Public Service Contract between Regione Lombardia and Trenord for the period 1 December 2023 – 30 November 2033

13 December 2023

Among the most important LPT railway players in Europe excluding the National train operators

Trenord is a 50:50 JV between Trenitalia and FNM Group and operates passengers rail services in Lombardy region

Incorporated in 2011, Trenord is one of the most important operators of suburban and regional local public rail transport in Europe, both in terms of size and in terms of service capillarity: 460 stations, 2.000 kilometers of rail network, 77% of Lombardy's municipalities within a 5-km radius serving 92% of citizens. Trenord also operates passenger services on the Milan rail link (Passante Milanese) as well as the connections with Canton of Ticino (CH), through TILO (50% owned jointly with the Swiss Federal Railways) and operates the Malpensa Express airport connection to the Malpensa International Airport
Trenord operates more than 400 trains leased from FNM Group, Trenitalia and Regione Lombardia with a production for LPT services of 38.8mln trains-km in 2022

The largest contract ever signed by Regione Lombardia, a journey marked by an extraordinary macro scenario

Trenord P&L guidelines

	ACT 2022 (€mln)	9M 2023 (€mln)	Avg. '23-33 (€mln)
Fare revenues	311.0	282.3	2033 +50% vs 2023
PSC contribution Revenues accrued in P&L based on current EFP assumptions, subject to annual review	438.7	329.1	510 / 520 1
Revenues	831.9	653.3	900.0 / 1,100
EBITDA	159.8	133.1	≈ 170
EBIT	(15.2)	6.9	30 / 35
Net Result	(9.5)	(1.1)	≈ 15 2

PSC contribution may be revised upward/downward depending on actual traffic performance, in order to balance economic-financial equilibrium and reasonable profit of the Contract

1 – Average variable PSC contribution applicable from 1 December 2023 to 30 November 2033 based on current EFP assumptions, excluding the interest accrued on the cumulated figurative credit/(debit) deriving from the linearization of PSC contribution paid by Regione Lombardia (please refer to slide 14 for details) 2 – Not applicable for FY 2023

Overview

EFP Highlights

EFP Guidelines

Appendix

New, Reliable and Stabilized Regulatory Framework

Three consecutive contracts with a heterogeneous overall structure since the establishment of a single railway company operated in Lombardy:
- PSC 2009-2011: Trenitalia and LeNORD contracts remained separate
- PSC 2012-2014: first "single contract" negotiated after the creation of Trenord
- PSC 2015-2020 + PSC 2008-2017 for Linea S5 (both extended until November 2023)
Compensation was calculated based on a "Catalogue of services" model, using a unit fee (EUR/train-km) calculated considering effective production and number of seats offered
The model envisaged a reimbursement for infrastructure access, electricity costs and leasing of rolling stock
Focus on maintaining the economic-financial equilibrium of the contract and guaranteeing the continuity of services

OLD NEW 2023-2033

Regione Lombardia (RL) is the competent authority for the entrustment of a comprehensive PSC in which scheduling, pricing and planning of the services are set
ART regulation¹ defines eligible costs in terms of operational expenses, depreciation charges and adequate capital investments returns
Model envisages a RAB based regime on which to apply the WACC for the calculation of reasonable profit, including leased rolling stock as by IFRS16
Remuneration of operating costs incurred in the fulfillment of Public Service Obligation, not covered by market revenues, determine PSC compensation (i.e. net-cost methodology)
PSC compensation guarantees economic-financial equilibrium
Ticket sales are linked to a price-cap yearly dynamic based on actual inflation and quality indicators defined in the PSC
Inflation, traffic, WACC and other relevant parameters are updated at the beginning of each regulatory period
The Risk Matrix provides the contractual obligations associated with the risks identified and their allocation to each party

Long term visibility on operating and financial KPIs

Trenord's new regulatory framework will be composed of two main documents:

o Plan for Achievement of Regulatory Targets (PART) is the planning document that defines effectiveness and efficiency targets and the actions to improve the performance, as well as the main assumptions on risk sharing between Trenord and Regione Lombardia;
o Economic and Financial Plan (EFP) presents economic and financial projections, the fair remuneration of investments and the public contribution due for the 10 years of the contract aimed at remunerating the Public Service Obligations not covered by commercial revenues.

