distribution grid losses were 370 GWh ofthermal energy in the year ended 31 December 2011, representing a decrease of 5 GWh, or 1.3%, from375 GWh in the year ended 31 December 2010.

The table below sets forth the volume of thermal energy sold by type of end-consumer in the year ended31 December 2011.

For the year ended 31 December 2011

Household Commercial Industrial Total

(GWh) (%) (GWh) (%) (GWh) (%) (GWh) (%)

1,352 58.5% 503 21.8% 456 19.7% 2,311 100%

The Group’s heating operations have generated a loss in each of 2009, 2010 and 2011 due to the low tariffrates the Group is required to charge and increased operating costs. The tariff rates are subject to politicalpressure and rarely change, with the last price increase approved in 2009. Operating costs associated withthermal energy generation (in particular fuel costs) have shown a steady increase since 2009. In 2010, theGroup made a request for tariffs to be brought in line with the increased operating costs of the Group. Atthe time, the Croatian Government was directly responsible for approving tariff rates and rejected theGroup’s request.

The Group’s initial focus is to make the district heating business economically viable. However, the Groupalso aims to expand Sisak’s heating business by finishing the construction of a new unit at Sisak TPP,continue the renewal projects of the hot water and steam networks, construct heating systems in Zagreband Velika Gorica, connect existing customers to the district heating system and close separate boilerplants, implement technical and economic optimisation of the district heating system and renew heatingsub-stations.

Distribution and Sale of Gas

The Group’s supply business sells gas (procured by HEP-Plin) exclusively to end-consumers in Croatia.The Group distributes gas to 72,060 customers and/or metering points as at 30 June 2012, making theGroup the second largest of more than 40 suppliers of gas currently operating in Croatia in terms ofvolume of gas sold to end-consumers, according to data provided by Eurostat.

Sales of gas to customers are regulated, with the tariff rates approved by the Croatian Government, on therecommendation of HERA. In order to obtain a change in the tariff rates, the Group is required to submita request to the Croatian Government and propose a new tariff rate. All requests must be approved byHERA as being in line with prescribed methodology before they are then approved by the CroatianGovernment. See ‘‘Regulation—Gas Sector’’ for further details.

In the year ended 31 December 2011, the Group distributed a total of 149.7 million m3 of gas to customersand/or metering points, of which 99.2% was distributed to end consumers (17.9% to CommercialCustomers, 23.1% to Industrial Customers and 59.0% to Households). The Group’s distribution grid losseswere 7.8 million m3 of gas in the year ended 31 December 2011, representing a decrease of 1 million m3, or4.0%, from 8.8 million m3 in the year ended 31 December 2010.

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The table below sets forth certain information regarding the volume of gas distributed by the Group(including grid losses) and volume of gas sold by type of end-consumer in the year ended 31 December2011 for HEP Plin.

For the year ended31 December 2011

(m3million) (%)

Distribution volumes:Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148.5 94.3Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 0.8Grid losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8 4.9

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157.5 100

Sale volumes:Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88.3 59.0Commercial Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.9 17.9Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.5 23.1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149.7 100

(1) Gas distributed to others mainly includes gas distributed to the Group’s distribution centres, specifically to certain of theGroup’s heating substations for their consumption.

In the year ended 31 December 2011, approximately 23.1% of the Group’s total gas sold to end-consumerswas sold on a forward basis as part of one year contracts, primarily to industrial customers.

The Group has expanded its gas supply operations with the establishment of a new gas supply route viaHungary, which became operational in 2011. The Group plans to further develop the natural gasdistribution and supply businesses by expanding the existing gas network in the Slavonia and Baranja areas.Preparations are also being made for the development and construction of an LNG (liquefied natural gas)terminal on Croatia’s Adriatic Coast at Omisalj on the island of Krk, providing a significant alternativesupply route for the Group. Consideration is also being given to the construction of a gas-fired power plantto be built on land adjacent to the LNG terminal. The project is being undertaken by the Adria LNGconsortium in which HEP has a share through its joint venture company, LNG Hrvatska, which it ownstogether with Plinacro. The estimated value of the LNG terminal project is approximatelyA500,000 thousand. Completion of project documentation is expected by the end of 2013 when locationpermitting will commence. Documentation is also being prepared for the possible involvement of astrategic partner for the financing and management of the terminal.

Trading

Overview

The Group’s trading business is carried out by its subsidiary HEP Trade which is responsible for theoptimisation of the Group’s power plant operation and intermediation in the domestic and internationalmarkets, purchasing electricity in order to meet anticipated consumption levels and selling excesselectricity, as appropriate. It operates only in the wholesale electricity market in Croatia and abroad,through its subsidiaries located in Hungary and Slovenia and does not engage in speculative trading forprofit or otherwise. HEP Trade has established further subsidiaries in each of Serbia and Bosnia andHerzegovina, however neither of these entities are currently trading.

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The following table sets forth a breakdown of the volume of electricity purchased and sold by the Group inthe wholesale markets for the periods indicated.

For theFor the year ended six months ended

31 December 30 June

2009 2010 2011 2012

(Gwh)

Wholesale trading in electricity(1): . . . . . . . . . . . . . . . . . . . . . . 5,944 5,119 6,046 3,907Electricity purchased in the wholesale market . . . . . . . . . . . . . 4,851 3,902 5,644 3,640Electricity purchased from other producers . . . . . . . . . . . . . . . 70 176 245 199Electricity sold in the wholesale market . . . . . . . . . . . . . . . . . . 1,023 1,041 157 68Balance of wholesale trading in electricity(2) . . . . . . . . . . . . . . 3,898 3,037 5,732 3,771

(1) Total volume (purchase + sales)

(2) Net volume purchased Purchase less sales

Trading performance

The Group imports electricity largely in response to fluctuations in the levels of capacity of its hydro powerplants. Fluctuations in the generation of electricity in hydro power plants are generally compensated byimports which allow the optimisation of costs of available electrical power.

In the six months ended 30 June 2012, the Group procured a total of 9,118 GWh of electricity (3,640 GWhof electricity in the wholesale market, 199 GWh of electricity from other producers and 5,279 GWh ofelectricity generated by the Group and it sold a total of 8,070 GWh of electricity (68 GWh of electricity inthe wholesale market and 8,002 GWh of electricity to end-consumers). During the six months ending30 June 2012, the purchases on the wholesale market increased by approximately 42% as compared to thesame period last year, primarily due to the lower production level of hydro power plants (37% lower ascompared to the same period last year) due to an exceptionally dry period. The sale on the wholesalemarket in the first half of 2012 was 23.0% lower as compared to the same period last year due to theexceptionally dry period. Sales to end consumers was 2.6% lower as compared to the first six months ended30 June 2011, primarily as a result of a decrease in consumption due to the economic crisis.

In the year ended 31 December 2011, the Group procured a total of 18,564 GWh of electricity (5,644 GWhof electricity in the wholesale market, which accounted for 30.4% of the Group’s total needs, 245 GWhfrom other producers (eligible and private production) and 12,675 GWh of electricity generated by theGroup) and it sold a total of 16,482 GWh of electricity. The balance of 2,082 GWh comprised networklosses and consumption by the Group.

In 2011, the Group’s purchases of electricity on the wholesale market reached record heights due to lowergeneration at its hydro power plants with only 26% of the Group’s consumption through the transmissionnetwork being covered by generation at hydro power plants. In 2010 a record generation level at theGroup’s hydro power plants was achieved through which 46% of consumption through the transmissionnetwork was covered. Due to such factors, in 2011, 85% less electricity was sold on the wholesale market ascompared to 2010.

Description of trading operations

HEP Trade conducts international trading through its international subsidiaries.

• Slovenia. The Group sells and purchases electricity mainly on the wholesale market in Slovenia, onthe Slovenian Power Exchange (BSP) and with bordering states (cross border trading—Austria,Croatia). Pricing is carried out on the basis of market prices for sold and purchased electricity withadded margins for operational costs. Trading limits are set on the basis of parent company guarantees(different limits with different partners depending on trading volumes). Trading is carried out on thebasis of daily, weekly and monthly contracts for physical deliveries. To date, the Group has notengaged in derivatives trading. The Group intends to intensify electricity trading and customer supplyactivities in Slovenia in the short-term.

• Hungary. The Group sells and purchases electricity mainly on the Hungarian Power Exchange(HUPX) and with bordering states (cross border trading—Croatia). Pricing is carried out on the basisof market prices for sold and purchased electricity with added margins for operational costs. Trading

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limits are set on the basis of the companies’ actual collateral position on their accounts held by Keller(the HUPX clearing house). Trading is carried out on the basis of daily contracts for physicaldeliveries. To date, the Group has not engaged in derivatives trading.

• Serbia. The Group has previously sold and purchased electricity mainly in the wholesale market inSerbia and with bordering states (cross border trading—Croatia). Pricing is carried out on the basis ofmarket prices for sold and purchased electricity with added margins for operational costs however theGroup is not currently trading with Serbia and therefore it has not set any trading limits. The Grouphas not carried out any trading activities in Serbia since 2009 but aims to start trading again during thesecond half of 2012.

• Bosnia and Herzegovina. The Group does not currently hold the relevant local licence for electricitytrading in this jurisdiction, although it intends to apply for such licence in the near future andtherefore there are no trading activities currently being undertaken here.

In addition to purchasing electricity on the market, the Group has also, since July 2012, started tradinggreen certificates and will commence trading in CO2 emissions allowances in 2013. See ‘‘Regulation’’ forfurther details. The Group also plans to increase the volume of its trading operations by increasing itspresence in Croatia’s neighbouring markets.

Commodities

The Group purchases 100% of its required fuel from third parties. The purchase of imported fuel iscentralised within the Group while locally sourced fuel is purchased by individual subsidiaries. Due to theGroup’s stable and predictable revenues it is able to predict fuel consumption requirements for any yearand in so doing be able to purchase required fuel on the market at optimal times and prices.

Commodities are subject to significant changes in supply and demand and the prices of heating oil, gas,coal and nuclear fuel have been volatile since 2009. The global financial crisis, the recent growth of largeemerging market countries (such as China), and the geopolitical conditions in the key oil producingregions have had a substantial impact on the prices of commodities used by the Group.

The table below sets forth information relating to the total amount of fuel consumed by the Group’sthermal power plants and the amount which was purchased from third parties for the periods indicated.

For the year ended 31 December

2009 2010 2011

Total Purchased Total Purchased Total Purchasedconsumed from others consumed from others consumed from others

Black coal (1000t) . . . . . . . . . . . . . 640 640 916 1,021 957 1,024Heavy fuel oil (1000t) . . . . . . . . . . 478.3 448 123 156 149 72Extra light fuel oil (1000t) . . . . . . . 1.8 1.1 1 0.6 1 0.5Gas (1,000,000m3) . . . . . . . . . . . . . 633 629 696 692 699 698

The Group maintains minimal fuel stocks year on year to ensure stability of supply.

The Group does not undertake any hedging transactions with regards to commodity products and anysignificant increases in commodity prices could have an adverse effect on the Group’s operating results andfinancial condition, especially if the Group is not able (or not permitted by regulatory authorities) to shiftproduction to lower-cost commodities or to adjust its rates to offset such increases in prices. As the Groupdoes not typically enter into long-term commodity supply agreements, its annual results are subject tosubstantial variation depending on its ability to generate electricity through its hydro power plants and theneed to purchase significant amount of oil, coal, fuel, gas and other commodities in order to power itsthermal and nuclear power plants. In addition, from 2013, thermal generation will be subject to theincreased costs associated with emissions allowances. Accordingly, during the years where weatherconditions are poor for hydro electricity generation, the Group might be required to switch its operationsto less cost effective production methods and this may incur significant additional costs.

Coal

As at 30 June 2012, two of the Group’s power plants burn black coal. In the year ended 31 December 2011,the Group’s power plants in Croatia consumed 957 thousand tons of black coal. The Group does not usebrown coal in its operations, which is not as efficient as black coal and generates more CO2 emissions. The

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price of black coal has significantly increased since 2009 with prices up by approximately 72.5% in 2011from 2009, although there was a partial reversal with approximately 21.8% decrease in prices in the firstsix months of 2012.

In the year ended 31 December 2011, approximately 79.82% of the black coal used in the Group’s powerplants in Croatia was supplied by Glencore International AG, with the remainder purchased fromMacquarie Bank Limited (approximately 13.62%) and Energy Coal SpA (approximately 6.56%).

Contracts for the purchase of coal are subject to tender and are entered into twice or three times a year.However, TE Plomin has a long-term co-operation contract with RWE in respect of the supply of coal toPlomin I and II which expires in early 2014. The Group does not currently have plans to extend thiscontract and TE Plomin intends to purchase coal for these plants on the open market in future. The Groupdoes not purchase coal on the spot market.

Fuel Oil

As at 31 December 2011, five of the Group’s power plants burn heavy fuel oil and one of the Group’spower plants burns extra light fuel oil. Two of the Group’s power plants also use extra light fuel oil as astart-up fuel. Both heavy fuel oil and extra light fuel oil are generally supplied by one company in Croatia,INA d.d., however the Group also purchases heavy fuel oil on the international oil market at prices basedon Platts (a global energy supplier) price quotations. HEP-Top also uses fuel oil in district boiler rooms forthe generation of thermal energy. Fuel oil prices have shown a significant increase since 2009 with pricesup by approximately 35% in 2011 compared with 2010 and have shown a further increase by approximately15.7% in the first six months of 2012, compared with the same period in 2011.

The Group purchases greater amounts of fuel oil for its operations in winter as during the heating season itmust utilise its fuel oil fired power stations to a greater extent to generate sufficient capacity to supply thecountry with heat. Due to a lack of availability from former suppliers and stronger emission regulations inCroatia, the Group have switched to the more expensive low-sulphur fuel oil and has started to purchasefuel oil on the Mediterranean market. This has impacted its generation operations as it has resulted in twothermal power plants no longer being suitable for electricity generation. A replacement block of a capacityof 250 MWel and 50 MWheat is under construction at TE Sisak and it is expected to start operating in 2014.

The Group anticipates that 2013 will be demanding in terms obtaining sufficient quantities of fuel oil for itsoperations. The Group also wants to exhaust the existing quantities of high-sulphur fuel oil purchased fromits supplier, INA Group, by 2013 and replaced it with low-sulphur fuel oil, which the Group will need toswitch to entirely in 2013 in order to comply with EU requirements.

In the year ended 31 December 2011, the Group consumed 149 thousand tons of heavy fuel oil and onethousand tons of extra light fuel oil. In the year ended 31 December 2011, approximately 48.2% of theheavy fuel oil used in the Group’s power plants in Croatia was supplied by INA Group, with the remainderpurchased from several suppliers on the international oil market (in aggregate approximately 51.8%). Inthe year ended 31 December 2011, all of the extra light fuel oil used in the Group’s power plants in Croatiawas supplied by INA Group.

Gas

As at 31 December 2011, five of the Group’s power plants burned gas. In the year ended 31 December2011, the Group’s power plants in Croatia consumed 699 million m3 of gas. The Group has a long-termagreement with INA Group for the purchase of gas that expires in 2015, through an INA Group subsidiary,Prirodni plin d.o.o, which supplies the Group with a total quantity of 700 million m3 per annum. However,the Group’s gas requirements are in excess of this amount and so the Group also contracts for additionalamounts annually on the open market. Prices are set according to a formula consisting of a fixed amountplus a variable amount, both of which are tied to the prevailing market prices. The Group does notcurrently have any plan to extend the purchase agreement with the INA Group, but it expects that it mightenter into other long-term contracts based on the prevailing market conditions.

The cost of gas has significantly increased since 2009, with an increase of 43.8% in 2011 as compared with2010 and a further increase of approximately 15% in the first six months of 2012. The Group has no gasstorage capacity and must take into account gas storage fees, additional penalties payable for exceeding gasstorage capacity and gas delivery expenses before purchasing additional gas for its operations. However,due to the new gas supply route through Hungary which became operational in 2011, the Group hasgreater ability to control its gas supply, which should result in increased operating efficiency. In addition,

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the Group expects that it will be able to obtain new long-term gas supply agreements after 2014, based onthe prevailing market conditions.

Nuclear Fuel

The Krsko nuclear plant is in charge of nuclear fuel procurement. Krsko procures nuclear fuel materials(uranium) and services (conversion and enrichment) pursuant to medium-term contracts with its suppliers.Krsko’s nuclear fuel procurement policy is developed by NPPK’s management, however must be agreedwith HEP and GenE as co-owners of the plant. HEP covers one half of the annual fuel costs as part of theprice that it pays for electricity generated from the nuclear plant.

Krsko purchases uranium from the German company Nukem GmbH (‘‘Nukem’’) with pursuant to aneight year contract that expires in 2013. Enrichment services are also provided by Nukem under the sameeight year contract however Nukem subcontracts the provision of such services to USEC Inc. Managementat Krsko are considering purchasing uranium and enrichment services on the cheaper spot market goingforward rather than entering into a new agreement with Nukem upon expiration of the current agreement.The fuel elements are provided by Westinghouse Electric Company with which the plant has a life-timecontract.

Spent nuclear fuel storage

Spent nuclear fuel is stored on the premises of the plant in the spent fuel pit. The pit was enlarged in 2002to ensure that it will have sufficient capacity to contain all spent fuel through to the end of the plant’sregular lifecycle, which was originally 2023, but the Group anticipates that it will be extended until 2043.However, motivated by the incident at Fukushima and globally adopted practices, HEP, GenE and NPPKare considering the option of dry storage of spent nuclear fuel for a portion of the spent fuel elements. Theconstruction of this new storage facility is expected to be completed during the lifecycle of the plant.

Property, Plant and Equipment

The Group owns all of its significant generation facilities and other properties and holds the title to or hasthe right to use by virtue of leases all of the land underlying its facilities. The Group’s plant, property andequipment mainly comprise power plants, transmission and distribution networks, administrative buildingsand other assets. As at 30 June 2012, the Group owned buildings with a total net book value ofHRK 11,175,240 thousand, plant and equipment with a net book value of HRK 11,594,637 thousand andland with a net book value of HRK 1,030,628 thousand.

Capital Expenditures

The Group has invested and is expected to invest significant additional amounts in the next five years tomaintain and develop its generation capacity, transmission and distribution networks to meet regulatorystandards, improve efficiency and increase capacity. See ‘‘Management’s Discussion and Analysis ofFinancial Condition and results of Operations—Capital Expenditures’’ for further details. Construction andmaintenance costs have increased throughout the power industry over the past several years and futurecosts will be highly dependent on the cost of building materials and availability of contractors. Since1 January 2009, the Group has invested approximately HRK 2,118,000 thousand towards increasing itsgeneration capacity and efficency of its current facilities, HRK 937,000 thousand to modernise and expandits electricity transmission network, HRK 2,538,000 thousand to improve its electricity distributionnetworks and HRK 632,000 thousand towards improving its thermal energy and gas distribution networkand information and telecommunication infrastructure.

During the next five years, the Group’s long term investment strategy includes the construction of newpower plants, primarily the construction of an additional four hydro power plants and one thermal powerplant, increasing the generating capacity and efficiency of its facilities, continuing with the modernisationand expansion of its transmission network to further reduce network losses and ensure the reliable andsafe operation of the new and replacement plants and other facilities. In addition, the Group is alsocommitted to modernising and expanding its distribution network in order to further reduce networklosses, meet the country’s growing need for electricity and connect new customers, in particular in themajor cities, tourist and industrial areas.

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For additional information on the Group’s capital expenditures, see ‘‘Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—CapitalExpenditures and Acquisitions’’.

Employees and Health and Safety

Employees

The Group had 14,197, 13,990, 13,762 and 13,641 employees in the years ended 31 December 2009, 2010and 2011 and 30 June 2012, respectively, the vast majority located in Croatia with a small team located inBosnia and Herzegovina. As part of the Group’s restructuring programme, it plans to significantly reducethe existing workforce, by approximately 3,500 employees over the next five years with a particular focus onreducing the numbers working in the distribution business, reducing the number of non-technicalpersonnel and increasing the number of technical personnel by approximately a further 500 new engineersover the same period. The Group estimates that during this time approximately 1,200 employees will takeretirement in the usual course. Approximately 1,950 further employees have expressed an interest in takingvoluntary early retirement. The Group will also out-source certain non-core functions, such as dispatch andvehicle repair functions, which will provide alternative employment for a further group of employees.While the Group does not anticipate any significant issues with this workforce restructuring, it is consciousof the need to preserve experience and knowledge within its businesses and to ensure key personnel do notdepart; therefore, in tandem with its restructuring, it will further increase staff training and ensure anadequate hand-over is conducted by departing employees to ensure that relevant expertise is passed on tothe remaining and/or new team members.

As at 1 January 2011, all of the Group’s employees in Croatia were covered by a collective bargainingagreement (the ‘‘Collective Agreement’’) in accordance with Croatian law. This Agreement is valid until31 December 2012. Staff costs are determined by the Collective Agreement, while the rise of salaries islinked to the growth of the gross domestic product in the previous year. The Group will commencenegotiations on a new collective agreement in the autumn of 2012 for 2013. In addition, the Group hasagreed a set of regulations with the Group’s registered unions for dealing with employee disputes.

In line with Croatian employment legislation, the Group contributes to a state pension fund and alsocontributes to a voluntary pension fund. Payments under such schemes are made by the state directly to theretiree. Therefore once such contributions have been made, the Group has no further obligations to makepayments.

In accordance with Article 278 of the Labour Act (Official Gazette 148/09 and 61⁄11) (the ‘‘Labour Act’’), atthe request of the employer, the trade union and the employer jointly prepare and adopt rules relating topotential strikes or lockouts by the trade union. According to the Labour Act, the employer must specify inthe agreement with the trade union exactly which operating activities would need to continue during astrike or lockout and how many employees would need to continue performing these activities. The Groupbelieves that its essential operating activities include the generation, distribution and supply of electricityand heat to the general public and industry and expects these activities to continue during a strike orlockout. The Group has made proposals in accordance with the Labour Act to the relevant trade unions,however no agreement has yet been reached and formal arbitration proceedings are now underway toformulate such rules.

Employee Education

The Group’s employees attend seminars and workshops to be trained with respect to their duties andactivities with respect to environmental and nature protection legislation. The Sustainable Developmentand Quality Improvement Department continuously follows and prepares analyses of the legalrequirements arising from Croatian, EU and other relevant environmental legislation. The Group alsoprovides technical support to its employees through its Environmental Protection Coordination andStandardisation team. This team is charged with analysing and evaluating the environmental activities ofthe Group with an emphasis on planning, coordination, internal communication and preparation ofproposals regarding the Group’s compliance with relevant legislation.

Health and Safety

The Group is committed to ensuring the health and safety of its employees and customers. With respect tothe essential regulations for the health and safety of the employees, the Group’s health and safety team

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closely monitors applicable regulations (both domestic and EU). The Group has put in place the ‘‘Healthand Safety Regulations for Employees Working with Electric Power’’ and the ‘‘Regulations on the BasicRequirements for the Fire Protection of Electric Power Plants and Devices’’ which all personnel at relevantsites within the Group must adhere to. These Regulations have also been introduced into regularprocedure by the Ministry of Economy and have been published in the official gazette of Croatia. Withsuch publishing, the Group has brought the official regulations into compliance with EU regulations andbest practices in the electricity market.

Each organisational unit within the Group has a Safety at Work Committee which holds regular meetingsto ensure compliance with the Group’s policies and regulations; a Central Committee oversees all of theSafety at Work Committees. Each Safety at Work Committee also ensures that employees are sufficientlytrained for the role they are fulfilling.

In the last five years there have been injuries and fatalities in the workplace (as shown in the chart below)following which investigations were held. However the number of industrial accidents has shown a steadydecrease since 2009. Investigations are held at the relevant Safety at Work Committee level for non-fatalaccidents, while any injury resulting in death is investigated and considered at a meeting of the CentralCommittee.

For the year ended 31 December

2007 2008 2009 2010 2011

Fatal injuries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0 1 0 1Injuries at the workplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 217 191 179 167

Licences

As at the date of this Offering Circular, the Group holds all licences necessary for the operation of itsbusinesses. With respect to the Group’s principal subsidiaries these are as follows:

• HEP Generation—the licences for electricity generation and for thermal energy generation were bothissued by HERA on 10 December 2003 and expire in December 2018.

• HEP-ODS—the licence for distribution of electricity was issued by the Croatian Energy RegulatoryAgency on 12 November 2003 and expires in November 2018 and the licence for the electricity supplywas issued by HERA on 16 May 2009 and expires in May 2014.

• HEP-OPS—the licence for electricity transmission was issued by HERA on 10 December 2003 andexpires in December 2018.

• HEP-Supply—the licence for electricity supply was issued by HERA on 14 December 2011 andexpires in December 2016.

• HEP-Top—the licences for thermal energy generation, distribution and thermal energy supplyoperations were issued by HERA on 11 December 2003, 11 December 2003 and 9 February 2010,respectively and expire in December 2018, December 2018 and February 2013 respectively.HEP-Plin—the licences for the Group-Plin’s gas distribution and supply operations were issued byHERA on 10 December 2003 and 12 December 2007, respectively and expire in December 2018 andDecember 2011, respectively.

• HEP-Trade—the licence to trade electricity was issued by HERA on 2 August 2010 for three years.

For further information on licences and permissions required under Croatian law and under otherapplicable regulations, please see ‘‘Regulation—The Republic of Croatia—Electric Energy Sector—LicensingRegime’’.

Emission Rights and the Kyoto Protocol

By ratifying the Kyoto Protocol and conducting negotiations over EU accession, Croatia has undertaken toreduce greenhouse gas emissions and to join the EU’s emissions trading system pursuant to whichcompanies in member states can buy and sell emission allowances to reduce the cost of emission cuts. TheEU ETS is the cornerstone of the EU’s efforts to meet its obligations under the Kyoto Protocol. On1 January 2013, Croatia and HEP will become an integrated part of the EU ETS. Within the EU ETSsystem, each greenhouse gas emitter is allocated a certain emissions cap by the national government,within which it is allowed to emit greenhouse gases (such as CO2, methane and nitrogen monoxide) by the

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European Commission. Any emissions in excess of this cap must be covered by emission allowancespurchased in the open market at market prices.

The Group owns large thermal power plants which emit large quantities of greenhouse gases into theatmosphere. From 1 January 2013, these plants will be part of the emission trading scheme for CO2,meaning that the Group will have to buy CO2 emission rights for all of its installations which solely produceelectricity and a portion of its installations which produce thermal generation (see ‘‘ETS Third TradingPeriod’’ below for further details). To prepare for the trading in greenhouse emissions, in 2009 the Groupset up a team for the Implementation of Kyoto Protocol provisions. The team members are employeeswithin the Group who will assist the Group with its entry onto the EU ETS and who will perform activitiesrelated to trading in greenhouse gas emissions at an operational level. At the same time, plans for themonitoring of the greenhouse gases emissions have been prepared for all of the Group’s large thermalpower plants.

For the year ended31 December

2009 2010 2011

Electricity produced from thermal power plants GWh . . . . . . . . . . . . . . . . . . . . 5,177 4,787 5,147CO2/ kt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,043 3,899 4,035

ETS Third Trading Period

The entrance of Group into the EU ETS coincides with the start of the EU ETS’ Third Trading Periodwhich will run through until 2020 and implement certain changes to the current system with a view toharmonising the system and making it more efficient and fairer. This will include a gradual reduction (by21%) of the caps on emissions across the region.

Electricity generation

Installations which solely produce electricity no longer receive any free allowances under the Third TradingPeriod. Therefore, from 2013 onwards, the Group will have to buy a quota for the greenhouse gases whichit produces covering 100% of its CO2 emissions from electricity production.

Thermal Generation

For the generation of thermal (heat) energy, there are transitional regulations which will allow a gradualphasing out of the currently available free allowances. Free allowances will therefore decrease in line withthe Carbon Leakage Exposure Factor (‘‘CLEF’’) coefficient and will to fall from 80% of emissions in 2013to 30% in 2020, as seen below:

2013 2014 2015 2016 2017 2018 2019 2020

CLEF . . . . . . . . . . . . . . . . . . . . . . . 0.8 0.7286 0.6571 0.5857 0.5143 0.4429 0.3714 0.3

HEP has submitted a request to the Ministry of Environmental and Nature Protection (‘‘MZOP’’) for freeemission units in respect of thermal energy produced in cogeneration plants, which is then transmitted tothe central thermal system (‘‘CTS’’). If MZOP approves this request, the Group will be allocated freeemission units for the generation of thermal energy which is transmitted to the CTS on the CLEF basis.MZOP is in the process of reviewing all requests and will forward its final recommendation to theEuropean Commission for their final decision.

In any case, from 2021, the Group will be required to purchase 100% of its required emission units for thegeneration of both electrical and thermal energy.

Management estimates the cost of purchasing necessary allowances will be between A23,000 thousand andA37,000 thousand in 2013. This figure will increase further thereafter, due to the gradual reduction in freeallowances for thermal energy based on CLEF.

Tariff changes

In light of the need to purchase emissions allowances, the Group has applied to HERA for amendments tothe current electricity tariff system to ensure that the costs of these allowances are reflected in thecalculation of electricity prices for Tariff Customers.

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Evaluation of CO2 emissions

The level of the Group’s annual CO2 emissions is evaluated based upon the Croatian Energy Balancewhich is an analysis of all the forms of energy utilised in Croatia. It includes data related to theperformance of each generation facility and the level of fossil fuels used at each facility.

When considering the level of funds to be reserved for the purchase of emissions allowances on themarket, the Group must consider a range of factors. These include the level of its annual CO2 emissions,the price of emissions units on the market (for the EU Allowance, Certified Emission Reductions (‘‘CER’’)and Emission Reduction Units (‘‘ERU’’)), market availability of these units, the percentage of cheaperCER and ERU units which can be used for the coverage of the annual quota, and the percentage of freeallocated quotas allowed for the generation of thermal energy transmitted to CTS.

The following table sets forth the Group’s emissions for the periods indicated.

For the year ended

2009 2010 2011

(in tons)

SO2 Emissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,956 8,277 9,621NOx Emissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,031 5,318 5,574CO2 Emissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,043,000 3,899,000 4,035,00Particulates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651 313 220

With respect to the level of the Group’s emissions, hydrological conditions play an extremely importantrole as the Group’s hydro power plants can generate between 31% and 53% (based on figures for the lastten years) of its required electricity, depending on conditions.

A further factor to be considered will be the impact of the Group’s planned two new fossil fuel thermalpower plants, which could increase the level of CO2 emissions produced by the Group.

Intellectual Property

HEP has a trademark which is regulated by HEP’s company statutes.

The Group does not own rights to any patents, utility models or industrial designs.

Information Technology

The Group’s information systems are managed by the information technology department within HEP. Thedevelopment and the implementation of applications are aimed at providing support to the businessprocesses and providing an integrated and centralised system for the Group. Business data is backed up ona daily basis in case of deletion or eventual system crash.

Insurance

The Group maintains several types of insurance coverage to protect itself against potential liabilities. Inaccordance with the Procurement Act, HEP has entered into a four year Framework Agreement withCroatia Osiguranje Inc., pursuant to which the Group enters into annual policies for general liabilityinsurance, 24-hour insurance against injury for all employees, insurance against injury for employees thatwork in high-risk mined areas, insurance against injury for drivers, passengers and workers, car insurance(general for all vehicles and all-risk (kasko) insurance for some vehicles) and liability insurance for motorvehicles.

The Group does not have sabotage or terrorism insurance.

In addition to the above insurance policies, TE Plomin and TE-TO Zagreb have property all risk insurancepolicies.

With respect to insurance for the Krsko nuclear plant, NPPK holds insurance for property, employees andthird party liability, all of which are in compliance with the applicable legislation in force in the Republic ofSlovenia and the practices of the nuclear industry.

Operations at the Krsko nuclear plant are covered by a A661,520 thousand (approximatelyHRK 4,954,785 thousand) material damage policy (‘‘MD’’) which insures the plant’s property againstnuclear hazards, fire, terrorism risk, a machinery breakdown policy (policy limit A124,000 thousand

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(approximately HRK 928,760 thousand) within the annual MD limit of A661,520 thousand) and aSDR 150,000 thousand (approximately HRK 1,365,500* thousand) third party liability policy.

In addition to these specific types of insurance, the employees of the Krsko nuclear power plant arecovered by a collective accident insurance policy and all vehicles are covered by regular and mandatoryvehicle insurance required in Slovenia. The total annual insurance cost for all policies amounts toA2,300 thousand (approximately HRK 17,227 thousand). Insurance costs are an integral part of the price ofthe electricity generated at Krsko and therefore HEP covers half these costs.

In the event of a nuclear incident with consequences outside the boundaries of the Krsko nuclear plant, thegoverning law is the Slovenian Law on Liability for Nuclear Damage (the ‘‘Nuclear Law’’), which becameeffective on 4 April 2011. The Nuclear Law has been brought into compliance with the Paris Conventionon Nuclear Third Party Liability and the Brussels Convention with the 2004 additional protocol on theliability for nuclear damage (the ‘‘Additional Protocol’’). As a result of such amendments to theNuclear Law, certain maximum compensation levels have been included, although they will not come intoeffect until the Additional Protocol becomes effective which will take place when it is ratified by two thirdsof the signatory states. As at the date of this Offering Circular, the third party liability insurance costs forthe Krsko nuclear power plant are calculated according to the former Slovenian regulations and amount toA389,000 (approximately HRK 2,913,610 thousand) with a total insured amount of SDR 150,000 thousand(approximately HRK 1,365,500* thousand).

Upon ratification of the Additional Protocol and the changes to the Nuclear Law coming into effect, thebasic liability of the user of a nuclear plant will amount to A700,000 thousand (approximatelyHRK 5,243,000 thousand), the liability of the state in which the nuclear plant is located will amount to afurther A500,000 thousand and the joint funds of all the signatories of the Additional Protocol will insureanother A300,000 thousand (approximately HRK 2,247,000 thousand) in the event of a nuclear incident.The annual third party liability insurance costs of the Krsko nuclear power plant are, as a result, expectedto increase to approximately A1,500,000 thousand (approximately HRK 11,235,000 thousand).

Quality Management

Each subsidiary is responsible for its own quality management, a key component of which is environmentmanagement. HEP-Generation has introduced a general quality and environment management system forall its generation areas, while each power plant implements its own environment management system. Inthe latter half of 2012 an integrated system of quality and environment management will be implementedacross the Group’s generation business. HEP-ODS has partly implemented the quality and environmentmanagement system in one distribution area, while for the remaining 20 distribution areas this process isunderway. This process is due to be completed by the end of 2012.

Nuclear Safety

Responsibility for nuclear safety lies solely with the Krsko management. Since Krsko is located in Slovenia,the Slovenian nuclear regulator Uprava Republike Slovenije za nuklearnu sigurnost (‘‘URSJV’’) isresponsible for supervising the safe operation of the nuclear power plant.

URSJV supervises regulatory compliance and reviews the operation of nuclear facilities, the quality ofselected activities, repair and maintenance, and personnel training. URSJV representatives arepermanently on site at the Krsko nuclear power plant to monitor its performance and its compliance withsafety standards and operating procedures and to make sure that any improvements made are appropriate.As part of this supervisory role, URSJV continuously monitors the levels of radiation in the immediatevicinity of the plants. As at the date of this Offering Circular, there have been no controlled oruncontrolled radiation leakages, above legal limits, recorded at Krsko.

The Krsko nuclear plant operates with a Westinghouse pressurised water reactor with two coolant loops.The nuclear island together with the design and fabrication of the initial cores with 16 � 16 fuel assemblieswere supplied by Westinghouse Electric Corporation, while the replacement Steam Generators wereprovided in 1999 by the consortium Siemens-Framatome. The large dry containment consists of acylindrical steel shell with a hemispherical dome and ellipsoidal bottom designed to accommodate normaloperating loads, functional loads resulting from a loss-of-coolant accident and the most severe loadingpredicted for seismic activity. A concrete shield building surrounds the steel shell to provide biologicalshielding for both normal and accident conditions and to provide collection and hold up for leakage from

* Based on an exchange rate of A1.21210 to one SDR as at 30 June 2012.

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the containment vessel. Inside the containment structure, the reactor and other safety components areshielded with concrete. In addition to a containment spray system, a containment recirculation and coolingsystem is provided to remove post-accident heat. The enforced concrete reactor building was designed byGilbert Associates, Inc.

The Krsko nuclear plant is connected to the 400 kV national grid by three power lines, two of them towardZagreb, and one toward Maribor. For start-up and emergency, the Krsko nuclear plant is also connected tothe 110 kV grid by the power line Krsko NPP—GPP Brestanica. The reactor is designed to operate at corepower levels up to 1994 MWt, which corresponds to a net electrical output of 696 MWe. First criticality wasachieved in September 1981. The plant is designed in accordance with the U.S. NRC regulations andstandards.

The plant is regularly upgraded and modernised in accordance with new industrial and regulatoryrequirements and standards. The Slovenian ‘‘Ionising Radiation Protection and Nuclear Safety Act’’,requires periodic safety reviews every ten years, which are the means for assessment of plant design andcondition of systems structures and components, safety analyses, performance and feedback of experience,management, environment impact, licensing and regulatory requirements with latest standards and goodindustry practices.

Risk Management

The Group continues to develop its integrated risk management system in order to increase itsfundamental value.

Risk management is the responsibility of the Internal Audit and Risk Management Department (the‘‘IARMD’’). The IARMD has been organised in accordance with the Regulations on the Organisation andSystematisation of HEP. The IARMD reports directly to the Chairman of the Management Board as wellas to the Audit Committee, through which the Group aims to achieve its independence. The IARMD isprimarily in charge of conducting audits of, and producing reports into, the Group’s business operations(excluding the Group’s joint venture TE Plomin and its associated company, NPPK which each have theirown risk management teams) in accordance with an annual plan approved by the Management Board. TheIARMD also liaises with the Group’s external auditors in relation to the Group’s financial and internalcontrols. The IARMD bases its annual plans on its findings during the previous years and on the results ofdiscussions with and management letters received from the Group’s external auditors.

In exceptional circumstances and at the request of the Management Board, the IARMD can also performadditional activities beyond the approved plan. The purpose and the objective of the internal audits andreports is to provide Management with a reasonable guarantee of the security, efficiency and effectivenessof the business system and processes, the reliability and accuracy of information, compliance of businessoperations with laws, regulations and HEP internal rules as well as plans, programmes and business policy.

Based on these audits for the three years ended 31 December 2011, it has been assessed that the Group’sinternal control system is reliable and the main business risks have been identified and well managed. TheIARMD also submits semi-annual and annual reports on its work to its Management Board.

In February 2010, the Supervisory Board adopted the ‘‘Audit Committee Work Rules’’ allowing for theformation of an audit committee (the ‘‘Audit Committee’’). Pursuant to such rules, the Audit Committeewill comprise three members, of whom two members will be Supervisory Board members, while the thirdexternal member, who must be familiar with accounting and audit, will be nominated by the SupervisoryBoard following a motion by the Supervisory Board President. As at the date of this Offering Circular, nomembers have been nominated and the Audit Committee has not yet started to perform its role within theGroup, however the Group intends that the Audit Committee should be appointed by the end of 2012.

Environmental Matters

As at the date of this Offering Circular, the Group is compliant in all material respects with therequirements of the Environmental Protection Act (OG 110/2007), the Regulation on Information andParticipation of the Public and Public Concerned with Environmental Protection Issues (OG 64/2008), theRegulation on the Procedure for Establishing Integrated Environmental Protection Requirements(OG 114/2008), the Kyoto Protocol and other relevant acts, as well as having its own internal policies inplace to inform employees about environmental and nature protection legislation.

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Aside from the Environment Protection Act, the most important laws for the Group are the AirProtection Act, Waste Act, Waters Act and Nature Protection Act. The Group is compliant in all materialrespects with the requirements of such acts.

Since 2000, the Sustainable Development and Quality Improvement Department has monitored thedevelopments of new legal regulations as well as amendments to the current legal regulations in the field ofenvironmental and nature protection which influence the work and development of electricity system.Monitoring of the legal regulations referred to above takes place on a monthly basis in the form of 12reports during the year which are sent to the coordinators of the environmental protection of companieswithin the Group by e-mail. Environmental protection coordinators pass them on to the leading personnelof companies and employees at the plants. At the end of the reporting period, the final document iscollated and published in the Bulletin HEP Vjesnik and on the Group’s intranet.

In the last few years Croatia has made progress in transposing the Integrated Pollution Prevention andControl (IPPC) Directive (2008/1/EC) into national legislation, as reported in the ‘‘National Programmefor the Accession of Croatia into the European Union’’ (NPAEU, April 2009). The IPPC Directive2008/1/EC has been transposed into Croatian legislation through the Environmental Protection Act(OG 110/2007), the Regulation on Information and Participation of the Public and Public Concerned inEnvironmental Protection Issues (OG 64/2008) and the Regulation on the Procedure for EstablishingIntegrated Environmental Protection Requirements (OG 114/2008).

According to the Regulation on the Procedure for Establishing Integrated Environmental ProtectionRequirements, the integrated environmental protection requirements are determined for (i) installationsthat may cause emission which pollute the soil, air, water and sea and new installations in which onceconstructed (during reconstruction and commissioning) such activities will be carried out. Within themeaning of the subject regulation, the activities/installations which may cause emission polluting the soil,air, water and sea are described in Annex I of Regulation on the Procedure for Establishing IntegratedEnvironmental Protection Requirements (so called IPPC installations), and they are further divided intochapters referring to: (i) Energy industries, (ii) Production and processing of metals, (iii) Mineral industry,(iv) Chemical industry, (v) Waste management and (vi) Other activities. The installations listed underchapter (i) Energy industries, are combustion installations with a rated thermal input exceeding 50 MW,mineral oil and gas refineries, coke ovens, coal gasification and liquefaction plants (please see below inRegulation on the Procedure for Establishing Integrated Environmental Protection Requirements).

Legal Proceedings

The Group is currently involved in a number of legal proceedings as part of its ordinary course of business.However, the Group believes that its liabilities relating to such proceedings would not, individually or inthe aggregate, have a material adverse effect on the Group’s results of operations or financial condition.Certain significant legal proceedings in which the Group is involved as at the date of this Offering Circularare described below.

Investigation by the Croatian Bureau for Combating Corruption and Organised Crime

In 2010, two former Members of the Management Board (mandated for the years 2008-2009) and oneformer executive director were indicted by the Croatian Bureau for Combating Corruption and OrganisedCrime (‘‘USKOK’’) for alleged offences relating to the making of improper payments. All three weresubsequently convicted and received jail sentences.

In addition, in 2010, USKOK began a formal investigation with regards to electricity supply contractsbetween the HEP, TLM and Aluminij Mostar signed by the former Chairman of the Management Board(mandated for the years 2004-2009).

Neither HEP nor any of its subsidiaries have been named as parties in the proceedings or theinvestigations initiated against the former members of the Management Board and HEP’s formerexecutives. No legal proceedings have been brought, and no investigations have been conducted, againstthe Company, the Group or any current members of the Group’s Management Board with respects tothese allegations.

The proceedings described above are being conducted by the judicial bodies of Croatia and under the lawsof Croatia and HEP is not permitted to make any official statement whilst they are ongoing. HEP hascomplied to the maximum extent with all official requests made by judicial bodies relating to thesubmission of documentation and interviews with HEP’s employees and has cooperated fully with the

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applicable state authorities. HEP is not aware of the status of such proceedings or whether any newproceedings will be initiated.

International Arbitration related to the Krsko Nuclear Power Plant

HEP is currently the plaintiff in a dispute for damages against the Slovenian Government for failure tosupply electricity to HEP from the Krsko nuclear plant during the period from 1 July 2002 through to18 April 2003. The disputed amount is estimated to be approximately A29,500 thousand plus interest(approximately A43,000 thousand in total as at 31 December 2011). The arbitration tribunal rendered itsaward in favour of HEP on 12 June 2009, when it confirmed that Slovenia should have supplied electricityto HEP during the relevant period. The arbitration tribunal confirmed that HEP was entitled to damages ifit provided evidence of the loss it suffered. In a subsequent ruling on 6 October 2010, the arbitrationtribunal rendered a decision that on the basis of the available data it could not determine the loss actuallysuffered by HEP and requested that an independent expert be appointed in order to determine the actualamount of damage. The expert began his activities at the beginning of 2012 and a final report is expectedby the end of 2012. Payment of the final award tribunal is expected in 2013.

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MANAGEMENT

General Overview

The Company has a tiered system of management, consisting of a General Assembly, a Supervisory Boardand a Management Board. The General Assembly elects the Supervisory Board and exercises other powerspursuant to the Articles of Association. The Supervisory Board appoints and oversees the ManagementBoard. The Management Board is responsible for day-to-day running of the business, although the Articlesof Association require prior consent from the Supervisory Board for certain decisions. The Group’sGeneral Assembly, a Supervisory Board and a Management Board are located at Ulica grada Vukovara 37,Zagreb, Republic of Croatia with telephone number +385 1 6322 111.

General Assembly

The General Assembly consists of shareholders of the Company or their proxies. The Company has oneshareholder, the Republic of Croatia. The General Assembly decides on certain issues as required by thelaw and by the Articles of Association.

The General Assembly’s powers include, among other powers, the power to:

• Approve the Articles of Association of the Company, as well as any amendments;

• Elect and terminate members of the Supervisory Board;

• Approve key decisions regarding the Annual Financial Statements

• Approve the Financial Statements and any distributions of profit;

• Appoint the Company’s auditors; and

• Approve any changes in the share capital of the Company.

Meetings of the General Assembly are convened by the Management Board. A meeting must also be heldfollowing a request by the Supervisory Board or by a Group of shareholders holding at least 20% of theCompany’s share capital. As stated above, Croatia is the sole shareholder of the Company and so it alonecan exercise this power.

Supervisory Board

The Company’s Supervisory Board consists of seven members of whom six are appointed by the GeneralAssembly, which also has the power to replace its appointed members. The remaining member isappointed by the employees of the Company pursuant to the Labour Act who can also replace suchmember discharged by the employees. The term of office for the Supervisory Board members is four yearsand members can be re-elected to the Supervisory Board at the end of this period.

The Supervisory Board’s powers include, among other powers, the power to:

• Nominate and replace members of the Management Board;

• Examine securities and other documents pertaining to the business operations of the Company;

• Approve decisions of the Management Board when required to do so by the Articles of Association;and

• Submit to the General Assembly reports on operating performance of the Company.

The members of the Supervisory Board as of the date of this Offering Circular are set out below:

Name Age Position Since

Nikola Bruketa . . . . . . . . . . . 69 Chairman of the Supervisory Board 23 February 2012Alen Leveric . . . . . . . . . . . . . 35 Deputy Chairman of the Supervisory Board 23 February 2012Jadranko Berlengi . . . . . . . . . 62 Member of the Supervisory Board 3 June 2008Igor Dzajıc . . . . . . . . . . . . . . 40 Member of the Supervisory Board 19 September 2012Zarko Primorac . . . . . . . . . . 75 Member of the Supervisory Board 23 February 2012Ante Ramljak . . . . . . . . . . . . 45 Member of the Supervisory Board 23 February 2012Ivo Uglesic . . . . . . . . . . . . . . 60 Member of the Supervisory Board 23 February 2012

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Nikola Bruketa. Nikola Bruketa has been the Chairman of the Supervisory Board since 23 February 2012.Prior to joining the Supervisory Board, Nikola Bruketa held various posts within the Group since 1973,including as the Director of the Development Department. Nikola Bruketa graduated from the Faculty ofElectrical Engineering in Zagreb in 1967.

Alen Leveric. Alen Leveric has been the Deputy Chairman of the Supervisory Board since 23 February2012. Prior to joining the Supervisory Board, Alen Leveric worked as the Head of the Administrativesection for Economy, Regional development and European integration for Varazdin County. He has alsohad a governmental role since 1 January 2012, within the Ministry of Economy, as an Assistant Minister.Alen Leveric graduated from the Faculty of Economics and Tourism, Pula in 2004.

Jadranko Berlengi. Jadranko Berlengi has been a member of the Supervisory Board since 3 June 2008.Jadranko Berlengi is the employees’ representative on the Supervisory Board and is currently serving hissecond term. Jadranko Berlengi has worked with the Group since 1990, and has been the Director of theLegal Department since 1997. Prior to this he worked with Europa Commerce in Zagreb andElektroprivreda Zagreb, as Head of Legal Affairs with both. Jadranko Berlengi graduated from theUniversity of Zagreb with a degree in Law in 1977.

Igor Dzajıc. Igor Dzajıc has been a member of the Supervisory Board since 19 September 2012. Prior tojoining the Supervisory Board, Igor Dzajıc worked as a director of Adista d.o.o. and held a range of roleswithin the brewing industry, including roles with Heineken Croatia. Igor Dzajıc graduated from theUniversity of Osijek with a degree in Economics.

Zarko Primorac. Zarko Primorac has been a member of the Supervisory Board since 23 February 2012.Prior to joining the Supervisory Board, Zarko Primorac worked as Regional Chairman with DeloitteZagreb. He also held the role of Minister of Finance of the Republic of Bosnia and Herzegovina and actedas the President of the Sarajevo Chamber of Commerce. Zarko Primorac graduated from the Faculty ofEconomics, Sarajevo with a degree in Economics in 1964, going on to complete a Masters and a Doctoratein the same field.

Ante Ramljak. Ante Ramljak has been a member of the Supervisory Board since 23 February 2012. Prior tojoining the Supervisory Board, Ante Ramljak worked as Chairman of Board of CA IB, Zagreb, aninvestment bank within the Bank Austria Group. Ante Ramljak graduated from the University of Rijekawith a degree in Maritime Studies and went on to study Economics at the University of Zagreb.

Ivo Uglesic. Ivo Uglesic has been a member of the Supervisory Board since 23 February 2012. Ivo Uglesic isa tenured Professor at the Faculty of Electrical Engineering, University of Zagreb. Prior to this, he held aseries of professorships, after completing his graduate, masters and doctorate degrees in ElectricalEngineering at the University of Zagreb.

There are no conflicts of interest between the duties of the Members of the Supervisory Board to theGroup and to their private interests or other duties.

Management Board

Members of the Management Board are appointed and replaced by the Supervisory Board. TheManagement Board is composed of six members. The term of office of the Chairman and the othermembers of the Management Board is four years. The decision on whether or not to extend a term ofoffice of any board member is based on an evaluation their performance as compared to previous results.

The Management Board makes decisions in adherence to domestic and international regulations, theArticles of Association, the Internal Rules of Procedure for the Management Board and Companybye-laws.

The Management Board’s powers include, among other powers, the power to:

• Manage the business activities of the Company;

• Establish and implement operating strategy;

• Implement decisions of the Supervisory Board and the General Assembly;

• Act on behalf of the Company in establishing contractual arrangements, pursuant to the applicablelaw and to the Articles of Association;

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• Nominate members of the General Assembly and/or members of the Supervisory Board in companiescontrolled by HEP; and

• Grant special authorisations and responsibilities to the Company employees and officers.

The members of the Management Board as of the date of this Offering Circular are set out below:

Name Age Position Since

Zlatko Koracevic . . . . . . . . . . 57 Chairman of the Management Board 23 February 2012Zvonko Ercegovac . . . . . . . . . 47 Head of Production 23 February 2012Krunoslava Grgic Boljesic . . . . 38 Head of Business Development 23 February 2012Rodoljub Lalic . . . . . . . . . . . . 56 Head of Development and Investments 23 February 2012Ivan Matasic . . . . . . . . . . . . . . 38 Head of Finance 23 February 2012Tomislav Seric . . . . . . . . . . . . 39 Head of Transmission and Distribution 23 February 2012

Zlatko Koracevic. Zlatko Koracevic has been a member of the Management Board since 23 February 2012.Previously he was an MP of the Croatian Parliament. During the fifth Parliament (2005-2008) he served onthe Finance and National Budget Committee. In the sixth Parliament (2008-2011) he chaired the RegionalDevelopment, Forestry and Water Management Committee and was a member of the Finance andNational Budget Committee, as well as serving on the Agriculture, Fishery and Rural Tourism Committee.Prior to this (2001-2004) he was a volunteer prefect of Bednja County and, until 2005, was a director ofLepo Lepoglava, a wood furniture factory where he initially started as a project engineer and designer in1982. He graduated from the Faculty of Mechanical Engineering and Naval Architecture, University ofZagreb in 1981.

Zvonko Ercegovac. Zvonko Ercegovac has been a member of the Management Board since 23 February2012. Previously he was a director in the Supply Department at HEP Plin from 1989. He served as amember of the HERA council from 2006-2010. He graduated from the Faculty of Electrical Engineering atJ.J. Strossmayer University, Osijek and undertook further post-graduate study in electrical engineering in2005 and economics in 2008.

Krunoslava Grgic Boljesic. Krunoslava Grgic Boljesic has been a member of the Management Board since23 February 2012. Previously she worked as secretary of the Energy Regulatory Council from 2002 to 2005and then as secretary of HERA until 2007 when she was made Head of Personnel and General Affairs ofHERA. She graduated from the Faculty of Law, University of Zagreb in 1999 and passed the Bar exam in2000. She also completed Postgraduate study in Commercial and Company Law in 2002.

Rodoljub Lalic. Rodoljub Lalic has been a member of the Management Board since 23 February 2012.From 1998 to 2012, he was a director and lead project engineer at the engineering firm Projektni biro Splitd.o.o. which was formerly part of HEP. He graduated from the Faculty of Engineering, University of Splitin 1980 and went on to become an assistant lecturer at the faculty from 1982 to 1993. He also worked atElektroprivreda Dalmacija from 1980 to 1998 as a project engineer.

Ivan Matasic. Ivan Matasic has been a member of the Management Board since 23 February 2012. Up untillate 2009, Mr. Matasic was a member of the Management Board of HZ Infrastruktura, in charge of financeand audit. He previously was the founder and director of Rego-Stan d.o.o. Zagreb (1998-2002), thenbecoming a member of the Management Board of Elektropromet d.d. Zagreb, as the Head of Finance andLogistics. He received a Master of Science degree from the Faculty of Electrical Engineering andComputing, University of Zagreb in 1999 and a doctorate from the Faculty of Electrical Engineering andComputing, University of Zagreb in 2003.

Tomislav Seric. Tomislav Seric has been a member of the Management Board since 23 February 2012.Previously he was the General Manager of Poslovni Inkubator BIOS in Osijek. Prior to this, he workedOsijek Traffic and Investment Ltd as General Manager and at T-Mobile Croatia as a Marketing Manager.He obtained a degree in Electrical Engineering at J.J. Strossmayer University, Osijek and an MBA fromthe Ecole Superieure Libre des Sciences Commerciales Appliquees, Paris in 2006.

There are no conflicts of interest between the duties of the Members of the Management Board to theGroup and to their private interests or other duties.

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Compensation

For the year ended 31 December 2011, members of the Supervisory Board and members of theManagement Board were paid a total of HRK 3,511 thousand in salaries, wages and other payments by theCompany.

Ownership

HEP, the parent company of the Group is 100% owned by the Republic of Croatia, which is represented bythe Ministry of Economy. As a state-owned company, the Group must follow general guidelines issued bythe state, which govern all such companies. These guidelines relate to specific areas of management, suchas payroll budgets, decisions on personnel, the remuneration of management and negotiations with unionsregarding collective bargaining.

