Annual Report 2017 This document has been translated into English for the convenience of the readers. In the event of discrepancy, the Italian language version prevails . ITALO| ANNUAL REPORT | 2017 TABLE OF CONTENTS GLOSSARY ___________________________________________________________ 5 KEY FINANCIAL AND OPERATIONAL DATA ___________________________________________________________ 8 HIGHLIGHTS FOR 2017 ____________________________________________________________________________ 9 FINANCIAL REVIEW _____________________________________________________________________________ 10 Operating results _______________________________________________________________________________ 10 Financial position _______________________________________________________________________________ 11 Net debt ______________________________________________________________________________________ 12 Cash flow ______________________________________________________________________________________ 12 INVESTMENT DURING THE YEAR __________________________________________________________________ 14 KEY EVENTS DURING THE YEAR ___________________________________________________________________ 16 Operating activities _____________________________________________________________________________ 16 Financial topics _________________________________________________________________________________ 18 Corporate actions _______________________________________________________________________________ 19 Other material events ___________________________________________________________________________ 20 THE GENERAL CONTEXT __________________________________________________________________________ 21 The macroeconomic context ______________________________________________________________________ 21 The high-speed train market in Italy ________________________________________________________________ 21 THE REGULATORY FRAMEWORK __________________________________________________________________ 23 Applicable EU and national rules and regulations ______________________________________________________ 23 The role of the Infrastructure Manager ______________________________________________________________ 23 The functions of the Regulator ____________________________________________________________________ 23 Conditions for the provision of rail transport services __________________________________________________ 24 RISK FACTORS __________________________________________________________________________________ 26 Operational risk ________________________________________________________________________________ 26 Risks related to the sector in which the Company operates _____________________________________________ 28 Fare evasion risk ________________________________________________________________________________ 31 Strategic risk ___________________________________________________________________________________ 31 Litigation risk __________________________________________________________________________________ 32 FINANCIAL RISK ________________________________________________________________________________ 33 Risks related to debt _____________________________________________________________________________ 33 Liquidity risk ___________________________________________________________________________________ 33 Interest rate risk ________________________________________________________________________________ 34 Foreign exchange risk ____________________________________________________________________________ 34 Credit risk _____________________________________________________________________________________ 34 OUTLOOK _____________________________________________________________________________________ 35 OTHER INFORMATION ___________________________________________________________________________ 36 Research and development _______________________________________________________________________ 36 Related party transactions ________________________________________________________________________ 36 Relations with subsidiaries, associates, parent companies and affiliates ___________________________________ 36 Treasury shares and shares/equity interests in parent companies ________________________________________ 36 Disclosures related to the environment and personnel _________________________________________________ 36 The Energy Efficiency Program: White Certificates _____________________________________________________ 37 Internal control _________________________________________________________________________________ 38 Internal Control and Organisational Model as per Legislative Decree 231/2001 _____________________________ 38 Code of Ethics __________________________________________________________________________________ 38 ALTERNATIVE PERFORMANCE INDICATORS _________________________________________________________ 40 PROPOSED APPROVAL OF FINANCIAL STATEMENTS AND APPROPRIATION OF PROFIT ______________________ 44 1 ITALO| ANNUAL REPORT | 2017 FINANCIAL STATEMENTS ________________________________________________ 45 INCOME STATEMENT ____________________________________________________________________________ 46 STATEMENT OF COMPREHENSIVE INCOME __________________________________________________________ 47 STATEMENT OF FINANCIAL POSITION ______________________________________________________________ 48 STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY ________________________________________________ 49 STATEMENT OF CASH FLOWS _____________________________________________________________________ 50 NOTES TO THE FINANCIAL STATEMENTS ____________________________________________________________ 51 1 General information ________________________________________________________________________ 51 2 Reporting standards ________________________________________________________________________ 51 3 Accounting policies _________________________________________________________________________ 52 4 Use of estimates ___________________________________________________________________________ 65 5 Financial risk management ___________________________________________________________________ 66 6 Segment reporting __________________________________________________________________________ 69 7 Revenue from transport services ______________________________________________________________ 69 8 Other operating revenues ____________________________________________________________________ 70 9 Access and electricity costs ___________________________________________________________________ 70 10 Train management costs _____________________________________________________________________ 70 11 Personnel costs ____________________________________________________________________________ 71 12 Other operating costs _______________________________________________________________________ 72 13 Depreciation, amortization and impairments ____________________________________________________ 72 14 Gains (losses) on disposal of non-current assets __________________________________________________ 72 15 Net financial income (expenses) _______________________________________________________________ 73 16 Income tax ________________________________________________________________________________ 74 17 Earnings per share __________________________________________________________________________ 75 18 Intangible assets ___________________________________________________________________________ 75 19 Property, plant and equipment ________________________________________________________________ 76 20 Deferred tax assets _________________________________________________________________________ 77 21 Other non-current assets ____________________________________________________________________ 78 22 Inventories ________________________________________________________________________________ 78 23 Trade receivables ___________________________________________________________________________ 78 24 Other current assets ________________________________________________________________________ 79 25 Short-term bank deposits ____________________________________________________________________ 79 26 Cash and cash equivalents ____________________________________________________________________ 80 27 Shareholders’ equity ________________________________________________________________________ 80 28 Current and non-current borrowings ___________________________________________________________ 84 29 Employee benefits __________________________________________________________________________ 88 30 Non-current provisions ______________________________________________________________________ 90 31 Trade payables _____________________________________________________________________________ 91 32 Other current and non-current liabilities ________________________________________________________ 92 33 Other information __________________________________________________________________________ 92 34 Events after the end of the year _______________________________________________________________ 97 USEFUL INFORMATION __________________________________________________________________________ 99 2 ITALO| ANNUAL REPORT | 2017 CORPORATE BODIES ITALO – NUOVO TRASPORTO VIAGGIATORI SPA BOARD OF DIRECTORS Elected by the General Meeting of shareholders held on October 20, 2017. In office until approval of the financial statements for the year ended December 31, 2019. Chairman Luca Cordero di Montezemolo Chief Executive Officer Flavio Cattaneo Directors Nicola Colavito Fabio Corsico Diego Della Valle Francesco Di Giovanni Andrea Faragalli Zenobi