Operating Targets	• LPT production: train-km up by 25% with target of 50.5mln train-km/year in 2033 (40.4mln train-km in 2022) • Passengers transported: up to 272mln pax from 151mln pax in 2022 (c. 1mln pax/weekday in 2033) • Efficiency target: operating costs per train-km (deflated at 2022 prices) decrease of 9.3% by 2028 • Operational performance: punctuality within 5 minutes perceived by customer (for Trenord sole responsibility) stands at 91.5% in 2028
Economic & Financial Targets	• PSC compensation from RL: constant installment equal €536mln p.a. (€5,362mln for 10 years), with the recognition of additional remuneration necessary to guarantee the time value equivalence • EFP RAB: determined at €933.5mln for 2023 by applying the IFRS16 accounting principles and remunerated on the basis of a WACC equal n°49/2023) to 7.45% nominal pre-tax (ART • Investment plan: CAPEX of over €400mln over 2023-2033, excluding new rolling stock which is not self-financed by Trenord • Traffic revenues: strong growth (+6.3% p.a.) supported by materially higher LPT demand, annual adjustment of tariffs equal to 75% of planned inflation and implementation of the integrated fare system

Operating
Targets

•
LPT
production:
train-km
up
by
25%
with
target
of
50.5mln
train-km/year
in
2033
(40.4mln
train-km
in
2022)
•
Passengers
transported:
up
to
272mln
pax
from
151mln
pax
in
2022
(c.
1mln
pax/weekday
in
2033)
•
Efficiency
target:
operating
costs
per
train-km
(deflated
at
2022
prices)
decrease
of
9.3%
by
2028
•
Operational
performance:
punctuality
within
5
minutes
perceived
by
customer
(for
Trenord
sole
responsibility)
stands
at
91.5%
in
2028

Economic
& Financial
Targets

•
PSC
compensation
from
RL:
constant
installment
equal
€536mln
p.a.
(€5,362mln
for
10
years),
with
the
recognition
of
additional
remuneration
necessary
to
guarantee
the
time
value
equivalence
•
EFP
RAB:
determined
at
€933.5mln
for
2023
by
applying
the
IFRS16
accounting
principles
and
remunerated
on
the
basis
of
a
WACC
equal
n°49/2023)
to
7.45%
nominal
pre-tax
(ART
•
Investment
plan:
CAPEX
of
over
€400mln
over
2023-2033,
excluding
new
rolling
stock
which
is
not
self-financed
by
Trenord
•
Traffic
revenues:
strong
growth
(+6.3%
p.a.)
supported
by
materially
higher
LPT
demand,
annual
adjustment
of
tariffs
equal
to
75%
of
planned
inflation
and
implementation
of
the
integrated
fare
system

Main elements of the risk matrix

How does it work:

Economic and financial equilibrium of the contract is verified annually by measuring the difference in the Net Result between the normalized EFP vs Actual
If the contractually established threshold is exceeded (net result greater than/less than 0.5% of total operating revenues), the differences are analyzed and the responsibilities allocated as defined in the Risk Matrix
- o Effectiveness of anti-avoidance actions
- o Demand risk LPT demand below the forecasts, except when due to infrastructure delays and airport connection tariffs' changes by Regione Lombardia
- o Difference of operating costs compared to EFP related to organizational inefficiencies or renewal of National Collective Bargaining Agreement
- o Availability of personnel, materials, facilities, and maintenance activities etc…
RL

o Annual changes from EFP in exogenous production costs such as infrastructure access charges, electricity cost, diesel/hydrogen consumption and D&A (related only to investments already envisaged the Contract)
o Missed tariff adjustments related to inflation, activation and modification of the regional integrated tariff system
o Impacts on demand due to exogenous factors (including inflation) and/or administrative choices or delays in planned infrastructure interventions