As the Group’s sole shareholder, the Republic of Croatia has the power to nominate, elect and replace sixof the seven members of the Group’s Supervisory Board through proposals made to the Group’s GeneralAssembly. The seventh member is elected by the employees. Supervisory Board members are elected for afour year term. The Supervisory Board elects members of the Management Board. The Group’sManagement Board is elected for a four year term and is replaced after their four year term expires at therequest of the Croatian Government through its Supervisory Board members. Consequently, the Republicof Croatia, through the General Assembly and the Supervisory Board, has and will continue to have,directly and indirectly, the power to affect the Group’s operations and strategic planning. As a result,certain of the Group’s decisions may reflect Croatian Government policy, including the Croatian energypolicy. This policy may lead the Group to make decisions that are different from those that it would havemade without this influence. Complying with any such decisions could lead to significant expenditures bythe Group, including debt capacity risks, which could have a material adverse effect on the Group’s ratings,business, results of operations and financial condition.

In February 2012, at the request of the elected Croatian Government through the General Assembly, theGroup replaced its entire Management Board and six of the seven members of the Supervisory Board. TheCroatian Government requested the change to be made due to political reasons and as part of its economicdevelopment programme.

Internal Audit

The Internal Audit Committee acts on behalf of the Management Board, to monitor decision makingprocesses and the implementation of decisions by all levels on management. It reports any irregularities tothe Management Board. This ensures systematic and regular monitoring of all business processes withinthe Company.

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REGULATION

Below is a brief summary of the rules and regulations applicable to the Group within the Republic of Croatia.The Republic of Croatia is in the process of adopting the rules and regulations of the EU in advance of itsaccession to the Union on 1 July 2013. This summary will therefore reflect the progress made in implementingthese regulations. This summary does not purport to be complete and may be subject to the laws of the Republicof Slovenia with respect to Nuclear energy where relevant.

Accession of the Republic of Croatia to the EU

In October 2001, Croatia started accession negotiations with the EU. This required the signing of theStabilisation and Association Agreement between the Republic of Croatia and the EU (the ‘‘SAA’’), whichentered into force on 1 February 2005. On the basis of the SAA, Croatia became a candidate for accessionto the EU and commenced formal negotiations in October 2005. Negotiations took place concerning 35chapters of EU law.

By signing the SAA, the Republic of Croatia was obliged to implement EU law in the energy industry. Itwas necessary to develop and liberalise the Croatian energy market in order to integrate it in the EU singlemarket. The chapter of EU law dealing with the energy sector (Chapter 15) was closed in November 2009,settling the obligation of Croatia to comply with the requirements of the EU Third Energy Package.

Following the completion of negotiations in June 2011, Croatia signed the Accession Treaty with the EU.On 22 January 2012, the accession of Croatia to the EU was approved in a national referendum, with thisbeing ratified by the Croatian Parliament on 9 March 2011. Croatia will obtain full membership of theEU on 1 July 2013. However, before the Accession Treaty can come into force, it requires ratification bythe legislative body of each EU member state. As at 12 October 2012, the process of ratification of theAccession Treaty has been (i) completed in Croatia and in 11 out the 27 EU member states and(ii) parliamentary approval has been obtained in six EU member states.

Third Energy Package

In June 2009, the EU adopted the Third Energy Package. This included but was not limited to Directive2009/72/EC concerning Common Rules for an International Market in Electricity (‘‘EU Third ElectricityDirective’’), Directive 2009/73/EC concerning Common Rules for the International Market in Natural Gas(‘‘E.U. Third Gas Directive’’), Regulation (EC) No. 714/2009 on Conditions for Access to the Network forCross-Border Exchanges in Electricity (‘‘EU Regulation on Cross-Border Exchanges’’) andRegulation 715/2009 on Conditions for Access to Natural Gas Transmission Networks (‘‘EU Regulation onNatural Gas Transmission Regulation’’). The Third Energy Package was designed to complete theliberalisation of the electricity and gas markets within the EU. It aims to create a market with the basicelements of a high standard of public service, customer protection, a structural separation of transmissionactivities and generation/supply activities (‘‘unbundling’’) and the establishment of independent nationalenergy regulators. The Third Energy Package contemplates a further separation of supply and generationactivities from transmission network operations. There are three options by which a Member State canachieve this goal:

• Full ownership unbundling (‘‘OU’’)—entailing the sale of the gas and electricity grid to anindependent operator by any vertically integrated energy provider including the handing over of themanagement of all network operations.

• Independent system operator (‘‘ISO’’)—where any vertically integrated energy provider maintains theownership of the gas and electricity grids, but they are obliged to designate an independent operatorfor the management of all network operations.

• Independent transmission operator (‘‘ITO’’)—this is a modification of an ISO whereby the verticallyintegrated energy provider does not have to designate an Independent System Operator, but mustinstead abide by strict rules ensuring a separation between supply and transmission.

As the accession of Croatia to the EU approaches, the regulation of the energy sector must be altered tocomply with the Third Energy Package. New legislation designed to harmonise the Croatian system withthe requirements of the EU Third Energy Package has been drafted and is currently in the legislativeprocess. The Energy Act and the new Act on Regulation of Energy Activities have been adopted. Theremaining energy legislation is expected to be adopted by the end of 2012. See ‘‘Regulation—The Republicof Croatia—General Overview’’ for further details.

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Croatia is expected to opt for the ITO model and Group is carrying out preparatory activities for theseparation of generation and supply activities from transmission activities on this basis. If the ITO model isadopted, the Group will be required to abide by strict rules with heavy regulation by HERA and will bemonitored to ensure the separation of the supply and transmission of electricity. Furthermore, whicheveroption is used, the organisation of the transmission system operator will need to be approved and certifiedby HERA and the European Commission. It is still uncertain which of these options for the separation ofproduction and supply activities from transmission activities will be finally adopted, implemented andapproved.

The Republic of Croatia

General Overview

The Croatian energy sector is governed by a wide range of laws and regulations. The key law governing theenergy sector is the Energy Act (OG 68/2001, 177/2004, 76/2007, 152/2008, and 127/2010) (the‘‘2012 Energy Act’’). The new Energy Act was adopted by Croatian Parliament on 19 October 2012 andpublished in the Official Gazette of the Republic of Croatia on 31 October 2012 (OG no. 120/2012) (‘‘2012Energy Act’’). The 2012 Energy Act will enter into force on 8 November 2012 (the 2001 Energy Act togetherwith the 2012 Energy Act, the ‘‘Energy Act’’). This provides a legal basis for the conduct of business in theenergy sector and facilitates the obtaining of any necessary licences in the sector.

The Energy Act provides a framework for the energy sector in several ways. It establishes measures for thesecure supply of energy, ensuring efficient generation and use. It lays down regulations upon which energypolicies and strategies are undertaken and allows energy activities to be undertaken both on the freemarket and as a public service. It also regulates key issues relevant for the energy sector concerningenvironmental protection.

Other laws related to the energy sector include, but are not limited to:

• The Electricity Market Act (OG 177/2004, 76/2007, 152/2008, 14/2011 and 59/2012) (‘‘ElectricityMarket Act’’)

• The Act on Regulation of Energy Activities (OG 177/2004, 76/2007, 152/2008, 14/2011, and 59/2012)(‘‘2004 Act on the Regulation of Energy Activities’’) and Act on Regulation of Energy Activities (OG120/2012) (the ‘‘2012 Act on Regulation of Energy Activities’’) (the 2004 Act on Regulation of EnergyActivities together with the 2012 Act on Regulation of Energy Activities, the ‘‘Act on Regulation ofEnergy Activities’’).

• The Gas Market Act (OG 40/2007, 152/2008, 83/2009, 91/2011 and 114/2011)

• The Heat Energy Production, Distribution and Supply Act (OG 42/2005, 20/2010)

• The Act on Radiological and Nuclear Safety (OG 28/10)

In light of the approaching accession of the Republic of Croatia to the EU, the European Commission ismonitoring the progress of the Republic of Croatia until the date of accession. The main measures whichare being monitored by European Commission in the energy sector concern the implementation of theThird Energy Package and progress on accumulating the mandatory 90 days of emergency oil stocks inorder to increase security of supply. In order to fully implement the Third Energy Package, in addition toalready adopted legislation, it is necessary to amend the Electricity Market Act and the Gas Market Act.

The Energy Development Strategy of the Republic of Croatia

The Energy Development Strategy of the Republic of Croatia (OG130/2009) (the ‘‘Strategy’’) is theumbrella document which sets out the national policy and future development of the energy sector inCroatia, up to 2020. The main goals pursued by the Strategy are security of energy supply, theestablishment of a competitive energy sector and sustainable development of the energy sector. Croatiahas therefore chosen an open, liberalised and efficient energy sector aligned with EU law. It envisages anincrease in the total consumption of electricity up to 2020 and the closure of existing conventional thermalpower plants. The Strategy therefore envisages the construction of generation facilities running on coaland gas and large hydro power plants. In addition to these conventional sources, the Strategy provides forthe construction of new renewable energy facilities. The objective is to maintain the share of generationfrom large hydro power and renewable energy sources in total electricity consumption at its present level

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(35%) up to 2020. Besides generating plants, the Strategy envisages further development of thetransmission and distribution networks.

New Energy Act

The new Energy Act should achieve the following outcomes: (i) the amendment of existing definitions,i.e. introducing new definitions based on the EU legislation, (ii) introducing a system of guarantee on theorigin of electricity which will serve as a basis to implement Directive 2009/28/EC on the Promotion of theUse of Energy from Renewable Sources, (iii) the equal treatment of electricity consumers, i.e. thetermination of the existing separation between Non-Tariff and Tariff Customers in the gas and electricitysectors, to enable a full liberalisation of the market, (iv) ensuring that the market is responsible forsecuring a regular supply of energy within the Republic of Croatia, (v) transfer control over the tariff ratesin the tariff systems (including the adoption of price rates in accordance with established methodology)from the Croatian Government to HERA, (vi) the separation of the existing general regulations for energysupply into different sets of regulations, in order to achieve consistency in division of rights andresponsibilities between the Croatian Government, HERA and the energy subjects (vii) the adoption byHERA of general energy supply regulations, which will contain consumer protection measures; (viii) theadoption by the energy suppliers of energy supply regulations, which are in line with the general energysupply regulations, (ix) the introduction of rules on energy quality by HERA, (x) ensuring the adoption ofintelligent measuring equipment, and (xi) the protection of some end consumers who require it due totheir social status or security reasons.

The 2012 Energy Act defines locations for construction of energy facilities, construction of energy facilities,their maintenance and use and undertaking energy activities as being of interest to the Republic of Croatia.

Furthermore, the 2012 Energy Act promotes the secure supply of energy to the Republic of Croatia andinfrastructure safety and development, the following objects, inter alia, are declared as objects of interest tothe Republic of Croatia: transmission and electricity networks, electricity and thermal energy generationfacilities, cogeneration plants, thermal energy and gas distribution systems. Owners of these facilities areobliged to maintain and develop them in accordance with the Strategy and interest of the Republic ofCroatia, as provided in the special provisions.

The Croatian government will adopt decisions that will regulate the preparation and delivery of documentsregarding maintenance and modernisation of facilities of interest to the Republic of Croatia, reports onundertaken activities, list the facilities of interest to the Republic of Croatia, as well as all other issues withrespect to protection and safety of infrastructure necessary for secure supply of energy to the Republic ofCroatia. Currently, it is difficult to assess the full impact of the provisions in the 2012 Energy Act. Furtherclarification may be provided by the decisions of the Croatian Government, expected to be adopted in thenext six months.

Regulatory Authorities

The main governmental authorities supervising the energy sector are the Ministry of Economy of theRepublic of Croatia (‘‘Croatian Ministry of Economy’’), the Ministry of Environmental and NatureProtection of the Republic of Croatia (‘‘Croatian Environmental Ministry’’) and HERA.

Generally speaking, HERA acts as the national regulatory body for the sector. It is an independent andnon-profit public institution responsible for regulatory issues in the energy sector. HERA’s obligations,authorities and responsibilities are based on the Act on Regulation of Energy Activities, the Energy Actand other acts regulating specific energy activities. HERA issues licences for carrying out energy activities,and also temporarily and permanently revokes these licences. HERA also issues rulings on the grant of thestatus of ‘‘eligible producer’’, and also temporarily and permanently revokes these rulings.

Pursuant to the Act on Regulation of Energy Activities, the establishment of an efficient and competitiveenergy market and the protection of energy buyers and operators are among the aims of regulation. Inpursuit of these aims, HERA has certain powers which could in the future be used as a way of controllingany abuse of the market. The Act on Regulation of Energy Activities lays down a duty for HERA tosupervise energy operators (energy operators are defined in the Energy Act as any ‘‘legal or natural personthat performs one or more energy activities and is licensed to perform energy activities’’), cooperate withministries and market inspection authorities, collect and process data regarding the activities of energyoperators and file requests for the initiation of any misdemeanour proceedings. HERA is also required toconduct its activities so that the energy market performs in an objective, transparent and unbiased manner,

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taking into account the interests of energy operators and buyers. All energy operators have a general dutyto respond to HERA queries. Regarding energy activities that are conducted on a market basis, HERAshall apply the rules for the protection of competition, which in particular means that it must monitor theextent to which a transmission system operator or distribution system operator fulfils its tasks inaccordance with the Energy Act and the level of transparency in market competition. For these purposes,HERA is authorised to require the implementation of certain measures in order to ensure the principles oftransparency, objectivity and the absence of bias are adhered to. One of the main amendments adopted bythe 2012 Energy Act, transfers control over the tariff rates (including the adoption and approval of newtariff rates) to HERA.

Electricity Sector

The Electricity Market Act was passed on 3 December 2004 and has been subject to four furtheramendments. Due to the implementation of the EU Third Energy Package, additional amendment will berequired in the 4th quarter of 2012. The Electricity Market Act regulates the following energy activities withregard to electricity: generation, transmission, distribution and supply, and organisation of the electricitymarket.

Electricity activities can be divided in two groups:

(i) Market electricity activities which include the generation and supply of electricity to Non-TariffConsumers and trading in electricity, whereby the price and quantity are freely negotiated; and

(ii) Regulated activities which include the generation and supply of electricity for Tariff Customers, thetransmission and distribution of electricity and electricity market organisation.

Regulated activities are performed as public services, whereby (i) the Croatian Energy Market Operator(‘‘HROTE’’) is responsible for the organisation of the electricity market, (ii) HEP-OPS is responsible forelectricity transmission, and (iii) HEP-ODS is responsible for electricity distribution. The remaining tworegulated energy activities (electricity generation and supply for Tariff Customers) are performed byGroup as a part of a public service obligation with regards to the energy supply of Tariff Customers.

According to the Electricity Market Act all customers in Croatia hold eligible customer status from 1 July2008. An eligible customer can freely choose a Market Supplier and negotiate the price of electricity.

Organisation of the electricity market

HROTE was formed in the process of the restructuring of the Croatian energy sector and beganoperations on 4 April 2005 as part of the Group for the purpose of organising the market in electricity andgas. It was fully separated from the Group in 2007 and since then it is 100% owned by the Republic ofCroatia instead. It has a licence to organise the electricity market (issued on 24 January 2012), valid for5 years. HROTE organises the electricity and gas market as a public service, under the supervision ofHERA.

Licensing regime

All energy market participants in Croatia require an energy licence, issued by HERA. Such licences areissued for a period of 3-30 years (depending on the energy activity). Based on the 2001 Energy Act alicence will be issued to an applicant if the following conditions are met: (i) the applicant is registered forthe conduct of energy activities, (ii) it is technically qualified for the conduct of energy activities, (iii) itemploys a sufficient number of expert employees for the conduct of energy activities, (iv) it has thenecessary funds to undertake the energy activities, (v) an energy licence was not revoked as regards theapplicant in the last 10 years, and (vi) there have been no board members convicted of a criminal offencerelating to economic activities in the last 3 years. The Croatian Government, with the prior consent of theMinistry of the Economy and on the proposal of HERA, will decide the term of any energy licence issued.The 2012 Energy Act has introduced some amendments in this respect, primarily with regards tocondition (v) above, including shortening the licensing period to five years with regards to energy activityfor which the licence is requested, and point (vi), stating that ‘‘there have been no board membersrespectively no other persons responsible to the board members in the subject legal entity convicted of a criminaloffence relating to economic activities in the last 5 years; or the physical person has not been convicted of acriminal offence relating to economic activities in the last 3 years.’’ Furthermore, the conditions referred tounder (ii) and (iii), as well as the period for which the licence is issued and the form, content and mannerof keeping register of issued and withdrawn licences is provided for by the minister of economy in a special

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regulation, with obtained opinion of HERA. A full list of current license holders can be found on theofficial website of HERA.

In addition, Energy approvals are required for the construction of each power plant. Energy approvals areissued by the Ministry of Economy. This is in addition to the regular process of issuing permits necessaryfor power plant construction. Connection to the grid is obtained from the transmission system operator,HEP-OPS.

Energy approvals and preliminary energy approvals are to be distinguished from energy licences. Anenergy approval is required for the construction of a power plant and is issued by the Ministry of Economy,whereas energy licences issued by HERA are required for performing the energy-related commercialactivities themselves. A preliminary energy approval is required for all renewable energy sources andcombined heat and power generation plants over 30 kW capacity.

Based on information provided by HERA, there are currently (i) 21 licences issued for the generation ofelectricity (HEP-Generation holds one of these licences), (ii) one licence issued for the transmission ofelectricity (HEP—OPS holds this licence), (iii) one licence issued for the distribution of electricity (HEP—ODS holds this licence), and (iv) 13 licences issued for supply of electricity (HEP—ODS and HEP-Supplyhold two of these licences).

Concessions Licences

Pursuant to the Croatian Concessions Act (OG 125/08 and 90/11]) (the ‘‘Concessions Act’’), there arethree types of concessions. They are (i) concession licences dealing in goods (ii) public works concessionlicence and (iii) public services concession licence. The Concessions Act incorporates Directive 2004/18/ECof the European Parliament and the European Council of 31 March 2004 on the Coordination ofProcedures for the Award of Public Works Contracts, Public Supply Contracts and Public ServiceContracts. It subjects all concession licences to public procurement procedures.

Depending on type of concession license, it may be awarded by the Croatian parliament, the CroatianGovernment, central bodies of the state administration, or competent bodies of local and regionalgovernments or legal entities authorised for issuing concessions by special regulations. The grant of aconcession is a two-step process, whereby a beneficiary is granted a concession, after which a concessioncontract is entered into, detailing the rights and obligations of the parties.

The period of each concession is variable and depends on the type of concession, the competent bodyissuing the concession and any specific legal requirements for each type of concession. For example, amaritime concession can be issued for periods of five to 99 years.

The Group currently holds 22 major concessions, as follows (i) ten maritime concessions (for the purposeof the construction and use of the coastline for the delivery of coal and for water cooling systems, and forthe special-purpose port at Plomin (issued for a 28 year period, expiring in 2025)), (ii) seven concessionsfor the use of water power for the generation of electricity (at the hydro power plants at Varazdin,Cakovec, Dubrava, Rijeka, Vinodol, Senj, Gojak, Peruca, Orlovac, D- ale, Zakucac, Kraljevac, Miljacka,Velebit, Dubrovnik) issued for a period of 33 years (until 2042), (iii) four concessions for water intake fortechnological needs (at Plomin, Jertovec, TETO Zagreb, Osijek, and ELTO Zagreb) issued for a period of20 years (until 2019) (iv) one concession for natural gas supply in the city of Osijek, issued for a period of30 years (until 2026) and (v) one concession for fish farming in contained waters (at the Fish Farm atVitunj), expiring on 31 December 2012.

Electricity Generation

Energy generators are entitled to: (i) use the energy sources considered most favourable in their plants, incompliance with necessary regulation; (ii) conclude contracts for the sale of its own electricity underconditions provided in the Electricity Market Act and other relevant regulations and (iii) have access to thetransmission and distribution network.

If an energy generator wishes to construct a power plant, energy approval must be obtained. Theprocedure for obtaining energy approval should be objective, transparent and neutral and should take intoaccount the following factors: (i) ensuring a reliable and safe electricity system, (ii) the protection of publichealth and safety, (iii) environmental protection, (iv) regulating the use of land, (v) managing the use ofpublic property, (vi) energy efficiency and (vii) the technical, economic and financial status of the investor.

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If the energy approval system is insufficient, a public tender process for the construction of power plantscan be adopted, in order to ensure safe supply, environmental protection and energy efficiency. For theconstruction of power plants of up to 50 MW capacity the public tender process will be managed byHERA. For power plants exceeding this level, the process will be the responsibility of the Government ofCroatia, based on the proposals of HERA.

The status of ‘‘eligible producer’’ may be obtained by a producer of electrical energy or a producer ofelectrical and thermal energy. An eligible producer may be an energy entity producing both electrical andthermal energy in a single production plant or using waste or renewable energy sources in an economicallyappropriate manner taking into account environmental protection. The status of eligible producer isdecided upon by HERA; whereby HERA first issues a preliminary decision during the construction of therelevant plant, accompanied by a preliminary energy approval issued by the Ministry of Economy. Thefinal decision will then be issued. As stated by HERA and HROTE, the timing of this process is specific toeach request.

Eligible producers qualify for an incentive price as prescribed by the Croatian Government. The incentiveprice is paid for through incentive fees. The level of the incentive price is calculated in compliance with thetariff system for the production of electricity from renewable energy sources and cogeneration (in forcefrom 6 June 2012). An eligible producer, apart from those with hydro power plants larger than 10 MW, canacquire the right to charge incentive prices.

The incentive fee is collected through usual electricity payments, hence from Tariff Customers ofHEP-ODS and from eligible customers (i.e. Non-Tariff Customers) by their suppliers. HROTE calculates,collects and distributes incentive fees to electricity generators based on electricity purchase contracts withincentivised eligible producers, for electricity produced from renewable energy sources and cogeneration.

Thermal power plants

The operation of a thermal power plant requires a power generation license, as well as any other necessarylicences and authorisations. Thermal power plants must comply with the Croatian Air Protection Act (OG130/2011), with respect to the emission of greenhouse gases. The Croatian Environment Agency (CEA)collects data on air quality and engages in environmental monitoring. For this purpose, CEA operates theQuality Information System, which is an integral part of the Environmental Information System.Furthermore, according to the Environmental Protection Act, CEA is designated as the Reporting Agencyto the European Commission.

The recent adoption of the Regulation on Free Allocation of Emission Allowances (OG 43/2012) is astep towards greenhouse gas emissions allowance trading in conjunction with the Air Protection Law,promulgated at the end of 2011. The Air Protection Law implemented the protocols of the United NationsFramework Convention on Climate Change, and the Kyoto Protocol. This new regulation, which came intoeffect on 24 April 2012, implements the Commission Decisions 2011/278/EU, 2010/2/EU and 2011/745/EU.Thermal plants needed to apply for allowances by 1 May 2012.

By ratifying the Kyoto protocol, Croatia has undertaken to reduce greenhouse gas emissions. TheEU Accession Treaty requires Croatia to join the EU emissions trading scheme (‘‘EU-ETS’’). From1 January 2013, the Group’s thermal power plants will governed by the emission trading scheme for carbondioxide, meaning that HEP will have to buy all carbon dioxide emission rights at auction and include anyadditional costs in the price of their products (electricity and thermal energy).

The Act on Environmental Protection and the Energy Efficiency Fund (OG 107/03) establishes special feeson polluters. The Environmental Protection and Energy Efficiency Fund collects these fees. Other feesinclude those for damaging the environment and those for pollution of industrial or dangerous waste.

The Croatian Government has issued the Regulation on the Quality of Liquefied Oil Fuels (OG 33/11)which regulates the quality of fuel, laying down requirements as to quality (the content of sulphur in fueloil must not amount to more than 1.0% m/m). The use of fuel oil exceeding this limit is governed by theRegulation on Border values of Emissions from Polluting Substances from Stationary Sources (OG 21/07,150/08). None of Group’s thermal power plants using liquefied fuel purchased during 2011 and earliermeet requirements for the emission of sulphur dioxide. However, the Group has given a request to theMinistry of Economy and the Ministry for Environmental and Nature Protection that it be allowed to useany remaining fuel stocks that do not meet these requirements, up until the end of 2014. From 1 January2012, the Group has purchased only fuel oil low that is low in sulphur and therefore meets the necessaryrequirements.

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Renewable energy

The European Climate and Energy Policy has set laid out targets for energy, in cutting greenhouse houses,reducing energy consumption and increasing the use of renewable energy to 20% of total energygeneration. The Strategy recognises developments in this area and notes the favourable conditions withinCroatia for a significant increase in the use of renewable energy sources. In line Directive 2009/28/EC onthe Promotion of the Use of Energy from Renewable Sources (the ‘‘Renewable Sources Directive’’), it isprovided in the Strategy that the Republic of Croatia will aim to ensure that renewable energy accounts for20% of gross energy consumption by 2020.

Renewable energy sources and cogeneration

The development and utilisation of renewable energy has been facilitated by a new legislative framework.Five sets of Regulations, made using powers in the Energy Act and the Act on the Electricity Market, havebeen implemented in this area. These govern the use, obligations, incentive measures, organisation andinstitutions related to renewable. Thereby Directive 2001/77/EC on Promotion of Electricity fromRenewable Sources has been implemented through both primary and secondary legislation.

The secondary legislation regulating the field is as follows:

• The Regulation on Fees for Promoting Electricity Production from Renewable Energy Sources andCogeneration (OG 33/07, 133/07, 155/08, 155/09, 8/11, 144/11). The incentive fee is collected throughusual electricity payments and from eligible customers by their Market Suppliers. The incentive fee foryear 2012 is 0.005 kn per kilowatt-hour (kn/kWh) + VAT. Incentive prices can be used by eligibleproducers, in compliance with the tariff system for the generation of electricity from renewable energysources and cogeneration.

• The Regulation on a Minimum Share of Electricity Produced from Renewable Energy Sources andCogeneration (OG 33/07, 8/11). The following Regulation does not apply to electricity generated inhydro power plants with capacity higher than 10 MW.

• The Tariff System for Production of Electricity from Renewable Energy Sources and Cogeneration(OG 63/12),

• The Ordinance on the Use of Renewable Energy Sources and Cogeneration (OG 88/12), and

• The Ordinance on Acquisition of Status of an Eligible Electricity Producer (OG 88/12).

The status of eligible producer for a specific plant is decided upon by HERA.

Nuclear Energy

The State Office for Radiological and Nuclear Safety (‘‘SORNS’’) was created in Croatia under the Act onRadiological and Nuclear Safety as a competent body for radiological and nuclear safety. Under the Actany legal entity which plans to engage in nuclear activity has to announce its intention to SORNS.Approval is required from SORNS before any nuclear activity can take place. If the owner fails in thefuture to meet the requirements of this Act and any secondary legislation, SORNS has the power towithdraw approval. The holder of the approval shall be liable to implement protection measures and shallbear any expenses incurred in so doing.

Nuclear incident liability

In the event of a nuclear incident with consequences outside the boundaries of the Krsko nuclear plant, thegoverning law is the Nuclear Law, which became effective on 4 April 2011. The Nuclear Law has beenbrought into compliance with the Paris Convention on Nuclear Third Party Liability and the BrusselsConvention with the Additional Protocol. As a result of such amendments to the Nuclear Law, certainmaximum compensation levels have been included, although they will not come into effect until theAdditional Protocol becomes effective which will take place when it is ratified by two thirds of thesignatory states.

Nuclear safety

Pursuant to the Act on Radiological and Nuclear Safety, SORNS is responsible for granting approval ofany nuclear activity, conducting independent safety analyses, issuing resolutions and consents for thepositioning, planning, construction, use and decommissioning of nuclear sites, monitoring the safety of

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nuclear power plants and evaluating the risk of possible nuclear accidents. This role is especially importantregarding the nuclear power plant Krsko, located in the Republic of Slovenia.

Nuclear fuel and nuclear waste

The Croatian Government, in accordance with article 11 of 2001 Agreement designates an institution tomanage radioactive waste and spent nuclear fuel. Pursuant to legislation (OG 107/07), a fund to financethe decommissioning of the Nuclear power plant Krsko has been set up. The fund collects finance for thefuture decommissioning process that must take place at the plant including the disposal of nuclear wasteand spent nuclear fuel in accordance with the ‘‘Krsko agreement’’ (OG—International agreements no9/02). HEP is liable for payments into the fund of A14,250 thousand a year.

Nuclear power plant Krsko

In Slovenia, nuclear safety is regulated by the ‘‘Ionising Radiation Protection and Nuclear Safety Act’’(Zakon o zastiti od ionizirajucih zracenja i nuklearnoj sigurnostiti) (OG—Uradni list RS 67/02). Somespecific areas are regulated in more detail by secondary legislation.

The Slovenian Nuclear Safety Administration (Uprava Republike Slovenije za nuklearnu sigurnost) isresponsible for supervising and regulating nuclear and radiological safety of nuclear facilities, nucleartrade, the transport and handling of nuclear and radioactive materials, the accountability and control ofnuclear materials, physical protection of nuclear facilities and nuclear materials, liability for nucleardamage, the professional qualifications of personnel operating nuclear facilities and early notification incase of nuclear or radiological accidents.

International Atomic Energy Agency

Croatia and Slovenia are both members of the IAEA and, as a result, the IAEA has carried out a numberof on-site operational safety reviews (‘‘OSART’’).

The first OSART review took place at the Krsko nuclear power plant in 1993 with a follow-up Re-OSARTreview in 1994. The last OSART review at the Krsko nuclear power plant took place in 2003.

The purpose of the review was to monitor the operating practices in the areas of ManagementOrganisation and Administration; Training and Qualification; Operations; Maintenance; TechnicalSupport; Radiation Protection; Chemistry; and Emergency Planning and Preparedness. An enhancedreview of the Safety Culture at the plant was also performed.

The OSART team concluded that the Krsko plant has several good features that will lead to the future safeoperation of the plant; most significantly, a well-educated, highly motivated, professional and experiencedstaff.

The senior management of the Krsko plant is committed to improving the operational safety and reliabilityof their plant in the long-term. The team found that the Krsko plant has several strong attributes andprogrammes, including the following:

• There is priority on nuclear safety at all levels of the organisation.

• As a whole, the management of the plant has a depth of technical knowledge and a good backgroundin nuclear plant operation.

• The plant has made effective use of computer technology to plan work, track activities andcommunicate within the plant.

However, although the Krsko plant has many good operational safety features, the team observed someareas for improvement. The most significant were:

• The industrial safety policy, practice and management involvement.

• The plant should further address the volume and storage of low level waste.

• The plant should enhance the use and adherence to procedures in the field.

The follow up of the OSART review from 2003 took place in 2005. The review team established that Krskohad implemented all of the recommendations made by the review team in a satisfactory way. It alsoconfirmed that the power plant had invested sufficient effort in terms of additional training and thedevelopment of the evaluation and promotion of a safety culture.

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In 1991, IAEA and the Nuclear Energy Agency of the OECD introduced a seven-grade internationalnuclear events scale (‘‘INES’’), an internationally recognised standard used to inform the public of thesignificance of a nuclear event. Levels 4 to 7 are termed ‘‘accidents’’ with a significant radiation exposureoff-site, while Levels 1 to 3 are termed ‘‘incidents’’ with effects on the nuclear facilities only. Level 0 isreferred to as ‘‘below scale’’ or as an anomaly and refers to events that do not affect safety.

Only a few operating events in the operating history of the Krsko plant have been classified 1 per the INESscale not leading to an impact on the environment. All other events were below INES classification.

Post Fukushima Stress Tests

Stress tests of nuclear power plants are required by the European Council. These are defined as focusedassessments of safety margins and of the resistance of nuclear plants in light of the events that occurred atthe Fukushima-Daiichi nuclear power plant in Japan following a tsunami on 11 March 2011.

The assessment of the Krsko plant was carried out by experts in nuclear safety, design of nuclear facilities,accident management, emergency preparation and phenomenology research of severe accidents. Theseexperts evaluated on the basis of successive failures of all preventative actions during any extreme scenario.

The Republic of Slovenia prepared a National Report on the Nuclear Stress Test. Croatia only madecomments on some parts of this report.

The report identified some areas for possible improvements, such as increasing the robustness of thenuclear power plant against beyond-design basis accidents, flooding, loss of offsite power and loss ofultimate heat sink however it noted that several safety improvements have already been implemented as aresult of the stress tests. The report also noted that the effects of a critical disruption of plant supplies dueto the destruction of infrastructure have been considered.

On 4 October 2012, the European Commission published a report following its completion of stress testsof Europe’s nuclear power plants. The report is based on the conclusions of peer reviews of nuclear powerplants, which were produced in April 2012 by the European Nuclear Safety Regulators Group (ENSREG).

Each power plant was assessed on the basis of 11 measures recognised as being useful and necessary tomitigate the effects of extreme natural and other disasters in the vicinity of a nuclear power plants.According to the European Commission’s report, the Krsko nuclear plant is the only power plant to havealready implemented, or be shortly implementing, all 11 measures.

The URSJV has also independently issued a decision on the implementation of the modernisation ofsafety solutions for the prevention of serious incidents and for the alleviation of their consequences on1 September 2011. Based on that decision, Krsko has prepared an investment plan for the period2012-2016 in the amount of A220,000 thousand (approximately HRK 1,647,800 thousand) (of which Groupwill be required to contribute 50%) which makes provision for the implementation of eight keymodifications to safety at the plant. The deadline for the implementation of this plan is the end of 2016.HEP and GenE have each approved the proposed investments and the financial plan. (See ‘‘Business—Electricity Generation—Nuclear Power Plant’’ for further details.)

Transmission and distribution of electricity

As part of the restructuring of the Croatian energy sector, which started in 2001 with adoption of the 2001Energy Act, the 2001 Electricity Market Act and the 2004 Electricity Market, the transmission anddistribution of electricity were divided into separate companies within the Group.

The term ‘‘electricity transmission’’ refers to the transport of electricity on high and very high voltageinterconnected networks in order to deliver electricity to end consumers or to an energy operator fordistribution. This does not include supply. The national electricity transmission system is operated byHEP-OPS and it is the only body registered for electricity transmission. HEP-OPS is 100% owned byHEP d.d. HEP-OPS was established on 23 March 2005 (merging with HEP Prijenos d.o.o.) with their maingoal, as a transmission system operator, to transmit electricity and to maintain and develop thetransmission network.

The HEP-OPS transmission network includes a transmissions grid of 400 kV, 220 kV and 110 kV of voltagelevels, with accompanying transformation stations and telecommunications infrastructure. HEP-OPSrepresents the Republic of Croatia in the European Network of Transmission System Operators forElectricity (ENTSO—E).

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The Energy Market Act provides for the adoption of rules on the allocation and use of cross-bordertransmission capacities. HEP- OPS has adopted these rules.

Further changes to the Croatian transmission system are necessary before accession of the Republic ofCroatia to the EU, in order to comply with the EU Third Energy Package.

The term ‘‘electricity distribution’’ refers to the distribution of electricity through the high, medium andlow voltage distribution network for the purpose of its delivery to end-customers, but does not includesupply.

HEP-ODS, a subsidiary of HEP d.d. is the only entity registered for electricity distribution in Croatia. Thedistribution system operator takes the electricity from the transmission network and transmits it to endconsumers. The distribution system operator is responsible for the operation, maintenance anddevelopment of the network. It also supplies electricity to Tariff Customers as a public service and isresponsible in this role for the calculation and collection of receivables as a result thereof.

Supply

There are 13 companies(3) which hold a licence for electricity supply in the Republic of Croatia. However,the vast majority of electricity is supplied by HEP-ODS and HEP-Supply.

From 1 July 2008, when market liberalisation reforms were adopted, several customer groups were created:

• Regulated or ‘‘Tariff Customers’’, comprising of virtually all Households, as well as some CommercialCustomers who have not expressly selected a Market Supplier (HEP or another Market Supplier) orwhose contract with their Market Supplier has been terminated. This customer category benefits fromregulated tariffs as defined by the Croatian Government, although Commercial Tariff Customers mustpay the Default Rate.

• Non-regulated or ‘‘Non-Tariff Customers’’, comprising of Commercial Customers which haveexpressly selected a Market Supplier. All Commercial Customers should have selected a MarketSupplier in a period of 6 months from 1 July 2008, and therefore be switched to the non-regulatedcategory. Commercial Customers may be returned to the regulated category if their contracts withMarket Suppliers are terminated or their Market Supplier stops operating (and they do not find a newMarket Supplier in a period of 30 days).

Trading

There is only one electricity market in Croatia, which is primarily governed by bilateral agreements.Certain ‘‘Market Rules’’ regulate relations and activities in the electricity market, as well as laying out theobligations and duties of market participants. These Rules are binding for all electricity marketparticipants.

Currently there are 8 companies which have licences to trade electricity and 17 companies (includingHEP d.d. and HEP Trade)(4) which have licences for trading, mediation and representation on theelectricity market.

Participants

Based on the above, the following categories of electricity market participants exist in the Republic ofCroatia: (i) generators (producers), (ii) transmission network operators (HEP-OPS), (iii) distribution

(3) HEP—Opskrba d.o.o, for supply of customers with electricity, heat and gas; KORLEA d.o.o. for trade and services;HEP-Operator distribucijskog sustav d.o.o.; HEP-Toplinarstvo d.o.o. for generation and production of heat; PARTNERELEKTRIK d.o.o. for electro-installation works and technical protection; CRODUX PLIN d.o.o. for trade and services;ENZYME d.o.o. for trade, generation and services; ENERGIJE 2 SUSTAVI d.o.o. for electricity supply; NOX GRUPA d.o.o.for trade and services; EL-EN SOLUCIJE d.o.o. for trade and services; Elektro plus d.o.o. for trade and services; PETROLHRVATSKA d.o.o. for trade, oil and oil derivates transportation; and PROFECTIO ENERGIJA d.o.o. for electricityproduction.

(4) HRVATSKA ELEKTROPRIVREDA d.d., INA-INDUSTRIJA NAFTE d.d., CROPLIN d.o.o. for gas supply,, INAS-INVESTd.o.o. for services and trade, Alpiq Energija Hrvatska d.o.o. for services and trade, KORLEA d.o.o. for trade and services,ELEKTRO GRUPA d.o.o. for trade and representation, EZPADA d.o.o., GEN-I Zagreb d.o.o. electricity trade and sale, EFTHrvatska d.o.o. for trade and services, HSE Adria d.o.o. for trade, mediation and representation on the energy market, TLMTvornica Lakih Metala d.d., Repower Hrvatska d.o.o. for trade and services, Interenergo d.o.o. for trade and services,RUDNAP energija d.o.o. for trade, mediation and representation on the market, PRIRODNI PLIN d.o.o. for procurement andsupply of gas and HEP-trgovina d.o.o. for electricity trade.

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network operators (HEP-ODS), (iv) energy market regulators (HROTE), (v) electricity traders,(vi) electricity suppliers and (vii) end-consumers.

Price of Electricity

The 2001 Energy Act provides in general that prices can be regulated or non-regulated. The regulatedprice contains: (i) the tariff (where applicable) (ii) incentive fees for generation of energy from renewableenergy sources (iii) fees for inherited costs, and (iv) other fees, if provided by special law.

The non-regulated price contains: (i) part of the price that is freely negotiated, (ii) part of the price inaccordance with the tariff, for energy activities to which the tariff system applies, (iii) incentive fee forgeneration of energy from renewable energy sources and cogeneration, (iv) fee for inherited costs, if thosecosts have been approved for particular type of energy, and (v) other fees, if provided by special laws.

The 2001 Energy Act governs which activities shall be subject to regulated prices. The tariff system consistsof a prescribed methodology to determine the tariff. Energy prices are calculated depending on the type,power, quality and other elements of the energy delivered.

The methodology has been adopted by HERA, after obtaining the opinion of energy operators whoseactivities are subject to the tariff system, and the opinion from the Ministry of the Economy. The CroatianGovernment determines tariff rates within the tariff methodology, based on the proposals of the Ministryof the Economy. Both the energy operator whose activities are subject to the tariff system or HERA cansubmit a proposal to change the tariffs.

The tariff models currently in force are (i) Electricity Supply Tariff model with exemption for Non-TariffCustomers; (ii) Electricity Distribution Tariff model; (iii) Electricity Transmission Tariff model and(iv) Electricity Generation Tariff model with exemption for Non-Tariff Customers. All listed models, withno tariff amounts (‘‘Electricity Tariff Models’’), were amended in 2010.

As stated above, currently the Croatian Government determines tariff rates within the tariff models andthe last change to electricity tariffs came into force on 1 May 2012, introducing new rates for generation,transmission and distribution of electricity for customers. A new tariff model for electricity supply alsocame into force; however it did not affect the existing electricity supply prices. Prior to the changes on1 May 2012, tariff rates were set by the Croatian Government: (i) for transmission, distribution and supplyof electricity for Tariff Customers in June 2008 (applicable from 1 July 2008) and (ii) for generation ofelectricity in August 2009 (applicable from 1 September 2009).

Pursuant to the 2012 Energy Act, the price of energy for end-consumers contains (i) a freely negotiatedshare, (ii) regulated share that will be determined by the tariff system, and (iii) other fees, if provided byspecial law.

The tariff system consists of a prescribed methodology and tariff rates. The methodology is based on thereasonable costs of business activity, maintenance, replacement, construction or reconstruction of facilitiesand environment protection, whereby it shall ensure a reasonable return on the invested funds, and may bebased on the method of incentive regulation or some other method of economic regulation. Themethodology is determined by HERA.

Tariff rates are covered by methodology and are determined according to type of energy service, power/capacity, quantity, quality and other elements related to the delivered energy, whereby they may differdepending on type of customer, delivery period and seasonal or daily dynamics of delivery.

The energy companies shall file their request for tariff rate determination and tariff rate changes withHERA, which may independently determine tariff rates based on the abovementioned methodology.

HERA shall adopt tariff methodologies for the distribution and transmission, i.e. transport of energy.Apart from these energy activities, HERA adopts methodology for a particular energy activity if providedby special law. HERA also adopts tariff methodologies for energy activities of generation, distribution andsupply of thermal energy. The 2012 Energy Act provides a period of 6 months from the entry into force ofspecial laws (i.e. new Energy Market Act and Gas Marker Act) for adoption of those new methodologies.

The tariff system for generation of electrical and/or thermal energy from renewable energy sources andcogeneration and generation of bio fuel shall be adopted by the Government of the Republic of Croatia.

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Electricity Tariff Models

Tariffs for electricity generation, distribution, transmission and supply are based on a cost-recovery modeldetermined in Electricity Tariff Models and individual tariff rates as adopted by the Croatian government.

All of the Electricity Tariff Models are based on similar principles and rules, including inter alia: (i) thatoperating costs must be reasonable, and a return on the invested capital must be within reasonable time;(ii) the costs of electricity generation for tariff customers/electricity transmission/electricity distribution/supply must be impartial and transparent, (iii), tariff items are determined by customer categories,(iv) tariff items for specific tariff models are equal throughout Croatia; (v) the account of tariff elementsfor electricity generation/transmission/distribution/supply is carried out for each metering point.

Electricity Generation Tariff Model

The method of regulation applied in the Electricity Generation Tariff Model with exemption for Non-TariffCustomers is based on ‘‘approved operational costs plus approved capital rate of return’’. The opinion onapproved costs, including the capital rate of return is provided by HERA. The regulation period is onecalendar year, i.e. from 1 January—31 December. The determination of the amount of any tariff item forthe following regulatory year is based on approved operating costs from the prior regulatory year, realisedand estimated operating costs for the current regulatory year and the accepted planned costs for the futureregulatory year.

Total costs of electricity generation for both Tariff and Non-Tariff Customers (UTP) are determined ona yearly basis, i.e. for a regulatory year and are equal to:

UTP = TPpos + TPkap – TRgub – TRpu – TRenuost

Whereby the individual items are as follows: (i) TPpos – OPEX [kn], (ii) TPkap – cost of capital [kn],(iii) TRgub – cost of loss coverage in the system [kn], (iv) TRpu – cost of providing ancillary services in thesystem[kn], and (v) TRenuost – cost of providing services for balancing energy for subjects liable fordeviations outside of the Group[kn].

The cost of capital is equal to: TPkap = PRim + A; whereby the individual items are as followsPRim – revenues from regulated assets (regulated asset base – RAB) [kn] and A – depreciation of theregulated assets in the considered year [kn].

Electricity Distribution Tariff Model

The method of regulation applied in Electricity Distribution Tariff Model with no tariff amounts is basedon ‘‘approved operational costs plus approved capital rate of return’’. For further details please see aboveunder Electricity Generation Tariff model. Total costs of the electricity distribution operator (UTP) aredetermined on a yearly basis, i.e. for the regulatory year and are equal to:

UTP = TPpos + TPkap – TRnsu

Whereby the individual items are as follows: (i) TPpos – OPEX [kn], (ii) TPkap – costs of capital [kn], and(iii) TRnsu costs of providing non-standard services [kn].

The cost of capital is equal to the tariff model set forth in the Electricity Generation Tariff Model.

Electricity Transmission Tariff Model

The method of regulation applied in the Electricity Transmission Tariff Model with no tariff amounts isbased on ‘‘approved operational costs plus approved capital rate of return’’. For further details please seeabove under Electricity Generation Tariff model.

Total costs of the electricity transmission operator (UTP) are determined on a yearly basis, i.e. for theregulatory year and are equal to:

UTP = TPpos + TPkap + TRenu – TRnsu

Whereby the individual items are as follows: (i) TPpos – OPEX [kn], (ii) TPkap costs of capital [kn],(iii) TRenu difference between costs of balancing energy procurement and income from providing servicesof electricity system balancing [kn] (iii) TRnsu costs for providing non-standard services [kn].

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The cost of capital is equal to the tariff model set forth in the Electricity Generation Tariff Model.

Electricity Supply Tariff Model

The method of regulation applied in the Electricity Supply Tariff Model with exemption for Non-TariffCustomers with no tariff amounts is based on ‘‘approved operational costs plus approved capital rate ofreturn’’. For further details please see above under Electricity Generation tariffs model.

Total costs of electricity supply to tariff customers (UTP) are determined on a yearly basis, i.e. for theregulation year and are equal to:

UTP = TPpos + TPkap + TRpovp – TRnsu

Whereby the individual items are as follows: (i) TPpos – OPEX [kn], (ii) TPkap the cost of capital [kn],(iii) TRpovp – the difference between costs of electricity taken over from eligible incentivised producersand revenues from sales of that electricity [kn], and (v) TRnsu – costs of providing non-standard services[kn].

The cost of capital is equal to the tariff model set forth in the Electricity Generation Tariff Model.

Thermal Energy Sector

The thermal energy sector in Croatia is regulated by the Energy Act and the Thermal Energy Production,Distribution and Supply Act. Based on these, thermal energy generators, distributors and suppliers mustobtain a license from HERA.

Thermal Energy Prices

A special chapter of the 2001 Energy Act is dedicated to thermal energy prices. The system of calculatingprices is the very similar to the system for electrical energy (please see section Price of Electricity).

The methodology, for the tariff systems for thermal energy without tariffs, has been adopted by HERA,after obtaining the opinion of energy subjects whose activities are subject to the tariff system, as well as theopinion of the Ministry. The tariff system currently in force is the Tariff system for generation, distributionand supply of thermal energy, with no tariff amounts, amended in 2011 (‘‘Thermal Energy Tariff Model’’).

Unlike the tariffs for electricity, the individual tariffs for generation, distribution and supply of thermalenergy are not determined by the Government of Croatia but by the Croatian local authorities, due toamendments of the 2001 Energy Act in November 2010. The 2012 Energy Act provides for the transfer ofcontrol of tariff rates from local authorities to HERA, based on proposals of energy subjects. See ‘‘—Priceof Electricity’’ for further details. The last increase to thermal energy tariff rates was in 2009 however theGroup has requested a tariff increase from local Croatian municipalities located in Zagreb, Osijek, Sisak,Velika Gorica, Samobor and Zapresic.

The Thermal Energy Tariff Models are based on similar principles and rules, including inter alia: (i) thatoperating costs must be reasonable and a return of the invested capital must be within reasonable time;(ii) the cost of thermal energy generation, distribution and supply for tariff customers must be impartialand transparent, (iii) tariff items are determined by customer categories, and (iv) tariff items for specifictariff model are equal throughout a distribution area.

The method of regulation applied in the Thermal Energy Tariff Model, based on the regulation of maximalincome from generation, distribution and supply of thermal energy.

An opinion on the regulated maximal income based on approved costs, including the capital rate of returnis provided by HERA. The regulation period is a calendar year, i.e. from 1 January–31 December.

The Thermal Energy Tariff Model—section for generation of thermal energy

Regulation of the maximal income from the generation of thermal energy is based on approved fuel costsfor the generation of thermal energy, fixed operational costs, the index of consumer prices, regulatory fees

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and revenues from regulated assets. Total regulated maximal income from thermal energy generation fortariff customers Pmax(t) is determined on a yearly basis, i.e. for a regulatory year and is equal to:

Pmax(t) = Tfix(t-1) * (1 + It-1) * (1-X) + Tenerg(t) + N + RSt

Whereby the individual items are as follows: (i) Tfix(t-1) – fixed costs in base year [kn], (ii) It-1 – the index ofconsumer prices in the base year, (iii) X – the efficiency coefficient, (iv) Tenerg(t) – the fuel costs forgeneration and/or purchase of thermal energy [kn], (v) N – regulatory fees [kn] and (vi) RSt – revenuesfrom regulated assets in a regulatory year [kn].

Fixed operational costs include material costs, salaries, insurance, maintenance costs, depreciation ofregulated assets in the base year and other operational costs.

Approved fuel costs are based on the average quantity of spent fuel for generation of thermal energy in thepast 5 years and weighted average fuel prices in the base year or weighted average prices in at least3 months of a regulatory year. Fuel costs for the purchase of thermal energy are calculated on the basis ofan average quantity of purchased thermal energy in the past 5 years and weighted average purchase pricein the past 3 years.

The Thermal Energy Tariff Model—section for distribution of thermal energy

The regulation of maximal income from distribution of thermal energy is based on approved fixedoperational costs for the distribution of thermal energy, the index of consumer prices, regulatory fees and areturn of the invested capital within reasonable time.

Total regulated maximal income from thermal energy distribution for tariff customers Pmax(t) is determinedon a yearly basis, i.e. for a regulatory year and is equal to:

Pmax(t) = Tfix(t-1) * (1+It-1) * (1-X) + N + RSt

Whereby the individual items are as follows: (i) Tfix(t-1) – the fixed costs in the base year [kn], (ii) It-1 – theindex of consumer prices in base year, (iii) X – efficiency coefficient, (iv) N – regulatory fees [kn] and(v) RSt – revenues from regulated assets in a regulatory year [kn].

For further details please see above under The Tariff system—section for generation of thermal energy.

The Thermal Energy Tariff Model—section for supply of thermal energy

The regulation of maximal income from the supply of thermal energy is based on approved fixedoperational costs for the supply of thermal energy, the index of consumer prices, regulatory fees and areturn of the invested capital within reasonable time.

Total regulated maximal income from thermal energy supply for tariff customers Pmax(t) is determined ona yearly basis, i.e. for a regulatory year and is equal to:

Pmax(t) = Tfix(t-1) * (1 + It-1) * (1-X) + N + RSt

Whereby the individual items are as follows: (i) Tfix(t-1) – the fixed costs in a base year [kn], (ii) It-1 – theindex of consumer prices in a base year, (iii) X – the efficiency coefficient, (iv) N – regulatory fees [kn] and(v) RSt – revenues from regulated assets in a regulatory year [kn].

For further details please see above under The Tariff system—section for generation of thermal energy

Final tariff items for tariff costumers are determined in accordance with the amount of total regulatedmaximal income for generation, distribution and supply in following regulatory year.

Gas Sector

As already stated, the full implementation of the EU Third Energy Package is foreseen for the fourthquarter of 2012. With these changes the existing Gas Market Act will be harmonised with EU Law.

The full package of energy laws will regulates the relations between market participants on the gas marketin Croatia. The Energy Act is the main law whilst relations between market participants are establishedand regulated trough the Gas Market Act, the Act on the Regulation of Energy Activities, the Ordinanceon the Natural Gas Market Organisation (OG 126/10 and 128/11) and the General Conditions for Natural

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Gas Supply (OG 42/09). Thus, Republic of Croatia has created the preconditions for a fully open gasmarket.

Licensing Regime

HERA issues the following licences for activities in the gas sector: gas generation, delivery and sale ofnatural gas from own generation, gas procurement, natural gas storage, natural gas transmission, gasdistribution, management of terminals for liquefied natural gas, gas supply, mediation in the gas market,representation in the gas market, gas trade, and organisation of the gas market. The licences are grantedfor a specific period of time, namely from 3 to 30 years. HROTE has a licence issued for 5 years (issued on8 December 2009) by HERA for the organisation of the gas market.

General overview

The only company registered for the delivery and sale of natural gas from its own generation is Industrijanafte d.d. (‘‘INA Group’’). After numerous reorganisations, INA Group became a joint stock companyafter being privatised. INA Group obtained its last license for the delivery and sale of natural gas from itsown generation in 2009, lasting for 5 years.

Plinara d.o.o. Pula (‘‘Plinara’’) is registered for gas generation activity. The company was established in1998, and is owned by the company INA Group (49%), the city of Pula (41%) and Istrian County (10%).Plinara obtained its last license for gas generation in 2009, for 5 years.

The company Plinacro d.o.o. (‘‘Plinacro’’) is registered for gas transmission, for 15 years starting from2003. Plinacro was established in 2001 as an INA Group subsidiary. In 2002 the company was separatedfrom the group and since then it has been owned by the Republic of Croatia. It engages in natural gastransmission as a regulated energy activity under the supervision of HERA.

There are 36 companies registered for gas distribution. A large number of distribution system operatorsused to be part of communal companies. After the adoption of energy laws in Croatia, distribution systemoperators must be organised as separate legal entities and must be independently from activities outsidethe gas sector. An additional reason for the existence of the large number of distribution system operatorsis that each municipality used to have its own operator.

Podzemno skladiste plina d.o.o. is the only company registered for natural gas storage. Since 2009 it hasbeen owned by Plinacro and it obtained its last license for gas storage in 2009, for 5 years.

A gas supplier is a person (whether legal or natural) who supplies gas, including gas procurement. Gassupply is performed as a market energy activity, and may be performed as a regulated energy activity underthe supervision of HERA. Gas procurement is a regulated energy activity under the supervision of HERA.There are 48 companies registered as gas suppliers. The 4 biggest gas suppliers are: Prirodni plin d.o.o.,Gradska plinara Zagreb—Opskrba d.o.o., HEP-Plin and Termoplin d.d. Varazdin.

Gas trading is performed as a market activity. Only one company is registered for gas trading, namelyLUKOS ENERGIJA d.o.o. za energetsku djelatnost, which first obtained its licence in 2010.

Price of Gas

The system of calculating gas prices is very similar to the system for electrical energy (please seesection Price of Electricity). There are also two categories of gas sale prices for end customers:(i) regulated—for public energy services, and (ii) free (non-regulated)—for other energy services. Pursuantto the 2001 Energy Act, the following gas energy activities are seen as public energy services: (i) gasprocurement for tariff customers, (ii) gas transportation, (iii) gas storage, (iv) gas distribution and (v) gassupply for tariff customers.

The regulated gas prices are determined according to the tariff systems, whereby the methodology isadopted by HERA and the tariff rates are determined by the Croatian Government, based on the proposalof energy subjects and the opinion of HERA. As already stated, the 2012 New Energy Act introducesamendments in the pricing sector, transfering control over tariff rates to HERA.

The tariff models for the gas sector currently in force are (i) the tariff model for natural gas supply, with anexemption for Non-Tariff Customers, and (ii) the tariff model for natural gas distribution, with no tariffamounts. Both were originally adopted by HERA in 2007 and have been amended several times, with thelast amendment being made in 2012. As stated above, the Croatian Government determines tariff rates

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within the tariff models and the last change to gas tariffs (supply and distribution) came into force on1 May 2012.

Tariff system for gas distribution

This tariff system was originally adopted by HERA in March 2007 (as amended from time to time, with thelast amendment in 2012). All users of the pipeline distribution system are classified into two tariff groups(i) households (TG1) and (ii) entrepreneurs (TG2), and three tariff models: (i) TM1—households,(ii) TM2—entrepreneurs with annual gas consumption lower than 1 million m3 and (iii) TM3—entrepreneurs with annual gas consumption higher than 1 million m3. Since April 2010 a new tariff modelfor large customers has been introduced, whereby the tariff model TM3 now refers to entrepreneurs withannual gas consumption higher than 1 million m3 and lower than 5 million m3, and the new tariff groupTM4 refers to entrepreneurs with the annual gas consumption higher than 5 million m3.

The methodology for tariff rate determination is based on ‘‘the approved operational costs, maintenance,replacement, construction or reconstruction of buildings and environment protection, including areasonable time for the return of funds for investment in power plants, devices and networks includingpipeline distribution systems.’’

For revenue estimates the ‘‘method of allowed revenue’’ is applied, and for the costs estimate the ‘‘methodof approved operational costs’’ is used. The tariff system does not contain the definitions of these methods.

The allowed revenue (DP) for a particular regulatory year consists of: operating costs (T), amortisation(A) and revenues on regulated assets (RS):

DP = T + A + RS

The method of calculating the return on regulated assets represents a significant part of the tariff system.The return on regulated assets is calculated in accordance with the following formula:

RS = RSpro � PCKpond

Whereby the individual items are as follows: (i) RSpro is an average value of the assets allocated to theperformance of regulated activities (regulated assets); (ii) PCKpond is a weighted average cost of capitalaccording to the CAPM (Capital Asset Pricing Model) model.

The calculated ‘‘allowed revenue’’ is compared with the ‘‘expected revenue’’ which should correspond tothe sum of the expected revenues for each tariff model: the estimated amount of distributed gas multipliedby the calculated tariff rate for gas and the tariff rate for fixed monthly fees. In the application for theapproval of tariff rates the ‘‘expected revenue’’ must not be higher than the ‘‘allowed revenue.’’

Tariff system for gas supply of Tariff Customers

This tariff system was also originally adopted by HERA in March 2007 (as amended from time to time,with the last amendment being made in 2012). However, it is not applicable to Non-Tariff Customersbecause the price of supply services is freely negotiated with such customers. Tariff models and tariffgroups correspond to those defined in the gas distribution system.

The methodology for tariff rate determination is the same as in the tariff system for gas distribution (pleasesee above), but the provisions on the method for recognition of gas procurement costs (procurement price,costs of transport, storage and gas distribution) have been added. Transport costs have been increased dueto the fact that excesses of the contracted peak load (m3 / day) that have occurred in the current year areincluded in the amount of the tariff rate for the following year. From April 2009 the value of regulatedassets used for natural gas supply to tariff customers shall be determined in proportion to the amount ofgas supplied to tariff customers. All other elements from the methodology shall be determined in the samemanner as for distribution.

Environmental matters

In the process of aligning Croatia’s environmental legislation with that of EU, in the last few years Croatiahas made progress in transposing the Integrated Pollution Prevention and Control (IPPC) Directive(2008/1/EC) into national legislation. The IPPC Directive 2008/1/EC has been transposed into Croatianlegislation through the Environmental Protection Act (OG 110/2007), the Regulation on Information andParticipation of the Public and Public Concerned in Environmental Protection Issues (OG 64/2008) and

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the Regulation on the Procedure for Establishing Integrated Environmental Protection Requirements(OG 114/2008). The integrated environmental requirements (‘‘environmental permits’’) are a conditionfor the continued operation of all thermal power plants of rated thermal capacity above 50 MW and forobtaining a permit for new construction or reconstruction of existing plants.

The Environmental Protection Act

The Environmental Protection Act regulates, the following issues: principles of environmental protectionand sustainable development, documentation related to sustainable development and environmentalprotection, instruments of environmental protection, environmental monitoring, participation of the publicin environmental issues, administration and inspectional supervision.

The Environmental Protection Act and Regulation on Environmental Impact Assessment (Official Gazetteno. 64/08 and 67/09), regulate the procedure of environmental impact assessment (‘‘EIA’’). By the adoptionof this legislation, the law in this area has been harmonised with the corresponding EU directives(Directive 85/337/EEC of 27 June 1985, amended by Directive 97/11/EC and Directive 2003/35/EC).

The EIA is a procedure for assessing the acceptability of a planned project with regard to the environment.It acts to determine the necessary measures for the protection of the environment, in order to reduce anyimpact to a minimum and achieve the best possible preservation of the environment. The assessmentprocess is carried out at an early stage in the planning of a project, prior to the issuance of a locationpermit or other early approvals for the project. There are various projects for which EIA is obligatory, suchas power plants with capacity greater than 100 MW, wind power stations capacity of over 20 MW, nuclearpower stations and other nuclear reactors. Members of public are allowed to participate in the EIA processsubject to requirements stipulated in the Croatian Environmental Protection Act and the Regulation onInformation and Participation of the Public.

Regulation on the procedure for establishing integrated environmental protection requirements

The Regulation on the Procedure for Establishing Integrated Environmental Protection Requirements,together with the Environmental Protection Act, transposes the basic requirements for the integratedprevention and control of pollution prescribed by the Council Directive 2008/1/EC. This integratedapproach to pollution control, taking into account waste management, aims to prevent emissions into theair, water or soil wherever this is possible, and if not, to reduce them to a minimum in order to achieve ahigh level of protection of the environment as a whole.

This Regulation applies to power plants in which certain activities that might cause pollution of the soil,air, water and sea are being carried out, or will be carried out after the construction, reconstruction orputting of the plant into regular operation. Thus, this Regulation creates an obligation to adhere to certainintegrated environmental protection requirements in the management of existing installations, theconstruction of new installations and any necessary reconstruction of existing installations.

The determination of integrated environmental protection requirements for a particular plant may refer toone or more parts of a plant in which a polluting activity may take place. The Ministry of Environmentaland Nature Protection (‘‘MZOP’’) issues decisions on the integrated environmental protectionrequirements.

According to the provisions of the Regulation, HEP has submitted to MZOP requests and technical-technological solutions for establishing integrated environmental protection requirements for all theexisting HEP thermal power plants with nominal thermal power exceeding 50 MW. This will allow MZOPto evaluate progress in this area. Such facilities include: the combined cycle power plant Jertovec, thethermal power plant Rijeka, the thermal power plant Sisak, the electric power/heating plant Zagreb, thethermal power/heating plant Zagreb, the thermal power/heating plant Osijek, the thermal power plantPlomin I, the thermal power plant Plomin II and the Osijek-based thermal facility of HEP-Top.

Further progress in establishing integrated environmental protection requirements will take placeaccording to the requirements laid down by MZOP and the analysis of each existing installation, until afinal decision is taken on unifying the environmental protection requirements at each of the mentionedfacilities. According to the Regulation, the procedure for establishing integrated environmental protectionrequirements for new facilities has been integrated with the environmental impact assessment and bothmust be satisfied to obtain a location permit. The prescribed legal procedure for assessing environmentalimpact and for establishing integrated environmental protection requirements has been adhered to in caseof Plomin III.

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The penalty for not obtaining integrated environmental protection requirements before construction/reconstruction is HRK 300,000 to HRK 900,000.

Regulation on information and participation of the public and public concerned in environmental protectionissues

According to this Regulation, the majority of the documentation that HEP has to compile in accordancewith environmental and nature protection is open for inspection to the public and the public concerned.HEP participates in public inspections and public debates in order to provide information to the public andthe public concerned. Representatives of companies which hold permits empowering them to compiledocuments on environmental protection (issued by the Ministry for Environmental and Nature Protection)also take part in these inspections and debates. In order to inform further the public and the publicconcerned, HEP collates reports on the emission of pollutants into the environment and on activities takingplace to protect the environment in fulfilment of its legal obligations. HEP publishes this data in its annualreport on Group as well as within a specialised report entitled Sustainable growth.

Nature Protection Act and the Regulation on Declaration of an Ecological Network

The Nature Protection Act (OG 70/05, 139/08, 57/11) regulates the carrying out of nature impactassessments (NIA) as an ecological assessment which deals with the consequences of projects on specifichabitats and species of a certain site. The new Croatian legislation on environmental protection integratesthe Environmental Impact Assessment (EIA) and the NIA procedure for future projects.

The Regulation on Declaration of an Ecological Network (109/07), had led to some of Group’s existingand planned plants/ installations being designated as within ecologically significant areas, as listed in the‘‘Strategy and Programme for Physical Planning within the Republic of Croatia’’ and in relevant countyplans. After Croatia’s entry into the E.U., the National Ecological Network will be included as anecologically significant area of EU—within NATURA 2000. In October 2012, HEP applied to the Ministryof Environment and Nature Protection for an exemption for 17 locations that are listed in the ‘‘Strategyand Programme for Physical Planning within the Republic of Croatia’’ which have been entered into theNational Ecological Network and NATURA 2000 proposal.

Under the provisions of the Environmental Protection Act and the Regulation, protected areas andecological network areas are subject to measures applicable to all physical persons and legal entities usingnatural resources and performing actions or operations under the relevant legislation in these areas, Groupincluded. The protection measures stipulated in the Act and the Regulation create some uncertaintyregarding the construction of planned power plants or the continued operation of Group’s existing powerplants within these areas. This may therefore affect energy production and the security of electricity supply.The Act and the Regulation also make it harder to meet the Croatian and E.U. obligations on reducinggreenhouse gases and other pollutant emissions, as well the requiring regular plant maintenance,environmental protection and work safety.

However, there are parts of the Nature Protection Act which can be used to overcome the limitationsimposed. For example, if it is established that a planned procedure (i.e. a construction project) has adamaging influence on the ecological network and there are no acceptable alternatives, a request fordetermining the existence of an overriding public interest could be made (e.g. the supply of electricalenergy for a certain area) and compensation could be given. The Ministry of Environment and Nature orin some cases the Croatian Government (after public consultation) will decide on any such request.

Overview of the Croatian Insolvency Act

Insolvency proceedings in Croatia are regulated by the Insolvency Act (OG Official Gazette No. 44/96,29/99, 129/00, 123/03, 82/06,116/10, 25/12) (‘‘Insolvency Act’’). Pursuant to the Croatian Insolvency Act,insolvency proceedings can be commenced either in case of insolvency or over-indebtedness of the debtor.The debtor is deemed to be insolvent if it has outstanding obligations with the bank that carries out itspayment transactions for a period in excess of 60 days and which, based on valid grounds for collection(such as a judgment), should have been collected from any of debtor’s accounts without its consent. If,during that period of time, the debtor has sufficient financial assets in its other accounts with which it couldsettle such obligations, it would still be deemed as insolvent. A debtor shall also be considered insolvent ifits debts exceed its existing assets. Under the terms of the Insolvency Act, insolvency proceedings can becommenced either by the debtor or by a creditor filing a petition for bankruptcy. In circumstances where acompany is either insolvent or holds too much debt, the company is required to promptly file a petition for

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insolvency without delay or, at the latest, 21 days after the occurrence of any over-indebtedness or the dateupon which debtor became unable to make payments as they fell due.

Categories and Ranking of Creditors

The Insolvency Act differentiates between four categories of creditors: (i) creditors of the insolvencyestate; (ii) creditors with exemption rights; (iii) separate creditors; and (iv) insolvency creditors.

Creditors of the Insolvency Estate

During insolvency proceedings, the costs incurred in connection with such proceedings and the ‘‘otherobligations’’ of the insolvency estate shall be met first. ‘‘Other obligations’’ include:

(i) Liabilities caused by the action or inaction of the trustee in connection with the insolvencyproceedings or in connection with the management of the insolvency estate or the liquidation ordistribution of the assets of the insolvency estate, which are not costs of the insolvency proceedings;

(ii) Claims of attorneys for their services rendered during the six months immediately prior to thecommencement of the insolvency proceedings in connection with the protection of the debtor’s rightsupon the debtor’s entry into the insolvency estate; and

(iii) Other items provided in the Insolvency Act.

The costs incurred in connection with the insolvency proceedings and the other obligations of theinsolvency estate shall be settled in the order in which they became due.

Creditors with Exemption Rights

Persons able to prove, based on a material or personal right, that a specific object does not belong to theinsolvency estate, shall not be considered as an insolvency creditor. The right to exempt such objects fromthe insolvency proceedings shall be determined according to the provisions of the general law of Croatiaoutside of insolvency regime.

Separate Creditors

Creditors who have a separate claim against real estate, fixtures or rights that are entered on a publicregister (for example, a land register, register of vessels, aircraft register, register of intellectual propertyand similar registers) shall have the right to separate satisfaction of their claim in accordance with theprovisions of the Law on Enforcement Procedure of Croatia.

Insolvency Creditors

These creditors are personal creditors of the debtor who, at the time of the commencement of theinsolvency proceedings have legally based claims against the debtor. Creditors are ranked according totheir priority, which is based on the nature of their claim. Creditors of a lower priority may be satisfied onlyafter creditors of a higher priority are satisfied in full. Creditors that rank pari passu rank with the samepriority and are satisfied in proportion to the amount of their claims.

Insolvency Creditors of a Higher Payment Priority

Claims of creditors with a higher payment priority are classified in order of ‘‘first higher priority’’ and‘‘second higher priority.’’ Claims of the first higher priority include claims of the debtor’s employees andex-employees incurred up until the time of the commencement of the proceeding, any dismissal wages upto the amount specified by law or by collective agreement, and damages for industrial injury orprofessional illness. Claims of the second higher priority include all other claims against the debtor that arenot categorised as a lower priority claim.

Insolvency Creditors of a Lower Payment Priority

The following claims of a lower payment priority are satisfied in the following order:

(i) Interest on claims of insolvency creditors incurred since the date of the commencement of theinsolvency proceedings;

(ii) Costs incurred by the creditors during their participation in the insolvency proceedings;

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(iii) Monetary fines for criminal acts or infringements, as well as costs resulting from a penalty for acriminal act or infringement;

(iv) Claims demanding a free performance by debtor; and

(v) Claims for the repayment of a loan extended to a member of the debtor where the loan was extendedin exchange for capital or claims of a similar nature.

Creditors’ Claims

Creditors must report their claims to the trustee in bankruptcy in writing. A claim shall be consideredestablished if, during an examination hearing, it has not been refuted by the trustee or any of the othercreditors, or, if it has been refuted already, such refutation has been withdrawn. If the trustee in insolvencyor any of the creditors has refuted a claim, the court shall direct the creditor to institute legal proceedingsin order to establish the claim.

Investors may experience difficulties in enforcing foreign judgments under laws other than Croatian law,including under U.S. federal securities laws.

The Issuer is a corporation organised under the laws of the Republic of Croatia. All of the officers anddirectors of the Issuer are residents of the Republic of Croatia and all or a substantial portion of the assetsof the Issuer and its officers and directors are located in the Republic of Croatia. As a result, it may not bepossible for an investor to effect service of process outside the Republic of Croatia upon the Issuer or suchpersons, or to enforce any judgments against them obtained in courts outside the Republic of Croatiapredicated upon civil liabilities of the Issuer or such directors and officers under laws other than Croatianlaw, including any judgments predicated upon United States federal or state securities laws.

There is doubt as to the enforceability in Croatia of original actions, or actions for the enforcement ofjudgments of English courts or U.S. courts, of civil liabilities predicated solely upon the laws of England orfederal laws of the United States. Croatia is not a party to any multilateral or bilateral treaty by which thejudgments of English courts or U.S. courts would be recognised and enforced, and Croatian courts havenot established ‘‘factual reciprocity’’ with the English courts or the U.S. courts. See ‘‘Service of Process andEnforcement of Civil Liabilities.’’

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CONDITIONS OF THE NOTES

The following is the text of the Conditions of the Notes which (subject to modification and except for theparagraphs in italics) will be endorsed on the Certificates (if issued) in respect of the Notes:

The U.S.$500,000,000 6.00% Notes due 2017 (the ‘‘Notes’’, which expression shall in these Conditions,unless the context otherwise requires, include any further notes issued pursuant to Condition 17 andforming a single series with the Notes) of Hrvatska Elektroprivreda d.d (the ‘‘Issuer’’) issued on9 November 2012 (the ‘‘Issue Date’’) are constituted by, subject to and have the benefit of a Trust Deeddated 9 November 2012 (as amended or supplemented from time to time, the ‘‘Trust Deed’’) madebetween the Issuer and Deutsche Trustee Company Limited (the ‘‘Trustee’’, which expression shall includeits successor(s)) as trustee for the holders of the Notes (the ‘‘Noteholders’’).

The statements in these Conditions include summaries of, and are subject to, the detailed provisions of anddefinitions in the Trust Deed. Copies of the Trust Deed and the Agency Agreement dated 9 November2012 (as amended or supplemented from time to time, the ‘‘Agency Agreement’’) made between the Issuerand Deutsche Bank Trust Company Americas and Deutsche Bank Luxembourg S.A. as registrars (the‘‘Registrars’’), the other paying and transfer agents named therein (together, the ‘‘Agents’’) and theTrustee are available for inspection during normal business hours by the Noteholders at the registeredoffice for the time being of the Trustee, being at the date of issue of the Notes at Winchester House, 1Great Winchester Street, London EC2N 2DB, United Kingdom and at the specified office of each of theAgents. The Noteholders are entitled to the benefit of, are bound by, and are deemed to have notice of, allthe provisions of the Trust Deed and the Agency Agreement applicable to them.

The owners shown in the records of Euroclear Bank SA/NV (‘‘Euroclear’’) and Clearstream Banking, societeanonyme (‘‘Clearstream, Luxembourg’’) and the Depository Trust Company (‘‘DTC’’) of book-entry interests inNotes are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions of theTrust Deed and the Agency Agreement applicable to them.

1. FORM, DENOMINATION AND TITLE

1.1 Form and Denomination

The Notes are issued in registered form in amounts of U.S.$200,000 and integral multiples of U.S.$1,000 inexcess thereof (referred to as the ‘‘principal amount’’ of a Note and each an ‘‘Authorised Holding’’). Anote certificate (each a ‘‘Certificate’’) will be issued to each Noteholder in respect of its registered holdingof Notes. Each Certificate will be numbered serially with an identifying number which will be recorded onthe relevant Certificate and in the register of Noteholders which the Issuer will procure to be kept by therelevant Registrar.

The Notes are not issuable in bearer form.

1.2 Title

Title to the Notes passes only by registration in the register of Noteholders. The holder of any Note will(except as otherwise required by law) be treated as its absolute owner for all purposes (whether or not it isoverdue and regardless of any notice of ownership, trust or any interest or any writing on (other than aduly executed transfer thereof in the form endorsed thereon), or the theft or loss of, the Certificate issuedin respect of it) and no person will be liable for so treating the holder. In these Conditions ‘‘Noteholder’’and (in relation to a Note) ‘‘holder’’ means the person in whose name a Note is registered in the register ofNoteholders.

For a description of the procedures for transferring title to book-entry interests in the Notes, see the Trust Deedand Condition 2 below.

2. TRANSFERS OF NOTES AND ISSUE OF CERTIFICATES

2.1 Transfers

A Note may be transferred by depositing the Certificate issued in respect of that Note, with the form oftransfer on the back duly completed and signed, at the specified office of the relevant Registrar or any ofthe Agents.

For a description of certain restrictions on transfers of interests in the Notes, see the Trust Deed and ‘‘TransferRestrictions’’ below.

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2.2 Delivery of new Certificates

Each new Certificate to be issued upon transfer of Notes will, within five business days of receipt by therelevant Registrar or the relevant Agent of the duly completed form of transfer endorsed on the relevantCertificate, be mailed by uninsured mail at the risk of the holder entitled to the Note to the addressspecified in the form of transfer. For the purposes of this Condition, ‘‘business day’’ shall mean a day onwhich banks are open for business in the city in which the specified office of the Agent with whom aCertificate is deposited in connection with a transfer is located.

Except in the limited circumstances described herein (see ‘‘The Global Certificates—Registration of Title’’),owners of interests in the Notes will not be entitled to receive physical delivery of Certificates. Issues ofCertificates upon transfer of Notes are subject to compliance by the transferor and transferee with thecertification procedures described above and in the Agency Agreement and, in the case of Rule 144A Notes,compliance with the Securities Act Legend.

Where some but not all of the Notes in respect of which a Certificate is issued are to be transferred a newCertificate in respect of the Notes not so transferred will, within five business days of receipt by therelevant Registrar or the relevant Agent of the original Certificate, be mailed by uninsured mail at the riskof the holder of the Notes not so transferred to the address of such holder appearing on the register ofNoteholders or as specified in the form of transfer.

2.3 Formalities free of charge

Registration of transfer of Notes will be effected without charge by or on behalf of the Issuer or any Agentbut upon payment (or the giving of such indemnity as the Issuer or any Agent may reasonably require) inrespect of any taxes, duties, or other governmental charges which may be imposed in relation to suchtransfer.

2.4 Closed Periods

No Noteholder may require the transfer of a Note to be registered during the period of 15 days ending onthe due date for any payment of principal, premium or interest on that Note.

2.5 Regulations

All transfers of Notes and entries on the register of Noteholders will be made subject to the detailedregulations concerning transfer of Notes scheduled to the Trust Deed. The regulations may be changed bythe Issuer with the prior written approval of the Registrars and the Trustee (such approval not to beunreasonably withheld or delayed). A copy of the current regulations will be mailed (free of charge) by theRegistrars to any Noteholder who requests one.

2.6 Authorised Holdings

No Note may be transferred unless the principal amount of Notes transferred and (where not all of theNotes held by a holder are being transferred) the principal amount of the balance of the Notes nottransferred are Authorised Holdings.

3. STATUS

The Notes are direct, general, unsubordinated, unconditional and (subject to the provisions ofCondition 4) unsecured obligations of the Issuer and rank and will rank pari passu amongst themselves andat least pari passu in right of payment, without any preference among themselves, with all otheroutstanding unsecured and unsubordinated obligations of the Issuer, present and future, but, in the eventof insolvency, only to the extent permitted by applicable laws relating to creditors’ rights.

4. COVENANTS

4.1 Negative Pledge

So long as any of the Notes remains outstanding (as defined in the Trust Deed) the Issuer will ensure thatno Relevant Indebtedness will be secured by any mortgage, charge, lien, pledge or other security interest(each a ‘‘Security Interest’’), other than a Permitted Security Interest (as defined below), upon, or withrespect to, any of the present or future business, undertaking, assets or revenues (including any uncalledcapital) of the Issuer or any of its Material Subsidiaries (as defined below) unless the Issuer, in the case of

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the creation of the Security Interest, before or at the same time and, in any other case, promptly, takes anyand all action necessary to ensure that:

(a) all amounts payable by it under the Notes and the Trust Deed are secured by the Security Interestequally and rateably with the Relevant Indebtedness to the satisfaction of the Trustee; or

(b) such other Security Interest or other arrangement (whether or not it includes the giving of a SecurityInterest) is provided either (i) as the Trustee shall in its discretion deem not materially less beneficialto the interests of the Noteholders or (ii) as is approved by an Extraordinary Resolution (which isdefined in the Trust Deed as a resolution duly passed by a majority of not less than three-fourths ofthe votes cast thereon) of the Noteholders.

4.2 Specified Borrowings

(a) The Issuer shall ensure that, by no later than 27 December 2012, all indebtedness of the Issuer underor in respect of the Specified Borrowings is repaid or prepaid to the relevant financial institutions.

(b) The Issuer shall ensure that either:

(i) by no later than 27 December 2012, the terms and conditions of each of the IBRD Loans areamended by the removal of the IBRD Loan Net Revenues/Debt Service Covenant (with noprovision equivalent to the IBRD Loan Net Revenues/Debt Service Covenant being included inthe terms and conditions of each of the IBRD Loans in connection with such removal); or

(ii) by no later than 27 December 2012, all indebtedness of the Issuer under or in respect of theIBRD Loans is repaid or prepaid to the International Bank for Reconstruction andDevelopment.

4.3 Interpretation

For the purposes of these Conditions:

(a) ‘‘IBRD Loan Net Revenues/Debt Service Covenant’’ means the covenant in the terms and conditions ofeach of the IBRD Loans that the Issuer (in its capacity as borrower under each such loan) shall notincur any debt, unless the net revenues of the Issuer for the fiscal year immediately preceding the dateof such incurrence or for a later twelve-month period ended prior to the date of such incurrence,whichever is the greater, shall be at least 1.2 times the estimated maximum debt service requirementsof the Issuer for any succeeding fiscal year on all debt of the Issuer, including the debt to be incurred;

(b) ‘‘IBRD Loans’’ means (i) the loan in an amount of up to A4,400,000 pursuant to a loan agreement dated10 November 2003 between the Issuer (as borrower) and International Bank for Reconstruction andDevelopment (as lender), and (ii) the loan in an amount of up to A24,000,000 pursuant to a loanagreement dated 11 September 2006 between the Issuer (as borrower) and International Bank forReconstruction and Development (as lender);

(c) ‘‘Group’’ means the Issuer and its Subsidiaries from time to time;

(d) ‘‘Material Subsidiary’’ means, at any time:

(i) each of:

HEP-Proizvodnja d.o.o;

HEP-Operator prijenosnog sustava d.o.o.;

HEP-Operator distribucijskog sustava d.o.o.; andHEP Opskrba d.o.o.;

(in each case unless and until such company ceases to be a Subsidiary of the Issuer solely as aresult of an Ownership Unbundling Event (as defined in Condition 7.4); and

(ii) any Subsidiary of the Issuer whose total assets or total revenues then equal or exceed 5% of theconsolidated total assets or consolidated total revenues of the Group; or

(iii) when the aggregate of the total assets and total revenues of each Subsidiary described inparagraphs (i) and (ii) above, together with the total revenues of the Issuer does not equal orexceed 90% of the consolidated total assets and consolidated total revenues of the Group, anySubsidiary of the Issuer such that the aggregate of the total assets and total revenues of the

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Subsidiaries described by paragraphs (i) and (ii) above and included under this paragraph (iii),together with the total assets and total revenues of the Issuer, equal or exceed 90% of theconsolidated total assets and consolidated total revenues of the Group.

For the purpose of this definition, total assets, total revenues, consolidated total assets and consolidatedtotal revenues will be determined by reference to the latest audited financial statements of the relevantSubsidiary of the Issuer and the Issuer (and, in the case of the total assets or total revenues of a Subsidiarywill include only those assets or revenues which contribute to the consolidated total assets or consolidatedtotal revenues of the Group). If there is any dispute as to whether or not a company is a MaterialSubsidiary, a certificate of the auditors of the Group will be, in the absence of manifest error, conclusive.

(e) ‘‘Permitted Security Interest’’ means any Security Interest over or affecting any assets or revenues ofany company in the Group where such Security Interest secures only Project Finance Indebtedness;

(f) ‘‘Person’’ means any individual, company, corporation, firm, partnership, joint venture, association,organisation, state or agency of a state or other entity, whether or not having separate legalpersonality;

(g) ‘‘Project Finance Indebtedness’’ means any indebtedness incurred by a debtor to finance the ownership,acquisition, construction, development and/or operation of an asset, assets or portfolio of assets inrespect of which the Person or Persons to whom such indebtedness is, or may be, owed has/have norecourse whatsoever for the repayment of or payment of any sum relating to such indebtedness otherthan:

(i) recourse to such debtor for amounts limited to the aggregate cash flow or net cash flow (otherthan historic cash flow or historic net cash flow) from such asset, assets or portfolio of assets;and/or

(ii) recourse to such debtor generally, which recourse is limited to a claim for damages (other thanliquidated damages and damages required to be calculated in a specified way) for breach of anobligation, representation or warranty (not being a payment obligation, representation orwarranty or an obligation, representation or warranty to procure payment by another or anobligation, representation or warranty to comply or to procure compliance by another with anyfinancial ratios or other test of financial condition) by the Person against whom such recourse isavailable; and/or

(iii) if such debtor has been established specifically for the purpose of constructing, developing,owning and/or operating the relevant asset, assets or portfolio of assets and such debtor owns noother significant assets and carries on no other business, recourse to all of the assets andundertaking of such debtor and the shares in the capital of such debtor;

(h) ‘‘Relevant Indebtedness’’ means (i) any present or future indebtedness (whether being principal,premium, interest or other amounts) for or in respect of any notes, bonds, debentures, debenturestock, loan stock or other securities which are for the time being quoted, listed or ordinarily dealt inon any stock exchange, over-the-counter or other securities market and (ii) any guarantee orindemnity of any such indebtedness;

(i) ‘‘Specified Borrowings’’ means:

(i) the credit facilities in an aggregate amount of up to A30,000,000 pursuant to an Agreement dated27 July 2009 between the Issuer (as borrower) and Bayersische Landesbank (as lender);

(ii) the credit facilities in an aggregate amount of up to A125,000,000 pursuant to an Agreementdated 16 December 2008 between, inter alios, the Issuer (as borrower) and Privredna BankaZagreb-Dionicko Drustvo (as facility agent);

(iii) the credit facility in an amount of up to A3,000,000 pursuant to an Agreement dated 23 July 2009between the Issuer (as borrower) and Societe Generale-Splitska Banka d.d. (as lender);

(iv) the credit facility in an amount of up to A100,000,000 pursuant to a Facility Agreement dated18 March 2010 between, inter alios, the Issuer (as borrower) and Deutsche BankLuxembourg S.A. (as lender); and

(v) the credit facility in an amount of up to A10,000,000 pursuant to an Agreement dated 15 April2010 between the Issuer (as borrower) and Societe Generale-Splitska Banka d.d. (as lender); and

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(j) ‘‘Subsidiary’’ means, in relation to the Issuer, any company (i) in which the Issuer holds a majority ofthe voting rights or (ii) of which the Issuer is a member and has the right to appoint or remove amajority of the board of directors or (iii) of which the Issuer is a member and controls a majority ofthe voting rights, and includes any company which is a Subsidiary of a Subsidiary of the Issuer.

5. INTEREST

5.1 Interest Rate and Interest Payment Dates

Subject as provided in Condition 5.2 below, the Notes bear interest from and including the Issue Date atthe rate of 6.00% per annum (the ‘‘Original Rate of Interest’’), payable semi-annually in arrear on 9 Mayand 9 November in each year (each an ‘‘Interest Payment Date’’). The first payment (for the period fromand including 9 November 2012 to but excluding 9 May 2013 and amounting to U.S.$30 per U.S.$1,000principal amount of Notes) shall be made on 9 May 2013. Each period beginning on (and including) theIssue Date or any Interest Payment Date and ending on (but excluding) the first or the next InterestPayment Date, respectively, is herein called an ‘‘Interest Period’’.

5.2 Interest Rate Adjustment Based on ratings Events

(a) The rate of interest payable on the Notes (the ‘‘Rate of Interest’’) will be subject to adjustment fromtime to time in the event of a Step Up Rating Change or a Step Down Rating Change, as the case maybe. Subject to paragraph (b) below:

(i) if at any time there occurs a Step Up Rating Change, the Rate of Interest shall be increased fromthe Original Rate of Interest by 1.00% per annum; and

(ii) if at any time following the occurrence of a Step Up Rating Change there occurs a Step DownRating Change, the Rate of Interest shall be decreased by 1.00% per annum to the Original Rateof Interest.

(b) Any adjustment to the Rate of Interest pursuant to paragraph (a) above will take effect from andincluding the first Interest Payment Date following the date on which the relevant Step Up RatingChange or Step Down Rating Change (as applicable) occurs provided that if, following a Step UpRating Change, a Step Down Rating Change occurs prior to the first Interest Payment Date followingthe date on which the relevant Step Up Rating Change occurs, the Rate of Interest shall neither beincreased nor decreased as a result of either such event.

(c) So long as any of the Notes remains outstanding, the Issuer shall use all reasonable efforts to maintaincredit ratings for the Notes from the Rating Agencies.

(d) The Issuer will cause the occurrence of a Step Up Rating Change or a Step Down Rating Change tobe notified to the Principal Paying Agent and to any stock exchange or other relevant authority onwhich the Notes are at the relevant time listed and notice thereof to be published in accordance withCondition 13 as soon as reasonably practicable after the occurrence of the Step Up Rating Change orthe Step Down Rating Change (as the case may be) and in no event later than the fifth LondonBusiness Day thereafter.

(e) In these Conditions:

‘‘London Business Day’’ means a day (other than a Saturday or Sunday) on which commercial banks areopen for business in London;

‘‘Rating Agency’’ means Standard & Poor’s Credit Market Services Europe Limited (‘‘S&P’’), Moody’sInvestors Service Ltd. (‘‘Moody’s’’), or any of their respective successors, or any other rating agency ofinternational standing;

‘‘Step Down Rating Change’’ means the first public announcement after a Step Up Rating Change by aRating Agency (i) that it has upgraded the credit rating assigned by it to the Notes or (ii) that it hasre-assigned a credit rating to the Issuer with the result that, following such public announcement, eachof the Rating Agencies has assigned a credit rating to the Issuer of (A) in the case of Moody’s, Ba2 orhigher, (B) in the case of S&P, BB- or higher or (C) in the case of any other Rating Agency, acomparable rating or higher.

‘‘Step Up Rating Change’’ means the first public announcement by one or more Rating Agencies (i) of adowngrade in the credit rating assigned to the Issuer to a rating of (A) in the case of Moody’s, Ba3 orlower, (B) in the case of S&P, B+ or lower or (C) in the case of any other Rating Agency, a

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comparable rating or lower, or (ii) that such Rating Agency(ies) have ceased to assign (other thantemporarily) any such credit rating to the Issuer in circumstances where no other Rating Agency isthen assigning such a credit rating to the Notes.

5.3 Interest Accrual

Each Note will cease to bear interest from and including its due date for redemption unless, upon duepresentation, payment of the principal in respect of the Note is improperly withheld or refused or unlessdefault is otherwise made in respect of payment in which event interest will continue to accrue as providedin the Trust Deed.

5.4 Calculation of Interest for an Interest Period

The amount of interest payable in respect of each Note for any Interest Period shall be calculated byapplying the Rate of Interest to the principal amount of such Note and dividing the product by two.

5.5 Calculation of Broken Interest

When interest is required to be calculated in respect of a period of less than half a year, it shall becalculated on the basis of a 360 day year consisting of 12 months of 30 days each and, in the case of anincomplete month, the number of days elapsed on the basis of a month of 30 days.

6. PAYMENTS

6.1 Payments in respect of Notes

Payment of principal, premium (if any) and interest will be made by transfer to the registered account ofthe Noteholder. Payments of principal and premium (if any) and payments of interest due otherwise thanon an Interest Payment Date will only be made against surrender (or, in the case of part payment only,endorsement) of the relevant Certificate at the specified office of any of the Agents. Interest on Notes dueon an Interest Payment Date will be paid to the holder shown on the register of Noteholders at the close ofbusiness on the date (the ‘‘record date’’) being the fifteenth day before the relevant Interest Payment Date.

For the purposes of this Condition, a Noteholder’s ‘‘registered account’’ means the U.S. dollar accountmaintained by or on behalf of it with a bank that processes payments in U.S. dollars, details of whichappear on the register of Noteholders at the close of business, in the case of principal and premium (ifany), on the second Business Day (as defined below) before the due date for payment and, in the case ofinterest, on the relevant record date.

6.2 Payments subject to Applicable Laws

Payments in respect of principal, premium and interest on Notes are subject in all cases to any fiscal orother laws and regulations applicable in the place of payment, but without prejudice to the provisions ofCondition 8.

6.3 No commissions

No commissions or expenses shall be charged to the Noteholders in respect of any payments made inaccordance with this Condition.

6.4 Payment on Business Days

Where payment is to be made by transfer to a registered account, payment instructions (for value the duedate or, if that is not a Business Day (as defined below), for value the first following day which is a BusinessDay) will be initiated on the Business Day preceding the due date for payment or, in the case of a paymentof principal and premium (if any) or a payment of interest due otherwise than on an Interest PaymentDate, if later, on the Business Day on which the relevant Certificate is surrendered at the specified officeof an Agent.

Noteholders will not be entitled to any interest or other payment for any delay after the due date inreceiving the amount due if the due date is not a Business Day, if the Noteholder is late in surrendering itsCertificate (if required to do so).

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In this Condition ‘‘Business Day’’ means a day (other than a Saturday or Sunday) on which commercialbanks are open for business in London, New York City and, in the case of presentation of a Certificate, theplace in which the Certificate is presented.

6.5 Partial Payments

If the amount of principal, premium (if any) or interest which is due on the Notes is not paid in full, therelevant Registrar will annotate the register of Noteholders with a record of the amount of principal,premium (if any) or interest in fact paid.

6.6 Agents

The names of the initial Agents and their initial specified offices are set out at the end of these Conditions.The Issuer reserves the right, subject to the prior written approval of the Trustee, at any time to vary orterminate the appointment of any Agent and to appoint additional or other Agents provided that:

(a) there will at all times be a Principal Paying Agent;

(b) there will at all times be an Agent (which may be the Principal Paying Agent) having a specified officein a European city which, so long as the Notes are listed on the Luxembourg Stock Exchange, shall beLuxembourg;

(c) the Issuer undertakes that it will ensure that it maintains a Paying Agent in a Member State of theEU that is not obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/ECor any law implementing or complying with, or introduced in order to conform to, such Directive;

(d) there will at all times be an Agent in a jurisdiction within continental Europe, other than thejurisdiction in which the Issuer is incorporated; and

(e) there will at all times be a Registrar or Registrars.

Notice of any termination or appointment and of any changes in specified offices given to the Noteholderspromptly by the Issuer in accordance with Condition 13.

7. REDEMPTION AND PURCHASE

7.1 Redemption at Maturity

Unless previously redeemed or purchased and cancelled as provided below, the Issuer will redeem theNotes at their principal amount on 9 November 2017 (the ‘‘Maturity Date’’).

7.2 Redemption for Taxation Reasons

If the Issuer satisfies the Trustee immediately before the giving of the notice referred to below that:

(a) as a result of any change in, or amendment to, the laws or regulations of a Relevant Jurisdiction (asdefined in Condition 8), or any change in the application or official interpretation of the laws orregulations of a Relevant Jurisdiction, which change or amendment becomes effective after9 November 2012, on the next Interest Payment Date the Issuer would be required to pay additionalamounts as provided or referred to in Condition 8; and

(b) the requirement cannot be avoided by the Issuer taking reasonable measures available to it,

the Issuer may at its option, having given not less than 30 nor more than 60 days’ notice to the Noteholdersin accordance with Condition 13 (which notice shall be irrevocable), redeem all the Notes, but not someonly, at any time at their principal amount together with interest accrued to but excluding the date ofredemption. Prior to the publication of any notice of redemption pursuant to this paragraph, the Issuershall deliver to the Trustee a certificate signed by two Directors of the Issuer stating that the requirementreferred to in (a) above will apply on the next Interest Payment Date and cannot be avoided by the Issuertaking reasonable measures available to it and the Trustee shall be entitled to accept the certificate assufficient evidence of the satisfaction of the conditions precedent set out above, in which event it shall beconclusive and binding on the Noteholders.

Upon the expiry of any notice as is referred to in this Condition 7.2 the Issuer shall be bound to redeem theNotes in accordance with the terms of this Condition.

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7.3 Redemption at the Option of the Noteholders upon a Change of Control

If, at any time while any of the Notes remains outstanding, a Change of Control (as defined below) occurs,each Noteholder shall have the option (unless, prior to the giving of the Change of Control Notice (asdefined below), the Issuer shall have given notice under Condition 7.2) to require the Issuer to redeem or,at the option of the Issuer, purchase (or procure the purchase of) that Noteholder’s Note(s) at 101% of theprincipal amount of the Notes then outstanding together with (or, where purchased, together with anamount equal to) interest (if any) accrued to (but excluding) the Change of Control Put Date (as definedbelow). Such option (the ‘‘Change of Control Put Option’’) shall operate as set out below.

If a Change of Control occurs the Issuer shall, within 14 days of the occurrence of such Change of Control,give notice (a ‘‘Change of Control Notice’’) to the Noteholders in accordance with Condition 13 specifyingthe nature of the Change of Control and the procedure for exercising the option contained in thisCondition 7.3.

To exercise the Change of Control Put Option, the Noteholder must deliver at the specified office of anyAgent on any Business Day (as defined in Condition 6) falling within the period (the ‘‘Change of ControlPut Period’’) of 45 days after that on which a Change of Control Notice is given, a duly signed and completednotice of exercise in the form (for the time being current and which may, if the Certificate for such Notes isheld in a clearing system, be any form acceptable to the clearing system delivered in any manner acceptableto the clearing system) obtainable from any specified office of any Agent (a ‘‘Change of Control PutNotice’’) and in which the holder must specify a bank account complying with the requirements ofCondition 6 to which payment is to be made under this Condition 7.3, accompanied by the Certificate forsuch Notes or evidence satisfactory to the Agent concerned that the Certificate for such Notes will,following the delivery of the Change of Control Put Notice, be held to its order or under its control.

The Issuer shall redeem or, at its option, purchase (or procure the purchase of) the relevant Note on thedate (the ‘‘Change of Control Put Date’’) being the fifteenth day after the date of expiry of the Change ofControl Put Period, unless previously redeemed or purchased and cancelled. Payment in respect of anyNote so delivered shall be made, if the holder duly specifies a bank account in the Change of Control PutNotice to which payment is to be made on the Change of Control Put Date, by transfer to that bankaccount, subject in any such case as provided in Condition 6.

A Change of Control Put Notice given by a holder of any Note shall be irrevocable except where, prior tothe due date of redemption, an Event of Default has occurred and is continuing in which event suchholder, at its option, may elect by notice to the Issuer to withdraw the Change of Control Put Notice andinstead to give notice that the Note is immediately due and repayable under Condition 10.

‘‘Change of Control’’ means, in relation to the Issuer, where the Republic of Croatia ceases to control theIssuer or ceases to own, directly or indirectly, 75% of the entire issued share capital of the Issuer, and forthe purposes of this definition, ‘‘control’’ shall mean the power to direct the management and policies ofthe Issuer or to control the composition of its board of directors or other equivalent body, whether throughthe ownership of voting capital, by contract or otherwise.

7.4 Redemption at the Option of the Noteholders upon an Ownership Unbundling Event

If, at any time while any of the Notes remains outstanding, an Ownership Unbundling Event (as definedbelow) occurs, each Noteholder shall have the option (unless, prior to the giving of the OwnershipUnbundling Event Notice (as defined below), the Issuer shall have given notice under Condition 7.2) torequire the Issuer to redeem or, at the option of the Issuer, purchase (or procure the purchase of) thatNoteholder’s Note(s) at their principal amount together with (or, where purchased, together with anamount equal to) interest (if any) accrued to (but excluding) the Ownership Unbundling Event Put Date(as defined below). Such option (the ‘‘Ownership Unbundling Event Put Option’’) shall operate as set outbelow.

If an Ownership Unbundling Event occurs the Issuer shall, within 14 days of the occurrence of suchOwnership Unbundling Event, give notice (an ‘‘Ownership Unbundling Event Notice’’) to the Noteholdersin accordance with Condition 13 specifying the nature of the Ownership Unbundling Event and theprocedure for exercising the option contained in this Condition 7.4.

To exercise the Ownership Unbundling Event Put Option, the Noteholder must deliver at the specifiedoffice of any Agent on any Business Day (as defined in Condition 6) falling within the period (the‘‘Ownership Unbundling Event Put Period’’) of 45 days after that on which an Ownership Unbundling EventNotice is given, a duly signed and completed notice of exercise in the form (for the time being current and

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which may, if the Certificate for such Notes is held in a clearing system, be any form acceptable to theclearing system delivered in any manner acceptable to the clearing system) obtainable from any specifiedoffice of any Agent (an ‘‘Ownership Unbundling Event Put Notice’’) and in which the holder must specifya bank account complying with the requirements of Condition 6 to which payment is to be made under thisCondition 7.4, accompanied by the Certificate for such Notes or evidence satisfactory to the Agentconcerned that the Certificate for such Notes will, following the delivery of the Ownership UnbundlingEvent Put Notice, be held to its order or under its control.

The Issuer shall redeem or, at its option, purchase (or procure the purchase of) the relevant Note on thedate (the ‘‘Ownership Unbundling Event Put Date’’) being the fifteenth day after the date of expiry of theOwnership Unbundling Event Put Period, unless previously redeemed or purchased and cancelled.Payment in respect of any Note so delivered shall be made, if the holder duly specifies a bank account inthe Ownership Unbundling Event Put Notice to which payment is to be made on the OwnershipUnbundling Event Put Date, by transfer to that bank account, subject in any such case as provided inCondition 6.

An Ownership Unbundling Event Put Notice given by a holder of any Note shall be irrevocable exceptwhere, prior to the due date of redemption, an Event of Default has occurred and is continuing in whichevent such holder, at its option, may elect by notice to the Issuer to withdraw the Ownership UnbundlingEvent Put Notice and instead to give notice that the Note is immediately due and repayable underCondition 10.

For the purposes of these Conditions:

(a) ‘‘Governmental Authority’’ means the Republic of Croatia or any entity exercising executive, legislative,judicial, regulatory or administrative functions of, or pertaining to, the Republic of Croatia;

(b) ‘‘Ownership Unbundling Event’’ means any reorganisation of the holding of the Regulated Assetspursuant to or in accordance with any order or act of a Governmental Authority implementingDirective 2009/72/EC in the Republic of Croatia following the consummation of which the RegulatedAssets cease to be owned by any member of the Group; and

(c) ‘‘Regulated Assets’’ means those assets of the Group relating to the transmission of electricity to, fromand within the Republic of Croatia in respect of which the Issuer and its Subsidiaries earn revenuesregulated, directly or indirectly, by the Croatian Regulatory Agency for Energy (HERA).

7.5 Purchases

The Issuer or any of its Subsidiaries (as defined above) may at any time purchase Notes in any manner andat any price. The Notes so purchased may be held or resold (provided that such resale is outside theUnited States and is otherwise in compliance with all applicable laws).

7.6 Cancellations

All Notes which are (a) redeemed will forthwith be, or (b) purchased by or on behalf of the Issuer or any ofits Subsidiaries may at the option of the Issuer be, cancelled, and any Notes so cancelled may not bereissued or resold.

8. TAXATION

8.1 Payment without Withholding

All payments in respect of the Notes by or on behalf of the Issuer shall be made without withholding ordeduction for, or on account of, any present or future taxes, duties, assessments or governmental chargesof whatever nature (‘‘Taxes’’) imposed or levied by or on behalf of the Relevant Jurisdiction, unless thewithholding or deduction of the Taxes is required by law. In that event, the Issuer will pay such additionalamounts as may be necessary in order that the net amounts received by the Noteholders after thewithholding or deduction shall equal the respective amounts which would have been receivable in respectof the Notes in the absence of the withholding or deduction; except that no additional amounts shall bepayable in relation to any payment in respect of any Note:

(a) presented for payment by or on behalf of a holder who is liable for the Taxes in respect of the Note byreason of his having some connection with any Relevant Jurisdiction other than the mere holding ofthe Note; or

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(b) presented for payment in the Republic of Croatia; or

(c) where such withholding or deduction is imposed on a payment to an individual and is required to bemade pursuant to European Council Directive 2003/48/EC or any law implementing or complyingwith, or introduced in order to conform to, such Directive; or

(d) presented for payment by or on behalf of a holder who would have been able to avoid suchwithholding or deduction by presenting the relevant Note to another Paying Agent in a Member Stateof the EU; or

(e) presented for payment more than 30 days after the Relevant Date (as defined below) except to theextent that a holder would have been entitled to additional amounts on presenting the same forpayment on the last day of the period of 30 days assuming that day to have been a Business Day (asdefined in Condition 6).

8.2 Interpretation

In these Conditions:

(a) ‘‘Relevant Date’’ means the date on which the payment first becomes due but, if the full amount of themoney payable has not been received by an Agent or the Trustee on or before the due date, it meansthe date on which, the full amount of the money having been so received, notice to that effect hasbeen duly given to the Noteholders by the Issuer in accordance with Condition 13; and

(b) ‘‘Relevant Jurisdiction’’ means the Republic of Croatia or any political subdivision or any authoritythereof or therein having power to tax or any other jurisdiction or any political subdivision or anyauthority thereof or therein having power to tax to which the Issuer becomes subject in respect ofpayments made by it of principal, premium (if any) and interest on the Notes.

8.3 Additional Amounts

Any reference in these Conditions to any amounts in respect of the Notes shall be deemed also to refer toany additional amounts which may be payable under this Condition or under any undertakings given inaddition to, or in substitution for, this Condition pursuant to the Trust Deed.

9. PRESCRIPTION

Claims in respect of principal and interest will become prescribed unless made within 10 years (in the caseof principal) and five years (in the case of interest) from the Relevant Date, as defined in Condition 8.

10. EVENTS OF DEFAULT

10.1 Events of Default

The Trustee at its discretion may, and if so requested in writing by the holders of at least one-fifth inprincipal amount of the Notes then outstanding or if so directed by an Extraordinary Resolution of theNoteholders shall (subject in each case to being indemnified and/or secured and/or pre-funded to itssatisfaction), (but, in the case of the happening of any of the events described in subparagraphs (b) to(d) (other than the winding up or dissolution of the Issuer) and, (e) to (h) inclusive below, only if theTrustee shall have certified in writing to the Issuer that such event is, in its opinion, materially prejudicialto the interests of the Noteholders) give notice to the Issuer that the Notes are, and they shall accordinglyforthwith become, immediately due and repayable at their principal amount, together with accrued interestas provided in the Trust Deed, if any of the following events (‘‘Events of Default’’) occurs and is continuing:

(a) if default is made in the payment of any principal or interest due in respect of the Notes or any ofthem and the default continues for a period of 7 days in the case of principal or 14 days in the case ofinterest; or

(b) if the Issuer fails to perform or observe any of its other obligations under these Conditions or theTrust Deed and (except in any case where the Trustee considers the failure to be incapable of remedy,when no continuation or notice as is hereinafter mentioned will be required) the failure continues forthe period of 30 days (or such longer period as the Trustee may permit) following the service by theTrustee on the Issuer of notice requiring the same to be remedied; or

(c) if (i) any Indebtedness for Borrowed Money (as defined below) of the Issuer or any of its MaterialSubsidiaries becomes, or becomes capable of being declared, due and repayable prematurely by

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reason of an event of default (however described); (ii) the Issuer or any of its Material Subsidiariesfails to make any payment in respect of any Indebtedness for Borrowed Money when due (after theexpiration of any originally applicable grace period); (iii) any security given by the Issuer or any of itsMaterial Subsidiaries for any Indebtedness for Borrowed Money becomes enforceable; or (iv) defaultis made by the Issuer or any of its Material Subsidiaries in making any payment due under anyguarantee and/or indemnity given by it in relation to any Indebtedness for Borrowed Money of anyother person provided that no event described in this Condition 10.1(c) shall constitute an Event ofDefault unless the relevant amount of Indebtedness for Borrowed Money or other relative liabilitydue and unpaid, either alone or when aggregated (without duplication) with other amounts ofIndebtedness for Borrowed Money and/or other liabilities due and unpaid relative to all (if any) otherevents specified in (i) to (iv) above, amounts to at least A5,000,000 (or its equivalent in any othercurrency); or

(d) if any order is made by any competent court or resolution is passed for the winding up or dissolutionof the Issuer or any of its Material Subsidiaries, save for the purposes of (i) reorganisation on termsapproved in writing by the Trustee or by an Extraordinary Resolution of the Noteholders; or (ii) (inthe case of a Material Subsidiary only) a Permitted Reorganisation; or

(e) if the Issuer or any of its Material Subsidiaries ceases to carry on the whole or a substantial part of itsbusiness, save for the purposes of (i) reorganisation on terms approved in writing by the Trustee or byan Extraordinary Resolution of the Noteholders or (ii) a Permitted Reorganisation, or the Issuer orany of its Material Subsidiaries stops payment of, or is unable to, or admits inability to, pay, its debts(or any class of its debts) as they fall due or is deemed unable to pay its debts pursuant to or for thepurposes of any applicable law, or is adjudicated or found bankrupt or insolvent; or

(f) if (i) proceedings are initiated against the Issuer or any of its Material Subsidiaries under anyapplicable liquidation, insolvency, composition, reorganisation or other similar laws or an applicationis made (or documents filed with a court) for the appointment of an administrative or other receiver,manager, administrator or other similar official, or an administrative or other receiver, manager,administrator or other similar official is appointed, in relation to the Issuer or any of its MaterialSubsidiaries or, as the case may be, in relation to the whole or any part of the undertaking or assets ofany of them or an encumbrancer takes possession of the whole or any part of the undertaking or assetsof any of them, or a distress, execution, attachment, sequestration or other process is levied, enforcedupon, sued out or put in force against the whole or any part of the undertaking or assets of any ofthem, and (ii) in any such case (other than the appointment of an administrator) unless initiated bythe relevant company, is not discharged within 45 days; or

(g) if the Issuer or any of its Material Subsidiaries (or their respective directors or shareholders) initiatesor consents to judicial proceedings relating to itself under any applicable liquidation, insolvency,composition, reorganisation or other similar laws (including the obtaining of a moratorium) or, ineach case save for the purposes of a Permitted Reorganisation, makes a conveyance or assignment forthe benefit of, or enters into any composition with, its creditors generally (or any class of its creditors)or any meeting is convened to consider a proposal for a composition with its creditors generally (orany class of its creditors); or

(h) if any event occurs which, under the laws of any Relevant Jurisdiction, has or may have, in theTrustee’s opinion, an analogous effect to any of the events referred to in subparagraphs (d) to(g) above.

10.2 Interpretation

For the purposes of this Condition:

‘‘Indebtedness for Borrowed Money’’ means any indebtedness (whether being principal, premium, interestor other amounts) for or in respect of any notes, bonds, debentures, debenture stock, loan stock or othersecurities or any borrowed money or any liability under or in respect of any acceptance or acceptancecredit;

‘‘Permitted Reorganisation’’ means (a) an Ownership Unbundling Event or (b) a Permitted UnbundlingEvent; and

‘‘Permitted Unbundling Event’’ means any reorganisation of the holding of the Regulated Assets in theGroup pursuant to or in accordance with any order or act of a Governmental Authority implementing

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Directive 2009/72/EC in the Republic of Croatia following the consummation of which any member of theGroup continues to own the Regulated Assets.

11. ENFORCEMENT

11.1 The Trustee may at any time, at its discretion and without notice, take such proceedings and/or othersteps or action (including lodging an appeal in any proceedings) against or in relation to the Issuer asit may think fit to enforce the provisions of the Trust Deed and the Notes or otherwise, but it shall notbe bound to take any such proceedings or any other action or steps in relation to the Trust Deed or theNotes unless (a) it shall have been so directed by an Extraordinary Resolution of the Noteholders orso requested in writing by the holders of at least one-fifth in principal amount of the Notes thenoutstanding, and (b) it shall have been indemnified and/or secured and/or pre-funded to itssatisfaction.

11.2 The Trustee may refrain from taking any action in any jurisdiction if the taking of such action in thatjurisdiction would, in in its opinion based upon legal advice in the relevant jurisdiction, be contrary toany law of that jurisdiction. Furthermore, the Trustee may also refrain from taking such action if itwould otherwise render it liable to any person in that jurisdiction or if, in its opinion based upon suchlegal advice, it would not have the power to do the relevant thing in that jurisdiction by virtue of anyapplicable law in that jurisdiction or if it is determined by any court or other competent authority inthat jurisdiction that it does not have such power.

11.3 No Noteholder shall be entitled to (i) take any steps or action against the Issuer to enforce theperformance of any of the provisions of the Trust Deed or the Notes or (ii) take any other proceedings(including lodging an appeal in any proceedings) in respect of or concerning the Issuer unless theTrustee, having become bound so to take any such action, steps or proceedings, fails so to do within areasonable period and the failure shall be continuing.

12. REPLACEMENT OF CERTIFICATES

If any Certificate is lost, stolen, mutilated, defaced or destroyed it may be replaced at the specified office ofthe relevant Registrar or the Agent in Luxembourg upon payment by the claimant of the expenses incurredin connection with the replacement and on such terms as to evidence and indemnity as the Issuer mayreasonably require. Mutilated or defaced Certificates must be surrendered before replacements will beissued.

13. NOTICES

13.1 Notices to the Noteholders

All notices to the Noteholders will be valid if mailed to them at their respective addresses in the register ofNoteholders maintained by the relevant Registrar or if the Certificates are held in a clearing system, maybe given through the clearing system in accordance with its standard rules and procedures and, in each caseand so long as the Notes are listed on the Luxembourg Stock Exchange and the rules of that exchange sorequire, published in accordance with Article 16 of the Luxembourg Law on Prospectuses for Securities,including in a daily newspaper in Luxembourg approved by the Trustee and/or via the website of theLuxembourg Stock Exchange (www.bourse.lu). The Issuer shall also ensure that notices are duly given orpublished in a manner which complies with the rules and regulations of any stock exchange or otherrelevant authority on which the Notes are for the time being listed. Any notice shall be deemed to havebeen given on the second day after being so mailed or on the date of publication or, if so published morethan once or on different dates, on the date of the first publication.

13.2 Notices from the Noteholders

Notices to be given by any Noteholder shall be in writing and given by lodging the same, together with therelative Certificate, with the relevant Registrar or if the Certificates are held in a clearing system, may begiven through the clearing system in accordance with its standard rules and procedures.

14. MEETINGS OF NOTEHOLDERS, MODIFICATION, WAIVER AND AUTHORISATION

14.1 Meetings of Noteholders

The Trust Deed contains provisions for convening meetings of the Noteholders to consider any matteraffecting their interests, including the modification or abrogation by Extraordinary Resolution of any of

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these Conditions or any of the provisions of the Trust Deed. The quorum at any meeting for passing anExtraordinary Resolution will be one or more persons present holding or representing more than 50% inprincipal amount of the Notes for the time being outstanding, or at any adjourned such meeting one ormore persons present whatever the principal amount of the Notes held or represented by him or them,except that at any meeting the business of which includes any matter defined in the Trust Deed as aReserved Matter, the necessary quorum for passing an Extraordinary Resolution will be one or morepersons present holding or representing not less than two-thirds, or at any adjourned such meeting not lessthan one-third, of the principal amount of the Notes for the time being outstanding. The Trust Deedprovides that (i) a resolution passed at a meeting duly convened and held in accordance with the TrustDeed by a majority consisting of not less than three-fourths of the votes cast on such resolution, (ii) aresolution in writing signed by or on behalf of the holders of not less than three-fourths in principalamount of the Notes for the time being outstanding or (iii) consent given by way of electronic consentsthrough the relevant clearing system(s) (in a form satisfactory to the Trustee) by or on behalf of the holdersof not less than three-fourths in principal amount of the Notes for the time being outstanding, shall, ineach case, be effective as an Extraordinary Resolution of the Noteholders. The Trust Deed does notcontain any provisions requiring higher quorums in any circumstances. An Extraordinary Resolutionpassed by the Noteholders will be binding on all Noteholders, whether or not they are present at anymeeting and whether or not they voted on the resolution.

14.2 Modification, Waiver, Authorisation and Determination

The Trustee may agree, without the consent of the Noteholders, to any modification of, or to the waiver orauthorisation of any breach or proposed breach of, any of these Conditions, any of the provisions of theTrust Deed, the Notes or the Agency Agreement or determine, without any such consent as aforesaid, thatany Event of Default or Potential Event of Default (as defined in the Trust Deed) shall not be treated assuch (provided that, in any such case, it is not, in the opinion of the Trustee, materially prejudicial to theinterests of the Noteholders) or may agree, without any such consent as aforesaid, to any modificationwhich, in its opinion, is of a formal, minor or technical nature or to correct a manifest or proven error.

14.3 Trustee to have Regard to Interests of Noteholders as a Class

In connection with the exercise by it of any of its trusts, powers, authorities and discretions (including,without limitation, any modification, waiver or authorisation), the Trustee shall have regard to the generalinterests of the Noteholders as a class but shall not have regard to any interests arising from circumstancesparticular to individual Noteholders (whatever their number) and, in particular but without limitation,shall not have regard to the consequences of any such exercise for individual Noteholders (whatever theirnumber) resulting from their being for any purpose domiciled or resident in, or otherwise connected with,or subject to the jurisdiction of, any particular territory or any political sub-division thereof and the Trusteeshall not be entitled to require, nor shall any Noteholder be entitled to claim, from the Issuer, the Trusteeor any other person any indemnification or payment in respect of any tax consequence of any such exerciseupon individual Noteholders except to the extent already provided for in Condition 8 and/or anyundertaking given in addition to, or in substitution for, Condition 8 pursuant to the Trust Deed.

14.4 Notification to the Noteholders

Any modification, abrogation, waiver or authorisation shall be binding on the Noteholders and, unless theTrustee agrees otherwise, any modification shall be notified by the Issuer to the Noteholders as soon aspracticable thereafter in accordance with Condition 13.

15. PROVISION OF INFORMATION

The Issuer shall, during any period in which it is not subject to or in compliance with the reportingrequirements of Section 13 or 15(d) of the United States Securities Exchange Act of 1934 (the‘‘Exchange Act’’) nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, dulyprovide to any holder of a Note which is a ‘‘restricted security’’ within the meaning of Rule 144(a)(3) underthe Securities Act or to any prospective purchaser of such securities designated by such Noteholder, uponthe written request of such Noteholder or (as the case may be) prospective Noteholder addressed to theIssuer and delivered to the Issuer or to the Specified Office of the relevant Registrar, the informationspecified in Rule 144A(d)(4) under the Securities Act.

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16. INDEMNIFICATION OF THE TRUSTEE AND ITS CONTRACTING WITH THE ISSUER

16.1 Indemnification of the Trustee

The Trust Deed contains provisions for the indemnification of the Trustee and for its relief fromresponsibility and liability towards the Issuer and the Noteholders, including (i) provisions relieving it fromtaking action unless indemnified and/or secured and/or pre-funded to its satisfaction and (ii) provisionslimited or excluding its liability in certain circumstances. The Trust Deed provides that, when determiningwhether an indemnity or any security or pre-funding is satisfactory to it, the Trustee shall be entitled torequire that any indemnity or security given to it by the Noteholders or any of them be given on a joint andseveral basis and be supported by evidence satisfactory to it as to the financial standing andcreditworthiness of each counterparty and/or as to the value of the security and an opinion as to thecapacity, power and authority of each counterparty and/or the validity and effectiveness of the security.

16.2 Trustee Contracting with the Issuer

The Trust Deed also contains provisions pursuant to which the Trustee is entitled, inter alia, (i) to enterinto business transactions with the Issuer and/or any of the Issuer’s Subsidiaries and to act as trustee forthe holders of any other securities issued or guaranteed by, or relating to, the Issuer and/or any of theIssuer’s Subsidiaries, (ii) to exercise and enforce its rights, comply with its obligations and perform itsduties under or in relation to any such transactions or, as the case may be, any such trusteeship withoutregard to the interests of, or consequences for, the Noteholders, and (iii) to retain and not be liable toaccount for any profit made or any other amount or benefit received thereby or in connection therewith.

17. FURTHER ISSUES

The Issuer is at liberty from time to time without notice to or the consent of the Noteholders to create andissue further notes or bonds (whether in bearer or registered form) either (a) having the same terms andconditions as the Notes in all respects (or in all respects save for the first payment of interest thereon) andso that the same shall be consolidated and form a single series with the outstanding notes or bonds of anyseries (including the Notes) constituted by the Trust Deed or any supplemental deed or (b) upon suchterms as to ranking, interest, conversion, redemption and otherwise as the Issuer may determine at thetime of the issue. Any further notes or bonds which are to form a single series with the outstanding notesor bonds of any series (including the Notes) constituted by the Trust Deed or any supplemental deed shall,and any other further notes or bonds may (with the consent of the Trustee), be constituted by a deedsupplemental to the Trust Deed. The Trust Deed contains provisions for convening a single meeting of theNoteholders and the holders of notes or bonds of other series in certain circumstances where the Trusteeso decides.

Noteholders should note that additional securities that are treated as a single series for non-tax purposes may betreated as a separate series for U.S. federal income tax purposes. In such case, the new securities may beconsidered to have been issued with original issue discount, as defined in the U.S. Internal Revenue Code of1986, as amended, and the U.S. Treasury regulations issued thereunder, which may affect the market value ofthe Notes since such additional securities may not be distinguishable from the Notes.

18. GOVERNING LAW AND DISPUTE RESOLUTION

18.1 Governing Law

The Trust Deed and the Notes, and any non-contractual obligations arising out of or in connection with theTrust Deed and the Notes, are governed by, and will be construed in accordance with, English law.

18.2 Arbitration

Subject to Condition 18.3, any dispute, claim, difference or controversy arising out of, relating to or havingany connection with the Trust Deed and the Notes (including any dispute as to their existence, validity,interpretation, performance, breach or termination or the consequences of their nullity and any disputerelating to any non-contractual obligations arising out of or in connection with them) (a ‘‘Dispute’’) shallbe referred to and finally resolved by arbitration under the LCIA Arbitration Rules (the ‘‘Rules’’), whichRules (as amended from time to time) are incorporated by reference into this Condition. For thesepurposes:

(a) the seat of arbitration shall be London;

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(b) there shall be three arbitrators, each of whom shall be disinterested in the arbitration, shall have noconnection with any party thereto, one of whom shall be nominated by the Claimant(s), one by theRespondent(s) and the third of whom, who shall act as Chairman, shall be nominated by the twoparty-nominated arbitrators, provided that if the third arbitrator has not been nominated withinthirty days of the nomination of the second party-nominated arbitrator, such third arbitrator shall beappointed by the LCIA Court. The parties may nominate and the LCIA Court may appointarbitrators from among the nationals of any country, whether or not a party is a national of thatcountry; and

(c) the language of the arbitration shall be English.

18.3 Court of Law

Notwithstanding Condition 18.2 above, any Noteholder may, in the alternative, and at its sole discretion, bynotice in writing to the Issuer:

(a) within 28 days of service of a Request for Arbitration (as defined in the Rules); or

(b) in the event no arbitration is commenced within 28 days of service of a Request for Arbitration (asdefined in the Rules).

require that a Dispute be heard by a court of law (subject to Condition 18.4 below). If any Noteholdergives such notice, the Dispute to which such notice refers shall be determined in accordance withCondition 18.4 and, subject as provided below, any arbitration commenced under Condition 18.2 in respectof that Dispute will be terminated. Each of the parties to the terminated arbitration will bear its own costsin relation thereto.

If any notice to terminate is given after service of any Request for Arbitration in respect of any Dispute,the relevant Noteholder must also promptly give notice to the LCIA Court and to any Tribunal (each asdefined in the Rules) already appointed in relation to the Dispute that such Dispute will be settled by thecourts. Upon receipt of such notice by the LCIA Court, the arbitration and any appointment of anyarbitrator in relation to such Dispute will immediately terminate. Any such arbitrator will be deemed to befunctus officio. The termination is without prejudice to:

(a) the validity of any act done or order made by that arbitrator or by the court in support of thatarbitration before his appointment is terminated;

(b) his entitlement to be paid his proper fees and disbursements; and

(c) the date when any claim or defence was raised for the purpose of applying any limitation bar or anysimilar rule or provision.

18.4 Jurisdiction of the English courts

In the event that a notice pursuant to Condition 18.3 is issued, the following provisions shall apply:

(a) subject to paragraph (c) below, the courts of England shall have exclusive jurisdiction to settle anyDispute and the Issuer submits to the exclusive jurisdiction of such courts;

(b) the Issuer agrees that the courts of England are the most appropriate and convenient courts to settleany Dispute and, accordingly, that it will not argue to the contrary; and

(c) this Condition 18.4 is for the benefit of the Trustee and the Noteholders only. As a result, andnotwithstanding Condition 18.4(a) above, the Trustee and the Noteholders may take any suit, actionor proceeding relating to a Dispute (‘‘Proceedings’’) in any other court of competent jurisdiction. Tothe extent allowed by law, the Trustee and the Noteholders may take concurrent Proceedings in anynumber of jurisdictions.

18.5 Appointment of Process Agent

The Issuer has, in the Trust Deed, irrevocably and unconditionally appointed Law Debenture CorporateServices Limited of Fifth Floor, 100 Wood Street, London EC2V 7EX, United Kingdom at its registeredoffice for the time being as its agent for service of process in England in respect of any Proceedings andhave undertaken that in the event of such agent ceasing so to act it will appoint such other person as theTrustee may approve as its agent for that purpose.

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18.6 Sovereign Immunity and Enforcement

The Issuer has in the Trust Deed, to the fullest extent permitted by law, irrevocably and unconditionallywith respect to any Proceedings (i) waived any right to claim sovereign or other immunity from jurisdiction,recognition or execution and any similar argument in any jurisdiction and (ii) consented to the giving ofany relief (whether by way of injunction, attachment, specific performance or other relief) or the issue ofany related process in any jurisdiction, whether before or after final judgment, including without limitation,the making, enforcement or execution against any property whatsoever (irrespective of its use or intendeduse) of any order, judgment or award in connection with any Proceedings or Disputes.

Under the Trust Deed, the Issuer has agreed that an arbitral award or judgment or order of an English orother court in connection with any Dispute shall be binding on it and may be enforced against it in thecourts of any competent jurisdiction. For the purposes of the foregoing, in respect of any proceedingsarising out of or connected with the enforcement and/or execution of any award or judgment made againstthe Issuer, the Issuer has expressly submitted under the Trust Deed to the jurisdiction of any court in whichany such proceedings are brought.

19. RIGHTS OF THIRD PARTIES

No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforceany term of this Note, but this does not affect any right or remedy of any person which exists or is availableapart from that Act.

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THE GLOBAL CERTIFICATES

The Global Certificates contain the following provisions which apply to the Notes in respect of which they areissued whilst they are represented by the Global Certificates, some of which modify the effect of the Conditions.Terms defined in the Conditions have the same meaning in paragraphs 1 to 6 below.

1. ACCOUNTHOLDERS

For so long as any of the Notes are represented by a Global Certificate, each person (other than anotherclearing system) who is for the time being shown in the records of DTC, Euroclear or Clearstream,Luxembourg (as the case may be) as the holder of a particular aggregate principal amount of such Notes(each an ‘‘Accountholder’’) (in which regard any certificate or other document issued by DTC, Euroclearor Clearstream, Luxembourg (as the case may be) as to the aggregate principal amount of such Notesstanding to the account of any person shall, in the absence of manifest error, be conclusive and binding forall purposes) shall be treated as the holder of such aggregate principal amount of such Notes and, in thecase of DTC or its nominee, voting, giving consents and making requests pursuant to the Trust Deed, (andthe expression ‘‘Noteholders’’ and references to ‘‘holding of Notes’’ and to ‘‘holder of Notes’’ shall beconstrued accordingly) for all purposes other than with respect to payments on such Notes, the right towhich shall be vested, as against the Issuer and the Trustee, solely in the nominee for the relevant clearingsystem (the ‘‘Relevant Nominee’’) in accordance with and subject to the terms of the relevant GlobalCertificate. Each Accountholder must look solely to DTC, Euroclear or Clearstream, Luxembourg, as thecase may be, for its share of each payment made to the Relevant Nominee.

2. CANCELLATION

Cancellation of any Note following its redemption or purchase by the Issuer or any of its Subsidiaries willbe effected by reduction in the aggregate principal amount of the Notes in the relevant register ofNoteholders and by the annotation of the appropriate schedule to the relevant Global Certificate.

3. PAYMENTS

Payments of principal and interest in respect of Notes represented by a Global Certificate will be madeupon presentation or, if no further payment falls to be made in respect of the relevant Notes, againstpresentation and surrender of such Global Certificate to or to the order of the relevant Registrar or suchother Agent as shall have been notified to the holders of the relevant Global Certificate for such purpose.

Distributions of amounts with respect to book-entry interests in the Regulation S Notes held throughEuroclear or Clearstream, Luxembourg will be credited, to the extent received by the relevant Registrar, tothe cash accounts of Euroclear or Clearstream, Luxembourg participants in accordance with the relevantclearing system’s rules and procedures.

Holders of book-entry interests in the Rule 144A Notes held through DTC will receive, to the extentreceived by the relevant Registrar, all distributions of amounts with respect to book-entry interests in suchNotes from the relevant Registrar through DTC. Distributions in the United States will be subject to U.S.tax laws and regulations.

A record of each payment made will be endorsed on the appropriate schedule to the relevant GlobalCertificate by or on behalf of the relevant Registrar and shall be prima facie evidence that payment hasbeen made.

4. NOTICES

So long as the Notes are represented by a Global Certificate or Global Certificates and such GlobalCertificate(s) is/are held on behalf of a clearing system or clearing systems, notices to Noteholders may begiven by delivery of the relevant notice to the relevant clearing system(s) for communication by it/them toentitled Accountholders in substitution for notification as required by Condition 13 except that, so long asthe Notes are listed on the Luxembourg Stock Exchange and the rules of that exchange so require, noticesshall also be published in a daily newspaper having general circulation in Luxembourg (which is expectedto be the Luxembourg Wort or the Tageblatt) and/or via the website of the Luxembourg Stock Exchange(www.bourse.lu). Any such notice shall be deemed to have been given to the Noteholders on the secondday after the day on which such notice is delivered to the relevant clearing system(s) as aforesaid.

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Whilst any of the Notes held by a Noteholder are represented by a Global Certificate, notices to be givenby such Noteholder may be given by such Noteholder (where applicable) through Euroclear orClearstream, Luxembourg or DTC (as applicable) and otherwise in such manner as the Trustee andEuroclear or Clearstream, Luxembourg or DTC (as applicable) may approve for this purpose.

5. REGISTRATION OF TITLE

Registration of title to Notes in a name other than that of the Relevant Nominee will not be permittedunless Euroclear or Clearstream, Luxembourg or DTC, as applicable notifies the Issuer that it is unwillingor unable to continue as a clearing system in connection with a Global Certificate or, in the case of DTConly, DTC ceases to be a clearing agency registered under the U.S. Securities Exchange Act of 1934, and ineach case a successor clearing system approved by the Trustee is not appointed by the Issuer within 90 daysafter receiving such notice from Euroclear, Clearstream, Luxembourg or DTC or becoming aware thatDTC is no longer so registered (as applicable). In these circumstances title to a Note may be transferredinto the names of holders notified by the Relevant Nominee in accordance with the Conditions, except thatCertificates in respect of Notes so transferred may not be available until 21 days after the request fortransfer is duly made.

The Registrars will not register title to the Notes in a name other than that of the Relevant Nominee for aperiod of 15 calendar days preceding the due date for any payment of principal, premium (if any) orinterest in respect of the Notes.

If only one of the Global Certificates (the ‘‘Exchanged Global Certificate’’) becomes exchangeable forCertificates in accordance with the above paragraphs, transfers of Notes may not take place between, onthe one hand, persons holding Certificates issued in exchange for beneficial interests in the ExchangedGlobal Certificate and, on the other hand, persons wishing to purchase beneficial interests in the otherGlobal Certificate.

6. TRANSFERS

Transfers of book-entry interests in the Notes will be effected through the records of Euroclear,Clearstream, Luxembourg and DTC and their respective participants in accordance with the rules andprocedures of Euroclear, Clearstream, Luxembourg and DTC and their respective direct and indirectparticipants, as more fully described under ‘‘Clearing and Settlement Arrangements’’. For additional transferrestrictions, see ‘‘Transfer Restrictions’’.

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TAXATION

This is a general summary of certain United States Federal, Luxembourg and Croatian income taxconsiderations in connection with an investment in the Notes. This summary does not address all aspects ofUnited States Federal, Luxembourg and Croatian income tax laws and does not discuss any state or localtax considerations. While this summary is considered to be a correct interpretation of existing laws in forceon the date of this Offering Circular, there can be no assurance that those laws or the interpretation ofthose laws will not change. This summary does not discuss all of the income tax consequences that may berelevant to an investor in light of such investor’s particular circumstances or to investors subject to specialrules, such as regulated investment companies, certain financial institutions or insurance companies.Prospective investors are advised to consult their tax advisers with respect to the tax consequences of thepurchase, ownership or disposition of the Notes (or the purchase, ownership or disposition of beneficialinterests therein) as well as any tax consequences that may arise under the laws of any state, municipalityor other taxing jurisdiction.

Certain U.S. Federal Income Tax Consequences

The following is a description of the principal U.S. federal income tax consequences of the acquisition,ownership, retirement or other disposition of Notes by a holder thereof. This description only applies toNotes held as capital assets by a U.S. Holder (as defined below) and does not address, except as set forthbelow, aspects of U.S. federal income taxation that may be applicable to holders that are subject to specialtax rules, such as:

• financial institutions;

• insurance companies;

• real estate investment trusts;

• regulated investment companies;

• grantor trusts;

• tax-exempt organisations;

• persons that will own Notes through partnerships or other pass-through entities;

• dealers or traders in securities or currencies;

• certain former citizens or long-term residents of the United States;

• holders that will hold a Note as part of a position in a straddle or as part of a hedging, conversion orintegrated transaction for U.S. federal income tax purposes; or

• holders that have a functional currency other than the U.S. dollar.

Moreover, this description does not address the U.S. federal estate and gift tax or alternative minimum taxconsequences of the acquisition, ownership, retirement or other disposition of Notes and does not addressthe U.S. federal income tax treatment of holders that do not acquire Notes as part of the initial distributionat their initial issue price, including the purchasers of additional Notes. The ‘‘issue price’’ of a Note isgenerally equal to the first price at which a substantial amount of Notes are sold for money to investors(excluding sales to bond houses, brokers or similar persons or organisations acting in the capacity ofunderwriters, placement agents or wholesalers). Each prospective purchaser should consult its tax adviserwith respect to the U.S. federal, state, local and non U.S. tax consequences of acquiring, holding anddisposing of Notes.

This description is based on the Internal Revenue Code of 1986, as amended (‘‘Code’’) existing andproposed U.S. Treasury Regulations (‘‘Regulations’’) administrative pronouncements and judicialdecisions, each as available and in effect on the date hereof. All of the foregoing is subject to change,possibly with retroactive effect, or differing interpretations which could affect the tax consequencesdescribed herein.

For purposes of this description, a U.S. Holder is a beneficial owner of Notes who, for U.S. federal incometax purposes, is:

• an individual who is a citizen or resident of the United States;

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• a corporation (or any other entity that is treated as a corporation for U.S. federal income taxpurposes) organised in or under the laws of the United States, any State thereof or the District ofColumbia;

• an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

• a trust (1) that has a valid election in effect to be treated as a U.S. person for U.S. federal income taxpurposes or (2)(a) the administration over which a U.S. court can exercise primary supervision and(b) all of the substantial decisions of which one or more U.S. persons have the authority to control.

If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holdsNotes, the tax treatment of the partnership and a partner in such partnership generally will depend on thestatus of the partner and the activities of the partnership. Such partner or partnership should consult itsown tax adviser as to its consequences.

IRS Circular 230 Disclosure

Pursuant to Internal Revenue Service (‘‘IRS’’) Circular 230, we hereby inform you that the description setout herein with respect to U.S. federal tax issues was not intended or written to be used, and suchdescription cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposedon the taxpayer under the Code.

Such description was written to support the promotion or marketing of the Notes. Taxpayers should seekadvice based on the taxpayer’s particular circumstances from an independent tax adviser.

Interest

It is expected and this discussion assumes that either the issue price of the Notes will equal the statedprincipal amount of the Notes or the Notes will be issued with no more than a de minimis amount ofOriginal Issue Discount (‘‘OID’’). Therefore, interest paid to a U.S. Holder on a Note, including anyadditional amounts with respect thereto as described under ‘‘Conditions of the Notes—Taxation’’, will beincludible in such holder’s gross income as ordinary interest income in accordance with such holder’s usualmethod of tax accounting. In addition, interest on the Notes will be treated as foreign source income forU.S. federal income tax purposes.

A U.S. Holder may require the Issuer to redeem or, at the option of the Issuer, purchase (or procure thepurchase of) its Notes in the event of a Change of Control (see ‘‘Description of the Notes—Redemption andPurchase—Redemption at the Option of the Noteholders upon a Change of Control’’). Under the contingentpayment debt instrument Regulations (‘‘CPDI Regulations’’), the possibility of a contingent payment on aNote may be disregarded if the likelihood of the contingent payment, as of the issue date, is remote orincidental. The Issuer believes that, as of the expected issue date of the Notes, the likelihood of a Changeof Control is for this purpose remote and, therefore, the Issuer does not intend to treat the Notes ascontingent payment debt instruments (‘‘CPDIs’’). This determination, however, is not binding on theInternal Revenue Service, and if the IRS were to challenge this determination, a U.S. Holder may berequired to accrue income on the Notes that such holder owns in excess of stated interest, and to treat asordinary income rather than capital gain any income realised on the taxable disposition of such Notesbefore the resolution of the contingency. In the event that such contingency were to occur, it would affectthe amount and timing of the income that a U.S. Holder recognises. U.S. Holders are urged to consulttheir tax advisers regarding the potential application to the Notes of the CPDI rules and the consequencesthereof. This discussion assumes that the Notes will not be treated as CPDIs.

Sale, Exchange, Retirement or Other Disposition

Upon the sale, exchange, retirement or other disposition of a Note, a U.S. Holder will recognise taxablegain or loss equal to the difference, if any, between the amount realised on the sale, exchange, retirementor other disposition, other than accrued but unpaid interest which will be taxable as interest, and suchU.S. Holder’s adjusted tax basis in the Note. A U.S. Holder’s adjusted tax basis in a Note generally willequal the cost of the Note to such holder, and any such gain or loss will be capital gain or loss. For anon-corporate U.S. Holder, the maximum marginal U.S. federal income tax rate applicable to the gain willbe lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income (otherthan certain dividends) if such U.S. Holder’s holding period for the Notes exceeds one year (i.e., such gainis long-term capital gain). Any gain or loss realised on the sale, exchange, retirement or other dispositionof a Note generally will be treated as U.S. source gain or loss, as the case may be.

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U.S. Backup Withholding Tax and Information Reporting

A backup withholding tax and information reporting requirements apply to certain payments of principalof, and interest on, an obligation and to proceeds of the sale or redemption of an obligation, to certainU.S. Holders. Information reporting generally will apply to payments of principal of, and interest on,Notes, and to proceeds from the sale or redemption of, Notes within the United States, or by a U.S. payoror U.S. middleman, to a U.S. Holder (other than an exempt recipient and certain other persons). Thepayor will be required to backup withhold on payments made within the United States, or by a U.S. payoror U.S. middleman, on a Note to a U.S. Holder, other than an exempt recipient, if the holder fails tofurnish its correct taxpayer identification number or otherwise fails to comply with, or establish anexemption from, the backup withholding requirements. The backup withholding tax rate is 28% for taxableyears through 2012 and is scheduled to increase to 31% for taxable years beginning 1 January 2013.

Backup withholding is not an additional tax. A U.S. Holder generally will be entitled to credit any amountswithheld under the backup withholding rules against such holder’s U.S. federal income tax liabilityprovided the required information is furnished to the IRS in a timely manner.

Further Issues

Further notes or bonds that are treated for non-tax purposes as a single series with the Notes may betreated as part of a separate issuance for U.S. federal income tax purposes. In such a case, for U.S. federalincome tax purposes, the new notes or bonds may be considered to have been issued with a differentamount of original issue discount than the Notes, which may affect the market value of the Notes sincesuch further notes or bonds may not be distinguishable from the Notes.

Foreign Asset Reporting

Certain U.S. Holders who are individuals are required to report information relating to an interest in theNotes, subject to certain exceptions (including an exception for Notes held in accounts maintained byfinancial institutions).

U.S. Holders are urged to consult their tax advisers regarding their information reporting obligations, ifany, with respect to their ownership and disposition of the Notes.

The above description is not intended to constitute a complete analysis of all tax consequences relating tothe ownership and disposition of the Notes. Prospective purchasers of Notes should consult their taxadvisers concerning the tax consequences of their particular situations.

Republic of Croatia

The following summary is of a general nature and is included herein solely for information purposes. Thediscussion describes certain material tax matters under Croatian tax law with respect to the Notes. Thediscussion does not purport to be a comprehensive description of all the tax considerations that may berelevant to a decision to purchase Notes. The discussion is based on the tax laws in Croatia in effect on thedate of this Offering Circular, and may be subject to change during the life of the Notes. Prospectiveinvestors in the Notes should therefore consult their own professional advisers as to the effects of state,local or foreign laws, including Croatian tax law, to which they may be subject.

Taxation of Interest

No payment of interest on the Notes is subject to payment of value added tax.

Interest on the Notes (including amounts of interest realised on a sale of the Notes) received by Croatianlegal entities is included in the relevant Noteholder’s tax base for the purposes of corporate income tax(profit tax), which is imposed at a rate of 20%. However, the Issuer is not required to make anywithholding or deduction from any payment of interest on the Notes made to any such Croatian legalentity.

Interest on the Notes received by natural persons who are taxpayers in the Republic of Croatia is notconsidered as ‘income’ and is not included in the relevant Noteholder’s tax base for the purposes of incometax, and is therefore not subject to taxation.

Under current Croatian laws and regulations, the Issuer is not required to make any withholding ordeduction from any payment of interest on Notes held by foreign legal entities or foreign natural persons.

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Taxation of Principal

Under current Croatian laws and regulations, payments of principal on the Notes are not subject topayment of any taxes in Croatia.

Taxation of Capital Gains

Revenue realised upon any sale of the Notes, equal to the difference between the price at which therelevant Notes were sold and the price at which they were paid-up or purchased, will constitute a ‘capitalgain’.

Any capital gain realised by a Croatian legal entity and branches of foreign legal entities in Croatia whopurchase the Notes i.e. taxpayers of corporate income tax (profit tax) in Croatia, is included in the relevantNoteholder’s tax base for the purposes of corporate income tax (profit tax), which is imposed at a rate of20%.

Any capital gain realised upon any sale of the Notes by a natural person who is tax resident in Croatiataxpayers of the income tax, is not included in the relevant Noteholder’s tax base for the purposes ofincome tax, and is therefore not subject to taxation, unless the Notes are held as part of the relevanttaxpayer’s business activity.

Capital gains realised by persons other than Croatian legal entities and Croatian tax-resident naturalpersons are not subject to taxation in Croatia.

Taxation upon inheritance of the Notes or receipt of the Notes as a gift

Subject to any applicable double taxation treaty, any natural person or legal entity who inherits or receivesgifts (including the Notes) with individual value higher than HRK 50,000.00 in the Republic of Croatia isunder an obligation to pay Croatian tax in respect of such inheritance or gift at a rate of 5%.

Provided the Notes are received outside of the Republic of Croatia, no Croatian taxes will be payable inrespect of such inheritance of gift.

EU Savings Directive

Under EC Council Directive 2003/48/EC on the taxation of savings income, Member States are required toprovide to the tax authorities of another Member State details of payments of interest (or similar income)paid by a person within its jurisdiction to an individual resident in that other Member State. However, for atransitional period, Luxembourg and Austria are instead required (unless during that period they electotherwise) to operate a withholding system in relation to such payments (the ending of such transitionalperiod being dependent upon the conclusion of certain other agreements relating to information exchangewith certain other countries). A number of non-EU countries and territories including Switzerland haveadopted similar measures (a withholding system in the case of Switzerland).

The European Commission has proposed certain amendments to the Directive, which may, if implementedamend or broaden the scope of the requirements described above.

Luxembourg Taxation

The following summary is of a general nature and is included herein solely for information purposes. It isbased on the laws presently in force in Luxembourg, though it is not intended to be, nor should it beconstrued to be, legal or tax advice. Prospective investors in the Notes should therefore consult their ownprofessional advisers as to the effects of state, local or foreign laws, including Luxembourg tax law, towhich they may be subject.

Withholding Tax

(i) Non-resident holders of Notes

Under Luxembourg general tax laws currently in force and subject to the laws of 21 June 2005 (the‘‘Laws’’) mentioned below, there is no withholding tax on payments of principal, premium or interest madeto non-resident holders of Notes, nor on accrued but unpaid interest in respect of the Notes, nor is anyLuxembourg withholding tax payable upon redemption or repurchase of the Notes held by non-residentholders of Notes.

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Under the Laws implementing the EC Council Directive 2003/48/EC of 3 June 2003 on taxation of savingsincome in the form of interest payments and ratifying the treaties entered into by Luxembourg and certaindependent and associated territories of EU Member States (the ‘‘Territories’’), payments of interest orsimilar income made or ascribed by a paying agent established in Luxembourg to or for the immediatebenefit of an individual beneficial owner or a residual entity, as defined by the Laws, which is a resident of,or established in, an EU Member State (other than Luxembourg) or one of the Territories will be subjectto a withholding tax unless the relevant recipient has adequately instructed the relevant paying agent toprovide details of the relevant payments of interest or similar income to the fiscal authorities of his/her/itscountry of residence or establishment, or, in the case of an individual beneficial owner, has provided a taxcertificate issued by the fiscal authorities of his/her country of residence in the required format to therelevant paying agent. Where withholding tax is applied, it will be levied at a rate of 35%. Responsibilityfor the withholding of the tax will be assumed by the Luxembourg paying agent.

(ii) Resident holders of Notes

Under Luxembourg general tax laws currently in force and subject to the law of 23 December 2005 (the‘‘Law’’) mentioned below, there is no withholding tax on payments of principal, premium or interest madeto Luxembourg resident holders of Notes, nor on accrued but unpaid interest in respect of Notes, nor isany Luxembourg withholding tax payable upon redemption or repurchase of Notes held by Luxembourgresident holders of Notes.

Under the Law payments of interest or similar income made or ascribed by a paying agent established inLuxembourg to or for the immediate benefit of an individual beneficial owner who is a resident ofLuxembourg will be subject to a withholding tax of 10%. Such withholding tax will be in full discharge ofincome tax if the beneficial owner is an individual acting in the course of the management of his/herprivate wealth. Responsibility for the withholding of the tax will be assumed by the Luxembourg payingagent. Payments of interest under the Notes coming within the scope of the Law would be subject towithholding tax of 10%.

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CLEARING AND SETTLEMENT ARRANGEMENTS

The information set out below is subject to any change in or reinterpretation of the rules, regulations andprocedures of DTC, Euroclear or Clearstream, Luxembourg (together, the ‘‘Clearing Systems’’) currently ineffect. Investors wishing to use the facilities of any of the Clearing Systems are advised to confirm the continuedapplicability of the rules, regulations and procedures of the relevant Clearing System. None of the Issuer and anyother party to the Agency Agreement will have any responsibility or liability for any aspect of the records relatingto, or payments made on account of, beneficial ownership interests in the Notes held through the facilities of anyClearing System or for maintaining, supervising or reviewing any records relating to such beneficial ownershipinterests.

Clearing Systems

Euroclear and Clearstream, Luxembourg

Euroclear and Clearstream, Luxembourg each hold securities for their customers and facilitate theclearance and settlement of securities transactions by electronic book-entry transfer between theirrespective account holders. Euroclear and Clearstream, Luxembourg provide various services includingsafekeeping, administration, clearance and settlement of internationally traded securities and securitieslending and borrowing. Euroclear and Clearstream, Luxembourg also deal with domestic securitiesmarkets in several countries through established depositary and custodial relationships. Euroclear andClearstream, Luxembourg have established an electronic bridge between their two systems across whichtheir respective participants may settle trades with each other.

Euroclear and Clearstream, Luxembourg customers are worldwide financial institutions, includingunderwriters, securities brokers and dealers, banks, trust companies and clearing corporations. Indirectaccess to Euroclear and Clearstream, Luxembourg is available to other institutions that clear through ormaintain a custodial relationship with an account holder of either system.

DTC

DTC has advised the Issuer that it is a limited purpose trust company organised under the New YorkBanking Law, a ‘‘banking organisation’’ within the meaning of the New York Banking Law, a ‘‘clearingcorporation’’ within the meaning of the New York Uniform Commercial Code and a ‘‘clearing agency’’registered pursuant to Section 17A of the Exchange Act. DTC holds securities that its participants depositwith DTC. DTC also facilitates the settlement among its participants of securities transactions, such astransfers and pledges, in deposited securities through electronic computerised book-entry changes inparticipants’ accounts. Direct participants include securities brokers and dealers, banks, trust companies,clearing corporations and certain other organisations. Access to the DTC system is also available to otherssuch as securities brokers and dealers, banks and trust companies that clear through or maintain acustodial relationship with a direct participant, either directly or indirectly.

Registration and Form

Book-entry interests in the Regulation S Notes held through Euroclear and Clearstream, Luxembourg willbe represented by the Unrestricted Global Certificate registered in the name of a nominee of, and held by,a common depositary for Euroclear and Clearstream, Luxembourg. Book-entry interests in the Rule 144ANotes held through DTC will be represented by the Restricted Global Certificate registered in the name ofCede & Co., as nominee for DTC, and held by a custodian for DTC. As necessary, the Registrars willadjust the amounts of Notes on each Register for the accounts of Euroclear, Clearstream, Luxembourgand DTC to reflect the amounts of Notes held through Euroclear, Clearstream, Luxembourg and DTC,respectively. Beneficial ownership of book-entry interests in Notes will be held through financialinstitutions as direct and indirect participants in Euroclear, Clearstream, Luxembourg and DTC.

The aggregate holdings of book-entry interests in the Notes in Euroclear, Clearstream, Luxembourg andDTC will be reflected in the book-entry accounts of each such institution. Euroclear, Clearstream,Luxembourg or DTC, as the case may be, and every other intermediate holder in the chain to thebeneficial owner of book-entry interests in the Notes, will be responsible for establishing and maintainingaccounts for their participants and customers having interests in the book-entry interests in the Notes. TheRegistrar which maintains the Register of Notes held through DTC will be responsible for maintaining arecord of the aggregate holdings of Notes registered in the name of a nominee for DTC, and the Registrarwhich maintains the Register of Notes held through Euroclear and Clearstream, Luxembourg will be

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responsible for maintaining a record of the aggregate holdings of Notes registered in the name of acommon nominee for Euroclear and Clearstream, Luxembourg, and/or, in each case if individualCertificates are issued in the limited circumstances described under ‘‘The Global Certificates—Registrationof Title’’, holders of Notes represented by those individual Certificates. The Principal Paying Agent will beresponsible for ensuring that payments received by it from the Issuer for holders of book-entry interests inthe Notes holding through Euroclear and Clearstream, Luxembourg are credited to Euroclear orClearstream, Luxembourg, as the case may be, and the Principal Paying Agent will also be responsible forensuring that payments received by the Principal Paying Agent from the Issuer for holders of book-entryinterests in the Notes holding through DTC are credited to DTC.

The Issuer will not impose any fees in respect of holding the Notes; however, holders of book-entryinterests in the Notes may incur fees normally payable in respect of the maintenance and operation ofaccounts in Euroclear, Clearstream, Luxembourg or DTC.

Clearing and Settlement Procedures

Initial Settlement

Upon their original issue, the Notes will be in global form represented by the two Global Certificates.Interests in the Notes will be in uncertified book-entry form. Purchasers electing to hold book-entryinterests in the Notes through Euroclear and Clearstream, Luxembourg accounts will follow the settlementprocedures applicable to conventional Eurobonds. Book-entry interests in the Notes will be credited toEuroclear and Clearstream, Luxembourg participants’ securities clearance accounts on the business dayfollowing the Closing Date against payment (value the Closing Date). DTC participants acting on behalf ofpurchasers electing to hold book-entry interests in the Notes through DTC will follow the deliverypractices applicable to securities eligible for DTC’s Same Day Funds Settlement system. DTC participants’securities accounts will be credited with book-entry interests in the Notes following confirmation of receiptof payment to the Issuer on the Closing Date.

Secondary Market Trading

Secondary market trades in the Notes will be settled by transfer of title to book-entry interests in theClearing Systems. Title to such book-entry interests will pass by registration of the transfer within therecords of Euroclear or Clearstream, Luxembourg or DTC, as the case may be in accordance with theirrespective procedures. Book-entry interests in the Notes may be transferred within Euroclear and withinClearstream, Luxembourg and between Euroclear and Clearstream, Luxembourg in accordance withprocedures established for these purposes by Euroclear and Clearstream, Luxembourg. Book-entryinterests in the Notes may be transferred within DTC in accordance with procedures established for thispurpose by DTC. Transfer of book-entry interests in the Notes between Euroclear or Clearstream,Luxembourg and DTC may be effected in accordance with procedures established for this purpose byEuroclear, Clearstream, Luxembourg and DTC.

General

Neither Euroclear, Clearstream, Luxembourg or DTC is under any obligation to perform or continue toperform the procedures referred to above, and such procedures may be discontinued at any time.

Neither the Issuer, the Trustee or any of their agents will have any responsibility for the performance byEuroclear, Clearstream, Luxembourg or DTC or their respective participants of their respectiveobligations under the rules and procedures governing their operations or the arrangements referred toabove.

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SUBSCRIPTION AND SALE

Each of Morgan Stanley & Co. International plc and UniCredit Bank AG (together, the ‘‘Joint LeadManagers’’) and Raiffeisen Bank International AG (the ‘‘Co-Manager’’ and together with the Joint LeadManagers, the ‘‘Managers’’) has, pursuant to a Subscription Agreement (the ‘‘Subscription Agreement’’)dated 7 November 2012, severally agreed to subscribe or procure subscribers for the respective principalamount of Notes set out opposite its name below, subject to the provisions of the Subscription Agreement:

Amountof Notes

Name of ManagerMorgan Stanley & Co. International plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$249,900,000UniCredit Bank AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$249,900,000Raiffeisen Bank International AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ 200,000Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$500,000,000

The Issuer has been informed that the Managers propose to resell the Notes at the offering price set forthon the cover page of this Offering Circular within the United States to persons reasonably believed to beQIBs in reliance upon Rule 144A, and to persons other than U.S. persons outside the United States inreliance upon Regulation S. See ‘‘Transfer Restrictions’’. The price at which the Notes are offered may bechanged at any time without notice. The Issuer will also reimburse the Managers in respect of certain oftheir expenses, and has agreed to indemnify the Managers and their controlling persons against certainliabilities (including liabilities under the Securities Act), incurred in connection with the issue of the Notes.The Subscription Agreement may be terminated in certain circumstances prior to payment of the issueprice to the Issuer.

The Notes are a new issue of securities for which there currently is no market. The Issuer cannot provideassurance that the prices at which the Notes will sell in the market after this offering will not be lower thanthe initial offering price or that an active trading market for the Notes will develop and continue after thisoffering. Certain of the Managers have advised the Issuer that following the completion of the offering ofthe Notes, they intend to make a market in the Notes. They are not obligated to do so, however, and anymarket-making activities with respect to the Notes may be discontinued at any time at their sole discretionwithout notice. In addition, such market-making activity will be subject to the limits imposed by theSecurities Act and the Exchange Act. Accordingly, the Issuer cannot give any assurance as to thedevelopment of any market or the liquidity of any market for the Notes.

In connection with the offering of the Notes, the Managers may engage in over-allotment, stabilisingtransactions and syndicate covering transactions. Over-allotment involves sales in excess of the offeringsize, which creates a short position for the Managers. Stabilising transactions involve bids to purchase theNotes in the open market for the purpose of pegging, fixing or maintaining the price of the Notes.Syndicate covering transactions involve purchases of the Notes in the open market after the distributionhas been completed in order to cover short positions. Any of these activities may prevent a decline in themarket price of the Notes, and may also cause the price of the Notes to be higher than it would otherwisebe in the absence of these transactions. The Managers may conduct these transactions in theover-the-counter market or otherwise. If the Managers commence any of these transactions, they maydiscontinue them at any time.

Certain of the Managers and their affiliates have performed certain investment and commercial banking orfinancial advisory services for the Issuer and its affiliates from time to time, for which they have receivedcustomary fees and commissions, and they expect to provide these services to the Issuer and its affiliates inthe future, for which they expect to receive customary fees and commissions. Certain of the Managers andtheir affiliates acted as, and will continue to act as, arrangers, agents and/or other lenders under theGroup’s loan agreements (see ‘‘Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Long-Term Loan Agreements’’ and ‘‘—Short-Term Loan Agreements’’), and in such capacity,may receive a portion of the net proceeds from this offering used to repay borrowings outstanding underthe Group’s loan agreements.

In addition, in the ordinary course of their business activities, the Managers and their affiliates may makeor hold a broad array of investments and actively trade debt and equity securities (or related derivativesecurities) and financial instruments (including bank loans) for their own account and for the accounts oftheir customers. Such investments and securities activities may involve securities and/or instruments of theIssuer or its affiliates. If the Managers or their affiliates have a lending relationship with the Issuer, they

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routinely hedge their credit exposure to the Issuer consistent with their customary risk managementpolicies. Typically, the Managers and their affiliates would hedge such exposure by entering intotransactions which consist of either the purchase of credit default swaps or the creation of short positionsin the Issuer’s securities, including potentially the Notes. Any such short positions could adversely affectfuture trading prices of the Notes. The Managers and their affiliates may also make investmentrecommendations and/or publish or express independent research views in respect of such securities orfinancial instruments and may hold, or recommend to clients that they acquire, long and/or short positionsin such securities and instruments.

United States

The Notes have not been and will not be registered under the Securities Act and, subject to certainexceptions, may not be offered or sold within the United States or to, or for the account or benefit of, aU.S. person except pursuant to an exemption from, or in a transaction not subject to, the registrationrequirements of the Securities Act. Accordingly, the Notes are being offered and sold only (a) outside theUnited States to persons other than U.S. persons as defined in Regulation S in offshore transactions inreliance on, and in compliance with, Regulation S and (b) in the United States to a limited number of QIBsas defined in the Securities Act in connection with resales by the Manager, in reliance on, and incompliance with, Rule 144A.

Each Manager has represented and agreed that it has offered and sold, and will offer and sell, theNotes (a) as part of its distribution at any time and (b) otherwise until 40 days after the later of thecommencement of the offering and the Closing Date, only in accordance with Rule 903 of Regulation S orRule 144A. Accordingly, neither such Manager nor its affiliates, nor any persons acting on its or theirbehalf, have engaged or will engage in any directed selling efforts (as defined in Regulation S) with respectto the Notes, and such Manager, its affiliates and all persons acting on its or their behalf have compliedand will comply with the offering restrictions requirement of Regulation S. Each Manager has agreed that,at or prior to confirmation of sale of the Notes (other than a sale pursuant to Rule 144A), it will have sentto each distributor, dealer or person receiving a selling concession, fee or other remuneration thatpurchases the Notes from it during the restricted period a confirmation or notice to substantially thefollowing effect:

‘‘The Notes covered hereby have not been registered under the U.S. Securities Act of 1933, as amended (the‘‘U.S. Securities Act’’) and may not be offered and sold within the United States or to, or for the account orbenefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later ofthe commencement of the offering and the Closing Date, except in either case in accordance with Regulation Sor Rule 144A under the U.S. Securities Act. Terms used above have the meanings given to them byRegulation S.’’

In addition, until 40 days after the commencement of the offering, an offer or sale of Notes within theUnited States by any dealer (whether or not participating in the offering of the Notes) may violate theregistration requirements of the Securities Act if such offer or sale is made otherwise than in accordancewith Rule 144A.

United Kingdom

Each Manager has represented and agreed that:

(a) it has only communicated or caused to be communicated and will only communicate or cause to becommunicated an invitation or inducement to engage in investment activity (within the meaning ofSection 21 of the FSMA) received by it in connection with the issue or sale of the Notes incircumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and

(b) it has complied and will comply with all applicable provisions of the FSMA with respect to anythingdone by it in relation to the Notes in, from or otherwise involving the United Kingdom.

Republic of Croatia

Each Manager has represented and agreed that it will only offer and sell the Notes, and it will onlydistribute this Offering Circular and any other offering material in relation to the Notes, in the Republic ofCroatia to persons who are qualified investors (kvalificirani ulagatelji) within the meaning of Article 343,point 6 of the Capital Market Act (Official Gazette of the Republic of Croatia Narodne novineNos. 88/2008, 146/2008 and 74/2009) (the ‘‘Capital Market Act’’ Zakon o trzistu kapitala). The definition of

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the ‘‘qualified investors’’ under the above-mentioned provision of the Capital Market Act corresponds inits material scope to the definition of the same term under the Prospectus Directive. Any offer, sale, orresale of the Notes in Croatia may only be made in accordance with the Capital Market Act and otherapplicable laws. The Issuer does not intend to file a securities prospectus with the Croatian FinancialServices Supervisory Agency, and accordingly, the Notes may not be, and are not being to, offered oradvertised publicly in Croatia.

General

No action has been taken or will be taken in any jurisdiction by the Issuer or any of the Managers thatwould, or is intended to, permit a public offer of the Notes or possession or distribution of this OfferingCircular or any other offering material in any country or jurisdiction where any such action for thatpurpose is required. Persons into whose hands this Offering Circular comes are required by the Issuer andthe Managers to comply with all applicable laws and regulations in each country or jurisdiction in whichthey purchase, offer, sell or deliver Notes or have in their possession, distribute or publish this OfferingCircular or any other offering material relating to the Notes, in all cases at their own expense.

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TRANSFER RESTRICTIONS

Because the following restrictions will apply with respect to the Notes, purchasers of the Notes are advisedto consult legal counsel prior to making an offer, resale, pledge or transfer of any of the Notes.

The Issuer has not registered the Notes under the Securities Act or the laws of any state securitiescommission and, therefore, the Notes may not be offered or sold within the United States or to, or for theaccount or benefit of, U.S. persons (as defined in Regulation S under the Securities Act) except pursuantto an exemption from, or in a transaction not subject to, the registration requirements of theSecurities Act. Accordingly, the Notes are being offered and sold only (1) to QIBs, in compliance withRule 144A under the Securities Act and (2) to persons other than U.S. persons outside the United Statesin compliance with Regulation S under the Securities Act.

By its purchase of Notes, each purchaser of Notes will be deemed to have acknowledged, represented andagreed with the Managers and the Issuer as follows:

1. that the Notes have not been registered under the Securities Act or any other applicable securities lawand that the Notes are being offered for resale in transactions not requiring registration under theSecurities Act or any other securities law, including sales pursuant to Rule 144A under theSecurities Act, and, unless so registered, may not be offered, sold or otherwise transferred except incompliance with the registration requirements of the Securities Act or any other applicable securitieslaw, or pursuant to an exemption therefrom or in a transaction not subject thereto, and in each case incompliance with the conditions for transfer set forth in paragraph (4) below.

2. it is not an ‘‘affiliate’’ (as defined in Rule 144 under the Securities Act) of the Issuer and it is notacting on the Issuer’s or their behalf and it is either (i) a QIB and is aware that any sale of Notes to itwill be made in reliance on Rule 144A and such acquisition will be for its own account or for theaccount of another QIB or (ii) not a ‘‘U.S. person’’ (as defined in Regulation S under theSecurities Act) or purchasing for the account or benefit of a U.S. person (other than a distributor) andit is purchasing Notes in an offshore transaction in accordance with Regulation S under theSecurities Act.

3. that none of the Issuer or the Managers, or any person representing the Issuer or the Managers, hasmade any representation to it with respect to the Issuer or the offer or sale of any of the Notes, otherthan the information contained in this Offering Circular, which has been delivered to it and uponwhich it is relying in making its investment decision with respect to the Notes. It acknowledges that theManagers make no representation or warranty as to the accuracy or completeness of this OfferingCircular. It has had access to such financial and other information concerning the Issuer and theNotes as it has deemed necessary in connection with its decision to purchase the Notes, including anopportunity to ask questions of and request information from the Issuer and the Managers.

4. it is purchasing the Notes for its own account, or for one or more investor accounts for which it isacting as a fiduciary or agent, in each case for investment, and not with a view to, or for offer or sale inconnection with, any distribution thereof in violation of the Securities Act. It agrees on its own behalfand on behalf of any investor account for which it is purchasing Notes, and each subsequent holder ofthe Notes by its acceptance thereof will agree, to offer, sell or otherwise transfer such Notes prior to(x), the date which is one year (or such shorter period of time as permitted by Rule 144 under theSecurities Act or any successor provision thereunder) after the later of the date of the original issue ofthe Notes and the last date on which the Issuer or any affiliate of the Issuer was the owner of suchNotes (or any predecessor thereto), or (y), such later date, if any, as may be required by applicable law(the ‘‘Resale Restriction Termination Date’’), only (a) to the Issuer, (b) pursuant to a registrationstatement which has been declared effective under the Securities Act, (c) for so long as the Notes areeligible for resale pursuant to Rule 144A, to a person it reasonably believes is a QIB that purchasesfor its own account or for the account of another QIB to whom it gives notice that the transfer is beingmade in reliance on Rule 144A, (d) in an offshore transaction complying with Rule 903 or 904 ofRegulation S under the Securities Act, or (e) pursuant to any other available exemption from theregistration requirements of the Securities Act, subject in each of the foregoing cases to compliancewith any applicable state securities laws. The foregoing restrictions on resale will not apply subsequentto the Resale Restriction Termination Date. It acknowledges that the Issuer reserves the right prior toany offer, sale or other transfer of the Notes pursuant to clause (d) or (e) above, to require thedelivery of an opinion of counsel, certifications and/or other information satisfactory to the Issuer.

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Each purchaser acknowledges that each Rule 144A Note will contain a legend substantially in thefollowing form:

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,AS AMENDED (THE ‘‘SECURITIES ACT’’), OR OTHER SECURITIES LAWS OF ANY STATEOR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST ORPARTICIPATION HEREIN MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED,PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCHREGISTRATION UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO,THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTSTHAT IT IS A ‘‘QUALIFIED INSTITUTIONAL BUYER’’ (AS DEFINED IN RULE 144AUNDER THE SECURITIES ACT), (2) AGREES ON ITS OWN BEHALF AND ON BEHALF OFANY INVESTOR ACCOUNT FOR WHICH IT HAS PURCHASED SECURITIES THAT ITWILL NOT PRIOR TO (X), THE DATE WHICH IS ONE YEAR (OR SUCH SHORTERPERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES OR ANYSUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUEDATE THEREOF (OR OF ANY PREDECESSOR OF THIS NOTE) OR THE LAST DAY ONWHICH THE ISSUER OR ANY AFFILIATE (AS DEFINED IN RULE 144) OF THE ISSUERWAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF THIS NOTE), OR (Y),SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW (THE‘‘RESALE RESTRICTION TERMINATION DATE’’), OFFER, SELL OR OTHERWISE TRANSFERSUCH NOTE EXCEPT (A) TO THE ISSUER, (B) PURSUANT TO A REGISTRATIONSTATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT,(C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TORULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES ISA ‘‘QUALIFIED INSTITUTIONAL BUYER’’ AS DEFINED IN RULE 144A UNDER THESECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNTOF ANOTHER QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THATTHE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A UNDER THESECURITIES ACT, (D) PURSUANT TO OFFERS AND SALES TO PERSONS OTHER THANU.S. PERSONS THAT OCCUR OUTSIDE HE UNITED STATES WITHIN THE MEANING OFREGULATION S UNDER THE SECURITIES ACT OR (E) PURSUANT TO ANY OTHERAVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THESECURITIES ACT AND, IN EACH CASE, IN COMPLIANCE WITH THE RELEVANTSECURITIES LAWS OF ANY OTHER JURISDICTION, AND (3) AGREES THAT IT WILLGIVE TO EACH PERSON TO WHOM THIS NOTICE IS TRANSFERRED A NOTICESUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE ISSUER ANDTHE ISSUING AND PAYING AGENT SHALL HAVE THE RIGHT PRIOR TO ANY SUCHOFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D) OR (E) ABOVE TO REQUIRETHE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHERINFORMATION REASONABLY SATISFACTORY TO THE ISSUER AND THE ISSUING ANDPAYING AGENT. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THEHOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN,THE TERMS ‘‘OFFSHORE TRANSACTION’’, ‘‘UNITED STATES’’ AND ‘‘U.S. PERSON’’HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIESACT.

5. if it is a purchaser in a sale that occurs outside the United States within the meaning of Regulation S,it acknowledges that until the expiration of the ‘‘40-day distribution compliance period’’ within themeaning of Rule 903 of Regulation S, any offer or sale of the Notes shall not be made by it to aU.S. person or for the account or benefit of a U.S. person within the meaning of Rule 902 under theSecurities Act.

6. if it purchases the Notes, it will also be deemed to acknowledge that the foregoing restrictions apply toholders of beneficial interests in the Notes as well as to holders of the Notes.

7. that the Registrars will not be required to accept for registration of transfer any Notes acquired by it,except upon presentation of evidence satisfactory to the Issuer and the Registrars that the restrictionsset forth herein have been complied with.

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8. that:

(a) the Issuer, the Trustee, the Managers and others will rely upon the truth and accuracy of itsacknowledgements, representations and agreements set forth herein and it agrees that if any of itsacknowledgements, representations or agreements herein cease to be accurate and complete, itwill notify the Issuer and the Managers promptly in writing; and

(b) if it acquires any Notes as fiduciary or agent for one or more investor accounts, it represents withrespect to each such account that:

(i) it has sole investment discretion; and

(ii) it has full power to make the foregoing acknowledgements, representations and agreementson behalf of each such account and that each such investment account is eligible to purchasethe Notes.

9. that it will give to each person to whom it transfers the Notes notice of any restrictions on the transferof the Notes.

10. that no action has been taken in any jurisdiction (including the United States) by the Issuer or theManagers that would permit a public offering of the Notes or the possession, circulation ordistribution of this Offering Circular or any other material relating to the Issuer or the Notes in anyjurisdiction where action for that purpose is required. Consequently, any transfer of the Notes will besubject to the selling restrictions set forth under ‘‘Transfer Restrictions’’ and ‘‘Subscription and Sale’’.

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GENERAL INFORMATION

Authorisation

The issue of the Notes was duly authorised by a resolution of the Management Board of the Issuer dated31 October 2012 and by a resolution of the Supervisory Board of the Issuer dated 2 November 2012.

Approval, admission to trading and listing

Application has been made to the CSSF to approve this document as a prospectus. Application has alsobeen made to the Luxembourg Stock Exchange for the Notes to be admitted to trading on the LuxembourgStock Exchange’s regulated market and to be listed on the Official List of the Luxembourg StockExchange. The Luxembourg Stock Exchange’s regulated market is a regulated market for the purposes ofthe Markets in Financial Instruments Directive (Directive 2004/39/EC).

The Issuer estimates that the total expenses related to the admission to trading of the Notes on theregulated market of the Luxembourg Stock Exchange are approximately A4,600.

Clearing Systems

The Regulation S Notes have been accepted for clearance through Euroclear and Clearstream,Luxembourg. Application has been made for acceptance of the Rule 144A Notes into DTC’s book-entrysettlement system. The ISIN for the Regulation S Notes is XS0853036860 and for the Rule 144A Notes isUS443293AA30. The Common Code for the Regulation S Notes is 085303686 and for the Rule 144ANotes is 085325086 and the CUSIP number for the Rule 144A Notes is 443293AA3.

No significant change

There has been no material adverse change in the prospects of the Issuer or the Issuer and its subsidiariessince 31 December 2011.

There has been no significant change in the financial or trading position of the Issuer or the Issuer and itssubsidiaries since 30 June 2012.

Litigation

Neither the Issuer nor any of its subsidiaries is or has been involved in any governmental, legal orarbitration proceedings (including any such proceedings which are pending or threatened of which theIssuer is aware) in the 12 months preceding the date of this document which may have or have in suchperiod had a significant effect on the financial position of the Issuer or the Issuer and its subsidiaries.

Auditors

The auditors of the Issuer for each of the three financial years ended 31 December 2009, 2010 and 2011and the six months ended 30 June 2012, were Deloitte who audited the Issuer’s accounts, withoutqualification (except as in ‘‘Presentation of Financial and Other Information—Qualified Audit Opinion as toPurchase of Electricity Facilities’’), in accordance with the International Standards on Auditing. The Issuermaintains its financial books and records and prepares its Financial Statements in HRK in accordance withIFRS and IAS 34. Deloitte has no material interest in the Issuer. In 2012, Deloitte were not reappointed bythe Issuer to perform the annual 2012 audit or the audits thereafter due to restrictions on suchappointment following the enactment on 1 January 2012 of the Public Procurement Act by the CroatianGovernment.

Deloitte is a member of the Croatian Chamber of Auditors, has audited the Issuer’s Financial Statementsin accordance with the International Standards on Auditing, as stated in its reports appearing in thisOffering Circular.

Documents

For the period of 12 months following the date of this Offering Circular, copies of the following documentswill be available for inspection from the registered office of the Issuer and from the specified offices of theTrustee and the Paying Agents for the time being in London and Luxembourg:

(a) the constitutional documents (with an English translation thereof) of the Issuer;

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(b) the Annual Financial Statements of the Issuer in respect of the financial years ended 31 December2011, 2010 and 2009, together with the audit reports in connection therewith. The Issuer currentlyprepares audited consolidated accounts on an annual basis;

(c) the Interim Financial Statements of the Issuer in respect of the six months ended 30 June 2012together with the review report prepared in connection therewith. The Issuer currently preparesreviewed interim accounts on a semi-annual basis;

(d) the Subscription Agreement;

(e) the Trust Deed;

(f) the Agency Agreement; and

(g) the Offering Circular.

In addition, copies of this Offering Circular are available on the Luxembourg Stock Exchange’s website atwww.bourse.lu.

Post-issuance information

The Issuer does not intend to provide any post-issuance information in relation to this issue of Notes.

Yield

On the basis of the issue price of the Notes of 100% of their principal amount, the yield on the Notes is6.00% on an annual basis.

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GLOSSARY OF TERMS AND DEFINITIONS

Terms and definitions used in this Offering Circular have the meanings set forth below:

Term/Definition Meaning

2001 Agreement The Contract between the Croatian and Slovenian Governmentson Regulating the Status and other Legal Relations in Respectof Investments in Exploitation and Decommissioning of, theNuclear Power Plant Krsko (Official Gazette No. 9/2002).

Accession The entrance of Croatia into the EU, planned for 1 July 2013.

Accession Treaty The treaty signed on 9 December 2011 on the accession ofCroatia to the EU.

Accountholder Each person (other than another clearing system) who is for thetime being shown in the records of DTC, Euroclear orClearstream, Luxembourg (as the case may be) as the holder ofa particular aggregate principal amount of any of the Notes.

Acquis Communautaire The overall body of EU law.

Act on the Regulation ofEnergy Activities (OG 177/2004, 76/2007, 152/2008, 14/2011, and 59/2012).

Additional Protocol The 2004 Additional Protocol on Liability for Nuclear Damageimplementing the Paris Convention on Nuclear Third PartyLiability and the Brussels Convention.

Admission Admission of GDRs to the official list maintained by the FSAand the admission of the GDRs to the regulated market on theLondon Stock Exchange, which together constitute admission tothe official listing on a stock exchange.

Advertising Law The Russian Federal Law No. 38-FZ ‘‘On Advertising’’ dated13 March 2006.

Affiliate As defined in Rule 144 under the Securities Act.

Agency Agreement The Agency Agreement dated 9 November 2012.

Annual Financial Statements The audited condensed consolidated financial statements of theGroup for the years ended 31 December 2011, 2010 and 2009.

ATC Available Transfer Capacities within the Rules on Allocationand Use of Cross Border Transmission Capacities.

Audit Committee The audit committee of HEP d.d.

Authorised Holding Amounts of U.S.$200,000 and integral multiples of U.S.$1,000 inexcess thereof.

Balancing Energy Tariff The balancing energy tariff paid by Commercial Customers thatare supplied by the public supply system, and which tariff issubject to a 20% increase if, after 30 days, the relevantCommercial Customer has failed to choose a Market Supplier.

Business Day A day (other than a Saturday or Sunday) on which commercialbanks are open for business in London, New York City and, inthe case of presentation of a Note Certificate, the place in whichthe Note Certificate is presented.

CBS Croatian Bureau of Statistics.

CCGT A combined cycle gas turbine.

CER Certified Emission Reduction credits.

Certificate A Note certificate.

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Term/Definition Meaning

Change of Control If the Republic of Croatia ceases to control the Issuer or ceasesto own, directly or indirectly, 75% of the entire issued sharecapital of the Issuer, and for this purpose control shall mean thepower to direct the management and policies of the Issuer or tocontrol the composition of its board of directors or otherequivalent body, whether through the ownership of votingcapital, by contract or otherwise.

Change of Control Notice Notice given pursuant to Condition 7.3 and in accordance withCondition 13 of the Notes.

Change of Control Put Date The fifteenth day after the date of expiry of the Change ofControl Put Period.

Change of Control Put Notice A duly signed and completed notice of exercise in the formobtainable from any specified office of any Agent for theexercise of a Change of Control Put Option.

Change of Control Put Option The option to require the Issuer to redeem or, at the option ofthe Issuer, purchase (or procure the purchase of) a Noteholder’sNote(s) at 101% of their principal amount pursuant toCondition 7.3.

Change of Control Put Period The period of 45 days after that on which a Change of ControlNotice is given.

CHP Combined heat and power.

Clearstream Luxembourg Clearstream Banking, societe anonyme.

CLEF Carbon Leakage Exposure Factor co-efficient.

Closing Date 9 November 2012, being the date on which delivery of theGlobal Certificates will be made or such later date as may beagreed.

CNB Croatian National Bank.

Code The Internal Revenue Code of 1986.

Collective Agreement The collective bargaining agreement of the employees of theGroup.

Co-Manager Raiffeisen Bank International AG.

Commercial Customers Customers operating in either the industrial or commercialsectors (i.e. are not Households).

Commercial Non-Tariff Customers Commercial Customers who are supplied by a Market Supplier.

Companies Act The 1995 Companies Act (Official Gazette nos. 111/93, 34/99,52/00, 118/03 and 107/07) was passed on November 23, 1993 andcame into force on January 1, 1995.

CPDI Regulations Contingent payment debt instrument regulations.

CPDIs Contingent payment debt instruments.

CRA Regulation The Regulation (EC) No. 1060/2009 (as amended).

Croatian Environmental Ministry Ministry of Environmental and Nature Protection of theRepublic of Croatia.

Croatian Government The current government of the Republic of Croatia.

Croatian Ministry of Economy Ministry of Economy of the Republic of Croatia.

CSSF Commission de Surveillance du Secteur Financier.

Deloitte Deloitte d.o.o.

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Term/Definition Meaning

DTC The Depository Trust Company.

EIA Environmental impact assessment.

Electricity Market Act (OG 177/2004, 76/2007, 152/2008, 14/2011 and 59/2012).

Electricity Tariff Models Tariff models in force for the prices of electricity activities.

ELES GEN ELES GEN d.o.o.

Eligible Customer An electricity customer who can freely choose a MarketSupplier.

EMF Electromagnetic field.

Energy Act Key Croatian law governing the energy sector (OG 68/2001,177/2004, 76/2007, 152/2008, and 127/2010).

Environmental Permits The integrated environmental requirements, that act as acondition for the continued operation of all thermal powerplants of a rated thermal capacity above 50 MW and forobtaining a permit for new construction or reconstruction ofexisting plants.

ERU Emission Reduction Units.

ESMA European Securities and Markets Authority.

EU-ETS EU Emissions Trading scheme.

EU Regulation on Cross-BorderExchanges Regulation (EC) No. 714/2009 on Conditions for Access to the

Network for Cross-Border Exchanges in Electricity.

EU Regulation on Natural GasTransmission Regulation 715/2009 on Conditions for Access to Natural Gas

Transmission Networks.

Euro, EUR, E Currency introduced at the start of the third stage of theEuropean economic and monetary union pursuant to the Treatyestablishing the European Community.

E.U. Third Electricity Directive Directive 2009/72/EC concerning Common Rules for anInternational Market in Electricity.

E.U. Third Gas Directive Directive 2009/73/EC concerning Common Rules for theInternational Market in Natural Gas.

ERM II The Exchange Rate Mechanism.

ESCM Energy Service Company Model.

Events of Default Events so defined under Condition 10 of the Conditions of theNotes.

Exchange Act The United States Securities Exchange Act of 1934.

Exchanged Global Certificate Any Global Certificate that has been exchanged for Certificates.

Financial Statements The Annual Financial Statements and Interim FinancialStatements.

GenE Gen Energija.

Generation Area North Includes three hydro power plants that were built on the Dravariver: Varazdin (1975), Cakovec (1982) and Dubrava (1989).They are multi-purpose hydro power plants, the main purposesbeing: electricity generation, water supply, flood control, landerosion protection, irrigation, drainage, transport.

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Term/Definition Meaning

Generation Area South Includes 10 hydro power plants in the basin of the river Cetina(Peruca, Orlovac, D– ale, Zakucac, Kraljevac hydro power plantsand Busko Blato pumping station), the basin of the river Krka(Golubic, Krcic, Miljacka, Jaruga) and on the Gracac Plateau(Velebit pumped storage hydro power plant).

Generation Area West Includes six hydro power plants which utilise water of the riversKrka (Ozalj hydro power plant), Ogulinska Dobra and ZagorskaMreznica (Gojak hydro power plant), Lokvarka, Kriz stream,Licanka, Lepenica, Kostanjevica, Potkosa and Benkovac stream(Vinodol hydro power system), Rjecina (Rijeka), Lika andGacka (Senj hydro power system). In 2010, on the Dobra River,Lesce, a 42.3 MW hydro power plant, was put in trial operation.

Global Certificates Global certificates in registered form representing the Notes.

Governmental Authority The Republic of Croatia or any entity exercising executive,legislative, judicial, regulatory or administrative functions of, orpertaining to, the Republic of Croatia.

Group or HEP Group ‘‘The Group’’, ‘‘Group’’ or ‘‘HEP Group’’ comprises 14 wholly-owned subsidiaries and two jointly controlled power plants,Krsko, located in the Republic of Slovenia and co-owned withGenE and Plomin II, located in Croatia and co-owned withRWE.

GW Gigawatt, which is equal to 1,000 MW.

GWh Gigawatt-hour, representing one hour of electricity consumptionat a constant rate of 1GW.

HAC Hrvatske autoceste d.o.o.

HEP Hrvatska Elektroprivreda d.d.

HEP-Generation HEP-Proizvodnja d.o.o.

HEP-ODS HEP-Operator distribucijskog sustava d.o.o.

HEP-OIE HEP Obnovlijivi izvori energije d.o.o.

HEP-OPS HEP-Operator prijenosnog sustava d.o.o. (formerlyHEP-Prijenos d.o.o.).

HEP-Plin HEP-Plin d.o.o.

HEP-Supply HEP Opskrba d.o.o.

HEP-Top HEP-Toplinarstvo d.o.o.

HEP Trade HEP-Trgovina d.o.o.

HERA Croatian Regulatory Agency for Energy.

Holder Means the person in whose name a Note is registered in therelevant register of Noteholders.

Households Residential customers.

HRK, Kuna The lawful currency of the Republic of Croatia.

HROTE The Croatian Energy Market Operator.

IARC International Agency for Research on Cancer.

IARMD Internal Audit and Risk Management Department.

IBRD Loan Net Revenues/DebtService Covenant As defined in Condition 4.3(a).

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Term/Definition Meaning

IBRD Loans As defined in Condition 4.3(b).

IFRIC International Financial Reporting Interpretations Committee.

IFRS The International Financial Reporting Standards issued by theInternational Accounting Standards Board, includinginterpretations of the International Financial ReportingInterpretations Committee (IFRIC) previously referred to as the‘‘Standing Interpretations Committee’’ (SIC) and, alsoincluding, International Accounting Standards, where thecontext requires, as endorsed by the European Commission foruse in the EU.

IMF International Monetary Fund.

INA Group Industrija nafte d.d.

Indebtedness for Borrowed Money Any indebtedness (whether being principal, premium, interest orother amounts) for or in respect of any notes, bonds,debentures, debenture stock, loan stock or other securities orany borrowed money or any liability under or in respect of anyacceptance or acceptance credit.

INES International nuclear events scale.

Interest Payment Date 9 May and 9 November in each year.

Interim Financial Statements The reviewed consolidated interim financial statements for thesix months ended 30 June 2012.

Interpretation IFRIC 18 ‘‘Transfer of Assets from Customers’’, which specifiesthe accounting treatment for assets transferred from customers,whereby revenue from such assets is to be recognised in theincome statement immediately upon transfer, rather thandeferred over the useful life of the asset concerned. IFRIC 18has been in effect since 1 July 2009.

Investor’s Currency The currency in which an investor’s financial activities areprincipally denominated.

IRS Internal Revenue Service.

Issue Date 9 November 2012.

ISO Independent system operator.

Issuer Hrvatska Elektroprivreda d.d.

ITO Independent transmission operator.

JANAF A Croatian oil transportation company, Jadranski Naftovod d.d.

Joint Lead Managers Morgan Stanley & Co. International plc and UniCreditBank AG.

KW Kilowatt, representing the rate at which energy is produced.

KWh Kilowatt-hour, representing one hour of electricity consumptionat a constant rate of 1 kW.

Krsko Nuclear Power Plant Krsko.

Krsko agreement A partnership agreement between HEP and GenE.

Law Luxembourg law of 23 December 2005.

Laws Luxembourg laws of 21 June 2005, implementing the ECCouncil Directive 2003/48/EC.

LNG Hrvatska LNG Hrvatska d.o.o.

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Term/Definition Meaning

London Business Day A day (other than a Saturday or Sunday) on which commercialbanks are open for business in London.

Managers Morgan Stanley & Co. International plc, UniCredit Bank AGand Raiffeisen Bank International AG.

Market Supplier A supplier offering non-tariff based rates.

Material Subsidiary As defined in Condition 4.3(d) of the Notes.

Maturity Date 9 November 2017.

MD Material damage policy.

Moody’s Moody’s Investors Service Ltd.

MW Megawatt, which is equal to 1,000 kW.

MZOP Ministry of Environmental and Nature Protection.

Non-Tariff Customers Commercial Customers and Households that have selected aparticular Market Supplier.

Noteholder Means the person in whose name a Note is registered in therelevant register of Noteholders.

Notes U.S.$500,000,000 6.00% Notes due 2017 of the Issuer.

NPPK Nuklearna elektrana Krsko d.o.o.

Nuclear Law Slovenian Law on Liability for Nuclear Damage.

Offering Circular The offering circular dated 7 November 2012.

OID Original Issue Discount.

Original Rate of Interest 6.00% per annum.

OSART IAEA operational safety reviews.

OU Full ownership unbundling.

Ownership Unbundling Event Any reorganisation of the holding of the Regulated Assetspursuant to or in accordance with any order or act of aGovernmental Authority implementing Directive 2009/72/EC inthe Republic of Croatia following the consummation of whichthe Regulated Assets cease to be owned by any member of theGroup.

Ownership Unbundling Event Notice Notice given pursuant to Condition 7.4 and in accordance withCondition 13 of the Notes.

Ownership Unbundling Event PutDate The fifteenth day after the date of expiry of the Ownership

Unbundling Event Put Period.

Ownership Unbundling Event PutNotice A duly signed and completed notice of exercise in the form

obtainable from any specified office of any Agent for theexercise of an Ownership Unbundling Event Put Option.

Ownership Unbundling Event PutOption The option to require the Issuer to redeem or, at the option of

the Issuer, purchase (or procure the purchase of) a Noteholder’sNote(s) at their principal amount pursuant to Condition 7.4.

Ownership Unbundling Event PutPeriod The period of 45 days after that on which an Ownership

Unbundling Event Notice is given.

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Term/Definition Meaning

Permitted Reorganisation An Ownership Unbundling Event or a Permitted UnbundlingEvent.

Permitted Security Interest Any Security Interest over or affecting any assets or revenues ofany company in the Group where such Security Interest securesonly Project Finance Indebtedness.

Permitted Unbundling Event Any reorganisation of the holding of the Regulated Assets in theGroup pursuant to or in accordance with any order or act of aGovernmental Authority implementing Directive 2009/72/EC inthe Republic of Croatia following the consummation of whichany member of the Group continues to own the RegulatedAssets.

Person Any individual, company, corporation, firm, partnership, jointventure, association, organisation, state or agency of a state orother entity, whether or not having separate legal personality.

Plinacro Plinacro d.o.o.

Plinara Plinara d.o.o. Pula.

Plomin II Plomin II Thermal Plant Power.

Principal Amount The amounts of U.S.$200,000 and integral multiples ofU.S.$1,000 in excess thereof in which the Notes are issued.

Proceedings Any suit, action or proceeding taken by the Trustee orNoteholders arising out of or in connection with the Trust Deedor the Notes.

Project Finance Indebtedness As defined in Condition 4.3(g) of the Notes.

Prospectus Act 2005 The Luxembourg Act dated 10 July 2005 on prospectuses forsecurities.

Prospectus Directive Directive 2003/71/EC.

PSR Periodical Safety Reviews.

QIB Qualified institutional buyers (within the meaning of Rule 144Aunder the Securities Act).

RAB Regulated Asset Base.

Rating Agency Standard & Poor’s Credit Market Services Europe Limited(‘‘S&P’’), Moody’s Investors Service Ltd. (‘‘Moody’s’’), or any oftheir respective successors, or any other rating agency ofinternational standing.

Record Date The fifteenth day before the relevant Interest Payment Date.

Registered Account Means the U.S. dollar account maintained by or on behalf of aNoteholder with a bank that processes payments in U.S. dollars,details of which appear on the relevant register of Noteholdersat the close of business, in the case of, on the second BusinessDay before the due date for payment and, in the case of interest,on the relevant Record Date.

Regulated Assets Assets of the Group relating to the transmission of electricity to,from and within the Republic of Croatia in respect of which theIssuer and its Subsidiaries earn revenues regulated, directly orindirectly, by the Croatian Regulatory Agency for Energy(HERA).

Regulations U.S. Treasury Regulations.

Regulation S Regulation S under the U.S. Securities Act.

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Term/Definition Meaning

Regulation S Notes Those Notes offered and sold in reliance on Regulation S.

Relevant Date Means the date on which the payment first becomes due but, ifthe full amount of the money payable has not been received byan Agent or the Trustee on or before the due date, it means thedate on which, the full amount of the money having been soreceived, notice to that effect has been duly given to theNoteholders by the Issuer in accordance with Condition 13.

Relevant Indebtedness Any present or future indebtedness (whether being principal,premium, interest or other amounts) for or in respect of anynotes, bonds, debentures, debenture stock, loan stock or othersecurities which are for the time being quoted, listed orordinarily dealt in on any stock exchange, over-the-counter orother securities market and any guarantee or indemnity of anysuch indebtedness.

Relevant Jurisdiction Means the Republic of Croatia or any political subdivision orany authority thereof or therein having power to tax or any otherjurisdiction or any political subdivision or any authority thereofor therein having power to tax to which the Issuer becomessubject in respect of payments made by it of principal, premium(if any) and interest on the Notes.

Relevant Nominee The nominee for DTC or for the common depositary forEuroclear and Clearstream, Luxembourg, as applicable.

Relevant Persons Persons who are outside the United Kingdom, persons in theUnited Kingdom who have professional experience in mattersrelating to investments falling within Article 19(5) of theFinancial Services and Markets Act 2000 (Financial Promotion)Order 2005 or those persons in the United Kingdom to whom itmay otherwise lawfully be distributed.

Renewable Sources Directive Directive 2009/28/EC on the Promotion of the Use of Energyfrom Renewable Sources.

Resale Restriction Termination Date The date which is one year (or such shorter period of time aspermitted by Rule 144 under the Securities Act or any successorprovision thereunder) after the later of the date of the originalissue of the Notes and the last date on which the Issuer or anyaffiliate of the Issuer was the owner of such Notes (or anypredecessor thereto), or such later date, if any, as may berequired by applicable law.

Responsible Person The Issuer.

Restricted Global Certificate The Global Certificate issued in respect of the Rule 144A Notes.

Rule 144A Rule 144A under the U.S. Securities Act.

Rule 144A Notes Those Notes offered and sold in reliance on Rule 144A.

Rules LCIA Arbitration Rules.

RWE RWE Energie Aktiengesellschaft.

S&P Standard & Poor’s Credit Market Services Europe Limited.

SAA Stabilisation and Association Agreement, between the Republicof Croatia and the EU.

Savings Directive EC Council Directive 2003/48/EC on the Taxation of SavingsIncome.

SDR Special Drawing Rights, a reserve currency created by the IMF.

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Term/Definition Meaning

Securities Act The United States Securities Act of 1933.

Security Interest Any mortgage, charge, lien, pledge or other security interest.

SEEC Auction Office A South East Europe Co-ordinated Auction Office.

Slovenian Nuclear Act Slovenian Act on Liability for Nuclear Damage.

SORNS State Office for Radiological and Nuclear Safety.

Specified Borrowings As defined in Condition 4.3(i).

Stabilising Manager Morgan Stanley & Co. International plc.

Step Down Rating Change The first public announcement after a Step Up Rating Changeby a Rating Agency (i) that it has upgraded the credit ratingassigned by it to the Notes or (ii) that it has re-assigned a creditrating to the Issuer with the result that, following such publicannouncement, each of the Rating Agencies has assigned acredit rating to the Issuer of (A) in the case of Moody’s, Ba2 orhigher, (B) in the case of S&P, BB� or higher or (C) in the caseof any other Rating Agency, a comparable rating or higher.

Step Up Rating Change The first public announcement by one or more Rating Agencies(i) of a downgrade in the credit rating assigned to the Issuer to arating of (A) in the case of Moody’s, Ba3 or lower, (B) in thecase of S&P, B+ or lower or (C) in the case of any other RatingAgency, a comparable rating or lower, or (ii) that such RatingAgency(ies) have ceased to assign (other than temporarily) anysuch credit rating to the Issuer in circumstances where no otherRating Agency is then assigning such a credit rating to theNotes.

Strategy Energy Development Strategy.

Subscription Agreement The Subscription Agreement dated 7 November 2012.

Subsidiary Any company (i) in which the Issuer holds a majority of thevoting rights or (ii) of which the Issuer is a member and has theright to appoint or remove a majority of the board of directorsor (iii) of which the Issuer is a member and controls a majorityof the voting rights, and includes any company which is aSubsidiary of a Subsidiary of the Issuer.

Tariff Customers All Households and Commercial Customers that have notchosen a Market Supplier.

Taxes Any present or future taxes, duties, assessments or governmentalcharges of whatever nature.

TE Thermal power plant.

TE Plomin TE Plomin d.o.o.

TE-TO Thermal power plant—Heating plant.

Territories Luxembourg and certain dependent and associated territories ofEU member states.

Thermal Energy Tariff Model Tariff models in force for the prices of thermal energy activities.

Treaty The EU Accession Treaty.

Trust Deed Trust Deed dated 9 November 2012 made between the Issuerand the Trustee.

Trustee Deutsche Trustee Company Limited.

TSO Transmission system operator.

178

Term/Definition Meaning

Unbundling Distribution of electricity being separate and independent fromthe generation, transmission and sale of electricity.

Unrestricted Global Certificate The Global Certificate issued in respect of the Regulation SNotes.

URSJV Slovenian nuclear regulator Uprava Republike Slovenije zanuclearnu sigurnost.

U.S. dollars, dollars, U.S. $, $ United States dollars.

USKOK Croatian Bureau for Combating Corruption and OrganisedCrime.

U.S. Person As defined in Regulation S under the Securities Act.

WHO World Health Organisation.

179

INDEX TO THE FINANCIAL STATEMENTS

Page

Interim Financial Statements of the Group as of and for the six months ended 30 June 2012Report on Review of Interim Financial Information of the HEP Group . . . . . . . . . . . . . . . . . . . F-3Condensed Consolidated Income Statement of the HEP Group . . . . . . . . . . . . . . . . . . . . . . . . F-5Condensed Consolidated Statement of Comprehensive Income of the HEP Group . . . . . . . . . . . F-6Condensed Consolidated Statement of Financial Position of the HEP Group . . . . . . . . . . . . . . . F-7Condensed Consolidated Statement of Changes in Equity of the HEP Group . . . . . . . . . . . . . . F-9Condensed Consolidated Statement of Cash Flows of the HEP Group . . . . . . . . . . . . . . . . . . . F-10Notes to the Consolidated Interim Financial Statements of the HEP Group . . . . . . . . . . . . . . . F-12

Annual Financial Statements of the Group as of and for the years ended 31 December 2009,2010 and 2011

Independent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-30Consolidated Income Statement—HEP Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-32Consolidated Statement of Comprehensive Income—HEP Group . . . . . . . . . . . . . . . . . . . . . . . F-33Consolidated Statement of Financial Position—HEP Group . . . . . . . . . . . . . . . . . . . . . . . . . . . F-34Consolidated Statement of Changes in Equity—HEP Group . . . . . . . . . . . . . . . . . . . . . . . . . . . F-36Consolidated Statement of Cash Flow—HEP Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-38Notes to the Consolidated Financial Statements—HEP Group . . . . . . . . . . . . . . . . . . . . . . . . . F-40

F-1

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries (HEP Group)

Condensed consolidated interim financial statements for the period ended

30 June 2012

F-2

Report on Review of Interim Financial Information

To the Owner of Hrvatska elektroprivreda d.d:

Introduction

We have reviewed the accompanying condensed consolidated statement of financial position of Hrvatska

elektroprivreda d.d. and its subsidiaries (“the Group”) as of 30 June 2012 and the related condensed

consolidated statement of income, condensed consolidated statement of changes in equity and condensed

consolidated statement of cash flows for the six-month period then ended, and a summary of significant

accounting policies and other explanatory notes (“the condensed consolidated interim financial statements”).

Management is responsible for the preparation and fair presentation of these condensed consolidated interim

financial statements in accordance with IAS 34 Interim Financial Reporting. Our responsibility is to express a

conclusion on this condensed consolidated interim financial statements based on our review.

Scope of Review

Except as explained in the following paragraph, we conducted our review in accordance with International

Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the

Independent Auditor of the Entity. A review of interim financial information consists of making inquiries,

primarily of persons responsible for financial and accounting matters, and applying analytical and other review

procedures. A review is substantially less in scope than an audit conducted in accordance with International

Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware

of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Basis for Qualified Conclusion

Prepayments to Hrvatske autoceste d.o.o.

As described in Note 9, the Group advanced HRK 300 million to Hrvatske autoceste d.o.o. in December 2006

for the purchase of electricity facilities on the Croatian motorways within two years from the date of the

advance payment. As of the date of these condensed consolidated interim financial statements, the legal title to

these facilities has not yet been transferred to the Group. The Group is the economic beneficiary of the

electricity facilities, which it uses for their intended economic purposes in the supply of electricity to customers.

As of the date of preparation of the accompanying condensed consolidated interim financial statements, the

Group did not classify the advance payment by type of assets used in the Group’s business, and we received

from the Management Board no calculation of the economic impact of the reclassification of those assets from

prepayments to assets in use and of the related depreciation. As a result, we are unable to assess the impact

of this matter on the Group’s condensed consolidated interim financial statements. Had we been able to

complete our review of the advance payment and corresponding impact, matters might have come to our

attention indicating that adjustments might be necessary to the Group’s condensed consolidated interim

financial statements.

F-3

F-4

Condensed Consolidated Income Statement of the HEP Group For the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 2

The accompanying accounting policies and notes form an integral part of this condensed consolidated income

statement.

Notes For the six-month period ended

30 June 2012 30 June 2011

HRK’000 HRK’000

Unaudited Unaudited

Revenue

Revenue from electricity sales 4,5 5,539,533 5,373,462

Revenue from thermal power sales 4,5 323,386 315,149

Revenue from gas sales 4,5 206,848 195,755

Other operating income 4,5 570,073 598,191___________ ___________

Total operating income 4,5 6,639,840 6,482,557___________ ___________

Electricity purchase cost (2,045,794) (1,434,243)

Fuel costs (1,722,670) (1,190,023)

Staff costs (935,395) (936,487)

Depreciation and amortization expense (871,420) (867,634)

Other operating expenses (1,248,716) (1,440,549) ___________ ___________

Total operating expenses 5 (6,823,995) (5,868,936) ___________ ___________

(Loss)/profit from operations (184,155) 613,621 ___________ ___________

Financial revenue 29,904 41,020

Financial costs (170,361) (130,415) ___________ ___________

Net loss from financial activities (140,457) (89,395)___________ ___________

(Loss)/profit before taxation (324,612) 524,226___________ ___________

Income tax income/(expense) 6 4,608 (133,564)___________ ___________

(Loss)/profit for the year (320,004) 390,662 ___________ ___________

Attributable to:

Equity holder (324,725) 385,653

Non-controlling interest 4,721 5,009 ___________ ___________

(320,004) 390,662 ___________ ___________

F-5

Condensed Consolidated Statement of Comprehensive Income of the HEP Group For the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 3

The accompanying accounting policies and notes form an integral part of this condensed consolidated statement of

comprehensive income.

Notes For the six-month period ended

30 June 2012 30 June 2011

HRK’000 HRK’000

Unaudited Unaudited

(Loss)/Profit for the year (320,004) 390,662 __________ __________

Exchange differences (16) 5

Fair valuation of Janaf shares 3,893 2,699__________ __________

Other comprehensive income 3,877 2,704 __________ __________

Total comprehensive (loss)/income for the year (316,127) 393,366 _________ _________

Total comprehensive (loss)/income attributable to:

Equity holder (320,832) 388,352

Non-controlling interest 4,705 5,014 ___________ ___________

(316,127) 393,366 ___________ ___________

F-6

Condensed Consolidated Statement of Financial Position of the HEP Group As at 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 4

The accompanying accounting policies and notes form an integral part of this condensed consolidated statement of

financial position.

ASSETS Notes 30 June 2012 31 December 2011

HRK’000 HRK’000

Unaudited Unaudited

Non-current assets

Property, plant and equipment 23,800,504 24,390,612

Capital work in progress 8 3,705,763 3,092,220

Intangible assets 56,406 57,647

Investment property 234,395 234,760

Prepayments for property, plant and equipment 7 411,057 427,039

Investment in NPP Krško d.o.o. 1,754,419 1,754,419

Long-term loan receivables and deposits 641 719

Assets held for sale and other investments 125,782 120,915

Other non-current assets 96,164 107,153

Deferred tax assets 251,121 178,902 ___________ ___________

Total non-current assets 30,436,252 30,364,386

___________ ___________

Current assets

Inventories 1,027,733 1,063,520

Trade accounts receivable 1,790,120 1,496,236

Other current receivables 83,048 415,105

Cash and cash equivalents 240,490 407,123 ___________ ___________

3,141,391 3,381,984 ___________ ___________

TOTAL ASSETS 33,577,643 33,746,370 ___________ ___________

F-7

Condensed Consolidated Statement of Financial Position of the HEP Group (continued) As at 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 5

EQUITY AND LIABILITIES Notes 30 June 2012 31 December 2011

HRK’000 HRK’000

Unaudited Unaudited

Share capital 9 19,792,159 19,792,159

Capital reserves 9 3,893 (438,958)

(Accumulated losses)/retained earnings 9 (759,372) 4,311 __________ __________Equity attributable to the equity holder of the parent 19,036,680 19,357,512 __________ __________

Non-controlling interest 43,116 62,847 __________ __________

Total equity 19,079,796 19,420,359 __________ __________

Long-term borrowings 10 1,980,071 2,534,489

Long-term liabilities to the state 28,978 30,466

Long-term provisions 801,253 778,629

Liabilities under issued bonds 918,780 965,202

Other non-current liabilities 5,075,814 5,144,960 __________ __________

Total non-current liabilities 8,804,896 9,453,746 __________ __________

Trade payables 1,844,693 2,427,184

Current portion of long-term bonds issued 93,380 93,380

Current portion of long-term borrowings 10 1,612,897 1,174,713

Short-term borrowings 11 1,340,059 603,163

Taxes and contributions payable 88,095 75,898

Interest payable 32,566 23,192

Amounts due to employees 162,852 127,934

Other current liabilities 518,409 346,801 __________ __________

Total current liabilities 5,692,951 4,872,265 __________ __________

TOTAL EQUITY AND LIABILITIES 33,577,643 33,746,370__________ __________

The accompanying accounting policies and notes form an integral part of this condensed consolidated statement of

financial position.

F-8

Condensed Consolidated Statement of Changes in Equity of the HEP Group For the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 6

Share

capital

Capital

reserves

Retained

earnings/(ac

cumulated

losses)

Attributable

to the equity

holder of the

parent

Non-

controlling

interest

Total

equity

HRK’000 HRK’000 HRK’000 HRK’000 HRK’000 HRK’000

Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited

Balance at 1 January 2011 19,792,159 (874,074) 946,439 19,864,524 76,993 19,941,517 _________ _________ _________ _________ _________ _________

Allocation of retained earnings - 444,038 (444,038) - - -

Dividends declared - - (493,376) (493,376) - (493,376)

Profit for the period - - 385,653 385,653 5,009 390,662

Exchange differences - - - - 5 5

Fair value of Janaf shares - 2,699 - 2,699 - 2,699 _________ _________ _________ _________ _________ _________

Other comprehensive income - 2,699 - 2,699 5 2,704 _________ _________ _________ _________ _________ _________

Total comprehensive income for the period

- 2,699 385,653 388,352 5,014 393,366 _________ _________ _________ _________ _________ _________

Dividends paid to RWE - - - - (14,063) (14,063)

Interest paid to RWE - - - - (12,668) (12,668) _________ _________ _________ _________ _________ _________ Balance at 30 June 2011 19,792,159 (427,337) 394,678 19,759,500 55,276 19,814,776

_________ ________ _________ _________ _________ _________

Balance at 1 January 2012 19,792,159 (438,958) 4,311 19,357,512 62,847 19,420,359 __________ _________ __________ _________ ________ _________

Allocation of retained earnings - 438,958 (438,958) - - -

Loss for the period - - (324,725) (324,725) 4,721 (320,004)

Exchange differences - - - - (16) (16)

Fair value of Janaf shares - 3,893 - 3,893 - 3,893 __________ _________ __________ _________ ________ _________

Other comprehensive income - 3,893 - 3,893 (16) 3,877 __________ _________ __________ _________ ________ _________

Total comprehensive income for the year - 3,893 (324,725) (320,832) 4,705 (316,127) _________ _________ _________ _________ _________ _________

Dividends paid to RWE - - - - (11,514) (11,514)

Interest paid to RWE - - - - (12,922) (12,922) _________ _________ _________ _________ _________ _________ Balance at 30 June 2012 19,792,159 3,893 (759,372) 19,036,680 43,116 19,079,796 _________ _________ _________ _________ _________ _________

The accompanying accounting policies and notes form an integral part of this condensed consolidated statement of

changes in equity.

F-9

Condensed Consolidated Statement of Cash Flows of the HEP Group For the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 7

For the six-month period ended

30 June 2012 30 June 2011

HRK’000 HRK’000

Unaudited Unaudited

Cash flows from operating activities

(Loss)/profit for the period (320,004) 390,662

Adjustments for:

Income tax (income) / expense recognised in profit or loss (4,608) 133,564

Net loss from financial activities 140,457 89,395

Depreciation and amortisation 871,420 867,272

Increase in impairment on receivables 106,507 99,877

Net book value of disposed of property, plant and equipment 17,508 -

Decrease in impairment on inventories (1,391) (1,524)

Increase / (decrease) in provisions 22,624 (13,230) __________ _________

Operating cash flows before movements in working capital 832,513 1,566,016 ___________ _________

(Increase)/decrease in trade receivables (400,391) 75,486

Decrease in inventories 37,178 67,282

Decrease in other current assets 199,819 129,432

Decrease in trade payables (599,088) (280,625)

Increase / (decrease) in other current liabilities 196,960 (116,456)

(Decrease) / increase in other non-current liabilities (70,613) 287,592 _________ _________

Cash generated from operations 196,378 1,728,727 __________ _________

Income taxes refunded/ (paid) 85,395 (460,232)

Interest paid (129,929) (127,471) _________ _________

NET CASH FROM OPERATING ACTIVITIES 151,844 1,141,024 _________ _________

INVESTING ACTIVITIES

Interest received 1,383 4,858

Increase in property, plant and equipment (901,042) (700,466)

Increase in intangible assets (10,077) (587)

(Decrease)/ increase in other non-current assets 27,411 (5,597)

Change in the non-controlling interest and dividends paid to RWE (24,436) (26,731) _________ __________

NET CASH USED IN INVESTING ACTIVITIES (906,761) (728,523) __________ __________

F-10

Condensed Consolidated Statement of Cash Flows of the HEP Group (continued) For the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 8

For the six-month period ended

30 June 2012 30 June 2011

HRK’000 HRK’000

Unaudited Unaudited

FINANCING ACTIVITIES

Repayments of bonds issued (46,422) (46,419)

Proceeds from long-term loans raised 505,905 7,314

Repayments of long-term loans (613,353) (591,625)

Proceeds from short-term loans raised 805,682 455,184

Repayment of short-term loans (63,528) (602,831) __________ __________

NET CASH USED IN FINANCING ACTIVITIES 588,284 (778,377) __________ __________

NET DECREASE IN CASH AND CASH EQUIVALENTS (166,633) (365,876) _________ __________CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 407,123 762,157

__________ __________

CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 240,490 396,281 __________ __________

The accompanying policies and notes form an integral part of this condensed consolidated statement of cash flows.

F-11

Notes to the condensed consolidated interim financial statements of the HEP Group As at and for the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 9

1. BASIS OF PRESENTATION

These financial statements are prepared in accordance with International Accounting Standard 34 Interim

Financial Reporting. The preparation of the unaudited condensed consolidated interim financial statements

requires from management to make estimates and assumptions that affect the reported amounts of assets and

liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the

reported amounts of revenues and expenses during the reporting period. These estimates are based on the

information available as at the date of the financial statements, and actual results could differ from those

estimates. The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to

accounting estimates are recognised in the period in which the estimate is revised if the revision affects only

that period or in the period of revision and future periods if the revision affects both current and future periods.

The annual financial statements of Hrvatska Elektroprivreda d.d. and its and subsidiaries (“the HEP Group”)

are prepared in accordance with International Financial Reporting Standards, and as issued by the

International Accounting Standards Board (‘IASB’). The condensed consolidated interim financial statements

have been prepared in accordance with International Accounting Standard 34 ‘Interim Financial Reporting’

(‘IAS 34’), as issued by the IASB. The condensed consolidated interim financial statements have been

prepared under the same accounting policies as the financial statements for year ended 31 December 2011.

Certain information and footnote disclosures normally included in financial statements prepared in accordance

with IFRS as issued by the IASB have been condensed or omitted as permitted by IAS 34. The 31 December

2011 statement of financial position was derived from audited financial statements but does not include all

disclosures required by IFRS as issued by the IASB. However, the Group believes that the disclosures are

adequate to make the information presented not misleading.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The HEP Group maintains its accounting records in the Croatian language, in Croatian Kuna and in

accordance with Croatian laws and the accounting principles and practices observed by enterprises in Croatia.

The accounting records of the subsidiaries in Croatia and abroad are maintained in accordance with the

requirements of the respective local jurisdictions.

The financial statements of the HEP Group are prepared under the cost convention, as modified by the

revaluation of certain assets and liabilities under conditions of hyperinflation in the period to 1993, and in

accordance with International Financial Reporting Standards, financial investments are also revalued at fair

value. Historical cost is generally based on the fair value of the consideration given in exchange for assets.

Some of the new Standards and Interpretations are effective for the financial year beginning on 1 January 2012

and, except as provided below, the manner or presentation, measurement methods and accounting policies

applied in the preparation of the financial statements of the Group for the year ended 31 December 2011 apply

to the accompanying unaudited condensed consolidated interim financial statements.

F-12

Notes to the condensed consolidated interim financial statements of the HEP Group (continued) As at and for the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 10

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Adoption of new and revised International Financial Reporting Standards ("IFRSs")

Standards and Interpretations effective in the current period

The following amendments to the existing standards issued by the International Accounting Standards Board

and interpretations issued by the International Financial Reporting Interpretations Committee are effective for

the current period:

• Amendments to IFRS 1 First-time Adoption of IFRS - Severe Hyperinflation and Removal of Fixed

Dates for First-time Adopters (effective for annual periods beginning on or after 1 July 2011),

• Amendments to IFRS 7 Financial Instruments: Disclosures – Transfers of Financial Assets

(effective for annual periods beginning on or after 1 July 2011),

• Amendments to IAS 12 Income Taxes - Deferred Tax: Recovery of Underlying Assets (effective for

annual periods beginning on or after 1 January 2012)

The adoption of the amended and revised Standards and Interpretations has not lead to any significant

changes in the Group's accounting policies.

Standards and Interpretations in issue not yet adopted

At the date of authorisation of these financial statements the following Standards, revisions and Interpretations were in issue but not yet effective:

• IFRS 9 Financial Instruments, as amended in 2010, (effective for annual periods beginning on or

after 1 January 2015)

• IFRS 10 Consolidated Financial Statements, published in May 2011 and amended in 2012,

supersedes the previous version of IAS 27 (2008) “Consolidated and Separate Financial Statements”,

(effective for annual periods beginning on or after 1 January 2013)

• IFRS 11 Joint Arrangements, published in May 2011 and amended in 2012, superseded IAS 31

“Interests in Joint Ventures” (effective for annual periods beginning on or after 1 January 2013)

• IFRS 12 Disclosure of Interests in Other Entities, published in May 2011 and amended in 2012

(effective for annual periods beginning on or after 1 January 2013)

• IFRS 13 Fair Value Measurement, published in May 2011 (effective for annual periods beginning on

or after 1 January 2013)

F-13

Notes to the condensed consolidated interim financial statements of the HEP Group (continued) As at and for the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 11

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Adoption of new and revised International Financial Reporting Standards ("IFRSs") (continued)

Standards and Interpretations in issue not yet adopted (continued)

• Amendments to IFRS 1 First- time Adoption of IFRS, published in March 2012, addressing

government loans with below-market rates of interest when transitioning to IFRSs (effective for annual

periods beginning on or after 1 January 2013)

• Amendments to IFRS 7 Financial Instruments - Disclosures, published in December 2011,

amendments enhancing disclosures about offsetting of financial assets and financial liabilities

(effective for annual periods beginning on or after 1 January 2013)

• Amendments to IFRS 7 Financial Instruments - Disclosures, published in December 2011,

amendments requiring disclosures about the initial application of IFRS 9 (effective for annual periods

beginning on or after 1 January 2015)

• IAS 27 Separate Financial Statements (as amended in 2011) - Consolidation requirements

previously forming part of IAS 27 (2008) have been revised and are now contained in IFRS 10

“Consolidated Financial Statements”, (effective date of IAS 27 (as amended in 2011) for annual

periods beginning on or after 1 January 2013)

• IAS 28 (as amended in 2011) Investments in Associates and Joint Ventures . This version

supersedes IAS 28 (2003) “Investments in Associates” (effective date of IAS 28 (as amended in 2011)

for annual periods beginning on or after 1 January 2013).

• Amendments to IAS 1 Presentation of Financial Statements - Revising the way of presenting the

other comprehensive income items (effective for annual periods beginning on or after 1 July 2012),

• Amendments to IAS 19 Employee Benefits – Improvements to the Accounting for Post-employment

Benefits (effective for annual periods beginning on or after 1 January 2013)

• Amendments to IAS 32 Financial instruments: Presentation, amendments to IFRS 7 Financial

Instruments - Disclosures, published in December 2011, amendments to mandatory disclosures

about offsetting of financial assets and financial liabilities (effective for annual periods beginning on or

after 1 January 2014)

• IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (effective for annual periods

beginning on or after 1 January 2013),

• Annual improvements "2009 – 2011 Cycle“ – published in May 2012, a collection of amendments to

IFRSs, in response to issues addressed during the 2009 – 2011 cycle. Five standards (IFRS 1, IAS 1,

IAS 16, IAS 32, IAS 34) are primarily affected by the amendments, with consequential amendments to

numerous others (effective for annual periods beginning on or after 1 January 2013).

F-14

Notes to the condensed consolidated interim financial statements of the HEP Group (continued) As at and for the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 12

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Adoption of new and revised International Financial Reporting Standards ("IFRSs") (continued)

Standards and Interpretations in issue not yet adopted (continued)

The Management of the HEP Group has elected not to adopt these standards, revisions and interpretations in

advance of their effective dates. The Management anticipates that the adoption of IFRS 13 “Fair Value

Measurement” will result in more extensive disclosures in the financial statements.

The Management anticipates that the adoption of other standards (IFRS 10 “Consolidated Financial

Statements”, IFRS 11 “Joint Arrangements” and IFRS 12 “Disclosure of Interests in Other Entities”), revisions

and interpretations will have no material impact on the financial statements of Group in the period of initial

application.

3. GOING CONCERN

Liquidity assessment

At 30 June 2012 the total current liabilities exceed the total current assets by HRK 2,551,560 thousand.

In order to meet the current liquidity requirements in the next period, the Group intends to extend all the

existing short-term credit lines and facilities, as well as raise new short-term loans. A short-term loan in the

amount of HRK 400 million was agreed in June 2012 with a consortium of domestic banks

The Group expects to meet its current liquidity requirements and investment plans by obtaining new long-term

sources of funding and having in view an increase in electricity prices, which became effective on 1 May 2012.

F-15

Notes to the condensed consolidated interim financial statements of the HEP Group (continued) As at and for the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 13

4. SEGMENT INFORMATION

The Group generates most of its income from its operations in a single geographical area – the Republic of

Croatia.

The Group’s reportable segments are defined as follows: electricity (generation, transmission, distribution and

sale of electricity), heating (generation, distribution and sale of heating power), and gas (distribution and sale of

gas).

Each segment’s operating profit or loss includes all revenue and expenses directly attributable to the reportable

segment. Information about financial income, expense and income tax is not provided on a segment level, as

the segments are disclosed based on the operating profit.

Electricity Heating Gas Group

For the six-month period ended 30 June

2012 2011 2012 2011 2012 2011 2012 2011

HRK ‘000 HRK ‘000 HRK ‘000 HRK ‘000 HRK ‘000 HRK ‘000 HRK ‘000 HRK ‘000

Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited

Revenue 5,539,533 5,373,462 323,386 315,149 206,848 195,755 6,069,767 5,884,366 Other segment income 522,374 554,576 34,642 32,304 13,057 11,311 570,073 598,191 (Loss)/profit from operations (184,155) 613,621

Net finance costs (140,457) (89,395) Income tax income/(expense)

4,608 (133,564) _________ _________

Net (loss)/profit (320,004) 390,662

_________ _________

Segment assets consist primarily of property, plant and equipment, receivables, cash and inventories.

Segment liabilities consist of trade and other payables. Non-segment assets and liabilities consist of assets

and liabilities that cannot be reasonably attributed to the reportable business segments. Total unallocated

assets include investments in NPP Krško, a part of property, plant and equipment, and unallocated financial

assets. Total unallocated liabilities include long-term loans, short-term loans and various other liabilities.

Total segment assets Total segment liabilities

30 June 2012 31 December 2011 30 June 2012 31 December 2011

HRK ‘000 HRK ‘000 HRK ‘000 HRK ‘000

Unaudited Unaudited Unaudited Unaudited

Electricity 28,854,201 29,095,594 6,571,633 7,230,121

Heating 1,058,198 1,138,791 190,933 245,176

Gas 278,411 322,338 114,578 170,566

Unallocated 3,386,833 3,189,647 7,620,753 6,680,148___________ ___________ ___________ ___________

Total Group 33,577,643 33,746,370 14,497,897 14,326,011___________ ___________ ___________ ___________

F-16

Notes to the condensed consolidated interim financial statements of the HEP Group (continued) As at and for the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 14

4. SEGMENT INFORMATION (continued)

Geographical information

The Group operates in Europe, with countries that are members of the European Union and other countries

that are not members of the European Union.

Presented below is the territorial analysis of the revenue that the Group generated from continuing operations

with external buyers of electricity:

For the six-month period ended 30 June

30 June 2012 30 June 2011

HRK’000 HRK’000

Unaudited Unaudited

Croatia 5,357,747 5,349,339

EU member states 4,775 18,285

Non-EU member states 177,011 5,838 ____________ __________

5,539,533 5,373,462 ___________ __________

5. SEASONALITY OF OPERATIONS

Demand for certain electrical energy, heating energy and natural gas varies according to the seasons, which

affects overall business results of HEP Group.

Total operating expenses are affected by electricity generation and purchase costs, and hydrological conditions

based on water inflow. Lower electricity generation in hydro power plants is compensated with increased

electricity import and higher quantities produced at thermal power plants.

Due to poor hydrological conditions, fuel prices, which refers to gas, heating-oil, coal, and imported electricity

prices, increase considerably.

6. INCOME TAX

Income tax expense costs and deferred taxes during the interim period are calculated on the basis of actual

results and the profit tax rate at 20% for the periods ended 30 June 2012 and 2011.

F-17

Notes to the condensed consolidated interim financial statements of the HEP Group (continued) As at and for the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 15

7. PREPAYMENTS FOR PROPERTY, PLANT AND EQUIPMENT AND CAPITAL EXPENDITURES

30 June 2012 31 December 2011

HRK'000 HRK'000

Unaudited

Unaudited

Power facilities – Hrvatske autoceste 300,000

300,000

JSC Tehnopromexport – TPP Sisak 78,040

94,299

Končar GIM 16,972

17,067

GE Energy Parts, Inc. 8,346

-

Litostroj Slovenia 2,806

2,891

VOITH Siemens, Austria 2,812

3,054

Končar Inženjering d.d. - TPP Sisak 1,328

2,896

Other 753

6,832 ___________ ___________

411,057

427,039 ___________ __________

In December 2006, the Group made a prepayment to Hrvatske autoceste d.o.o. for the purchase of electricity

facilities on the Croatian motorways within two years from the date of the advance payment.

As of the date of issue of these financial statements, the facilities were not transferred to the Group, and an

agreement was concluded with Hrvatske autoceste d.o.o. in December 2009, under which the deadline for the

takeover of the electricity facilities by the Group has been prolonged for another 2 years.

The Group is the beneficial owner of these facilities, as it uses those assets for their intended economic

purpose, which is to supply electricity to customers.

As of the date of publication of these financial statements, the Group did not reclassify the prepayment by type

of assets used by the Group in its operations and determined neither the economic effect of the transfer of

these assets from prepayments to tangible assets nor of the related depreciation.

8. CAPITAL WORK IN PROGRESS

Increase of HRK 613,543 thousand within Capital work in progress is due to several significant capital

expenditures during the six-month period ended 30 June 2012. Most of these occurred within HEP Proizvodnja

d.o.o. and HEP Operator prijenosa sustava d.o.o.. Most significant investments relate to investments in Block C

of HEP Proizvodnja’s power plants in the amount of HRK 121,100 thousand and investment in substation Plat

in Dubrovnik area in the amount of HRK 122,165 thousand by HEP Operator prijenosa sustava.

F-18

Notes to the condensed consolidated interim financial statements of the HEP Group (continued) As at and for the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 16

9. CAPITAL AND RESERVES

The share capital was first registered on 12 December 1994 in German marks (DEM) and amounted to DEM

5,784,832 thousand. On 19 July 1995, the share capital was reregistered in Croatian kunas in the amount of

HRK 19,792,159 thousand. The share capital consists of 10,995,644 ordinary shares, with a nominal value of

HRK 1,800 each.

The accumulated losses amount to HRK 759,372 thousand and consist of loss for the period attributable to the

equity holder in the amount of HRK 324,725 thousand and transfer of HRK 438,958 thousand from retained

earnings in Hrvatska elektoprivreda d.d. (the “Holding Company”). to capital reserves. The allocation of

Holding Company retained earnings to Holding Company capital reserves is allowed by Croatian law and is

performed at the Holding Company, not the Group level. The Holding Company, as at 30 June 2012,,had

sufficient retained earnings from which negative capital reserves were covered.

The non-controlling interest of RWE amounts to HRK 43,116 thousand, of which HRK 4,721 thousand

represent dividends for current period.

10. LONG-TERM BORROWINGS

Interest rate 30 June 2012 31 December 2011

HRK'000 HRK'000

Unaudited Unaudited

Domestic bank borrowings EURIBOR+(1.00%-6.5%) 2,091,892 1,681,140

Foreign bank borrowings EURIBOR+ (0.50%-4.94%) 1,513,873 2,042,011

Loan from RWE 8,828 8,828 __________ __________

Total long-term borrowings 3,614,593 3,731,979 __________ __________

Deferred loan origination fees (21,625) (22,777) __________ __________

Current portion (1,612,897) (1,174,713) __________ __________

Long-term portion 1,980,071 2,534,489_________ _________

Loans from domestic banks are secured by bills of exchange and promissory notes. Loans from foreign banks

are partly secured by state guarantees (the IBRD loans in the amount of EUR 4,400 thousand and EUR 24,000

thousand and a Deutsche Bank loan in the amount of EUR 100,000 thousand) and the total assets of Plomin

power plant.

F-19

Notes to the condensed consolidated interim financial statements of the HEP Group (continued) As at and for the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 17

10. LONG-TERM BORROWINGS (continued)

New sources of funds

For the purpose of financing the 2012 investments and operations, HEP d.d. obtained the approval from the

Croatian Government for raising debt by issuing eurobonds in the amount of up to EUR 500,000 thousand (or

the equivalent amount in another currency). EUR 290,000 thousand are intended to finance investments during

2012, comprising mainly transmission and distribution networks, whereas the remaining portion will be used for

working capital purposes and refinancing a portion of the loan debt in order to improve liquidity and extend the

average maturity of the overall loan portfolio of the HEP Group.

Loans approved not yet in use

In November 2011 a long-term loan agreement was concluded with the European Restructuring and

Development Bank (“EBRD”) and a syndicate of banks for a loan of EUR 123,200 thousand. The loan funds

are intended to finance the construction of Hydro Power Plant Ombla near Dubrovnik. The loan tranches

mature in 12 and 15 years, including the utilisation period of 4 years. As of 30 June 2012 the entire loan was

still undrawn. The works and utilisation of the loan funds are expected to commence in the last quarter of 2012.

Loans in use

Long-term loan approved by KfW Entwicklungsbank in the amount of EUR 50,000 thousand for the financing

of the projects of subsidiaries HEP ESCO d.o.o and HEP Obnovljivi izvori energije d.o.o continued to be used

during 2012. The key lending terms and conditions are as follows: 5-year utilisation period; quarterly repayment

of principal over a period of 10 years following the expiry of the utilisation period. At 31 December 2011 the

KfW loan balance was EUR 2,500 thousand, of which EUR 47,500 thousand were unutilised. At the time of the

conclusion of the agreement with KfW, which was in late 2008, a Financial Grant Agreement was concluded

with the Government of the Federal Republic of Germany, under which HEP d.d. received a GEF grant in the

amount of EUR 600 thousand.

As of 30 June 2012, the KfW outstanding loan balance was EUR 3,391 thousand, and the unused portion

amounted to EUR 46,609 thousand.

Some of the foreign bank loans are subject to restrictive financial and operating covenants. The covenants, as

defined in the applicable loan agreements, specifically require from the Group to meet certain prescribed levels

of the following ratios: operating ratio, debt service coverage, internal cash generation, tangible net worth

capital, and net borrowings.

As of 30 June 2012 the Group did not meet several financial covenants (EBITDA to Net finance charges where

minimum required ratio is 8:1; debt service ratio where minimum required is 1.05; ratio total net borrowings to

EBITDA where required maximum ratio is 3.5), due to unfavourable business environment prevailing during

2011 and 2012, primarily the poor hydrologic conditions, higher fuel costs (gas, heavy fuel oil, coal) and

increased electricity import during dry periods. This resulted in reclassification of HRK 768,750 thousand from

noncurrent portion to current portion loan liabilities.

F-20

Notes to the condensed consolidated interim financial statements of the HEP Group (continued) As at and for the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 18

10.LONG-TERM BORROWINGS (continued)

The facilities in breach as of 30 June 2012 are presented below:

Approved amount in currency

Amount used at 30 June 2012

Non-current portion at 30 June 2012

reclassified to current portion

EUR '000 HRK '000 HRK '000

Unaudited Unaudited

Unaudited

Bank

Deutsche bank 100,000 485,948

309,239

Societe Generale - Splitska banka 10,000 53,012

35,342

Societe Generale - Splitska banka 3,000 11,928

6,626

Club deal 125,000 521,201

354,176

Bayerische Landesbank 15,000 63,366

35,204

Bayerische Landesbank 12,000 50,693

28,163

EBRD 123,200 -

- ___________

768,750 __________

The Group received all waivers from its bank creditors for loans which are in breach of covenants as at 30 June

2012, after the reporting period but before the date of approval of financial statements, regarding early

repayment of the bank loans. Regarding the EBRD loan, where there was no drawdown or usage of the loan,

the Group received a letter indicating the breach of covenant was a one-off event and that it is not EBRD’s

practice to issue a formal waiver for a one-off breach of financial covenants or to declare default on the basis of

a one-off breach of financial covenants alone.

11. SHORT-TERM BORROWINGS

During 2012 the Group used short-term loans from domestic banks for working capital purposes and for the

settlement of trade payables. In addition to the prolongation of current loans, the Group also concluded new

credit lines.

New sources of funds

New loan in amount of HRK 400,000 thousand with consortium of banks for the purpose of keeping financial

stability was concluded as of 4 June 2012, with usage date until 4 December 2012 at the latest, with financial

covenants for which Group is not in breach as of 30 June 2012. This loan is fully utilised as of 30 June 2012.

Interest is payable on semi-annual basis at interest rate of 182 days treasury bills of Ministry of finance + 2,6%

but not less than 6,5 %. Maturity date is 4 June 2013.

A loan in the amount of EUR 8,500 thousand is approved on 17 May 2012, available for use by 25 May 2012.

Total amount of the loan matures by 25 November 2012 at the latest. Interest is payable quarterly at interest

rate of 3 m Euribor +4.75%. Purpose of the loan is financing of working capital.

F-21

Notes to the condensed consolidated interim financial statements of the HEP Group (continued) As at and for the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 19

11. SHORT-TERM BORROWINGS (continued)

New sources of funds (continued)

Another loan in the amount of EUR 8,500 thousand, represent an amendment to an existing loan approved on

19 April 2011 in the amount of EUR 17,000 thousand, originally repayable by 30 April 2012. According to

Annex no. 3 remaining amount of EUR 8,500 thousand is repayable at once, on 20 November 2012 at the

latest. Interest rate is changed, and now amounts to 3 m Euribor +4.75%, payable quarterly.

Third loan, approved on 9 March 2012, amounts to EUR 23,000 thousand, with interest payable quarterly at

interest rate of 3 m Euribor +5.7%, Part of the loan in amount of EUR 12,000 thousand matures in 8 equal

monthly instalments from 30 June 2012 until 28 February 2013. The other part in amount of EUR 11,000

thousand matures at once at 15 March 2013.

The Group also signed a short term revolving loan agreement in the amount of HRK 300,000 thousand. Loan is

approved for liquidity purposes with interest rate of 182 days treasury bills of Ministry of finance + 2.75%

(variable). Interest is payable monthly, and loan is repayable successively by 30 June 2013. As of 30 June

2012 the loan is fully used.

Existing short term loan approved as of 30 June 2010 for the purpose of factoring of HEP’s payables to its

suppliers, up to the the amount of HRK 300,000 thousand, was amended by Annex VI. as of 25 July 2012, with

new defined amount of HRK 295,530 thousand, and new repayment date as of 9 November 2012. As of 30

July 2012 the Group signed a new short term loan for purposes of factoring of HEP’s payables to its suppliers,

up to the amount of HRK 300,000 thousand. Interest rate charged is 182 days treasury bills of Ministry of

finance + 2.6% p.a. This loan agreement puts the before mentioned loan and all its amendments out of use.

On 25 November 2009 frame loan was approved in the amount of EUR 6,000 thousand and with amendments

done as of 31 October 2011 frame amount is changed to EUR 10,000 thousand for issuing of guarantees,

letters of credit and letters of intention. Frame which is used for loans (denominated in HRK or foreign

currency) matures by 31 October 2012, deadline for issuing of guarantees, letters of credit and letters of

intention is 31 October 2012, all issued guarantees and letters of intention must have maturity date at the latest

31 October 2014, and all open letters of credit must have maturity date at the latest of 31 October 2013.

Interest rate is determined before each withdrawal. Balance of loan approved from this frame as of 30 June

2012 amounts to HRK 37,551 thousand at interest rate of 3m Euribor + 4.5%.

F-22

Notes to the condensed consolidated interim financial statements of the HEP Group (continued) As at and for the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 20

12. RELATED PARTY TRANSACTIONS

The Group has a 50-percent equity share in Krško Nuclear Power Plant (NE Krško d.o.o.).

The electricity produced by NE Krško d.o.o. is delivered to HEP d.d. at 50 % of the total produced quantities at

a price which is determined in accordance with the total production costs.

Receivables and payables and income and expenses from related party transactions are provided in the table

below:

As at 30 June 2012 31 December 2011 HRK'000 HRK'000

Unaudited Unaudited

NPP Krško

Liabilities for purchased electricity 60,240 59,227

For the six-month period ended 30 June 30 June 2012 30 June 2011

HRK'000 HRK'000

Unaudited Unaudited

Cost of purchased electricity 345,675 354,119

F-23

Notes to the condensed consolidated interim financial statements of the HEP Group (continued) As at and for the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 21

12. RELATED PARTY TRANSACTIONS (continued)

Sales revenue Purchases

For the six month period ended For the six month period ended

HRK'000 30 June 2012 30 June 2011 30 June 2012 30 June 2011

Unaudited Unaudited Unaudited UnauditedEnterprises controlled by the Government HRK'000 HRK'000 HRK'000 HRK'000

Hrvatske Željeznice 53,237 55,461 5,284 5,603

INA d.d. 78,993 54,096 94,890 810,289

Prirodni Plin - - 1,342,063 167,398

Plinacro 1,056 1,002 13,789 14,375

Hrvatske telekomunikacije 41,175 41,393 8,608 9,881

Croatia osiguranje 3,296 2,540 7,486 6,666

Hrvatska pošta 9,496 9,177 25,387 27,779

Hrvatske šume 4,343 2,863 2,898 5,309

Jadrolinija 622 472 404 269

Narodne novine 1,242 990 2,863 3,077

Croatian Radio & Television 6,020 6,263 582 560

Plovput 349 287 34 80

Croatia Airlines 461 403 159 96

Petrokemija Kutina 6,216 5,811 104 66 Croatian Ministry of Foreign Affairs 292 280 - -

Croatian Ministry of Defence 15,723 11,443 - -

Croatian Ministry of Interior 15,951 12,468 - - Elementary and secondary schools 57,737 43,977 - 13

Judicial institutions 8,352 5,725 - 11

Colleges and universities 20,429 16,337 1,611 1,307 Legislative, executive and other bodies of the Republic of Croatia 18,104 15,649 3,690 2,695 Health institutions and organisations 56,358 40,858 1,913 1,619

Other users 9,292 63,257 3,368 2,327 ____________ ____________ ____________ ____________

TOTAL 408,744 390,752 1,515,133 1,059,420 ____________ ____________ ____________ ____________

F-24

Notes to the condensed consolidated interim financial statements of the HEP Group (continued) As at and for the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 22

12. RELATED PARTY TRANSACTIONS (continued)

Receivables Payables

HRK'000

At 30 June

2012

At 31 December

2011

At 30 June

2012

At 31 December

2011

Unaudited Unaudited Unaudited Unaudited

Enterprises controlled by the Government HRK'000 HRK'000 HRK'000 HRK'000

Hrvatske Željeznice 32,166 22,615 1,053 866

INA d.d. 20,829 14,709 7,507 206,061

Prirodni Plin - - 100,119 371,656

Plinacro 297 351 2,907 4,380

HT 9,037 8,092 2,801 8,179

Croatia osiguranje 589 582 3,297 -

Hrvatska pošta 2,997 3,380 4,753 4,568

Hrvatske šume 875 1,262 25 1,288

Jadrolinija 123 57 344 761

Narodne novine 329 284 1,311 1,790 Croatian Radio & Television 1,769 2,006 162 231

Plovput 53 64 33 49

Croatia Airlines 108 149 51 -

Petrokemija Kutina 575 266 - - Croatian Ministry of Defence 2,473 4,209

- -

Croatian Ministry of Interior 3,440 7,286

- -

Elementary and secondary schools 9,125 15,096

- -

Judicial institutions 1,697 2,599 - - Colleges and universities 3,554 4,136

- -

Legislative, executive and other bodies of the Republic of Croatia 3,613 5,183

-

- Health institutions and organisations 26,671 35,810

- -

Other users 3,519 5,842 - 11,008 __________ __________ ____________ ____________

TOTAL 123,839 133,978 124,363 610,837 ___________ ___________ ____________ ___________

Under the Croatian energy laws, the Group is an eligible gas buyer, for whom gas prices differ from the market

ones.

F-25

Notes to the condensed consolidated interim financial statements of the HEP Group (continued) As at and for the six-month period ended 30 June 2012

Hrvatska elektroprivreda d.d. and its subsidiaries, Zagreb 23

13. SUBSIDIARIES

At 30 June 2012 the Group owned the following subsidiaries:

Subsidiary

Country

Ownership interest in

% Principal activity

HEP-Proizvodnja d.o.o. Croatia 100 Electric and thermal power generation HEP-Operator prijenosnog sustava d.o.o. Croatia 100 Electricity transmission HEP-Operator distribucijskog sustava d.o.o. Croatia 100 Electricity distribution

HEP Opskrba d.o.o. Croatia 100 Electricity supply

HEP-Toplinarstvo d.o.o. Croatia 100 Thermal power generation and distribution

HEP - Trgovina d.o.o. Croatia 100 Electricity trading and optimisation of power plant operations

HEP-Plin d.o.o. Croatia 100 Gas distribution

TE Plomin d.o.o. Croatia 50 Electricity generation

APO d.o.o., usluge zaštite okoliša Croatia 100 Environmental protection services and radioactive waste management

HEP ESCO d.o.o. Croatia 100 Financing of energy efficiency projects

Plomin Holding d.o.o. Croatia 100 Development of infrastructure in the surrounding area of Plomin

CS Buško Blato d.o.o. B&H 100 Maintenance of hydro power plants

HEP-Odmor i rekreacija d.o.o. Croatia 100 Resort and recreation services

HEP-NOC Velika Croatia 100 Accommodation and training

HEP-Obnovljivi izvori energije d.o.o. Croatia 100 Electricity generation

HEP-Trgovina d.o.o. Brežice Slovenia 100 Electricity trading

HEP- Magyarorszag Energia KFT Hungary 100 Electricity trading

HEP- Razvoj višenamjenskih nekretninskih projekata d.o.o. Croatia 100

Engineering and related technical consultancy services

The majority of these subsidiaries were created as part of the reorganisation and restructuring of the core

business activities driven by the new energy legislation, which came into effect on 1 January 2002.

F-26

F-27

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries (HEP Group)

Consolidated financial statements

As of 31 December 2011,

31 December 2010 and 31 December 2009

Together with Independent Auditor's Report

F-28

F-29

Independent Auditor's Report

To the Owner of Hrvatska elektroprivreda d.d:

We have audited the accompanying consolidated financial statements of the HEP Group (the ‘Group’),

which comprise the consolidated statement of financial position as at 31 December 2011, 31 December

2010 and 31 December 2009 and the related consolidated income statements, consolidated statements of

comprehensive income, consolidated statements of changes in equity and consolidated statements of cash

flows for the years then ended, and a summary of significant accounting policies and other explanatory

notes.

Management’s responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial

statements in accordance with International Financial Reporting Standards, and for such internal control

as management determines is necessary to enable the preparation of consolidated 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 consolidated financial statements based on our audit.

Except as described in the Basis for qualified opinion paragraph below, we conducted our audit in

accordance with International Standards on Auditing. Those standards require that we comply with

ethical requirements and plan and perform the audit to obtain reasonable assurance whether the

consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in

the consolidated financial statements. The procedures selected depend on the auditor’s judgment,

including the assessment of the risks of material misstatement of the consolidated financial statements,

whether due to fraud or error. In making those risk assessments, the auditor considers internal control

relevant to the preparation and fair presentation of the consolidated 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 Group’s internal control. An audit also includes evaluating the

appropriateness of accounting policies used and the reasonableness of accounting estimates made by

management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for

our qualified audit opinion.

F-30

F-31

Consolidated Income Statement - HEP Group For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

4

The accompanying notes form an integral part of these consolidated financial statements.

For the year ended 31 December Notes 2011 2010 2009 HRK’000 HRK’000 HRK’000

Restated Restated Restated Revenue from electricity sales 4 10,769,900 10,851,054 10,798,272 Revenue from thermal power sales 4 582,352 569,784 553,732 Revenue from gas sales 4 381,177 394,182 294,262 Other operating income 4,5 1,353,600 1,241,879 983,514 ___________ ___________ ___________ Total operating income 13,087,029 13,056,899 12,629,780 ___________ ___________ ___________

Electricity purchase cost (3,259,984) (2,011,535) (3,078,977) Fuel costs (2,870,113) (2,077,105) (2,385,583) Staff costs 6 (1,890,228) (1,895,205) (1,954,350) Depreciation and amortization expense 10,11 (1,749,518) (1,721,472) (1,688,750) Other operating expenses 7 (2,850,790) (2,992,271) (2,937,066) ___________ ___________ ___________ Total operating expenses (12,620,633) (10,697,588) (12,044,726) ___________ ___________ ___________ Profit from operations 466,396 2,359,311 585,054

___________ ___________ __________ Financial revenue 8 57,718 91,187 81,101 Financial costs 8 (428,989) (439,224) (450,414)

___________ ___________ __________ Net financial expense (371,271) (348,037) (369,313) ___________ ___________ ___________ Profit before tax 95,125 2,011,274 215,741 ___________ ___________ ___________ Income tax expense 9 (88,048) (436,623) (70,413) ___________ ___________ ___________

Profit for the year 7,077 1,574,651 145,328 ___________ ___________ ___________

Attributable to:

Equity holder

(4,437)

1,560,588

126,750

Non-controlling interest 11,514

14,063

18,578 ___________ ___________ ___________

7,077 1,574,651 145,328 ___________ __________ __________

F-32

Consolidated Statement of Comprehensive Income - HEP Group For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

5

The accompanying notes form an integral part of these consolidated financial statements.

For the year ended 31 December Notes 2011 2010 2009 HRK’000 HRK’000 HRK’000

Restated Restated Restated Profit for the year 7,077 1,574,651 145,328 __________ ___________ ___________ Foreign translation differences 1,071 486 124 Fair valuation adjustment of Janaf shares (8,922) 7,499 1,423 Other comprehensive loss - - (1,995) __________ ___________ ___________ Other comprehensive (loss) / income (7,851) 7,985 (448) __________ ___________ ___________ Total comprehensive (loss) / income for the year

(774)

1,582,636

144,880 _________ ___________ ___________ Total comprehensive (loss) / income attributable to:

bEquity holder (13,359) 1,568,087 126,178

Non-controlling interest 12,585 14,549 18,702 ___________ ___________ ___________ (774) 1,582,636 144,880 ___________ ___________ ___________

F-33

Consolidated Statement of Financial Position – HEP Group As at 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

6

The accompanying notes form an integral part of these consolidated financial statements.

ASSETS Notes 31 December

2011 31 December

2010 31December

2009 HRK’000 HRK’000 HRK’000

Non-current assets Restated Restated Restated

Property, plant and equipment 10 24,390,612 24,090,370 24,082,799 Capital work in progress 10 3,092,220 3,046,316 3,130,294 Intangible assets 11 57,647 65,010 63,671 Investment property 12 234,760 223,094 202,467 Prepayments for property, plant and equipment 13 427,039

386,055

403,080

Investment in NE Krško d.o.o. 14 1,754,419 1,754,419 1,754,419 Long-term loan receivables and deposits 16 719 1,183 1,483 Assets available for sale and other investments 17 120,915

162,380

152,997

Other non-current assets 18 107,153 110,973 117,106 Deferred tax assets 9 178,902 157,555 132,373 ___________ __________ __________ 30,364,386 29,997,355 30,040,689 ___________ __________ __________ Current assets Inventories 19 1,063,520 1,116,671 967,931 Trade receivables 20 1,496,236 1,730,328 1,433,879 Other short-term receivables 21 415,105 144,064 225,459 Cash and cash equivalents 22 407,123 762,157 143,834 ___________ _________ _________

3,381,984 3,753,220 2,771,103 ___________ _________ _________

TOTAL ASSETS 33,746,370 33,750,575 32,811,792 ___________ __________ _________

F-34

Consolidated Statement of Financial Position – HEP Group (continued) As at 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

7

CAPITAL AND LIABILITIES Notes 31 December

2011 31 December

2010 31 December

2009 HRK’000 HRK’000 HRK’000 Restated Restated Restated Share capital 23 19,792,159 19,792,159 19,792,159 Capital reserves 23 (438,958) (874,074) (1,889,646) Retained earnings 23 4,311 946,439 393,924 __________ __________ __________ Equity attributable to equity holder 19,357,512 19,864,524 18,296,437 __________ __________ __________ Non-controlling interest 15 62,847 76,993 91,409 __________ __________ __________

Total equity 19,420,359 19,941,517 18,387,846 __________ __________ __________ Long-term borrowings 24 2,534,489 2,883,554 3,113,467 Long-term liabilities to the state 25 30,466 33,734 59,713 Long-term provisions 27 778,629 799,945 559,017 Bonds issued 28 965,202 1,058,042 1,150,887 Other long-term liabilities 29 5,144,960 5,008,205 4,878,280 __________ _________ _________

Total non-current liabilities 9,453,746 9,783,480 9,761,364 __________ _________ _________ Trade payables 2,427,184 1,553,211 2,179,323 Current portion of long-term bonds issued 28 93,380 93,380 46,690 Current portion of long-term borrowings 24 1,174,713 1,184,921 947,747 Short-term borrowings 30 603,163 292,493 767,805 Taxes and contributions payable 31 75,898 477,532 180,828 Interest payable 23,192 30,489 64,301 Liabilities to employees 32 127,934 134,226 143,132 Other short-term liabilities 33 346,801 259,328 332,756 __________ __________ __________

Total current liabilities 4,872,265 4,025,578 4,662,582 __________ __________ __________

TOTAL CAPITAL AND LIABILITIES 33,746,370 33,750,575 32,811,792 __________ __________ __________

The accompanying notes form an integral part of these consolidated financial statements.

F-35

Consolidated Statement of Changes in Equity– HEP Group For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

8

Share

capital

Capital

reserves

Retained

earnings/

(Accumulated

losses)

Equity

attributable to

the equity

holder of the

parent

Non-

controlling

interest

Total equity

HRK '000 HRK '000 HRK '000 HRK '000 HRK '000 HRK '000

Balance at 1 January 2009, before restatement 19,792,159 (2,035,890) 267,155 18,023,424 106,821 18,130,245 _________ _________ _________ _________ _________ _________

Effect of restatement (Note 3) - 144,821 - 144,821 - 144,821 _________ _________ _________ _________ _________ _________

Balance at 1 January 2009, as restated 19,792,159 (1,891,069) 267,155 18,166,245 106,821 18,275,066 _________ _________ _________ _________ _________ _________

Profit for the year, - - 126,750 126,750 18,578 145,328

Non-controlling interest, restated - - - - (1,995) (1,995)

Other comprehensive income, net, before restatement - (2,582) - (2,582) 124 (2,458)

Effect of restatement (Note 3)

- 4,005 - 4,005 - 4,005 _________ _________ _________ _________ _________ _________

Other comprehensive income, net, as restated as of 31 December 2009 - 1,423 - 1,423 (1,871) (448) _________ _________ _________ _________ _________ _________

Dividends paid to RWE - - - - (19,442) (19,442)

Interest paid to RWE - - - - (12,677) (12,677)

Write off HEP Telekom - - 19 19 - 19 _________ _________ _________ _________ _________ _________

Balance at 31 December 2009, as restated 19,792,159 (1,889,646) 393,924 18,296,437 91,409 18,387,846

_________ _________ _________ _________ _________ _________

Allocation of retained earnings - 1,008,073 (1,008,073) - -

-

Profit for the year, restated - -

1,560,588 1,560,588 14,063 1,574,651

Other comprehensive income, net, before restatement - 24,853

- 24,853 486 25,339

Effect of restatement (Note 3) - (17,354) - (17,354) - (17,354) _________ _________ __________ _________ ________ _________

Other comprehensive income for the year, restated as of 31 December 2010 - 7,499 - 7,499 486 7,985 _________ _________ _________ _________ _________ _________

Dividends paid to RWE - - - - (16,583) (16,583)

Interest paid to RWE - - - - (12,382) (12,382) _________ _________ _________ _________ _________ _________

Balance at 31 December 2010, restated 19,792,159 (874,074) 946,439 19,864,524 76,993 19,941,517 _________ _________ _________ _________ _________ _________

F-36

Consolidated Statement of Changes in Equity– HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

9

The accompanying notes form an integral part of these consolidated financial statements.

Share

capital

Capital

reserves

Retained

earnings/

(Accumulated

losses)

Equity

attributable

to the equity

holder of the

parent

Non-

controlling

interest

Total equity

Balance at 31 December 2010, restated 19,792,159 (874,074) 946,439 19,864,524 76,993 19,941,517 _________ _________ _________ _________ ________ _________

Retained earnings - 444,038 (444,038) - - -

Dividends paid to owner - - (493,376) (493,376) - (493,376)

Profit for the year, restated - - (4,437) (4,437) 11,514 7,077 __________ _________ __________ _________ ________ _________

Other comprehensive income for the year - (8,922) - (8,922) 1,071 (7,851) __________ _________ __________ _________ ________ _________

Total comprehensive income for the year ended 31 December 2011 - (8,922) (4,437) (13,359) 12,585 (774) _________ _________ _________ _________ _________ _________

Carried loss Trgovina Hungary - - (277) (277) - (277) Dividends paid to RWE - - - - (14,063) (14,063) Interest paid to RWE - - - - (12,668) (12,668) _________ _________ _________ _________ _________ _________ Balance at 31 December 2011, restated 19,792,159 (438,958) 4,311 19,357,512 62,847 19,420,359 _________ _________ _________ _________ _________ _________

F-37

Consolidated Statement of Cash Flows – HEP Group For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

10

For the year ended 31 December 2011 2010 2009 HRK’000 HRK’000 HRK’000

Restated Restated Restated

Cash flows from operating activities

Profit for the year 7,077 1,574,651 145,328 Adjustments for: Income tax expense recognised in profit or loss 88,048 436,623 70,413 Net financial expense 370,191 346,166 367,042 Loss / (gain) on fair valuation of investment property (7,676) (19,865) 19,748 Loss / (gain) on fair valuation of derivatives 1,080 1,871 2,271 Depreciation and amortization 1,749,518 1,721,472 1,688,750 Increase in impairment allowance for receivables 403,568 272,029 335,116 Increase in impairment allowance for inventories 11,330 15,070 145,328 (Decrease) / increase in provisions (21,316) 240,928 70,413

Net book value of disposed of property, plant and equipment

44,420

46,559

118,449 __________ _________ _________

Operating cash flows before movements in working capital 2,646,240

4,635,504

2,994,781 __________ _________ _________

Increase in trade receivables (169,438) (568,746) (349,319) Decrease / (increase) in inventories 41,821 (163,810) 291,126 (Increase) / decrease in other current assets (270,288) 82,556 119,068 Increase / (decrease) in trade payables 831,604 (645,815) (439,387) Increase / (decrease) in other current liabilities 172,900 (88,173) 37,489 Increase in other long-term liabilities 132,407 102,075 503,600 _________ _________ _________

Cash generated from operations 3,385,246 3,353,591 3,157,358 _________ _________ _________ Income taxes paid (600,873) (161,137) (126,470) Interest paid (244,172) (304,526) (321,115) _________ _________ _________ NET CASH FROM OPERATING ACTIVITIES 2,540,201 2,887,928 2,709,773 _________ _________ _________ INVESTING ACTIVITIES

Interest received 12,279 14,480 7,529 Dividends received 3,224 - - Increase in property, plant and equipment (2,116,883) (1,666,839) (2,371,277) Increase of intangibles and investment properties (19,828) (26,886) (23,527) Increase/(decrease) and other non-current assets (33,635) 49,165 25,163 Change in the non-controlling interest and dividends paid to RWE (26,036) (28,479) (33,971) _________ __________ _________

NET CASH USED IN INVESTING ACTIVITIES (2,180,879) (1,658,559) (2,396,083) _________ _________ _________

_________ _________ _________

F-38

Consolidated Statement of Cash Flows – HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

11

For the year ended 31 December 2011 2010 2009

HRK’000 HRK’000 HRK’000

Restated Restated Restated

FINANCING ACTIVITIES Repayments of bonds issued (92,840) (46,155) - Proceeds from long-term loans raised 754,940 926,760 941,014 Repayments of long-term loans (1,193,750) (956,881) (950,834) Proceeds from short-term loans raised 997,924 566,692 710,092 Repayments of short-term loans (687,254) (1,101,462) (1,064,341) Dividends paid to the owner (493,376) - - __________ __________ __________

NET CASH USED IN FINANCING ACTIVITIES (714,356) (611,046) (364,069) __________ __________ __________ NET DECREASE IN CASH AND CASH EQUIVALENTS (355,034) 618,323 (50,379) _________ __________ __________ CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 762,157 143,834 194,213 _________ __________ __________ CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 407,123 762,157 143,834 __________ __________ __________

The accompanying notes form an integral part of these consolidated financial statements.

F-39

Notes to the consolidated financial statements of the HEP Group For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

12

1 GENERAL

The Hrvatska elektroprivreda Group (‘the Group’) consists of Hrvatska elektroprivreda d.d., Zagreb (‘HEP d.d.’

or the ‘Company’), as the parent company, and the subsidiaries listed in Note 36.

HEP d.d. is registered in Zagreb, Ulica grada Vukovara 37. The principal activities of the HEP Group comprise

generation, transmission and distribution of electricity, and the control of the electric power systems. In addition

to these main activities, the HEP Group deals with the generation and distribution of thermal power through the

district heating systems in Zagreb and Osijek, and the distribution of gas in Osijek and Đakovo.

All the Group's activities are governed by applicable laws, regulations and decisions issued by the Croatian

Government.

At 31 December 2011, the number of staff employed by the Group was 13,762 (at 31 December 2010: 13,990;

at 31 December 2009: 14,197).

These financial statements are presented in the Croatian kuna (HRK) since this is the currency in which the

majority of the Group’s transactions are denominated.

Going concern

At 31 December 2011 the total current liabilities exceed the total current assets by HRK 1,490,281 thousand. In

order to meet the current liquidity requirements in the next period, the Group intends to extend all the existing

short-term credit lines and facilities, as well as raise new short-term loans. The Group expects to meet its

current liquidity requirements and investment plans by obtaining new long-term sources of funding and having

in view an increase in electricity prices, which became effective on 1 May 2012.

Energy laws

On 3 December 2004, the Croatian Parliament ratified the amendments to the following laws: The Energy Law,

the Law on Electricity Market and the Law on the Regulation of Energy Activities.

HEP d.d. and its subsidiaries continue to provide their services as regulated public services as follows:

electricity generation for tariff-based customers, electricity transmission, electricity distribution and electricity

supply for tariff-based customers.

Generation and supply of electricity for eligible customers, (eligibility as described by a set of tariff laws) and

trading on the energy market are performed as market activities.

The supply of electricity to eligible customers is performed according to rules governing market relations, which

allow negotiating electricity quantities and prices on a free-market basis. Electricity for households and those

preferential customers that have not exercised their right to select the electricity supplier or are left without a

supplier is supplied as part of the system of obligatory public services.

F-40

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

13

1 GENERAL (continued) Energy laws (continued) In June 2008, the Government of the Republic of Croatia promulgated a Decision on The Electricity Generation

Tariff Model, with the exemption of eligible customers, with no tariff item amounts; The Electricity Transmission

Tariff Model, with no tariff item amounts; The Electricity Distribution Tariff Model, with no tariff amounts; and the

Electricity Supply Tariff Model, with the exemption of eligible customers, with no tariff amounts. The Group has

been applying the tariff models since 1 July 2008.

In December 2008, the Law on the Amendments to the Electricity Market Law became effective, under which

small customers were obliged to choose their supplier and sign a contract with that chosen supplier by 30 June

2009, which is the date until which they were entitled to receive energy supplied by suppliers of tariff-based

customers.

Small customers failing to select their electricity supplier until the given date are charged for the supply of

electricity based on the balancing electricity price charged to customers who have not selected their supplier

either.

According to the new laws, HEP d.d. has restructured its operations, by forming separate companies for

electricity generation, transmission of electricity, distribution of electricity, electricity supply and electricity

trading, and reorganised the Group in line with the amended laws.

F-41

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

14

1 GENERAL (continued)

Governance and management

General Assembly

Representatives of shareholder on The General Assembly were as follows in years 2009, 2010 and 2011:

Radimir Čaćić President Member since 26 January 2012

Đuro Popijač President Member from 21 November 2009 until 25 January 2012

Miljenko Pavlaković President Member from 14 February 2008 until 30 October 2009

Supervisory Board of HEP d.d.

Members of the Supervisory Board in 2009, 2010, 2011 and 2012:

Nikola Bruketa President Member since 23 February 2012 Alen Leverić Member Member since 23 February 2012 Ante Ramljak Member Member since 23 February 2012 Hubert Bašić Member Member since 23 February 2012 until 7 May 2012 Žarko Primorac Member Member since 23 February 2012 Ivo Uglešić Member Member since 23 February 2012 Jadranko Berlengi Member Member since 3 June 2008

Darko Horvat President Member from 30 June 2010, President from 30 July 2010 until 22 February 2012

Branimir Horaček President Member from 19 October 2009 until 6 May 2010 Dražen Bošnjaković Member Member from 19 October 2009 until 22 February 2012 Krešimir Dragić Member Member from 19 October 2009 until 22 February 2012 Slavko Konfic Member Member from 28 April 2008 until 22 February 2012 Gordana Obran Member Member from 19 October 2009 until 22 February 2012 Zvonimir Sabati Member Member from 19 October 2009 until 22 February 2012 Jadranko Berlengi Member Member from 3 June 2008

Leo Begović President Member from 28 April 2008 until 22 September 2009 Krešimir Ćosić Member Member from 28 April 2008 until 19 October 2009 Dasenko Baldasari Member Member from 28 April 2008 until 19 October 2009 Luciano Delbianco Member Member from 28 April 2008 until 19 October 2009 Zdenko Jurčić Member Member from 28 April 2008 until 19 October 2009 Slavko Konfic Member Member from 28 April 2008 Jadranko Berlengi Member Member from 3 June 2008

F-42

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

15

1 GENERAL (continued)

Management Board in 2009, 2010, 2011 and 2012:

Zlatko Koračević President Member since 23 February 2012

Zvonko Ercegovac Member Member since 23 February 2012

Krunoslava Grgić-Bolješić Member Member since 23 February 2012

Rodoljub Lalić Member Member since 23 February 2012

Ivan Matasić Member Member since 23 February 2012

Tomislav Šerić Member Member since 23 February 2012

Leo Begović President Member from 25 September 2009 until 22 February 2012

Dubravko Lukačević Member Member since 2 November 2009 until 22 February 2012

Snježana Pauk Member Member since 2 November 2009 until 22 February 2012

Miljenko Pavlaković Member Member since 2 November 2009 until 22 February 2012

Damir Pečvarac Member Member since 2 November 2009 until 22 February 2012

Velimir Rajković Member Member since 2 November 2009 until 22 February 2012

Ivan Mravak President Member from 2004 until 25 September 2009

Željko Kljaković-Gašpić Member Member from 1 March 2008 until 25 September 2009

Darko Dvornik Member Member from 1 March 2008 until 25 September 2009 Stjepan Tvrdinić Member Member from 18 March 2008 until 25 September 2009 Željko Tomšić Member Member from 29 April 2008 until 25 September 2009 Nikola Rukavina Member Member from 29 April 2008 until 25 September 2009

F-43

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

16

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Group’s principal accounting policies, applied consistently in the current and prior years, is set out below.

Presentation of the financial statements

The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as published by the International Accounting Standards Board.

The consolidated financial statements have been prepared on the historical cost basis, except for certain financial instruments that are presented at fair value. The consolidated financial statements of the Group are presented in thousands of Croatian kunas (HRK'000).

Basis of accounting

The Group maintains its accounting records in the Croatian language, in Croatian kunas and in accordance with Croatian laws and the accounting principles and practices observed by enterprises in Croatia. The accounting records of the Group's subsidiaries in Croatia and abroad are maintained in accordance with the requirements of the respective local jurisdictions.

F-44

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

17

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Adoption of new and revised International Financial Reporting Standards

Standards and Interpretations effective in the current period

The following amendments to the existing standards issued by the International Accounting Standards Board and interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current period:

� Amendments to IFRS 1 “First - time adoption to IFRS” – limited exemption from Comparative IFRS 7 Financial instruments – Disclosure for first time adopters (effective for annual periods beginning on or after 1 July 2010);

� Amendments to IAS 24 “Related Party Disclosures” - simplifying the disclosure requirements for

government-related entities and clarifying the definition of a related party (effective for annual periods beginning on or after 1 January 2011);

� Amendments to IAS 32 “Financial instruments – Presentations” - accounting for rights issues

(effective for annual periods beginning on or after 1 January 2011);

� Amendments to various standards and interpretations (2010) resulting from the Annual quality improvement project of IFRS published on 6 May 2010 (IFRS 1, IFRS 3, IFRS 7, IAS 1, IAS 27, IAS 34, IFRIC 13) primarily with a view to removing inconsistencies and clarifying wording, (amendments are to be applied for annual periods beginning on or after 1 July 2010 or 1 January 2011, depending on standard/interpretation);

� Amendments to IFRIC 14 “IAS 19 — The Limit on a defined benefit Asset, Minimum Funding

Requirements and their Interaction” - Prepayments of a Minimum Funding Requirement (effective for annual periods beginning on or after 1 January 2011);

� IFRIC 19 “Extinguishing Financial Liabilities with Equity Instruments” (effective for annual periods beginning on or after 1 July 2010).

The adoption of these amendments to the existing Standards and Interpretations has not led to any changes in the HEP Group accounting policies.

F-45

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

18

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Adoption of new and revised International Financial Reporting Standards (continued)

Standards and Interpretations in issue not yet adopted

At the date of authorisation of these financial statements the following standards, revisions and interpretations were in issue but not yet effective:

� IFRS 9 “Financial Instruments”, as amended in 2010 (effective for annual periods beginning on or after 1 January 2013);

� IFRS 10 “Consolidated Financial Statements”, published on May 2011, supersedes the previous

version of IAS 27 (2008) “Consolidated and Separate Financial Statements” (effective for annual periods beginning on or after 1 January 2013);

� IFRS 11 “Joint Arrangements”, published in May 2011, superseded IAS 31 “Interests in Joint

Ventures” (effective for annual periods beginning on or after 1 January 2013);

� IFRS 12 “Disclosure of Interests in Other Entities”, published in May 2011 (effective for annual periods beginning on or after 1 January 2013):

� IFRS 13 “Fair Value Measurement”, published on May 2011 (effective for annual periods beginning

on or after 1 January 2013);

� IAS 27 “Separate Financial Statements” (as amended in 2011), consolidation requirements previously forming part of IAS 27 (2008) have been revised and are now contained in IFRS 10 “Consolidated Financial Statements” (effective date of IAS 27 (as amended in 2011) for annual periods beginning on or after 1 January 2013);

� IAS 28 (as amended in 2011) “Investments in Associates and Joint Ventures”. This version

supersedes IAS 28 (2003) “Investments in Associates” (effective date of IAS 28 (as amended in 2011) for annual periods beginning on or after 1 January 2013);

� Amendments to IFRS 1 “ First-time Adoption of IFRS” – Severe Hyperinflation and Removal of

Fixed Dates for First-time Adopters (effective for annual periods beginning on or after 1 July 2011);

� Amendments to IFRS 7 “Financial Instruments – Disclosures” –Transfer of Financial Assets (effective for annual periods beginning on or after 1 July 2011);

� Amendments to IAS 1 “Presentation of Financial Statements” - Revising the way of presenting the

other comprehensive income (effective for annual periods beginning on or after 1 July 2012);

F-46

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

19

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Adoption of new and revised International Financial Reporting Standards (continued)

Standards and Interpretations in issue not yet adopted (continued)

� Amendments to IAS 12 “Income taxes” – Deferred tax: Recovery of Underlying Assets (effective for annual periods beginning on or after 1 January 2012);

� Amendments to IAS 19 “Employee Benefits” - Improvements to the Accounting for Post-

Employment Benefits (effective for annual periods beginning on or after 1 January 2013).

Key requirements of IFRS 7 are described as follows:

The amendments to IFRS 7 increase the disclosure requirements for transactions involving transfers of financial assets. These amendments are intended to provide greater transparency around risk exposures when a financial asset is transferred but the transferor retains some level of continuing exposure in the asset. The amendments also require disclosures where transfers of financial assets are not evenly distributed throughout the period.

The Management does not anticipate that these amendments to IFRS 7 will have a significant impact on the Group’s disclosures regarding transfers of trade receivables previously effected.

Key requirements of IFRS 9 are described as follows:

� All recognised financial assets that are within the scope of IAS 39 "Financial Instruments: Recognition and Measurement“ to be measured subsequently at amortised cost or fair value.

In May 2011, a package of five Standards on consolidation, joint arrangements, associates and disclosures was issued, including IFRS 10, IFRS 11, IFRS 12, IAS 27 (as revised in 2011) and IAS 28 (as revised in 2011).

Key requirements of these five Standards are described below:

IFRS 10 replaces the parts of IAS 27 “Consolidated and Separate Financial Statements” that deal with consolidated financial statements. Under IFRS 10, there is only one basis for consolidation that is control. New definition of control that contains three elements: (a) power over an investee, (b) exposure, or rights, to variable returns from its involvement with the investee, and (c) the ability to use its power over the investee to affect the amount of the investor's returns.

IFRS 11 replaces IAS 31 “Interests in Joint Ventures”. Under IFRS 11, joint arrangements are classified as joint operations or joint ventures, depending on the rights and obligations of the parties to the arrangements. In addition, joint ventures under IFRS 11 are required to be accounted for using the equity method of accounting, whereas jointly controlled entities under IAS 31 can be accounted for using the equity method of accounting or proportionate accounting.

F-47

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

20

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Adoption of new and revised International Financial Reporting Standards (continued)

Standards and Interpretations in issue not yet adopted (continued)

IFRS 12 is a disclosure standard and is applicable to entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities. In general, the disclosure requirements in IFRS 12 are more extensive than those in the current standards.

IFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The Standard defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. The scope of IFRS 13 is broad; it applies to both financial instrument items and non-financial instrument items for which other IFRSs require or permit fair value measurements and disclosures about fair value measurements, except in specified circumstances.

Key requirements of the amendments to IAS 1 are described as follows:

The amendments to IAS 1 require additional disclosures to be made in the other comprehensive income section such that items of other comprehensive income are grouped into two categories: (a) items that will not be reclassified subsequently to profit or loss; and (b) items that will be reclassified subsequently to profit or loss when specific conditions are met.

Key requirements of the amendments to IAS 12 are described as follows:

The amendments to IAS 12 provide an exception to the general principles in IAS 12 that the measurement of deferred tax assets and deferred tax liabilities should reflect the tax consequences that would follow from the manner in which the entity expects to recover the carrying amount of an asset. Specifically, under the amendments, investment properties that are measured using the fair value model in accordance with IAS 40 Investment Property are presumed to be recovered through sale for the purposes of measuring deferred taxes, unless the presumption is rebutted in certain circumstances.

Key requirements of the amendments to IAS 19 are described as follows:

The amendments to IAS 19 change the accounting for defined benefit plans and termination benefits. The most significant change relates to the accounting for changes in defined benefit obligations and plan assets.

The Management of the HEP Group has elected not to adopt these standards, revisions and interpretations in advance of their effective dates. The Management anticipates that the adoption of IFRS 13 “Fair Value Measurement” will result in more extensive disclosures in the financial statements.

The Management anticipates that the adoption of other standards (IFRS 10 “Consolidated Financial Statements”, IFRS 11 “Joint Arrangements” and IFRS 12 “Disclosure of Interests in Other Entities”), revisions and interpretations will have no material impact on the financial statements of Group in the period of initial application.

F-48

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

21

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The basis of the preparation of the Group's financial statements

The financial statements of the Group represent aggregate amounts of the assets, liabilities, capital and

reserves, and the results of its operations for the year then ended. All material intragroup balances and

transactions have been eliminated.

Principles and methods of consolidation

The consolidated financial statements incorporate the financial statements of HEP d.d. and entities controlled by it (its subsidiaries). A listing of the Group’s subsidiaries is provided in Note 36. Control is achieved where HEP d.d. has the power to govern the financial and operating policies of an investee so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All significant intragroup transactions, balances, income and expenses are eliminated on consolidation. Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling’s share of changes in equity since the date of the combination. Losses applicable to the non-controlling in excess of the non-controlling interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the holders of the non-controlling interests have a binding obligation and are able to make an additional investment to cover the losses. Reporting currency

The financial statements of the Group are prepared in the Croatian kuna, rounded to the nearest thousand (HRK ‘000).

F-49

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

22

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Investments in associates

An associate is an entity over which the Group is in a position to exercise significant influence, but not control or joint control, through participation in the financial and operating policy decisions of the investee.

The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting except when classified as held for sale in accordance with IFRS 5 “Non-current Assets Held For Sale and Discontinued Operations”.

Investments in associates are carried in the consolidated statement of financial position at cost as adjusted by post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Group’s interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate) are not recognised, unless the Group has incurred legal or constructive obligations or made payments on behalf of the associate.

Any excess of the cost of acquisition over the Group’s share of the fair values of the identifiable net assets of the associate at the date of acquisition is recognised as goodwill. Goodwill is included in net book value of investments and is tested for impairment as part of investment. Any deficiency of the cost of acquisition below the Group’s share of the fair values of the identifiable net assets of the associate at the date of acquisition is credited to profit and loss in the period of acquisition.

Where the Group transacts with its associate, profits and losses are eliminated to the extent of the Group’s interest in the relevant associate.

Investments in jointly controlled entities

Jointly controlled entities are entities where Group and other parties are engaged in business activities under the joint control, i.e. when strategic financial and business decisions require unanimous approval of all parties that participate in control.

Where a Group entity undertakes its activities under joint venture arrangements directly, the Group’s share of jointly controlled assets and any liabilities incurred jointly with other ventures are recognised in the financial statements of the relevant entity and classified according to their nature. Liabilities and expenses incurred directly in respect of interests in jointly controlled assets are accounted for on an accrual basis. Income from the sale or use of the Company’s share of the output of jointly controlled assets, and its share of joint venture expenses, are recognised when it is probable that the economic benefits associated with the transactions will flow to / from the Company and their amount can be measured reliably.

Joint venture arrangements that involve the establishment of a separate entity in which each venture has an interest are referred to as jointly controlled entities. The Group reports its interests in jointly controlled entities using full consolidation.

F-50

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

23

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Retirement and other employee benefit costs

The Group has no defined post-retirement benefit plans for its employees or management in Croatia or abroad.

Accordingly, no provision for these costs has been included.

Legal pension and health insurance contributions are paid on behalf of the Group’s employees in the Republic

of Croatia. This obligation applies to all staff hired on the basis of employment contracts. The contributions are

paid at a certain percentage determined on the basis of gross salary.

2011, 2010 and2009

Pension insurance contributions 20%Health insurance contributions 15%Employment Fund contribution 1.7%Occupational injury contribution 0.5%

The Group companies have the obligation to withhold the pension insurance contributions from the employees'

gross salaries.

Contributions on behalf of the employer and the employees are recognised as expenses in the period in which

they are incurred (see Note 6).

One – off retirement benefits and jubilee bonuses

The Group provides benefits to its employees, which include long-service benefits (jubilee bonuses) and one-

off retirement payments. The obligation and the cost of these benefits are determined using the Projected Unit

Credit Method. The Projected Unit Credit Method considers each period of service as giving rise to an

additional unit of benefit entitlement and measures each unit separately to build up the final obligation. The

obligation is measured at the present value of estimated future cash flows using a discount rate that is similar

to the interest rate on the Croatian Government bonds where the currency and terms of the Government bonds

are consistent with the currency and estimated terms of the benefit obligation. Calculations of the obligation

and cost of these benefits are performed by a certified actuary.

Jubilee bonuses

The Company provides long-service benefits (jubilee bonuses) and retirement benefits to its employees. The

long-service benefits range from HRK 1,500 to HRK 5,500, net, and are provided for a discontinued tenure

from 10 to 45 years (under the provisions of the Collective Agreement in effect until 31 December 2010, the

long-service benefits amounted from HRK 1,650 to HRK 5,500, net, and were granted for 10 to 40 years of

continuous employment with the employer).

F-51

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

24

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

One – off retirement benefits and jubilee bonuses (continued)

One- off retirement payments

The Collective Agreement in effect from 1 July 2008 until 31 December 2010, which covered all the HEP Group

members, specified the entitlement to a retirement benefit of one-eighth of the gross average monthly salary

paid to the retiring employee for the three months preceeding the termination of the employment contract for

each completed year of continuous tenure.

A new Collective Agreement has been in force since 1 January 2011 for all the HEP Group members, under

which a one-off retirement benefit is provided to each retiring employee in accordance with the provisions of

the Collective Agreement that was previously in force.

F-52

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

25

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Property, plant and equipment

Property, plant and equipment are carried at cost less accumulated depreciation and any impairment losses, except for land, which is carried at cost.

The estimated useful lives, residual values and depreciation methods are reviewed at each year end, with the

effect of any changes in estimate recognised within income statement.

Property, plant and equipment in use are depreciated using the straight-line method on the following bases:

Buildings 2011, 2010 and

2009 Hydroelectric power plants (Dams, embankments, buildings and other structures and facilities)

20 – 50 years Thermal power plants (Buildings and other structures) 33 – 50 years

Electricity transmission and distribution plants and facilities (Transmission lines and buildings of transformer stations, switch-yard, dispatch centres and others) 20 – 40 years Water and steam pipelines and other thermal power generation and transmission plants and facilities 33 years Gas pipelines 20 - 25 years Administrative buildings 50 years Plant and equipment

Hydroelectric power plants 10 – 33 years

Thermal power plants 6 – 25 years

Electricity transmission plants and facilities (electric parts of transformer stations and transformer; and electric parts of transmission lines) 15 – 40 years Electricity distribution plants and facilities (electric parts of transformer stations and transformers, electric parts of distribution lines, measuring instruments, meters and other equipment) 8 – 40 years Thermal power stations, hot-water pipelines and other equipment 15 – 30 years

Gas meters and other gas network equipment 5 – 20 years Other equipment and vehicles

IT equipment 5 – 20 years

Software licenses 5 years

Telecommunications equipment 5 – 20 years

Motor vehicles 5 – 8 years

Office furniture 10 years

F-53

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

26

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Property, plant and equipment (continued)

The initial cost of property, plant and equipment contain the purchase price, including all customs duties and

non-refundable taxes and all costs directly attributable to bringing an asset to the condition and location for its

intended use. Expenditures incurred after the property, plant and equipment have been put into use are

charged to expense the period in which they are incurred.

In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the

future economic benefits expected to be obtained from the use of an item of property, plant and equipment

beyond its originally assessed standard performance, the expenditures are capitalised as an additional cost of

property, plant and equipment. Costs eligible for capitalization include costs of periodic, planned significant

inspections and overhauls necessary for further operation.

Any gains or losses arising from the disposal or withdrawal of property, plant and equipment is determined as

the difference between the proceeds gains on sale and the carrying amount of the asset and are credited or

charged, respectively, to the income statement.

Impairment of tangible and intangible assets

Items of tangible and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is charged to the income statement.

At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually, and whenever there is an indication that an asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

F-54

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

27

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Property, plant and equipment (continued)

The net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction less the cost of disposal, while value in use is the present value using a pre-tax discount rate that reflects current market assessments of the time value of money, the risks specific to the asset of the estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the relevant cash-generating unit.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is land or a building other than an investment property carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Intangible assets

Intangible fixed assets include mainly software and different project studies which are carried at cost less

accumulated amortisation. Amortisation is provided on a straight-line basis over a period from 5 to 20 years.

F-55

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

28

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Investment property

Investment properties are properties held to earn rentals and/or for capital appreciation (including property

under construction for such purposes). Investment properties are measured initially at cost, including

transaction costs. Subsequent to initial recognition, investment properties are measured at fair value. Gains

and losses arising from changes in the fair value of investment properties are included in profit or loss in the

period in which they arise.

An investment property is derecognised upon disposal or when the investment property is permanently

withdrawn from use as well as when no future economic benefits are expected from the disposal. Any gain or

loss arising on de-recognition of the property (calculated as the difference between the net disposal proceeds

and the carrying amount of the asset) is included in profit or loss in the period in which the property is

derecognised.

Finance and operating leases

The Group as lessee The Group has no significant finance lease arrangements and no significant operating lease arrangements were entered during 2011, 2010 and 2009. Amounts payable under operating leases are recognised as expense on a straight-line basis over the term of the relevant lease, unless there is another systematic basis that would be more representative of the time pattern of the user's benefit.

F-56

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

29

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Trade receivables and prepayments

Trade receivables are carried at invoiced amount less any impairment for doubtful accounts.

Management provides for doubtful receivables based on a review of the overall ageing of all receivables and a

specific review of significant individual amounts receivable.

As the collectability of certain receivables over a longer period is not certain, the Group makes an assessment

of allowance for unrecoverable amounts, based on a reasonable estimate and past experience, in order to

write down or write off those amounts.

In 2010 the Group revised the allowance percentage and the maturity groupings based on the estimated

ageing of receivables. The revised estimate reflected through a decrease in the allowance expense for

receivables by HRK 10,630 thousand.

Ageing of past due Allowance percentage

2011 and 2010 Ageing of past due Allowance

percentage 2009 31-60 days 1.5% - -

61-90 days 3% 61-90 days 5%

91-180 days 9% 91-120 days 10%

181-365 days 30% 121-365 days 20%

Over one year 90% Over one year 100%

Outstanding receivables claimed through courts and those included in bankruptcy estate (the debt principal and

interest) are fully provided against, regardless of the number of past due days, and the provision is charged to

expenses.

F-57

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

30

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Inventories

Inventories comprise mainly of materials and small items and are carried at the lower of cost, determined using the weighted average price less allowance for obsolete and excessive inventories, and net realisable value. The management provides for inventories based on a review of the overall ageing structure of inventories and non-recurring transfers over the years, as well as of individual significant amounts of inventories.

Cost comprises the invoiced amount as well as all other costs directly attributable to brining inventories to their location and the condition of being readily available for use.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits with banks and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

F-58

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

31

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which

are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are

added to the cost of those assets, until such time as the assets are substantially ready for their intended use or

sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure

on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

All other borrowing costs are recognised in the statement of income in the period in which they are incurred.

Short-term borrowings and supplier loans are recorded at original amount granted less repayment. Interest

expense is charged to income statement on an accrual basis.

Foreign currencies

The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group entity are expressed in Croatian kunas (HRK), which are the functional currency of the Group and the presentation currency for the consolidated financial statements.

In preparing the financial statements of the individual Group entities, transactions in currencies other than the entity’s functional currency (foreign currencies) are translated to the functional currency of the entity at the rates of exchange prevailing on the dates of the transactions. At each reporting date, monetary items denominated in foreign currencies are retranslated to the functional currency of the entity at the year-end rates. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period as finance cost except for differences arising on the retranslation of non-monetary assets available for sale, in respect of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity.

For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are expressed in Croatian kuna using exchange rates prevailing at the date of the statement of financial position. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising on the year-end translation, if any, are classified as equity and recognised in the Group’s foreign currency translation reserve. Such exchange differences are recognised in profit or loss in the period in which the foreign operation is disposed of.

F-59

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

32

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Taxation

The tax expense represents the sum of the current tax and deferred tax income or expense.

Current tax

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of reporting period.

Deferred tax

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and are accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised on the basis of taxable temporary differences on investments in subsidiaries and associates and joint ventures, unless the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the amount in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

F-60

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

33

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Taxation (continued)

Current and deferred tax for the period

Current and deferred tax are recognised as an expense or income in profit or loss, except when they relate to items credited or debited directly to equity, in which case the tax is also recognised directly in equity, or where they arise from the initial accounting for a business combination.

In the case of a business combination, the tax effect is taken into account in calculating goodwill or in determining the excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over cost.

Financial assets

Investments are recognised and derecognised on a trade date where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, net of transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value.

Financial assets are classified into as “assets available for sale” and “loans and receivables”. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period.

Income is recognised on an effective interest basis for debt instruments.

Financial assets available for sale

Unlisted shares held by the Group that are traded in an active market are classified as being AFS and are stated at fair value. Gains and losses arising from changes in fair value are recognised directly in equity in the investments revaluation reserve with the exception of impairment losses, interest calculated using the effective interest method and foreign exchange gains and losses on monetary assets, which are recognised directly in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognised in the investments revaluation reserve is included in profit or loss for the period.

Dividends on AFS equity instruments are recognised in profit or loss when the Group’s right to receive the dividends has been established.

F-61

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

34

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Financial assets (continued)

The fair value of AFS financial assets denominated in a foreign currency is determined in that foreign currency

and translated at the spot rate at the end of reporting period. The change in fair value attributable to translation

differences that result from a change in amortised cost of the asset is recognised in profit or loss, and other

changes are recognised in equity.

Loans and receivables

Trade receivables, loans, and other receivables with fixed or regular payments that are not quoted in an active

market are classified as loans and receivables. Loans and receivables are measured at amortised cost using

the effective interest method, less any impairment. Interest income is recognised by applying the effective

interest rate, except for short-term receivables when the recognition of interest would be immaterial.

Impairment of financial assets

Financial assets are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss.

With the exception of AFS equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

In respect of AFS equity securities, any increase in fair value subsequent to an impairment loss is recognised directly in equity.

Investments

Investments in immaterial non-consolidated companies are generally recorded at cost less provisions for any impairment.

F-62

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

35

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Financial liabilities

Other financial liabilities (including borrowings) are subsequently measured at amortised cost using the effective interest method.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.

Derecognition of financial liabilities

The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.

Derivative financial instruments

The Group entered into an interest rate swap to manage its exposure to interest rate. Further details of derivative financial instruments are disclosed in Note 26.

Derivatives are initially recognised at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

Embedded derivatives

During 2011, 2010 and 2009, the Group had no embedded derivative financial instruments.

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and 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. Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. Where the effect of discounting is material, the amount of the provision is the present value of the expenditures expected to be required to settle the obligation. Where discounting is used, the increase in provisions that reflects the passage of time is recognized as interest expense.

F-63

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

36

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Use of estimates in the preparation of the financial statements

The preparation of financial statements in conformity with International Reporting Financial Standards, as published by the International Accounting Standards Board requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingencies. The significant areas of estimation used in the preparation of the accompanying financial statements relate to employee benefits, useful lives of property, plant and equipment, impairment of assets and determination of fair values of assets and liabilities, and estimated decommissioning costs. Future events may occur which will cause the assumptions used in arriving at the estimates to change. The effect of any changes in estimates will be recorded in the financial statements, when determinable.

Revenue recognition

Revenue is earned primarily from the sale of electricity to households, industrial and other customers within

Croatia. These sales constitute the main source of the Group’s operating income.

Revenue from the sale of electricity is recognised according to the best management estimate of the actual

energy consumed based on the energy data and tariff items under the cost-recovery models called Electricity

Transmission Tariff Model With No Tariff Amounts, The Electricity Distribution Tariff Model, with no tariff

amounts; and the Electricity Supply Tariff Model, with the exemption of eligible customers, with no tariff

amounts. Revenue recognition is based on the Decision of the Croatian Government on the level of tariff items

from June 2008 and August 2009 (see Note 1) and the decisions of the Management Board of HEP d.d. from

June 2008, June and August 2009.

Revenue from connection fees

As of 1 July 2009 the Group has applied IFRIC 18 “Transfers of Assets from Customers”.

IFRIC 18 clarifies the requirements of IFRSs for agreements in which an entity receives from a customer asset

(item or property, plant and equipment or cash) that the entity must then use either to connect the customer to

a network or to provide the customer with on-going access to a supply of goods or services. When the item of

property, plant and equipment transferred from a customer meets the definition of an asset the Company must

recognize the asset in its financial statements.

Segmental disclosures

The Group has fully adopted IFRS 8 “Operating Segments” and presented operating segment disclosures required by the Standard, since it has debt instruments traded through public capital markets.

F-64

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

37

3 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES

Critical judgments in applying accounting policies

In the application of the accounting policies, which are described in Note 2, the management made certain judgments that had a significant impact on the amounts reported in the financial statements (irrespective of the underlying estimates referred to below).

These judgments are provided in detail in the accompanying notes. However, the critical judgments relate to the following areas:

Useful lives of property, plant and equipment

The determination of the useful life of the assets is based on past experience involving similar assets, as well

as on forecast changes in the economic environment and industry-specific factors. The useful life is reviewed

annually or whenever there are indications of significant changes in the underlying assumptions. We believe

this accounting estimate is significant considering the considerable share of depreciable assets in the total

assets. Therefore, any change in the underlying assumptions could be material for the Group's financial

position and the results of its operations.

Fair value of financial assets and interest-rate swap

As described in Note 20, the management uses judgment to estimate whether trade and other receivables

have suffer an impairment loss. The management believes that the carrying amount of the interest-rate swap

approximates its fair value as disclosed in Note 26.

Provisions for environmental protection

The exact scope of activities or technologies to be applied has not been specified by the applicable laws or

regulations. In determining the level of provisions for environmental protection and decommissioning, the

management relies on the prior experience and its own interpretation of the current laws and regulations.

Pursuant to Article 4.1 of the Law on Acknowledging the Contract between the Government of the Republic of

Croatia and the Government of the Republic of Slovenia on Regulating the Status and other Legal Relations in

Respect of Investments in, Exploitation and Decommissioning of, the Nuclear Power Plant Krško (Official

Gazette No. 9/2002), the Croatian Government issued on 28 April 2006 a decree on the payment of the funds

for the decommissioning and disposal of radioactive waste and consumed nuclear fuel of the NPPK.

The decommissioning costs of thermal power plants represent the discounted value of the estimated

decommissioning costs of the Group's thermal power plants.

Over / under billed revenue adjustment

After analysing a number of different methods of approximation (five-year average, a linear approximation,

etc.), the Management has decided that the most appropriate is a method of logarithmic regression is the most

appropriate. The amount of losses on the network distribution is calculated using the percentage of the function

of the logarithmic regression on the total amount of purchased power from the transmission network - the result

of the losses of electricity distribution network in the current year in MWh.

The difference between the thus obtained size of losses and over/under billed revenue balance for the current

year is calculated.

F-65

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

38

3 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Critical judgments in applying accounting policies (continued)

Over / under billed revenue adjustment (continued)

Such difference represents basis for calculation of over / under billed revenue and is multiplied by the average

selling prices for households earned in the current year from those without a fixed monthly fee and the result is

the difference that increases or decreases the revenues from selling electricity to households (Note 21).

Impairment of non-current assets

Impairment is recognised in the financial statements of the HEP Group whenever the net carrying amount of an

asset or a cash-generating unit exceeds the higher of the assets i.e. cash-generating unit's recoverable amount

or fair value less costs to sell. Fair value less costs to sell is determined on the basis of observable inputs from

identical selling transactions under normal market conditions involving similar assets or observable market

prices less additional costs of disposal.

Value in use is measured using the discounted cash flow projections. The most significant assumptions in

determining cash flows are discount rates, time values, the period of cash flow projections, as well as

assumptions and judgements used in determining cash receipts and payments. There were no impairments of

assets of the Group that would result from the projections described above.

At the end of each reporting period Group prepares impairment calculation regarding NPPK. There was no

impairment of investment in NPPK that would result from the projections described above.

Availability of taxable profits against which the deferred tax assets could be recognised

A deferred tax asset is recognized only to the extent that it is probable that the related tax benefit will be realized. In determining the amount of deferred taxes that can be recognised are required, which are based on the probable quantification of time and level of future taxable profits, together with the future tax planning strategy. The carrying amounts of deferred tax assets at 31 December 2011 and 31 December 2010 amounted to HRK 178,902 thousand and HRK 157,555 thousand (2009: HRK 132,373 thousand) respectively (see Note 9).

F-66

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

39

3 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Critical judgments in applying accounting policies (continued)

Actuarial estimates used in determining the retirement bonuses

The cost of defined benefits is determined using actuarial estimates. Actuarial estimates involve assumptions about discount rates, future salary increases and the mortality or fluctuation rates. Because of the long-term nature of those plans, there is uncertainty surrounding those estimates. Provisions for jubilee and retirement bonuses amounted to HRK 357,632 thousand and HRK 348,425 thousand at 31 December 2011 and 31 December 2010(31 December 2009: 287,849 thousand), respectively (see Note 27).

Consequences of certain legal actions

There are a number of legal actions involving the Group, which have arisen from the regular course of their operations. If there is a present obligation as a result of a past event (taking into account all available evidence, including the opinion of law experts) for which is probable that outflow of resources will be required to settle the obligation and if a reliable estimate can be made of the amount of the obligation, provisions are recorded (see Note 27).

Re-measurement of the Jadranski naftovod shares and investment property at fair value

During 2011, 2010 and 2009, the Group remeasured the Jadranski naftovod shares using market value of shares and the investment properties at fair value.

In 2011, 2010 and 2009 fair value was determined based on a notification of Central clearing deposit company

regarding open balances as of 31 December 2011, 2010 and 2009. The market value of the Jadranski naftovod

share as at 31 December 2011 was HRK 2,230 (2010: HRK 3,000; 2009: HRK 2,826).

The gain resulting from the fair valuation of the investment property amounts to HRK 7,676 thousand, while a gain of HRK 19,865 thousand was recognised on the fair valuation in 2010 (2009: a loss on the fair valuation of HRK 19,748) (see Note 5).

Valuation of inventories

During 2011, the Group recognised an impairment allowance in the total amount of HRK 11,330 thousand

(2010: HRK 15,070 thousand; 2009: HRK 110,648 thousand) for obsolete inventories and materials (materials

with no turnover in the previous 2 years) based on the ageing structure of the inventories.

F-67

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

40

3 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Restatements

Restatements to the financial statements for the years ended 31 December 2009, 31 December 2010, and 31

December 2011 comprise the restatement of the investment in Nuclear Power Plant Krško ("NPPK"),

impairment allowance on bad and doubtful receivables and the adoption of IFRIC 18 Transfer of Assets from

Customers for the periods subsequent to 1 July 2009.

The financial statements contain reclassifications in connection with the presentation of certain expenses and

income presented in other operating income, other operating expenses and financial activities costs.

The impact of each of the restated amounts on the respective periods is discussed below.

(i) Restatement of the investment in Krško Nuclear Power Plant (“NPPK“)

The Group's investment in Nuclear Power Plant Krško is the amount of the investment denominated in euro

that was translated to Croatian kunas at each date of statement of financial position using the middle exchange

rate of the Croatian National Bank. This was not compliant with International Accounting Standards 28.

Therefore, the investment was restated to the initial amount determined as the historical cost.

The restatement made at 31 December 2009 resulted in an increase of the investment in Krško Nuclear Power

Plant by HRK 148,826 thousand in 2009 and an increase in capital reserves by the same amount. The amount

of HRK 148,826 thousand comprises the restatement of the opening balance for the year as of 1 January 2009

in the amount of HRK 144,821 thousand. This restatement resulted in an adjustment of HRK 4,005 thousand to

other comprehensive income recorded during the year ended 31 December 2009.

The restatement made at 31 December 2010 in amount of HRK 17,354 thousand relates to the restatement of

other comprehensive income recorded during the year ended 31 December 2010, which resulted in decrease

of other comprehensive income and investment in NPPK by HRK 17,354 thousand. The cumulative effect of

the restatement of NPPK is an increase of the investment in NPPK by HRK 131,472 thousand and an increase

in capital reserves by the same amount.

This restatement had no impact as of or for the year ended 31 December 2011.

(ii) Impairment allowance on bad and doubtful receivables

In 2010 the Group recognised an impairment allowance for bad and doubtful receivables in the amount of HRK

60,110 thousand. Since circumstances, such as poor liquidity and accumulated debts of the customer,

indicating that the receivables should be impaired existed as of 31 December 2009. As a result, the year ended

31 December 2009 was restated to reflect the impairment allowance.

F-68

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

41

3 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Restatements (continued)

(ii) Impairment allowance on bad and doubtful receivables (continued)

The restatement made to these financial statements regarding impairment allowance on bad and doubtful

receivables at 31 December 2009 resulted in decrease of the balance of trade receivables at 31 December

2009 by HRK 60,110 thousand and an increase in other operating expenses by the same amount. Since the

amount restated represents a temporary difference, the restatement resulted in an increase in deferred tax

assets in the amount of HRK 12,022 thousand, and a decrease of income tax expense by the same amount.

Net effect of above described restatement on statement of comprehensive income for the year ended 31

December 2009 amounts to HRK 48,088 thousand.

The previously reported receivables balance at 31 December 2010 remains unchanged. However, the

Company previously inappropriately recorded the impairment during the year ended 31 December 2010. In

conjunction with the restatement of the financial statements for year that ended 31 December 2009, the

Company reversed the entry recorded in the year ended 31 December 2010 which resulted in an increase in

receivables and decrease of other operating expenses of HRK 60,110 thousand, an increase in income tax by

HRK 12,022 thousand, and a decrease in retained earnings by HRK 48,088 thousand.

This restatement had no impact as of or for the year ended 31 December 2011.

(iii) Adoption of IFRIC 18

The Group is required to apply IFRIC 18 "Transfer of Assets from Customers", which specifies the accounting

treatment for assets transferred from customers, whereby revenue from such assets is to be recognised in the

income statement immediately upon transfer, rather than deferred over the useful life of the asset concerned.

The Interpretation is in effect since 1 July 2009. The Management Board of the Company first adopted the

Interpretation to assets transferred from customers subsequent to 1 January 2010.

In these financial statements, the Group restated the balances for the six-month period beginning on 1 July

2009 and ending 31 December 2009 to which the Interpretation applies. As a result of the restatement, other

long-term liabilities at 31 December 2009 decreased by HRK 48,742 thousand, and other income increased by

the same amount, and, consequently, income tax expense and taxes and contributions payable increased by

HRK 9,748 thousand. The restatement made at 31 December 2010 with respect to the timely adoption of IFRIC

18 resulted in an increase in other income by HRK 113,996 thousand and a decrease in other long-term

liabilities by the same amount. The cumulative effect on long term liabilities as at 31 December 2010 amounts

to a total decrease of HRK 162,738 thousand. As at 31 December 2010, the impact of the correction on the tax

balances was an increase in the balance of current tax payable and of the income tax by HRK 22,799

thousand each. The current tax balance as at 31 December 2010 also reflects the correction regarding the

adoption of IFRIC 18 in 2009, and as a result, the cumulative effect on the current tax payable is an increase of

HRK 32,547 thousand.

F-69

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

42

3 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Restatements (continued)

(iii) Adoption of IFRIC 18 (continued)

The restatement made at 31 December 2011 with respect to the adoption of IFRIC 18 resulted in an increase in

other income by HRK 12,978 thousand and a decrease in other long-term liabilities by the same amount. Total

cumulative effect on other long-term liabilities, inclusive of the restatement of the preceding 2 periods, amounts

to a decrease of HRK 175,716 thousand.

The impact of the correction on the tax balances as at 31 December 2011 was an increase in the balance of

current tax and of the income tax by HRK 2,595 thousand each. The current tax balance reflects the correction

regarding the adoption of IFRIC 18 in 2009 and 2010 as well, and as a result, the cumulative effect on the

current tax payable is an increase by HRK 35,143 thousand as at 31 December 2011.

(iv) Reclassification of income statement items

At 31 December 2009 the Group reclassified HRK 28,772 thousand from other operating expenses to financial

costs because the balance relates to exchange differences on a loan.

In addition, the Group reclassified at 31 December 2009 HRK 19,748 thousand from other operating expenses

to operating income for comparability purposes.

(v) Reclassification of deferred tax liability

At 31 December 2010 the Group reclassified a deferred tax liability in the amount of HRK 1,874 thousand, by

offsetting it against deferred tax assets.

Changes in Statement of cash flows

The restatements made to certain income statement and statement of financial position items described above

resulted in the restatement of the statement of cash flows for the years ended 31 December 2009, 31

December 2010 and 31 December 2011, in particular, of the profit, income tax and impairment allowance on

receivables, which reflect adjustments by non-cash items. In addition, the restatements reflected through an

additional decrease in other long-term liabilities by HRK 48,742 thousand (2010: HRK 113,996 thousand, 2011:

HRK 12,978 thousand), whereas other current liabilities increased by additional HRK 9,748 thousand due to

the change in the current tax liability (2010: HRK 22,799 thousand, 2011: HRK 2,595 thousand).

F-70

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

43

3 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Restatement to the financial statements for the year ended 31 December 2009

Notes As originally reported

As restated Restatement effect: increase

/ (decrease)

HRK'000 HRK'000 HRK'000

Statement of financial position at 31 December 2009

Investment in Krško Nuclear Power Plant ("NPPK") (i) 14 1,605,593

1,754,419 148,826

Deferred tax assets (ii) 9 120,351 132,373 12,022 __________ __________ __________

Total non-current assets 29,879,841 30,040,689 160,848 ___________ __________ ___________

Trade receivables (ii) 20 1,493,989 1,433,879 (60,110) __________ __________ __________

Total current assets 2,831,213 2,771,103 (60,110) ___________ __________ ___________

TOTAL ASSETS 32,711,054 32,811,792 100,738 ___________ __________ ___________

Capital reserves (i) 23 (2,038,472) (1,889,646) 148,826

Retained earnings (ii) – Impairment allowance on

trade receivables -

- (48,088)

Retained earnings (iii) – Adoption of IFRIC 18 - - 38,994 __________ __________ __________

Retained earnings 23 403,018 393,924 (9,094) __________ __________ __________

Total equity 18,248,114 18,387,846 139,732 ___________ __________ ___________

Other long-term liabilities (iii) 29 4,927,022 4,878,280 (48,742) __________ __________ __________

Total non-current liabilities 9,810,106 9,761,364 (48,742) ___________ __________ ___________

Taxes and contributions payable (iii) 31 171,080 180,828 9,748 __________ __________ __________

Total current liabilities 4,652,834 4,662,582 9,748 ___________ __________ ___________ __________ __________ __________

TOTAL EQUITY AND LIABILITIES 32,711,054 32,811,792 100,738 ___________ __________ ___________

F-71

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

44

3 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Restatement of the financial statements for the year ended 31 December 2009 (continued)

Notes As originally reported

As restated Restatement effect:

increase / (decrease)

HRK'000 HRK'000 HRK'000

Statement of comprehensive income for the year ended 31 December 2009

Other operating income (iii) – Adoption of IFRIC 18 - - 48,742 Other operating income (iv) – Reclassified from other operating expenses -

- (19,748) __________ __________ __________

Other operating income 4.5 954,520 983,514 28,994 __________ __________ __________

Total operating income 12,600,786 12,629,780 28,994 ___________ __________ ___________ Other operating expenses (ii) – Impairment allowance on trade receivables -

- (60,110)

Other operating expenses (iv) – Reclassified to other operating income -

- 19,748

Other operating expenses (iv) – Reclassified to financial costs -

- 28,772 __________ __________ __________

Other operating expenses 7 (2,925,476) (2,937,066) (11,590) __________ __________ __________

Total operating expenses 12,033,136 12,044,726 (11,590) ___________ __________ ___________

__________ __________ __________

Net loss from financial activities (iv) 8 (340,541) (369,313) (28,772) ___________ __________ ___________

Income tax expense (ii) – Impairment allowance on trade receivables -

- 12,022

Income tax expense (iii) – Adoption of IFRIC 18 - - (9,748) __________ __________ __________

Income tax expense 9 (72,687) (70,413) 2,274 __________ __________ __________

Profit for the year 154,422 145,328 (9,094) ___________ __________ ___________

Attributable to:

Equity holder 135,844 126,750 (9,094)

Non-controlling interest 18,578 18,578 - ___________ __________ ___________

Other comprehensive income (i) (4,453) (448) (4,005) __________ __________ __________ Total comprehensive income for the year years

149,969

144,880 (5,089) ___________ __________ ___________

Attributable to:

Equity holder 131,267 126,178 (5,089)

Non-controlling interest 18,702 18,702 - ___________ __________ ___________

F-72

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

45

3 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Restatement of the financial statements for the year ended 31 December 2010

Notes

As originally reported

Effect of prior year

restatements Current year

restatements As restated

Cumulative restatement

effect: increase /

(decrease) HRK'000 HRK'000 HRK'000 HRK'000 HRK'000

Statement of financial position at 31 December 2010

Investment in Krško Nuclear Power Plant ("NPPK")(i) 14 1,622,947 148,826 (17,354) 1,754,419 131,472 Deferred tax assets (ii) - 12,022 (12,022) - -

Deferred tax assets (v) - - (1,874) - -

Deferred tax assets 9 159,429 12,022 (13,896) 157,555 (1,874) __________ __________ __________ __________ __________

Total non-current assets 29,867,757 160,848 (31,250) 29,997,355 129,598 ___________ ___________ __________ ___________ ___________

Trade receivables 20 1,730,328 (60,110) 60,110 1,730,328 - __________ __________ __________ __________ __________

Total current assets 3,753,220 (60,110) 60,110 3,753,220 - __________ __________ __________ __________ __________

TOTAL ASSETS 33,620,977 100,738 28,860 33,750,575 129,598 ___________ ___________ __________ ___________ ___________

Capital reserves (i) 23 (1,005,546) 148,826 (17,354) (874,074) 131,472

Retained earnings (i) - (48,088) 48,088 - -

Retained earnings (iii) - 38,994 91,197 - 130,191

Retained earnings 23 816,248 (9,094) 139,285 946,439 130,191 __________ __________ __________ __________ __________

Total equity 19,679,854 139,732 121,931 19,941,517 261,663 ___________ ___________ __________ __________ ___________

Other long-term liabilities (iii) 29 5,170,943 (48,742) (113,996) 5,008,205 (162,738)

Deferred tax liability (v) 9 1,874 - (1,874) - (1,874) __________ __________ __________ __________ __________

Total non-current liabilities 9,948,092 (48,742) (115,870) 9,783,480 (164,612) ___________ __________ __________ __________ ___________

Taxes and contributions 31 444,985 9,748 22,799 477,532 32,547 __________ __________ __________ __________ __________

Total current liabilities 3,993,031 9,748 22,799 4,025,578 32,547 ___________ __________ __________ __________ ___________

TOTAL EQUITY AND

LIABILITIES 33,620,977 100,738 28,860 33,750,575 129,598 ___________ __________ ___________

F-73

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

46

3 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Restatement of the financial statements for the year ended 31 December 2010 (continued)

Notes As originally reported

As restated Restatement effect: increase

/ (decrease)

HRK ‘000 HRK ‘000 HRK ‘000 Statement of comprehensive income for the year ended 31 December 2010

Other operating income (iii) 4,5 1,127,883 1,241,879 113,996 __________ __________ __________

Total operating income 12,942,903 13,056,899 113,996 ___________ __________ ___________

Other operating expenses (ii) 7 (3,052,381) (2,992,271) 60,110 __________ __________ __________

Total operating expenses (10,757,698) (10,697,588) 60,110 ___________ __________ ___________

Income tax expense (ii) – Impairment allowance on

trade receivables -

- 12.022

Income tax expense (iii) – Adoption of IFRIC 18 - - 22.799 __________ __________ __________

Income tax expense 9 (401,802) (436,623) (34,821) __________ __________ __________

Profit for the year 1,435,366 1,574,651 139,285 ___________ __________ ___________

Attributable to:

Equity holder 1,421,303 1,560,588 139,285

Non-controlling interest 14,063 14,063 - ___________ __________ ___________

Other comprehensive income (i) 25,339 7,985 (17,354) __________ __________ __________

Total comprehensive income for the year

1,460,705

1,582,636 121,931 ___________ __________ ___________

Attributable to:

Equity holder 1,446,156 1,568,087 121,931

Non-controlling interest 14,549 14,549 -

F-74

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

47

3 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Restatement to the financial statements for the year ended 31 December 2011

Notes

As originally reported

Effect of prior year

restatements Current year

restatements As restated

Cumulative restatement

effect: increase /

(decrease) HRK'000 HRK'000 HRK'000 HRK'000 HRK'000

Statement of financial position at 31 December 2011

(Accumulated losses) / retained earnings (iii) 23 (136,262) 130,191 10,382 4,311 140,573 __________ __________ __________ __________ __________

Total equity 19,279,787 130,191 10,382 19,420,359 140,573 ___________ ___________ ___________ __________ ___________

Other long-term liabilities (iii) 5,320,676 (162,738) (12,978) 5,144,960 (175,716) __________ __________ __________ __________ __________

Total non-current liabilities 9,629,462 (162,738) (12,978) 9,453,746 (175,716) ___________ ___________ ___________ __________ ___________

Taxes and contributions payable (iii) 31 40,755 32,547 2,596 75,898 35,143 __________ __________ __________ __________ __________

Total current liabilities 4,837,122 32,547 2,596 4,872,265 35,143 ___________ ___________ ___________ __________ ___________

__________ __________ __________ __________ __________

TOTAL EQUITY AND

LIABILITIES

33,746,370 - - 33,746,370 - ___________ ___________ ___________ __________ ___________

F-75

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

48

3 CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Restatement to the financial statements for the year ended 31 December 2011 (continued)

Notes As originally reported

As restated Restatement effect: increase

/ (decrease)

HRK'000 HRK'000 HRK'000

Statement of comprehensive income for the year ended 31 December 2011

Other operating income (iii) 4.5 1,340,622 1,353,600 12,978 __________ __________ __________

Total operating income 13,074,051 13,087,029 12,978 ___________ __________ ___________

Income tax expense (iii) 9 (85,453) (88,048) (2,595) __________ __________ __________

(Loss)/ Profit for the year (3,306) 7,077 10,383 ___________ __________ ___________

Attributable to:

Equity holder (14,820) (4,437) 10,383

Non-controlling interest 11,514 11,514 -

__________ __________ __________

Total comprehensive income for the year (11,157) (774) 10,383 ___________ __________ ___________

Attributable to:

Equity holder (23,742) (13,359) 10,383

Non-controlling interest 12,585 12,585 -

F-76

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

49

4 SEGMENT INFORMATION

The Group generates most of income from its operations in a single geographical area – the Republic of

Croatia.

The Group’s reportable segments are separated as follows: electricity (generation, transmission, distribution

and sale of electricity), heating (distribution and sale of heating power), and gas (distribution and sale of gas).

Each segment’s operating profit or loss includes all revenue and expenses directly attributable to the reportable

segment. Information about financial income, expense and income tax is not provided on a segment level, as

the segments are disclosed based on operating profit.

Electricity Heating Gas Group

For the years that ended 31 December

2011 2010 2009 2011 2010 2009 2011 2010 2009 2011 2010 2009

HRK’000 HRK’000 HRK’000 HRK’000 HRK’000 HRK’000 HRK’000 HRK’000 HRK’000 HRK’000 HRK’000 HRK’000

Restated Restated Restated

Revenue 10,769,900 10,851,054 10,798,272 582,352 569,784 553,732 381,177 394,182

294,262 11,733,429 11,815,020 11,646,266 Other income allocated to segments 1,247,711 1,153,294 900,549 72,768 59,928 56,662 33,121 28,657 26,303 1,353,600 1,241,879 983,514 Profit from operations 779,165 2,504,994 689,263 (314,738) (142,592)

(104,388) 1,969 (3,091) 179 466,396

2,359,311 585,054

Net financial expense

(371,271) (348,037) (369,313) Income tax

(88,048) (436,623) (70,413)

_________ ___________ _________

Net profit 7,077 1,574,651 145,328 _________ _________ ________

Segment assets consist primarily of property, plant and equipment, receivables, cash and inventories. Segment

liabilities consist of trade and other payables. Non-segment assets and liabilities consist of assets and liabilities

that cannot be reasonably attributed to the reportable business segments.

Total unallocated assets include investments in NPPK, a part of property, plant and equipment, and

unallocated financial assets. Total unallocated liabilities include long-term loans, short-term loans and various

other liabilities.

Total segment assets Total segment liabilities 2011 2010 2009 2011 2010 2009 HRK’000 HRK’000 HRK’000 HRK’000 HRK’000 HRK’000

Restated Restated Restated Restated Restated Restated

Electricity 29,095,594 28,409,155 30,064,653 7,230,121 6,865,250 6,914,891 Heating 1,138,791 1,097,458 1,036,394 245,176 220,139 292,518 Gas 322,338 319,336 286,987 170,566 180,345 158,621 Unallocated 3,189,647 3,924,626 1,423,758 6,680,148 6,543,324 7,057,916 _________ __________ __________ __________ __________ __________Total Group 33,746,370 33,750,575 32,811,792 14,326,011 13,809,058 14,423,946 _________ __________ __________ __________ __________ __________

F-77

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

50

4 SEGMENT INFORMATION (continued)

In 2011 electricity sales amount to HRK 10,769,900 thousand (2010: HRK 10,851,054 thousand, 2009: HRK

10,798,272 thousand).

Heating energy sales for the year 2011 amount to HRK 582,352 thousand (2010: HRK 569,784 thousand;

2009: HRK 553,732 thousand).

In 2011 gas sales amount to HRK 381,177 thousand (2010: HRK 394,182 thousand; 2009: HRK 294,262

thousand).

Territorial business analysis

The Group operates in Europe, with countries that are members of the European Union and other countries

that are not members of the European Union.

Presented below is the territorial analysis of the revenue that the Group generated from continuing operations

with external buyers of electricity:

For the year ended 31 December 2011 2010 2009 HRK’000 HRK’000 HRK’000 Restated Restated Restated Croatia 10,582,154 10,600,969 10,461,750 European Union member states 27,463 185,373 323,870 Other countries –non-European Union member states 160,283 64,712 12,652 ____________ __________ __________

10,769,900 10,851,054 10,798,272 ___________ __________ ___________

F-78

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

51

5 OTHER OPERATING INCOME

For the year ended 31 December 2011 2010 2009 HRK'000 HRK'000 HRK'000 Restated Restated Restated Grid connection services 262,921 253,241 48,742 Income from assets received free of charge 231,908 218,769 194,762 Collection of receivables previously provided against 139,266 134,531 91,033 Services rendered 118,859 150,423 239,454 Capitalised assets 109,502 112,592 147,151 Late-payment interest 93,220 80,126 68,808 Reversal of vacation accrual 64,477 - - Income from sale of materials 52,070 48,512 20,411 Income from sale of cross-border transmission capacity 49,997 21,584 30,032 Income from electricity in transit – foreign 33,877 45,715 30,049 Reversal of long-term provisions for retirement benefits and jubilee bonuses 26,514

24,449

18,356

Reversal of long-term provisions – court costs 23,088 18,144 13,816 Income in respect of the electricity bill reminders 21,702 19,462 17,523 Income from balancing energy 14,479 4,067 - Income in respect of court costs on claims 8,831 7,673 9,844 Gain/ (loss) on fair valuation of investment properties 7,676 19,865 (19,748) Inventory surplus – fixed assets 5,648 870 406 Income from sale of tangible assets 4,835 1,889 7,163 Recovery of receivables previously written off 4,286 2,585 8,208 Income from reversal of long-term decommissioning provision - 4,706 620 Other 80,444 72,676 56,884 ___________ __________ __________

1,353,600 1,241,879 983,514 ___________ __________ ___________

F-79

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

52

6 STAFF COSTS

For the year ended 31 December 2011 2010 2009 HRK’000 HRK’000 HRK’000 Restated Restated Restated Net salaries 1,135,278 1,134,137 1,157,790 Taxes and contributions 754,950 761,068 796,560 ___________ ___________ ___________

1,890,228 1,895,205 1,954,350 ___________ ___________ __________

Total staff costs: For the year ended 31 December 2011 2010 2009 HRK’000 HRK’000 HRK’000

Restated Restated Restated

Gross salaries 1,890,228 1,895,205 1,954,350

Reimbursement of costs to employees (Note 7) 143,885 156,673 147,718

Employee benefits (Note 7) 108,285 77,055 89,030 __________ ___________ ___________

2,142,398 2,128,933 2,191,098 __________ __________ __________ Directors' and executives remuneration: For the year ended 31 December 2011 2010 2009 HRK’000 HRK’000 HRK’000

Restated Restated Restated

Gross salaries 19,104 18,693 20,079

Pension contributions 4,305 4,115 4,290

Other benefits 2,185 2,266 2,563 __________ ___________ ___________

25,594 25,074 26,932 __________ __________ __________

Reimbursement of costs to employees includes transportation allowances in the amount of HRK 83,925

thousand (2010: HRK 80,158; 2009: HRK 88,867 thousand), daily allowances and travelling expenses in the

amount of HRK 15,530 thousand (2010: HRK 17.636 thousand; 2009: 16,870 thousand), additional health

insurance amounting to HRK 15,530 thousand (2010: HRK 17,209 thousand; 2009: 21,461 thousand), receipts

based on tax inspection in the amount of HRK 1,299 (2010: HRK 15,561 thousand; 2009: 4,601 thousand), and

other similar expenses.

Employee benefit costs include benefits under the Collective Agreement and consist primarily of Christmas and

Easter allowances, solidarity support, jubilee bonuses, family separation allowances and fieldwork bonuses,

holiday bonuses, child benefits and other in the total amount of HRK 85,488 thousand (2010: HRK 54,424

thousand; 2009: HRK 46,392 thousand).

F-80

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

53

7 OTHER OPERATING EXPENSES

For the year ended 31 December 2011 2010 2009 HRK’000 HRK’000 HRK’000 Restated Restated Restated Maintenance costs (service and material) 669,345 645,098 578,792 Provisions for doubtful receivables 403,568 272,029 335,116 Gas costs 352,066 355,869 256,454 General and administrative expenses 341,278 380,020 478,113 Reimbursement of costs to employees (Note 6) 143,885 156,673 147,718 Cost of material 123,038 118,136 131,858 Other employee benefits (Note 6) 108,285 77,055 89,030 NPPK – decommissioning expense 106,005 103,854 104,506 Contributions, fees and duties payable to the State 96,524 99,264 104,073 Litigation provisions 78,265 75,986 105,689 Water contributions and concession fees 68,789 74,601 63,803 Accrual for unused vacation days 63,900 64,477 - Fee for the usage of power plant facilities 48,539 66,115 52,564 Write-off of non-current assets 47,854 21,462 79,310 Cost of sold materials 45,464 40,710 17,233 Calculation and collection costs 39,859 34,823 36,647 Provisions for retirement and jubilee bonuses 35,721 86,762 60,964 Gas storage fee 30,753 - - Insurance premiums 24,607 24,860 25,045 Fee for environmental protection 21,217 27,299 48,943 Damages and indemnities 16,027 37,449 9,643 Impairment allowance on inventories 11,330 15,070 110,648 Provision for electricity delivered from wind power plants - 22,031

- Provisions for contractual damages - 52,179 28,621 Provision for investment in HE Lešće (39,286) 39,286 - Provision for NPPK - additional decommissioning

costs (53,838) 53,838

- Other 67,595 47,325 72,296 __________ ____________ ______________ 2,850,790 2,992,271 2,937,066 ___________ ___________ ___________

F-81

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

54

8 FINANCIAL REVENUE AND COSTS

For the year ended 31 December 2011 2010 2009 Financial income HRK’000 HRK’000 HRK’000

Restated Restated Restated

Foreign exchange gains 41,515 76,707 73,572

Interest income 12,979 14,480 7,529

Dividends on Janaf shares 3,224 - - _________ _________ _________

Total financial income 57,718 91,187 81,101 __________ _________ _________

Finance costs

Interest expense (242,560) (272,471) (358,907)

Foreign exchange losses (160,266) (167,029) (111,191)

Amortization of deferred interest expense (3,740) (3,858) (3,686)

Fair value of interest rate swap (1,080) (1,871) (2,271)

Fair valuation of Janaf shares (30,769) - - __________ __________ __________

Financial expenses (438,415) (445,229) (476,055)

Less: Capitalised borrowing cost 9,426 6,005 25,641

Total financial expenses (428,989) (439,224) (450,414) __________ ___________ ___________

Net financial expense (371,271) (348,037) (369,313) ___________ __________ __________

F-82

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

55

9 INCOME TAX

For the year ended 31 December 2011 2010 2009 HRK’000 HRK’000 HRK’000

Restated Restated Restated Current taxes 109,395 461,805 136,218

Deferred tax income relating to the origination and reversal of temporary differences (21,347)

(25,182)

(65,805) ___________ ___________ ____________

Income tax expense 88,048 436,623 70,413

________ __ _____ _____ ___________

Adjustments to deferred tax assets were as follows: 2011 2010 2009 HRK’000 HRK’000 HRK’000

Restated Restated Restated Balance at 1 January 157,555 132,373 66,568 Reversal of deferred tax assets (29,869) (21,345) (1,285)

Deferred tax assets recognised 49,342 48,401 67,090

Deferred tax liability created 1,874 (1,874) - ___________ ___________ ___________ Balance at 31 December 178,902 157,555 132,373 ___________ __________ ___________

F-83

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

56

9 INCOME TAX (continued)

Deferred tax assets have arisen on provisions for jubilee bonuses and regular retirement benefits not

recognised for tax purposes, provisions for trade debtors – households and provisions for legal actions.

The reconciliation between income tax and profit reported in the income statement is set out below:

For the year ended 31 December 2011 2010 2009 HRK’000 HRK’000 HRK’000

Restated Restated Restated Profit before taxation 95,125 2,011,274 215,741

Income tax at the applicable rate of 20% 19,024

402,254

43,148

Reversal of temporary differences on which no deferred tax asset was recognized (149,725)

(157,509)

(52,527)

Tax effect of permanent differences 159,920 39,078 53,783

Realisation of tax losses from prior years for which deferred tax asset was not recognised (4,429)

-

(90,089)

Unrecognised deferred tax assets of loss making Group companies 63,258

152,800

116,098 __________ __________ ___________

Income tax expense for the year 88,048

436,623

70,413 ___________ __________ __________

HEP and its subsidiaries are subject to income tax separately, according to the tax laws and regulations of the

Republic of Croatia. Other subsidiaries in the Group, including HEP d.d., reported total tax losses of HRK

1,000,859 thousand (2010: HRK 626,588 thousand; 2009: 536,237 thousand), while the Group recorded a total

income tax expense of HRK 109,395 thousand (2010: HRK 475,701 thousand; 2009: HRK 124,196 thousand)

and reported deferred tax assets in the amount of HRK 21,347 thousand for the current year (2010: HRK

25,182 thousand; 2009: HRK 65,805 thousand).

Tax losses are available for carry forward and offsetting against the tax base in future taxation periods until

their expiration as prescribed by law, which is 5 years following the year in which the tax losses were incurred.

Tax losses reported by the Group and their expiry by year are presented below:

Year of loss origination

Total tax loss reported by the Group

Year of expiry

2007 102,889 2012 2008 194,136 2013 2009 116,099 2014 2010 152,800 2015 2011 434,935 2016 __________

1,000,859 __________ As of 31 December 2011, 2010 and 2009 the Group did not recognise deferred tax assets arising from tax

losses carried forward at certain subsidiaries because the availability of future taxable profit against which the

unused tax losses can be utilized is not certain.

F-84

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

57

9 INCOME TAX (continued)

The Croatian Tax Authorities have not performed a review of the income tax returns of the Group and its

subsidiaries over several preceding years. In accordance with local regulations, the Tax Authority may at any

time inspect the books and records of any Group company within 3 years following the year in which the tax

liability is reported and may impose additional tax assessments and penalties. The Group management is not

aware of any circumstances that may give rise to a potential material liability in this respect.

The following table summarizes the movement in deferred tax assets during the year:

HRK’000 Impairment allowance on

inventory

Provisions for jubilee and retirement benefits

Litigation provision

Depreciation at rates above

statutory rates

Other Total

Restated Restated Restated Restated Restated Restated At 31 December 2009, restated 21,675 65,163 17,680 3,519 24,336 132,373 Credited to profit and loss for the year 4,324 12,381 (13,130) 1,335 20,272 25,182 __________ _________ __________ __________ _____ ________ At 31 December 2010, restated 25,999 77,544 4,550 4,854 44,608 157,555 __________ ____________ __________ __________ ________ ________ Credited to profit and loss for the year 3,385 1,638 (4,550) 2,081 18,793 21,347 __________ _________ __________ __________ _____ ________ At 31 December 2011, restated 29,384 79,182 - 6,935 63,401 178,902 __________ ____________ __________ __________ ________ ________

F-85

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

58

10 PROPERTY, PLANT AND EQUIPMENT

HRK’000 Land and buildings

Fixtures and equipment

Assets under construction

Total

COST At 31 December 2009, restated 33,624,793 32,162,924 3,130,294 68,918,011 __________ __________ __________ __________ Additions 4,997 75,362 1,553,796 1,634,155 Transfers from assets under construction 604,534 1,027,383 (1,631,917) -

Capitalized borrowing costs - - 7,161 7,161 Inventory (shortages) / surplus (347) 437 428 518 Disposals (61,172) (134,031) (13,446) (208,649) __________ __________ __________ __________ At 31 December 2010, restated 34,172,805 33,132,075 3,046,316 70,351,196 __________ __________ __________ __________ Additions 9,380 67,386 2,029,690 2,106,456 Transfers from assets under construction 759,134 1,196,938 (1,956,072) - Capitalized borrowing costs - - 10,427 10,427 Inventory surplus 5,343 4,146 1,982 11,471

Disposals (51,995) (131,024) (40,123) (223,142) __________ __________ __________ __________ At 31 December 2011 34,894,667 34,269,521 3,092,220 72,256,408 __________ __________ __________ __________

ACCUMULATED DEPRECIATION __________ __________ __________ __________ At 31 December 2009, restated 21,151,527 20,553,391 - 41,704,918 __________ __________ __________ __________ Transfers (946) 1,399 - 453 Charge for the year 689,028 1,007,579 - 1,696,607 Disposals (59,728) (128,314) - (188,042)

Inventory surplus 263 311 - 574 __________ __________ __________ __________ At 31 December 2010, restated 21,780,144 21,434,366 - 43,214,510 __________ __________ __________ __________ Restated balance at 1 January 2011 - 1,517 - 1,517 Transfers (2,509) 9,043 - 6,534

Charge for the year 697,423 1,028,908 - 1,726,331 Disposals (50,173) (126,279) - (176,452) Inventory surplus 242 894 - 1,136 At 31 December 2011, restated 22,425,127 22,348,449 - 44,773,576 __________ __________ __________ __________ CARRYING AMOUNT __________ __________ __________ __________ At 31 December 2011, restated 12,469,540 11,921,072 3,092,220 27,482,832 __________ __________ __________ __________

At 31 December 2010, restated 12,392,661 11,697,709 3,046,316 27,136,686 __________ __________ __________ __________

At 31 December 2009, restated 12,473,266 11,609,533 3,130,294 27,213,093 __________ __________ __________ __________

F-86

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

59

10 PROPERTY, PLANT AND EQUIPMENT (continued)

Disposals of capital work in progress during 2011 in the amount of HRK 40,074 thousand (2010: HRK 13,446

thousand; 2009: HRK 62,118 thousand) represent write-offs based on the management estimate that no future

economic benefits will be derived from those assets.

Due to political developments in Croatia since 1990, certain local municipal land registers have not been fully

established. The Company is in the process of registering, through the local courts in Croatia, its title to land

and buildings. Up to this date, no claims have been made against the Company concerning its title to these

assets.

The Group has pledged property, plant and equipment with a carrying amount of approximately HRK 427,392

thousand (2010: HRK 560,384 thousand; 2009: 693,376 thousand) to secure the banking facilities provided to

TE Plomin d.o.o.

The Group has long-term financial investments in the territories of Bosnia and Herzegovina and Serbia, which

in 1994 had a historical cost of HRK 1,243,970 thousand. At the time of the transformation of the Company into

a public limited company in 1994, this amount was excluded from the net asset value.

F-87

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

60

11 INTANGIBLE ASSETS

HRK’000 COST

At 31 December 2009, restated 542,875 __________

Transfers 140

Additions 25,937

Disposals (221) __________

At 31 December 2010, restated 568,731 __________

Transfers (5,972)

Additions 15,729

Disposals (2,304) __________

At 31 December 2011, restated 576,184 __________

ACCUMULATED AMORTISATION

At 31 December 2009, restated 479,204 __________

Transfers 57

Charge for the year 24,678

Disposals (218) __________

At 31 December 2010, restated 503,721 __________

Transfers (5,972)

Charge for the year 23,078

Disposals (2,290) __________

At 31 December 2011, restated 518,537 __________

CARRYING AMOUNT

At 31 December 2011, restated 57,647 __________

At 31 December 2010, restated 65,010 __________

At 31 December 2009, restated 63,671 __________

F-88

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

61

12 INVESTMENT PROPERTIES

As of 31 December 2011, 2010 and 2009 investment properties comprise properties held for the purpose of

generating earnings from rental and or capital appreciation, and are carried at fair value by reference to the best

management estimate. The fair value comprises the estimated market price at the end of the reporting period. All

the investment properties are owned by HEP d.d.

At fair value

31 December 2011

31 December 2010

31 December 2009

HRK’000

HRK’000 HRK’000

Restated Restated Restated Fair value 223,094 202,467 211,074 Depreciation charge for the year (109) (187) (189) Net gain / (loss) on fair value adjustment, Note 5 7,676

19,865

(19,748)

Other changes 4,099 949 11,330 ___________ ___________ ___________

Closing balance at fair value 234,760 223,094 202,467 ____________ ____________ ____________

F-89

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

62

13 PREPAYMENTS FOR PROPERTY, PLANT AND EQUIPMENT

31 December 2011

31 December 2010

31 December 2009

HRK’000

HRK’000 HRK’000

Restated

Restated Restated

Power facilities – Hrvatske autoceste 300,000 300,000 300,000

JSC Tehnopromexport – TE Sisak 94,299 56,530 59,068

Končar GIM 17,067 17,905 18,257

Litostroj Slovenia 2,891 4,457 8,447

VOITH Siemens, Austria 3,054 3,978 4,955

Končar Inženjering d.d – TE Sisak 2,896 - -

Končar Inženjering d.d. – HE Lešće - 1,249 5,169

Others 6,832 1,936 7,184 ___________ ___________ ___________

427,039 386,055 403,080 ___________ __________ __________

In December 2006, the Group advanced a payment to Hrvatske autoceste d.o.o. for the purpose of acquisition of electricity facilities on the Croatian highways within 2 years from the advance payment.

As of the date of issue of these financial statements, the facilities were not transferred to the Group, and an agreement was concluded with Hrvatske autoceste d.o.o. in December 2009, under which the deadline for the takeover of the electricity facilities by the Group has been prolonged for another 2 years.

The Group is the beneficial owner of these facilities, as it uses those assets for their intended economic purpose,

which is to supply electricity to customers.

As of the date of issue of these financial statements, the Group did not classify these assets by type, and

determined neither the economic effect of the transfer of these assets from prepayments to tangible assets nor of

the related depreciation.

F-90

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

63

14 INVESTMENT IN NUCLEAR POWER PLANT KRŠKO

31 December 2011

31 December 2010

31 December 2009

HRK’000 HRK’000 HRK’000

Restated Restated Restated

Opening balance 1,754,419 1,754,419 1,754,419 ___________ __________ __________ 1,754,419 1,754,419 1,754,419 ___________ ___________ __________

Investment background

The legal status of Nuclear Power Plant Krško ("NPPK") was regulated by an inter-republic agreement dating back to 1970 and various agreements between the founders from 1974 and 1982. Pursuant to those agreements, the Company had a 50% interest in NPPK in Slovenia, the other 50% were held by ELES GEN d.o.o., Ljubljana, the legal successor of the Slovenian power utility. In 1998, the Slovene government passed a decree transforming NPPK into a public company, Nuklearna elektrana Krško d.o.o. ("NPPK"), and nationalizing the nuclear power plant. Additionally, due to operational disputes, which include disagreements on energy prices to be charged and approval of annual budgets, the supply of power to HEP d.d. from NPPK was cut on 30 July 1998 and was not restored until 19 April 2003. In late 2001, the Governments of the Republic of Croatia the Republic of Slovenia signed an agreement governing the status and other legal relations in connection with their respective investment in NPPK, usage and decommissioning, as well as a partnership agreement between HEP d.d. and ELES GEN. The agreement was ratified by the Croatian parliament in 2002 and came into effect as of 11 March 2003, following the ratification by the Slovene parliament on 25 February 2003. The agreement acknowledges the ownership rights of HEP d.d. in the newly formed company, Nuklearna elektrana Krško d.o.o. (‘NPPK’) in respect to its 50% holding in NPPK, which were previously denied. Both parties have agreed to extend the useful life of the power plant at least to the year 2023. According to the agreement, the produced electricity is supplied 50:50 to both contracting parties, and the price of the electricity supplied is determined based on the total production cost. HEP d.d. started to receive electricity from NPPK on 19 April 2003 and expects to receive 2,550 GWh annually up to 2023, representing 16% of electricity consumption in Croatia. By the end of 2003, provisions of the agreement had been implemented according to which HEP d.d. and NPPK waived mutual receivables for damages and withdrew all claims arising therefrom up to 30 June 2002, including the disputed liabilities for electricity purchase and amounts due with respect to the previously calculated contribution for financing the decommissioning of the power plant and funds to cover the losses from previous years. After implementing the changes, the capital of NPPK as at 31 December 2003 amounted to SIT 84.7 billion (approximately: HRK 2.8 billion). There are still some outstanding off-balance receivables of HEP d.d. from NPPK and Slovenia from the past, which do not have any influence on the current business relations.

F-91

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

64

14 INVESTMENT IN NUCLEAR POWER PLANT KRŠKO (continued)

Current status

According to the above-mentioned agreement, the decommissioning of NPPK will be a joint obligation of both

parties. Each party will provide half of the funds necessary to prepare the decommissioning plan and cover the

cost of the plan implementation. In addition, each party will form a separate fund to allocate the funds for this

purpose in the amounts estimated by the decommissioning plans. According to the current programme for the

decommissioning of Nuclear Power Plant Krško and disposal of nuclear waste, HEP d.d. is obliged to pay into the

fund EUR 14,250 thousand per year. From 2004 to 2011, the Company disclosed radioactive waste disposal and

decommissioning provisions in the amount of HRK 836,161 thousand, which is also the amount it paid onto the

Fund's account in the period from 2006 to 2011.

The investment in NPPK is accounted for using the equity method and amounts to HRK 1,754,419 thousand. The

investment in NPPK and the capital reserves of HEP d.d. were increased by accrued foreign exchange losses

arisen on translation of the net investment in the period from 2004 to 2010 in the amount of HRK 131,471,749.66.

The prior periods were restated to reflect this change.

Extracted financial information

The following table presents the financial information extracted from the financial statements of NPPK as at 31

December 2011, 2010 and 2009:

31 December

2011 31 December

2010 31 December

2009

HRK’000 HRK’000 HRK’000

Property, plant and equipment 3,023,770 3,089,065 3,063,234

Capital and reserves 3,309,732 3,245,896 3,211,186

Gross sales 1,492,491 1,214,576 1,120,485

Cash flows from operating activities 495,358 313,211 352,970 ___________ ___________ ___________

Liabilities for received electrical energy from NPP Krško as at 31 December 2011 amount to HRK 64,667 thousand

(2010: HRK 61,090 thousand; 2009: 41,451 thousand). NPPK has breakeven results for the financial years.

F-92

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

65

15 INVESTMENT IN TPP PLOMIN

In November 1996, HEP d.d. entered into a Joint Venture Agreement with RWE Energie Aktiengesellschaft,

Germany (‘RWE’) regarding the completion and operation of TPP Plomin II. Consequently, a joint venture, TE

Plomin d.o.o. (‘Plomin’) was formed in December 1996, with each partner holding 50 % of the equity of the new

entity. A number of agreements were entered into, which regulate the relationship between the joint venture

partners and their respective relationships with the new groups and how jointly controlled asset will be oprated.

In accordance with the 1996 Asset Contribution Agreement, HEP d.d. contributed property, plant and

equipment previously acquired for the project valued (by Croatian valuation experts) at DEM 50,000 thousand

(HRK 179,138 thousand) as a contribution in kind to Plomin. Of this amount, HRK 50 thousand were allocated

as share capital, while HRK 179,088 thousand were allocated to reserves.

In accordance with the Joint Venture Agreement, RWE contributed an equal amount of cash over the period of

construction. The initial cash contribution of HRK 50 thousand was allocated as share capital and the

remainder to reserves. The capital contributed by RWE is distributed back to RWE over the term of the joint

venture of 15 years, starting from the operation start-up date of the power plant, which was 30 April 2000.

In 2011 the distribution of RWE invested equity amounted to HRK 12,668 thousand (2010: HRK 12,382

thousand; 2009: HRK 12,677 thousand). The remaining undistributed RWE invested capital amounted to HRK

51 million at 31 December 2011 (2010: HRK 63 million; 2009: HRK 75 million).

Under the Statute of Plomin, RWE is entitled to an annual return during the term of the joint venture of 14% to

17% on invested capital (based on the actual number of hours of peak exploitation during the year). The

invested capital includes RWE undistributed equity contribution as the unpaid portion of the accrued

cumulative interest earned on investment during construction.

During the period of construction, the accrued cumulative interest on the RWE capital amounted to HRK

54,717 thousand (EUR 7,536 thousand) and is payable on a straight-line basis during the period of

exploitation. At 31 December 2011, accrued undistributed interest amounted to HRK 12,611 thousand (2010:

HRK 16,078 thousand; 2009: HRK 19,577 thousand).

The RWE annual return on invested capital, effectively a preferred dividend, is paid out from net profit of

Plomin. The rate for 2011 is 17% as well as for 2010. The amount paid out in 2011 in respect of the 2010

profits was HRK 14,063 thousand and in 2010 HRK 16,583 thousand in respect of the 2009 profits (2009: HRK

19,442 thousand in respect of the 2008 profits).

These distributions have priority over any HEP d.d. interest in the results of the joint venture and any other

payments to HEP d.d.

F-93

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

66

15 INVESTMENT IN TPP PLOMIN (continued)

The joint venture partners entered into a number of agreements necessary for power plant operations,

including: operation and maintenance agreements, a joint use and supply agreement, and a power purchase

agreement (‘PPA’). The PPA agreement regulates the sale of electric energy to the Group by Plomin d.o.o.

HEP d.d. is obliged to purchase all energy produced by TE Plomin d.o.o. at prices calculated in accordance

with specified formulas in the PPA, which are designed to cover all costs of operations of Plomin, and ensure

the guaranteed return on capital to RWE. In these financial statements, the Group has presented its interest in

TE Plomin using the method of full consolidation.

2011 2010 2009

HRK '000 HRK '000 HRK '000 Restated Restated Restated

Opening balance of non-controlling interest 76,993

91,409 106,821

Interest payment (12,668)

(12,382) (12,677)

Dividend payment (14,063)

(16,583) (19,442)

Share of current year’s profit 11,514

14,063 18,578

Correction of tax liabilities through retained earnings -

- (1,995)

Exchange differences 1,071

486 124 __________ ___________ ___________

Closing balance 62,847 76,993 91,409 ___________ __________ __________

F-94

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

67

16 LONG-TERM LOAN RECEIVABLES AND DEPOSITS

31 December 2011

31 December 2010

31 December 2009

HRK’000 HRK’000 HRK’000

Restated

Restated Restated

Loans given 1,022

1,318 1,794

Impairment allowance (167)

(135) (311)

Current portion of long term loans (136)

- - __________ ___________ ___________

Long-term portion 719 1,183 1,483 ___________ __________ __________

Loans given to third parties Year loan

approved Repayment

period Loan

amount 31 December

2011 31 December

2010 31 December

2009 HRK’000 HRK’000 HRK’000

Restated Restated

Restated

Town of Pregrada 2006 10 years 1,358 815 950

914

Did d.o.o. 2007 4 years 1,010 207 368

880 __________ ___________ ____________

Total 1,022 1,318 1,794 __________ ___________ ____________ Impairment allowance (167) (135)

(311)

Current portion (136) -

- __________ ___________ ____________

Non-current portion 719

1,183

1,483

___________ __________ ___________

17 ASSETS AVAILABLE FOR SALE AND OTHER INVESTMENTS

31 December 2011

31 December 2010

31 December 2009

HRK’000 HRK’000 HRK’000

Restated Restated Restated

Investments available for sale 120,605 162,170 152,797

Other investments 310 210 200 ___________ ___________ ___________

120,915 162,380 152,997 ___________ __________ ___________

F-95

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

68

17 ASSETS AVAILABLE FOR SALE AND OTHER INVESTMENTS (continued)

Changes in investments available for sale are presented below:

31 December 2011

31 December 2010

31 December 2009

HRK '000 HRK '000 HRK '000

Restated Restated Restated Opening balance 162,170 152,797 151,374 Fair valuation of Jadranski Naftovod d.d. (41,565) 9,373 1,423 ___________ ___________ ___________

120,605 162,170 152,797 ___________ ___________ ___________

31 December 2011

31 December 2010

31 December 2009

HRK '000 HRK '000 HRK '000

Restated Restated Restated

Investment in securities:

Jadranski Naftovod d.d. 120,378 161,943 152,570

Viktor Lenac d.d. 220 220 220

Đuro Đaković d.d. 5 5 5

Kraš d.d. 2 2 2 ___________ ___________ ___________

120,605 162,170 152,797 __________ __________ __________

Other investments

Geopodravina d.o.o. 200 200 200

LNG Hrvatska d.o.o. 110 10 - ___________ ___________ ___________

120,915 162,380 152,997 __________ __________ __________

In December 2008, HEP d.d. acquired 53,981 shares of Jadranski Naftovod d.d. under a decision of the Croatian Government, with a nominal value of HRK 2,700 per share i.e. the total nominal value of HRK 145,748,700. According to a Management Decision, the Jadranski Naftovod shares were designated as available for sale. The shares were subscribed at the Central Depository Agency on 19 March 2009.

F-96

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

69

17 ASSETS AVAILABLE FOR SALE AND OTHER INVESTMENTS (continued)

In 2011, 2010 and 2009 the fair value was determined by reference to the notification of the central clearing deposit company as of 31 December. The market value of Jadranski naftovod shares as of 31 December 2011 is HRK 2,230 (2010: HRK 3,000; 2009: HRK 2,826).

As a result of the remeasurement of the investment in Jadranski naftovod at fair value as of 31 December 2011, the value of the investment was reduced by HRK 41,565 thousand as permanent impairment through income statement in amount of HRK 30,769 thousand and amount of HRK 8,922 thousand was reversed from reserves together with deferred tax liability in amount of HRK 1,874 thousand (in prior years amounts were recognized through reserves as follows 2010: increased by 9,373 thousand, HRK 7,499 recognized in reserves; 2009: increased by HRK 1,423 thousand recognized in reserves).

On 1 June 2010 HEP d.d. and Plinacro d.o.o. concluded the Articles of Incorporation of LNG Hrvatska d.o.o., a

liquefied natural gas company. In 2011 a decision was made to increase the share capital of LNG Hrvatska d.o.o.

from HRK 20 thousand to HRK 220 thousand. HEP d.d. and Plinacro d.o.o. each hold 50 percent of the equity

share.

F-97

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

70

18 OTHER NON-CURRENT ASSETS

31 December 2011

31 December 2010

31 December 2009

HRK'000 HRK'000 HRK '000

Restated

Restated Restated

Energy efficiency receivables – long-term portion 56,415

51,930 43,391

Housing loan receivables 38,095

42,890 54,035

Accrued cumulative interest – RWE 12,611

16,078 19,577

Other non-current assets 32

75 103 ___________ ___________ ___________ 107,153 110,973 117,106 ___________ __________ __________

Prior to 1996, the Group had sold apartments it owned to its employees, the sale of which was governed by the

laws of the Republic of Croatia. This property was generally sold on credit, and the related housing receivables,

which are secured and bear interest at rates below market rates, are repayable on a monthly basis over periods of

20-35 years. Receivables for sold flats were transferred to new subsidiaries as of 1 July 2002. The housing

receivables are shown in the financial statements at their discounted net present values, determined using an

interest rate of 7.0 %. The amounts owed to the state, which represent 65 % of the value of the sold apartments,

are included in non-current liabilities to the state (Note 25). The receivables are secured by mortgages over the

sold apartments.

According to the Statute of Plomin, intercalary interest was accrued on all the funds invested by RWE in the period

of construction at a rate of 17 percent. The accrued interest balance of EUR 7,536 thousand, equivalent to HRK

55,653 thousand, was recognised as deferred expense subject to straight-line amortisation over a period of 15

years.

Repayment of the interest concurs with the repayment of invested funds from RWE Power and it started after the

electric power plant was finished. In 2011 the total amount repaid was EUR 502 thousand, equivalent to HRK

3,734 thousand (2010: EUR 502 thousand, equivalent to HRK 3,650 thousand; 2009: EUR 502 thousand,

equivalent to HRK 3,737 thousand).

As at 31 December 2011 deferred expense for the interest amounted to EUR 1,675 thousand equivalent to HRK

12,611 thousand (2010: EUR 2,177 thousand, equivalent to HRK 16,078 thousand; 2009: EUR 2,679 thousand,

equivalent to HRK 19,577 thousand). The related exchange differences are included in the financial revenue or

financial cost for the year in which they arise.

Receivables related to energy efficiency project are long-term receivables based on the energy efficiency projects

carried out by HEP ESCO d.o.o., which fall due based on planned savings upon the implementation of energy

efficiency projects.

F-98

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

71

19 INVENTORIES

31 December 2011

31 December 2010

31 December 2009

HRK’000 HRK’000 HRK '000

Restated Restated Restated

Inventories of fuels and chemicals 644,113 748,065 553,996

Electric materials 187,740 162,486 171,684

Spare parts 212,512 175,536 99,099

Construction material 90,418 83,211 84,454

Other inventories 65,784 73,090 169,345

Impairment allowance for obsolete materials and spare parts (137,047)

(125,717)

(110,647) ___________ ____________ ___________ 1,063,520 1,116,671 967,931 ___________ __________ __________

In 2011, the Group estimated the impairment for obsolete inventories of materials (material with no turnover in the last 2 years), in accordance with the ageing structure, at HRK 11,330 thousand (2010: HRK 15,070 thousand; 2009: 110,647 thousand), Note 7.

F-99

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

72

20 TRADE RECEIVABLES

31 December 2011

31 December 2010

31 December 2009

HRK’000 HRK’000 HRK '000

Restated Restated Restated

Electricity – Corporate customers 1,422,139 1,355,919 1,109,074

Electricity – Households 313,463 336,814 270,576

Heating, gas and services 443,354 446,462 444,020

Foreign electricity sales 35,625 71,530 23,386

Connection to transmission network - 33,131 -

Other 63,255 61,882 49,818 __________ ___________ ___________

2,277,836 2,305,738 1,896,874 __________ ___________ ___________

Impairment allowance on bad and doubtful receivables (781,600) (575,410) (462,995) __________ ___________ ___________

1,496,236 1,730,328 1,433,879 ___________ __________ __________

F-100

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

73

20 TRADE RECEIVABLES (continued)

Maturity analysis of receivables not impaired:

31 December

2011 31 December

2010 31 December

2009 HRK’000 HRK’000 HRK’000

Restated Restated Restated

Not yet due 876,451 1,044,409

0-30 days 309,826 347,291 Not yet due 775,460

31-60 days 138,013 145,786 0-60 days 507,927

61-90 days 67,558 64,544 61-90 days 109,517

91-180 days 61,198 68,461 91-120 days 9,537

181-365 days 37,075 50,294 121-365 days 31,438

Over 365 days 6,115 9,543

Over 365 days - ________ __________ __________

1,496,236 1,730,328

1,433,879 ________ __________ __________ Movements in impairment allowance were as follows:

31 December

2011 31 December 2010 31 December

2009

HRK’000 HRK’000 HRK’000

Restated Restated Restated

At 1 January 575,410 462,995 239,989 ____________ ___________ ___________

Impairment allowance on receivables and interest on receivables (Note 7) 403,568 272,029

335,116

Reversal of prior-year provisions (58,112) (25,083) (21,077)

Amounts collected (Note 5) (139,266) (134,531) (91,033) ___________ ___________ ___________

At 31 December 781,600 575,410 462,995 ___________ __________ __________

Management performs a review of receivables and recognises impairment for bad and doubtful receivables

based on a review of the overall ageing structure of all receivables and of significant individual amounts

receivable.

F-101

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

74

21 OTHER SHORT-TERM RECEIVABLES

31 December 2011 31 December

2010 31 December 2009

HRK’000 HRK’000 HRK’000

Restated Restated Restated

VAT receivable 179,965 27,560 19,555

Prepayments of income tax 138,719 - 5,750

Advances for working capital 13,616 26,196 18,865

Receivables from the State in respect of employees 10,284 6,403 7,950

Interest receivable 2,553 3,564 2,714

Demand and time deposits of over 3 months 4,328 1,735 8,362

Deferred income from the sale of electricity to households -

380

87,058

Other short-term receivables 65,640 78,226 75,205 ___________ ___________ ___________

415,105 144,064 225,459 ___________ __________ __________ 22 CASH AND CASH EQUIVALENTS 31 December

2011 31 December

2010 31 December

2009 HRK’000 HRK’000 HRK’000

Restated Restated Restated

Current accounts - HRK 123,916 71,510 61,810

Current accounts – Foreign currency 92,117 27,352 22,436

Current accounts for special purposes 6,105 5,710 11,407

Petty cash registers - HRK 280 287 418

Deposits with maturities of up to 90 days 5,120 559,800 13,865

Daily deposits 179,585 97,498 33,898 ___________ ___________ ___________

407,123 762,157 143,834 ___________ __________ __________

F-102

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

75

23 CAPITAL AND RESERVES The share capital was first registered on 12 December 1994 in German marks (DEM) and amounted to DEM

5,784,832 thousand. On 19 July 1995, the share capital was reregistered in Croatian kunas in the amount of

HRK 19,792,159 thousand. The share capital consists of 10,995,644 ordinary shares, with a nominal value of

HRK 1,800 each.

Capital reserves

31 December

2011 31 December

2010 31 December

2009 HRK’000 HRK’000 HRK’000

Restated Restated Restated

Opening balance of reserves, before restatement - (1,889,646) (2,035,890)

Effect of restating the opening balance - - 144,821 __________ __________ ____________

Opening balance of reserves, as restated (874,074) (1,889,646) (1,891,069) __________ __________ __________

Transferred from retained earnings 444,038 1,008,073 - Other comprehensive income, net, before restatement - 24,853 (2,582) Effect of restatement - (17,354) 4,005 Other comprehensive (loss) / income, net (8,922) 7,499 1,423 __________ __________ __________

(438,958) (874,074) (1,889,646) __________ __________ __________

Retained earnings

31 December

2011 31 December

2010 31 December

2009 HRK’000 HRK’000 HRK’000

Restated Restated Restated

Opening balance 946,439 393,924 267,155

Disposal of HEP telecom and loss of Trgovina Hungary (277)

-

19

Transferred to reserves (444,038) (1,008,073) -

Dividend paid to the owner (493,376) - -

Profit for the year (4,437) 1,560,588 126,750 __________ __________ _________ 4,311 946,438 393,924 __________ __________ __________

Based on the Decision the General Shareholders’ Assembly of HEP d.d. from 27 June 2011 on the Allocation

of the 2010 Profits and Retained Earnings, HRK 444,038 thousand were transferred to reserves and HRK

493,376 thousand were distributed to the owner.

F-103

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

76

24 LONG-TERM BORROWINGS

Interest

rate 31 December

2011 31 December

2010 31 December

2009

HRK’000 HRK’000 HRK’000

Restated Restated Restated

Domestic bank borrowings

EURIBOR+ (1.00%-6.5%) 1,681,140

1,040,610

1,062,199

Foreign bank borrowings

EURIBOR+ (0.50%-4.74%) 2,042,011

3,010,835

2,929,555

Liabilities to domestic companies

EURIBOR+

1.95% -

4,661

13,835

Loan from RWE 8,828 12,369 19,577

Reprogrammed debt - - 36,048

Total 3,731,979 4,068,475 4,061,214 _________ _________ __________

Deferred loan origination fees (22,777)

- -

Total long-term borrowings 3,709,202

4,068,475 4,061,214 __________ _________ __________

Current portion (1,174,713)

(1,184,921) (947,747) __________ _________ __________

Long-term portion 2,534,489 2,883,554 3,113,467 _________ _________ _________

Loans from domestic banks are secured by bills of exchange and promissory notes. Loans from foreign banks

are partly secured by state guarantees (the IBRD loans in the amount of EUR 4,400 thousand and EUR 24,000

thousand and a Deutsche Bank loan in the amount of EUR 100,000 thousand) and the total assets of Plomin.

New sources of funds

For the purpose of financing the investments and operations in 2011, HEP d.d. concluded two long-term loan

agreements in 2011, involving a loan of EUR 150,000 thousand with a consortium of banks (Privredna banka

Zagreb d.d., Raiffeisenbank Austria d.d. and Zagrebačka banka d.d.) and a loan of EUR 20,000 thousand with

Hrvatska poštanska banka d.d. The maturity of both loans is 7 years. At 31 December 2011 the consortium

loan balance was EUR 84,000 thousand, whereas the loan with Hrvatska poštanska banka d.d. was fully

utilised and amounted to EUR 20,000 thousand.

In November 2011 a long-term loan agreement was concluded with the European Restructuring and

Development Bank and a syndicate of banks for a loan of EUR 123,200 thousand. The loan funds are intended

to finance the construction of Hydro Power Plant Ombla near Dubrovnik. The loan tranches mature in 12 and

15 years, including the utilisation period of 4 years.

F-104

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

77

24 LONG-TERM BORROWINGS (continued)

Loans in use

During 2011 the utilisation of the long-term loan approved by KfW Entwicklungsbank in the amount of EUR

50,000 thousand for the financing of the projects of subsidiaries HEP ESCO d.o.o and HEP Obnovljivi izvori

energije d.o.o. The key lending terms and conditions are as follows: 5-year utilisation period; quarterly

repayment of principal over a period of 10 years following the expiry of the utilisation period. At 31 December

2011 the KfW loan balance was EUR 2,500 thousand, of which EUR 47,500 thousand were unutilised. At the

time of the conclusion of the agreement with KfW, which was in late 2008, a Financial Grant Agreement was

concluded with the Government of the Federal Republic of Germany, under which HEP d.d. received a GEF

grant in the amount of EUR 600 thousand. The total balance utilised as of 31 December 2011 was EUR 580

thousand.

The annual principal repayment schedule for the following five years is as follows:

The covenants, as defined in the applicable loan agreements, specifically require from the Group to meet

certain prescribed levels of the following ratios based on consolidated financial statements: operating ratio,

debt service coverage, internal cash generation, tangible net worth capital, and net borrowing. As at 31

December 2011 all the covenants were met.

An analysis of long-term borrowings by foreign currencies is provided below (in ‘000):

Currency 31 December 2011 31 December 2010 31 December 2009

USD - - 7,083 EUR 495,587 549,223 548,245

HRK’000 2012 1,174,713 2013 798,638 2014 481,798 2015 383,611 2016 324,188 __________ Thereafter 569,031 __________

Total 3,731,979 __________

F-105

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

78

25 LONG-TERM LIABILITIES TO THE STATE

The long-term debt to the Government in the amount of HRK 30,466 thousand (2010: HRK 33,734 thousand,

2009: HRK 59,713 thousand) relates to the obligation arising on the sale of housing units to employees under

the Government program, which was discontinued in 1996. According to the law regulating housing sales, 65%

of the proceeds from the sale of apartments to employees were payable to the state at such time as the

proceeds were collected. According to the law, HEP d.d. has no obligation to remit the funds unless and until

they are collected from the employees.

26 DERIVATIVE FINANCIAL INSTRUMENTS

Interest rate swap

The Group has one interest rate swap contract which hedges the Group’s exposure to variable interest rate

debt. Under the contract, the six-month interest rate payable by the Company is fixed at 5.39%, while the

swapped interest rate is equal to the six-month EURIBOR rate of approximately 1.7263 % at 31 December

2011 (2010: approximately 1.2019 %; 2009: 1.0075%).

Contract settlements are payable every six months. The contract expires on 25 October 2012. The notional

principal amount of the interest rate swap contract at 31 December 2011 was EUR 5,113 thousand (2010: EUR

10,226 thousand; 2009: EUR 15,339 thousand). The fair value of the interest rate swap contract, representing

a future obligation at 31 December 2011, amounted to HRK 850 thousand (2010: HRK 2,875 thousand; 2009:

HRK 6,284 thousand). The related deferred tax asset at 31 December 2011 amounted to HRK 170 thousand

(2010: HRK 575 thousand; 2009: HRK 1,257 thousand).

The non-current and the current portions of the obligation are presented below: 31 December

2011 31 December

2010 31 December

2009

HRK’000 HRK’000 HRK’000

Restated Restated Restated

Long-term portion (Note 29) - 672 3,513

Current portion (Note 33) 850 2,203 2,771 __________ ___________ ___________

850 2,875 6,284 ___________ __________ __________

F-106

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

79

27 LONG-TERM PROVISIONS

31 December 2011

31 December 2010

31 December 2009

HRK’000 HRK’000 HRK’000

Restated Restated Restated

Litigation provision 217,621 162,443 145,335

Provision for retirement bonuses 314,081 302,157 233,949

Provision for jubilee bonuses 43,551 46,268 53,900

Provision for the decommissioning of thermal power plants 100,044

93,121

92,280

NPPK - decommission - - 4,932

Provision for NPPK decommissioning (long-term) - 53,838 -

Provisions according to contractual damages 80,800 80,800 28,621

Provision for electricity purchased from wind power plants 22,532

22,031

-

Provision for investment in HE Lešće - 39,287 - ___________ __________ __________

778,629 799,945 559,017 ___________ __________ __________

The thermal power plant decommissioning provision in the amount of HRK 100,044 thousand represents a

discounted value of the estimated decommissioning costs of the Group's thermal power plants. Movements in

the present value of defined benefit obligations in the current period were as follows:

HRK’000 Legal actions

Retirement bonuses

Jubilee bonuses

Decommissioning - NPPK

Decommissioning of TPPs Other Total

At 31 December 2009, restated 145,335 233,949 53,900 4,932 92,280 28,621 559,017 __________ __________ __________ __________ __________ _______ _________ Current portion - - - - - - - New provisions made 75,986 85,360 1,402 53,838 5,548 113,497 335,631 Decrease in provisions (amounts paid) (58,808) (17,152) (9,030) (4,932) - - (89,922) Decrease in provision on valuation (70) - (4) - (4,707) - (4,781) __________ __________ __________ __________ __________ _______ _________ At 31 December 2010, restated 162,443 302,157 46,268 53,838 93,121 142,118 799,945 __________ __________ __________ __________ __________ _______ _________ New provisions made 78,267 31,277 5,018 - 6,923 501 121,985 Decrease in provisions (amounts paid) (21,906) (20,023) (6,977) - - - (48,906) Decrease in provision on valuation (1,183) 670 (758) (53,838) - (39,287) (94,395) __________ __________ __________ __________ __________ _______ _________ At 31 December 2011, restated 217,621 314,081 43,551 - 100,044 103,332 778,629 __________ __________ __________ __________ __________ _______ _________

F-107

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

80

27 LONG-TERM PROVISIONS (continued)

Litigation provision

The litigation provision refers to legal cases where possible outcome has been determined as uncertain or

negative, and was recognised in the total amount of HRK 217,621 thousand. The most important court case

provided against is the one of HEP Proizvodnja d.o.o. for a dispute with Zagrebački Holding (the 2010 provision

amounted to HRK 19,075 thousand, while the total provision in 2011 amounts to HRK 84,821 thousand and

was made for the waste water treatment plant fee).

NE Krško – Long-term decomissioning provision

In 2010 the Group recognised a long-term provision in the amount of HRK 53,828 thousand for the

decomissioning of Nuclear Power Plant Krško because of the pending approval of the amendments to the

Decision on the Amount of the Fee for the Decommissioning of NE Krško by the Croatian Parliament. Since the

constructive obligation existed at 31 December 2011 in accordance with requirements of IAS 37, the

Management Board assessed that the provision should be recognised. As the Decision remained unapproved

and was withdrawn during 2011, the Group reversed the provision as requirements of IAS 37 ceased to exist.

Retirement and jubilee bonuses

Movements in the present value of the defined benefit obligation in respect of employee benefits during the

current period were as follows:

Retirement benefits

Jubilee bonuses

Total

HRK’000 HRK’000 HRK’000

Restated Restated Restated

At 31 December 2009 233,949 53,900 287,849

Cost of services (15,499) (8,885) (24,384)

Interest expense 18,025 2,717 20,742

Past service cost - (6,170) (6,170)

Benefits paid 10,924 2,389 13,313

Actuarial gains 54,758 2,317 57,075

At 31 December 2010 302,157 46,268 348,425

Cost of services 10,859 2,237 13,096

Interest expense 20,418 2,781 23,199

Benefits paid (20,023) (6,977) (27,000)

Actuarial gains/(losses) 670 (758) (88) _________ _________ __________

At 31 December 2011 314,081 43,551 357,632 __________ __________ __________

F-108

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

81

27 LONG-TERM PROVISIONS (continued)

Retirement and jubilee bonuses (continued)

The following assumptions were used in preparing the calculations:

� The termination rate is from 0% to 6.49% percent and is based on the statistical fluctuation rates for the

Group in the period from 2005 to 2011.

� The probability of death by age and sex is based on 2000 Croatian Mortality Tables published by the

Croatian Bureau of Statistics. It is assumed that the population of employees of the Group represents

average with respect to mortality and health status.

� We assumed that in 2009 and 2010 there will be no wage growth, and in 2011 the annual salary will

grow at 0.7%.

� The present value of the obligation was determined using a 7.3% discount rate for HEP d.d. and HEP

Proizvodnja d.o.o., and 7.2% for other companies within the Group (2010: 6.5% for HEP d.d. and 6.6%

for other companies within the Group; 2009: 6.2% for all companies within the Group)

F-109

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

82

28 ISSUED BONDS 31 December

2011 31 December

2010 31 December

2009

HRK’000 HRK’000 HRK’000

Restated Restated Restated

Nominal value of bonds 1,200,000 1,200,000 1,200,000

Cumulative repayment (140,070) (46,690) -

Discount value (1,348) (1,888) (2,423)

Current portion of bonds (93,380) (93,380) (46,690) ___________ ___________ ___________

965,202 1,058,042 1,150,887 ___________ __________ __________

Bonds in the amount of HRK 500,000 thousand, issued in 2006, are due in 2013, and bear interest at a fixed

rate of 5.00 percent. Bonds in the amount of HRK 700,000 thousand, issued at the end of 2007, are repayable

in 15 semi-annual instalments commencing three years from the date of issue and bear interest at a fixed rate

of 6.50 percent. The HEP d.d. bonds are listed on the Zagreb Stock Exchange.

29 OTHER LONG-TERM LIABILITIES

31 December 2011

31 December 2010

31 December 2009

HRK’000 HRK’000 HRK’000

Restated Restated Restated

Deferred revenue – assets financed by others 4,441,439 4,590,816 4,634,841

Long-term liabilities for assets financed by clearing system debt 701,012

414,938

239,926

Long-term debt under interest rate swap (Note 26) 850 672 3,513

Other 1,659 1,779 - ___________ __________ ___________

5,144,960 5,008,205 4,878,280 ___________ __________ __________

Deferred revenue is related to fixed assets received from others or financed out of the connection fee. The

revenue is recognized into income over the same periods as the related assets are amortized, which applies to

contracts on grid connection concluded until 1 July 2009.

At 31 December 2011 the Group reported a liability in the amount of HRK 701,012 thousand respect of a

clearing debt (2010: HRK 414,938 thousand; 2009: 239,926 thousand) regarding a payment under a letter of

credit on the basis of the consent of the Ministry of Finance with the use of the funds pursuant to an interbank

agreement. As there is no other document that would regulate the relationship between the HEP Group and the

Ministry of Finance regarding the clearing system debt, it has not been clearly defined as either a loan or a

government grant.

F-110

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

83

30 SHORT-TERM BORROWINGS

31 December 2011

31 December 2010

31 December 2009

HRK’000 HRK’000 HRK’000

Restated Restated Restated

Borrowings from domestic and foreign banks, denominated in various currencies, with interest rates ranging from EURIBOR + (1.50 – 3.85%), secured by bills of exchange 592,778

282,252

761,320

Borrowings from domestic companies, secured by bills of exchange 2,806 2,805 2,805

Current portion of RWE loan 7,579

7,436

3,680 ___________ ___________ ___________

603,163 292,493 767,805 ___________ __________ __________

During 2011 the Group used short-term loans from domestic banks for working capital purposes and for the

settlement of trade payables. In addition to the prolongation of current loans arranged during 2011, the Group

also concluded new credit lines for the purpose of maintaining access to liquidity for working capital purposes.

31 TAXES AND CONTRIBUTIONS PAYABLE

31 December 2011

31 December 2010

31 December 2009

HRK '000 HRK '000 HRK’000

Restated Restated Restated

Liabilities for income tax 35,143 389,775 126,311

Utility and other fees 12,680 25,596 28,573

Contributions on salaries 23,205 23,953 24,217

Customs duties payable 2,239 20,153 5

Contributions and taxes for benefits in kind 1,984 14,880 -

Other 647 3,175 1,722 ___________ ___________ ___________

75,898 477,532 180,828 ___________ __________ __________

F-111

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

84

32 LIABILITIES TO EMPLOYEES

31 December 2011

31 December 2010

31 December 2009

HRK’000 HRK’000 HRK’000 Restated Restated Restated Net salaries 78,074 81,133 77,334 Contributions 40,363 41,953 46,614

Other 9,497 11,140 19,184 ___________ ___________ ___________

127,934 134,226 143,132 ___________ __________ __________

33 OTHER SHORT-TERM LIABILITIES

31 December 2011

31 December 2010

31 December 2009

HRK’000 HRK’000 HRK’000

Restated Restated Restated

Advances received for connections 193,125 110,538 -

Other advances received 15,538 7,214 7,117

Vacation accruals 63,900 64,477 -

Deferred revenue from electricity sold to households 10,905 - -

Fees payable for renewable energy sources 8,017 16,446 228,351

Accrued NPPK decommissioning expenses - 5,023 41,645

Other accrued expenses 3,203 9,459 5,464

Current portion of the liability under interest rate swap (Note 26) 850

2,203

2,771

Other payables 51,263 43,966 47,408 ___________ __________ ___________

346,801 259,326 332,756 ___________ __________ __________

Value adjustment of deferred revenue for electricity sold to households as at 31 December 2011 was

calculated by using logarithmic curve with losses on the supply network of 8.3 %, while for the year ended 31

December 2010 the loss percentage was 8.74 % (2009: 8.46 %). As a result, the revenue in 2011 decreased

by HRK 11,285 thousand compared to the prior year.

Pursuant to the amended Labour Law, the Group recognised provisions for unused vacation days during the

years ended 31 December 2010 and 31 December 2011 because of its obligation to pay benefits to its

employees in lieu of unused vacation entitlement.

F-112

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

85

34 RELATED PARTY TRANSACTIONS

The Group has a 50-percent equity share in Krško Nuclear Power Plant (NE Krško d.o.o.). The electricity produced by NE Krško d.o.o. is delivered to HEP d.d. at 50 % of the total produced quantities at

a price which is determined in accordance with the total production costs of NPPK.

Receivables and payables, and income and expenditure arisen from related party transactions are presented in the table below:

31 December 2011

31 December 2010

31 December 2009

HRK’000 HRK’000 HRK’000 Restated Restated Restated NE Krško d.o.o.

Liabilities for purchased electricity 64,667 61,090 41,451

Cost of purchased electricity 737,565 594,612 557,575

F-113

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

86

34 RELATED PARTY TRANSACTIONS (continued)

Sales revenue Purchases

HRK’000 2011 2010 2009 2011 2010 2009

Enterprises controlled by the Government

Hrvatske Željeznice

108,259 123,627 92,624 9,279 16,260 15,746 INA d.d. 121,110 135,772 156,242 1,419,311 1,480,394 1,812,967 Prirodni plin - 134 - 1,011,225 427,615 - Plinacro 1,975 1,102 - 34,296 38,508 - Hrvatske telekomunikacije 83,937 77,854 75,011 27,400 29,382 19,337 Croatia osiguranje 6,481 6,181 4,754 16,924 15,842 15,558

Hrvatska pošta

22,062

21,115 17,480 54,523 51,251 48,853 Hrvatske šume 5,785 6,572 5,959 12,113 13,784 14,364 Jadrolinija 727 1,107 1,202 787 603 398 Narodne novine 2,855 2,081 2,081 6,236 5,667 4,963 Croatian Radio & Television 12,441 12,763 13,898 1,079 1,124 1,060 Plovput 551 543 559 230 163 210 Croatia Airlines 788 807 772 2 110 63 Petrokemija Kutina 9,428 8,311 9,965 46 133 6,834 Ministry of Foreign Affairs 563 621 598 - - - Ministry of Defence 17,597 31,172 34,743 - - 58 Ministry of Interior 24,862 25,621 24,100 - - 38 Elementary and secondary schools 79,120 78,697 80,008 - - 1,027 Judicial institutions 10,506 10,563 11,004 - - 69 Colleges and universities 30,649 29,715 32,138 3,160 4,869 15,785 Legislative, executive and other bodies of the Republic of Croatia 29,169 48,470 63,850 5,848 7,648 12,115 Health institutions and organisations 81,711 92,427 112,586 3,502 4,027 4,906 Other users 70,472 109,474 94,142 15,883 14,202 145,011 ________ ________ ______ _________ ________ ________

TOTAL 721,048 824,729 833,716 2,621,844 2,111,582 2,119,362 ________ ________ ______ ________ ________ ________

F-114

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

87

34 RELATED PARTY TRANSACTIONS (continued)

Receivables Payables

HRK’000

31 December

2011

31 December

2010

31 December

2009

31 December

2011

31 December

2010

31

December 2009

Enterprises controlled by the Government

Hrvatske Željeznice 22,615 34,957 20,229 866 3,238 5,091 INA d.d. 14,709 8,483 15,602 206,061 210,541 218,667 Prirodni Plin - 7 - 371,656 76,652 -

Plinacro 351 32 - 4,380 9,631 - Hrvatske telekomunikacije 8,092 8,761 8,407 8,179 8,879 6,485 Croatia osiguranje 582 668 469 - - - Hrvatska pošta 3,380 3,156 3,301 4,568 4,637 7,966 Hrvatske šume 1,262 2,017 1,287 1,288 925 235 Jadrolinija 57 242 195 761 561 487 Narodne novine 284 246 259 1,790 1,397 1,641 Croatian Radio & Television 2,006 2,233 1,636 231 143 275 Plovput 64 68 64 49 49 49 Croatia Airlines 149 150 176 - 64 113 Petrokemija Kutina 266 668 797 - - - Ministry of Defence 4,209 4,531 11,455 - - - Ministry of Interior 7,286 7,442 6,274 - - - Elementary and secondary schools 15,096 15,135 13,477 - - - Judicial institutions 2,599 2,983 2,148 - - - Colleges and universities 4,136 4,516 4,411 - - - Legislative, executive and other bodies of the Republic of Croatia 5,183 7,038 7,046 - - - Health institutions and organisations 35,810 34,970 25,895 - - - Other users 5,842 16,245 17,060 11,008 9,888 12,865 ________ ________ ________ __________ ________ ________

TOTAL 133,978 154,548 140,188 610,837 326,605 253,874 ________ ________ ________ _________ ________ ________

Under the Croatian energy laws, the Group is an eligible gas buyer, for whom gas prices differ from the market ones.

F-115

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

88

35 CONTINGENT LIABILITIES AND COMMITMENTS Legal actions In 2011, the Group established a provision for legal actions estimated to be ruled against HEP d.d.

Operating commitments

As at 31 December 2011, as part of its investing activities, the Group had contracts under which the

construction of a number of significant facilities and other investments has commenced but has not been

completed. In 2011 the contracted works outstanding on most significant projects amount to approximately

HRK 1,670,904 thousand (2010: HRK 1,986,175 thousand; 2009: HRK 2,163,949 thousand).

Most significant investments comprise investments in HEP Proizvodnja d.o.o., HEP Operator Prijenosnog

Sustava d.o.o. and HEP Operator Distribucijskog Sustava d.o.o

Environmental matters

The HEP Group monitors and analyses the environmental impact of its business activities on an on-going

basis. The key impact indicators comprise emissions of pollutants into air and the quantity of production waste,

which HEP reports to the competent institutions, local self-government units and public stakeholders on a

regular and timely basis. The staff engaged in environmental and nature protection undergo training and

seminars and workshops where they receive information about the obligations and measures provided in the

applicable environmental laws and regulations.

There is an environmental expenditure monitoring system (RETZOK) at the Group, used since 2004 to monitor

all investments in environmental and nature protection.

The Group is in the process of performing analyses and achieving readiness with respect to compliance with

the requirements imposed by EU legislation in terms of more stringent pollutant emission limits and reduced

greenhouse gas emissions, the greenhouse gas emission trading scheme, integrated environmental permitting

system, as well as the system of ecologically important areas and corridors (the National Ecological Network).

Investments in environmental protection and energy efficiency projects at the level of the entire HEP Group

have been substantiated before the Environmental Protection Fund, resulting in a more favourable correction

factor and, consequently, reduced fees for pollutant emissions by 50 percent (approximately HRK 15 million).

F-116

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

89

36 SUBSIDIARIES

As at 31 December 2011, 2010 and 2009 the Group had the following subsidiaries:

Subsidiary

Country Ownership interest (in

%) Main activity

HEP-Proizvodnja d.o.o. Croatia 100 Electric and thermal power generation

HEP-Operator prijenosnog sustava d.o.o. Croatia 100 Electricity transmission

HEP-Operator distribucijskog sustava d.o.o. Croatia 100 Electricity distribution

HEP Opskrba d.o.o. Croatia 100 Electricity supply

HEP-Toplinarstvo d.o.o. Croatia 100 Thermal power generation and distribution

HEP-Trgovina d.o.o. Croatia 100 Electricity trading and optimisation of power plant operations

HEP-Plin d.o.o. Croatia 100 Gas distribution

TE Plomin d.o.o. Croatia 50 Electricity generation

APO d.o.o., environmental services Croatia 100

Environmental protection services and radioactive waste management

HEP ESCO d.o.o. Croatia 100 Financing of energy efficiency projects

Plomin Holding d.o.o. Croatia 100 Development of infrastructure in the surrounding area of Plomin

Buško Blato d.o.o. BiH 100 Maintenance of hydro power plants

HEP-Odmor i rekreacija d.o.o. Croatia 100 Resort and recreation services

HEP-NOC Velika Croatia 100 Accommodation and training

HEP-Obnovljivi izvori energije d.o.o. Croatia 100 Electricity generation

HEP-Trgovina d.o.o. Brežice Slovenia 100 Electricity trading

HEP- Magyarorszag Energia KFT Hungary 100 Electricity trading The majority of these subsidiaries were created as part of the re organisation and restructuring of the core

business activities driven by the new energy legislation, which came into effect as of 1 January 2002, as

indicated in Note 1.

F-117

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

90

37 FINANCIAL INSTRUMENTS

Capital risk management

The Group manages its capital to ensure that it will be able to continue as a going concern while maximising

the return to stakeholders through the optimisation of the debt and equity balance.

The capital structure of the Company consists of debt, which includes the borrowings and issued bonds

disclosed in Notes 24 and 28, cash and cash equivalents and equity attributable to equity holders of the parent,

comprising issued capital, legal and other reserves and retained earnings.

Gearing ratio

The Group’s risk management committee reviews the capital structure on a semi-annual basis. As part of this

review, the committee considers the cost of capital and the risks associated with each class of sources of

funding. The gearing ratio at the yearend can be presented as follows:

(HRK’000) 31 December

2011 31 December

2010 31 December

2009 Restated Restated Restated

Debt 5,370,947 5,512,390 6,026,596

Cash and cash equivalents (407,123) (762,157) (143,834) ___________ ___________ __________

Net debt 4,963,824 4,750,233 5,882,762

Equity 19,420,359 19,941,517 18,387,846 ___________ ___________ __________ Net debt to equity ratio 26% 24% 32% ___________ __________ __________

Significant accounting policies

Details of the significant accounting policies and methods adopted, including the criteria for recognition, the

basis of measurement and the basis on which income and expenses are recognised, in respect of each class

of financial asset, financial liability and equity instrument are disclosed in Note 2 to the financial statements.

Categories of financial instruments

(HRK’000)

31 December 2011

31 December 2010

31 December 2009

Restated Restated Restated

Financial assets Loans and receivables (including cash and cash equivalents) 1,989,496 2,602,206 1,682,859

Other non-current assets 1,862,291 1,866,575 1,873,008

Available for sale assets 120,915 162,380 152,997

Financial liabilities

Non-current liabilities 4,308,786 4,775,275 4,883,084

Current liabilities 4,796,367 3,548,046 4,481,754

F-118

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

91

37 FINANCIAL INSTRUMENTS (continued)

Financial risk management objectives

The Group’s Treasury function provides services to the business, co-ordinates access to domestic and

international financial markets, monitors and manages the financial risks relating to the operations of the Group

through internal risk reports which analyse exposures by degree and magnitude of risks. These risks include

market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and cash

flow interest rate risk.

Market risk

The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates

and interest rates (see below). Market risk exposures are supplemented by sensitivity analysis. There has been

no change to the Group’s exposure to market risks or the manner in which it manages and measures the risk.

Foreign currency risk management

The Group undertakes certain transactions denominated in foreign currencies. Hence, exposures to exchange

rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising

forward foreign exchange contracts.

The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities at

the reporting date are as follows:

Assets Liabilities

31 December

2011

31 December

2010

31 December

2009

31 December

2011

31 December

2010

31 December

2009 (in '000 ) (in '000 ) (in '000 ) (in '000 ) (in '000 ) (in '000 ) Restated Restated Restated Restated Restated Restated

European Union (EUR) 16,101 88,390 3,866 548,280 573,176 647,683 United States Dollar (USD) 109 34 198 48,716 75,315 82,591

F-119

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

92

37 FINANCIAL INSTRUMENTS (continued)

Foreign currency sensitivity analysis

The Group is mainly exposed to the changes of the euro (EUR) and the US dollar (USD). The following table

details the Group’s sensitivity to a 10% increase and decrease in the Croatian kuna against the euro and the

US dollar. 10% is the sensitivity rate used when reporting foreign currency risk internally to key management

personnel and represents Management’s assessment of the reasonably possible change in foreign exchange

rates. The sensitivity analysis includes only outstanding foreign currency denominated receivables and

liabilities and adjusts their translation at the period end for a 10% change in foreign currency rates. The

sensitivity analysis includes external loans where the denomination of the loan is in a currency other than the

currency of the lender or the borrower. A positive / negative number below indicates an increase in profit and

other equity where HRK strengthens 10% against the relevant currency. For a 10% weakening of the HRK

against the relevant currency, there would be an equal effect, but the balance would be negative.

2011 2010 2009 HRK’000 HRK’000 HRK’000

Restated Restated Restated

EUR change impact Profit or loss 400,753 350,872 470,385 USD change impact Profit or loss 28,288 38,853 44,809

F-120

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

93

37 FINANCIAL INSTRUMENTS (continued)

Interest rate risk management

The Group is exposed to interest rate risk as it borrows funds at floating interest rates. The Group’s exposures to interest rates on financial assets and financial liabilities are shown in the liquidity risk management section of this note. The Group manages this risk by maintaining an appropriate mix between fixed and floating rate borrowings using interest rate swap contracts.

Interest rate sensitivity analysis

The sensitivity analysis has been determined based on the interest rate exposure of the Group to financial

instruments at the date of the statement of financial position. For floating rates, the analysis is prepared

assuming the amount of liability outstanding at the reporting date was outstanding for the whole year. A 50

basis-point increase or decrease is used when reporting interest rate risk internally to key management

personnel and represents Management’s assessment of the reasonably possible change in interest rates.

If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Group’s:

� Profit for the year ended 31 December 2011 would decrease/increase by HRK 19,597 thousand (2010:

HRK 21,153 thousand; 2009: HRK 22,031 thousand), based on exposure to interest rate risk. This is

mainly attributable to the Group’s exposure to interest rates on its variable rate borrowings, which

accounted for 73% in 2011 (77 % in 2010 and 73 % in 2009); and

� The Group's sensitivity to interest rates decreased during the current period mainly due to the

reduction of the reference rate applied to variable rate instruments.

Credit risk management

Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss

to the Group. The Group is the sole provider of electric energy in the Republic of Croatia. As such, it has a

public responsibility to provide services to all users, and at all locations within the country, irrespective of credit

risk associated with particular customers. Trade receivables, net, consist of a large number of customers,

spread across diverse industries and geographical areas.

The Group does not have any significant credit risk exposure to any single counterparty or any group of

counterparties having similar characteristics. The Group defines counterparties as having similar

characteristics if they are related entities. Credit risk with respect to trade receivables is primarily related to

domestic corporate receivables, specifically where services are provided to economic concerns, which are in a

difficult financial position. Overdue receivables from households are limited due to Group’s ability to disconnect

such customers from the power supply network.

Except as detailed in the following table, the carrying amount of financial assets presented in the financial

statements, which is net of impairment losses, represents the Group’s maximum exposure to credit risk without

taking account of the value of any collateral obtained.

F-121

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

94

37 FINANCIAL INSTRUMENTS (continued)

Liquidity risk management

Ultimate responsibility for liquidity risk management rests with the Management Board, which has built an

appropriate liquidity risk management framework for the management of the Group's short, medium and long-

term funding and liquidity management requirements. The Company manages liquidity risk by maintaining

adequate reserves, banking facilities and other sources of financing, by continuously monitoring forecast and

actual cash flows and matching the maturity profiles of financial assets and liabilities.

Liquidity and interest rate risk tables

The following table details the remaining period to contractual maturity for the Group’s non-derivative financial

assets. The tables below have been drawn up based on the undiscounted cash flows of the financial assets,

including interest to be earned on those assets except where the Group anticipates that the cash flow will occur

in a different period.

Maturity of non-derivative financial assets

Weighted

average

effective

interest

rate

Less than

1 month

1 - 3

months

3 -12

months

1 - 5

years

Over 5

years Total

% (HRK’000) (HRK’000) (HRK’000) (HRK’000) (HRK’000) (HRK’000) Restated Restated Restated Restated Restated Restated

2009

Non-interest bearing 797,104 890,514 36,476 199,799 1,783,465 3,707,358 Variable- rate instruments 6.00% 28 56 242 1.557 - 1,883

_________ _______ ________ ________ ________ ________ _______

Total 797,132 890,570 36,718 201,356 1,783,465 3,709,241 ________ ________ ________ ________ ________ ________ 2010

Non-interest bearing 897,814 1,715,750 23,490 219,590 1,773,334 4,629,978 Variable-rate instruments 5.00% 23 46 73 1,242 - 1,384

_________ _______ _______ ________ ________ ________ ________ Total 897,837 1,715,796 23,563 220,832 1,773,334 4,631,362 ________ ________ ________ ________ ________ ________ 2011

Non-interest bearing 1,029,336 969,439 22,151 196,638 1,754,419 3,971,983 Variable-rate instruments 5.00% 22 43 149 755 - 969

_________ ________ ________ ________ ________ ________ ________ Total 1,029,358 969,482 22,300 197,393 1,754,419 3,972,952 _______ ________ _______ _______ _______ _______ The following table details the Group’s remaining contractual maturity for its non-derivative financial liabilities.

The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest

date on which the Group can be required to pay.

F-122

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

95

37 FINANCIAL INSTRUMENTS (continued)

Liquidity and interest rate risk tables (continued)

Maturity of non-derivative financial liabilities

Weighted

average

effective

interest

rate

Less than

1 month

1 - 3

months

3 -12

months

1 - 5

years

Over 5

years Total

% (HRK’000) (HRK’000) (HRK’000) (HRK’000) (HRK’000) (HRK’000) Restated Restated Restated Restated Restated Restated

2009 Non-interest

bearing - 983,852 1,290,073 641,161 343,041 20,402 3,278,529

Variable-rate instruments 3,94% 32,463 216,747 858,979 3,682,705 688,477 5,476,124 Fixed- rate instruments 5,96% 3,248 255,811 130,276 1,185,654 452,499 2,027,488

________ _______ ________ _______ _______ _______ ________

1,016,316 1,762,631 1,630,416 5,211,400 1,161,378 10,782,141 ________ ________ ________ ________ ________ ________ 2010 Non-interest

bearing 784,785 792,584 839,403 344,601 15,824 2,777,197

Variable-rate instruments 3,57% 43,200 571,673 982,759 2,539,715 451,013 4,588,360 Fixed- rate instruments 5,93% 8,766 - 186,200 1,111,980 204,721 1,511,667 ________ ________ ________ ________ ________ ________ ________

Total 836,751 1,364,257 2,008,362 3,996,296 671,558 8,877,224 ________ ________ ________ ________ ________ ________

2011 Non-interest

bearing

1,436,563 1,082,085 452,560 729,914 2,618 3,703,740 Variable-rate instruments 4,37% 51,966 571,673 1,168,959 3,547,752 684,184 6,024,534 Fixed- rate instruments 5,60% 8,766 - 186,200 1,037,917 112,162 1,345,045

________ ________ ________ ________ ________ ________ _________ Total 1,497,295 1,653,758 1,807,719 5,315,583 798,964 11,073,319

_______ ________ _______ _______ _______ ________

The Group has access to financing facilities, the total unused amount of which is HRK 2,090,982 thousand at

the reporting date. The Group expects to meet its other obligations from operating cash flows and proceeds of

maturing financial assets.

Maturity of derivative financial liabilities

The Group has an interest rate swap, which it uses to hedge its exposure to variable rate debt. Based on the

underlying agreement, the six-month interest rate payable by the Company is fixed at 5.39 %, whereas the

swap rate is equal to six-month EURIBOR, which approximated 1.7263 % at 31 December 2011 (2010: 1.2019

%; 2009: 1.0075%), as disclosed in detail in Note 26.

F-123

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

96

37 FINANCIAL INSTRUMENTS (continued)

Weighted

average

effective

interest

rate

Less than 1

month

1 - 3

months

3 -12

months

1 - 5

years

Over 5

years Total

% (HRK’00) (HRK’000) (HRK’000) (HRK’000) (HRK’00) (HRK’000)

Restated Restated Restated Restated Restated Restated

31 December 2009 Variable- rate

instruments 1.0075% - - 7,157 6,512 - 13,669 Fixed-rate instruments 5.39% - - (7,726) (7,029) - (14,755)

________ ________ ________ ________ ________ ________ ________

- - (569) (517) - (1,086) ________ ________ ________ ________ ________ ________ 31 December 2010 Variable- rate instruments 1.2019% - - 1,108 476 - 1,584 Fixed-rate instruments 5.39% - - (4,969) (2,136) - (7,105) ________ ________ ________ ________ ________ ________ ________ Total - - (3,861) (1,660) - (5,521) ________ ________ ________ ________ ________ ________ 31 December 2011 Variable- rate instruments 1.7263% - - 698 - - 698 Fixed-rate instruments 5.39% - - (2,178) - - (2,178) ________ ________ ________ ________ ________ ________ ________ Total - - (1,480) - - (1,480)

________ ________ ________ ________ _______ ________

Fair value of financial instruments

The fair values of financial assets and financial liabilities are determined as follows:

� The fair value of financial assets and financial liabilities with standard terms and conditions and traded

on active liquid markets is determined with reference to quoted market prices.

� The fair value of other financial assets and financial liabilities (excluding derivative instruments) is

determined in accordance with generally accepted pricing models based on discounted cash flow

analysis using prices from observable current market transactions and dealer quotes for similar

instruments.

� The fair value of derivative instruments is calculated using the listed price. Where such prices are not

available, the analysis uses discounted cash flows using the current yield curve for the period of the

instruments under optional derivatives, while the optional derivative used models for pricing options.

Forward currency contracts are valued using quoted forward exchange rates and yield curves derived

from quoted interest rates for contracts with similar maturity. Interest rate swaps are valued at the

present value of estimated future cash flows and discounted based on the current yield curve derived

from quoted interest rates.

F-124

Notes to the consolidated financial statements of the HEP Group (continued) For the years ended 31 December 2011, 2010 and 2009

HRVATSKA ELEKTROPRIVREDA d.d. and its subsidiaries, Zagreb

97

37 FINANCIAL INSTRUMENTS (continued)

� The fair value of derivative instruments is calculated using the listed price. Where such prices are not

available, the analysis uses discounted cash flows using the current yield curve for the period of the

instruments under optional derivatives, while the optional derivative used models for pricing options.

Forward currency contracts are valued using quoted forward exchange rates and yield curves derived

from quoted interest rates for contracts with similar maturity. Interest rate swaps are valued at the

present value of estimated future cash flows and discounted based on the current yield curve derived

from quoted interest rates.

At 31 December 2011, the carrying amounts of cash and cash equivalents, short-term loans and receivables,

short-term borrowings and other liabilities and other financial instruments approximate their market value due

to the short-term nature of those assets and liabilities.

Fair value measurements recognized in the statement of financial position

The table below analyzes the financial instruments remeasured subsequently at fair value, classified into three

groups depending on the availability of indicators of fair value:

Level 1 observable indicators - indicators of fair value derived from (unadjusted) prices quoted in active

markets for identical assets and liabilities are identical

Level 2 observable indicators - indicators of fair value derived from data other than quoted prices from Level 1

for observable assets or liabilities (i.e. their prices) or indirectly (derived from the price), and

Level 3 indicators - indicators derived from valuation techniques using as input data on the assets or liabilities

that are not based on available market data (unobservable input).

The indicators of fair value recognized in the balance

1st level 2nd level 3rd level Total HRK'000 HRK'000 HRK'000 HRK'000

Restated Restated Restated Restated

2011 Assets available for sale 120,915 - - 120,915

Interest swap liability (current and non-current portion) - 850 - 850

2010 Assets available for sale 162,380 - - 162,380 Interest swap liability (current and non-current portion) - 2,875 - 2,875

2009 Assets available for sale 152,997 - - 152,997 Interest swap liability (current and non-current portion) - 6,284 - 6,284

F-125

F-126

THE ISSUERHrvatska Elektroprivreda d.d.

Ulica Grada Vukovara 3710 000 Zagreb

Croatia

TRUSTEEDeutsche Trustee Company Limited

Winchester House1 Great Winchester Street

London EC2N 2DBUnited Kingdom

PRINCIPAL PAYING AGENT AND TRANSFER AGENTDeutsche Bank AG, London Branch

Winchester House1 Great Winchester Street

London EC2N 2DBUnited Kingdom

REGISTRARS, PAYING AGENTS AND TRANSFER AGENTSIn respect of the Rule 144A Notes In respect of the Regulation S Notes

Deutsche Bank Trust Company Americas Deutsche Bank Luxembourg S.A.60 Wall Street, 27th Floor 2, boulevard Konrad Adenauer

MS: NYC60-2710 1115 LuxembourgNew York, NY 10005 Luxembourg

United States

LEGAL ADVISERSTo the Issuer To the Issuer

as to Croatian law as to English law and United States lawLaw Firm Glinska & Miskovic White & Case LLP

Green Gold—Tower V1 5 Old Broad StreetUlica grada Vukovara 269f London EC2N 1DW

10000 Zagreb United KingdomCroatia

To the Managers and the Trustee To the Managers and the Trusteeas to Croatian law as to English and United States law

Savoric & Partners Allen & Overy LLPGunduliceva 15 One Bishops Square10000 Zagreb London E1 6AD

Croatia United Kingdom

AUDITORSDeloitte d.o.o.ZagrebTower

Radnicka cesta 80Zagreb 10000

Croatia

LISTING AGENTDeutsche Bank Trust and Agency Services

Winchester House1 Great Winchester Street

London EC2N 2DBUnited Kingdom

JOINT LEAD MANAGERSMorgan Stanley & Co. International plc UniCredit Bank AG

25 Cabot Square Moor HouseCanary Wharf 120 London Wall

London E14 4QA London EC2Y 5ETUnited Kingdom United Kingdom

CO-MANAGERRaiffeisen Bank International AG

Am Stadtpark 9A-1030 Wien

Austria

Merrill Corporation Ltd, London12ZCY41001