First regulatory period 2023-2028: inflation, traffic projections, WACC and other relevant parameters will be revaluated afterwards 1
Subject to possible revisions of the EFP at the end of the first regulatory period (2028) or for other causes provided for in the Contract 2
Parties can propose additions inherent to consistency and appropriateness of contents of the Contract during the first two years of the Contract's term 3

Overview

EFP Highlights

EFP Guidelines

Appendix

Economic and Financial Plan (EFP) – Traffic revenues

• Expected demand trend assumptions

o historical growth rate of the different types of service weighted by line for the period 2016-2019
o demand attractors/generators (Euro 6 block in Milan, Winter Olympics, Bergamo Airport connection, opening of Mind, City of Health, new Segrate commercial center)
o supply-demand interaction linked to important infrastructure deployments

• Tariff assumptions

o Regional Integrated Tariff System (STIBM, STIL, IVOL e IVOP) fully running by 2026
o price-cap yearly dynamic based on 75% of planned inflation, conditioned on compliance with quality indicators
o actions to combat tariff evasion/avoidance (-50% in 10 years)
o daily validity of the ticket
o Expected inflation: 5.9% in 2023, 2.8% in 2024 and 2.1% in 2025¹ , a constant level of inflation of 2% was assumed after 2026

Economic and Financial Plan (EFP) – Fleet composition

• Regione Lombardia has strategically chosen to fully finance the purchase of new rolling stock, simplifying future tender procedures. With the completion of the modernization program (214 trains by 2025) ~ 70% of the fleet will be under the direct control of RL and managed through Ferrovienord

• RL rolling stock purchase programme

o Implemented through Ferrovienord, envisages a total of 214 trains (130 are already into service) + 129 trains related to previous purchase programs
o Doesn't include other programs being implemented by Regione Lombardia for further renewal of the fleet (ex. Regio Express)
o Cyclical maintenance costs are borne directly by RL, through the PSC with Ferrovienord which acts as procurement agent and fleet manager

• Trains leased from FNM

o +15 high-capacity trains
o H2iseO project:
- ⁻ FNM already committed to buy 6 trains for €70.8mln
- ⁻ 8 trains may be financed with additional public resources, or alternatively also leased from FNM
- ⁻ EFP considers costs for the leasing of 7 trains (out of 14) and cyclical maintenance for 14 trains
o CAPEX for the new rolling stock was already envisaged in FNM 2021-2025 Strategic Plan
o No additional investments currently envisaged in the EFP

• Trains owned by Trenord and leased from Trenitalia

o Partial replacement of the oldest elements with new rolling stock provided by RL

Economic and Financial Plan (EFP) – Regulatory Asset Base

Economic and Financial Plan (EFP) – CAPEX

1 – Cyclical maintenance on rolling stock leased from FNM is borne by FNM itself and remunerated with a simultaneous adjustment to the leasing fee charged to Trenord, and reflected indirectly into the RAB. Maintenance on rolling stock given in use by Regione Lombardia, starting from 2024, is managed by Ferrovienord and the costs are fully covered by public contributions in line with the provisions of Public Service Contract.

Economic and Financial Plan (EFP) – PSC contribution

• Impact on revenues

o Variable PSC contribution calculated according to EFP (see slide 20) coincides with Trenord expected accrued PSC revenues
o Actual PSC contribution may differ from expectations due to discrepancies in traffic performance and/or accrued penalty charges

• Impact on net financial result

o Fixed contribution paid annually from Regione Lombardia (RL) is equal to €536.2mln (total €5,362mln)
o Linearization of PSC contribution paid by RL generates a difference between flat vs variable contribution creating a figurative credit/(debit) with a positive overall economic effect
o The accumulated balance of figurative credit/(debit) matures an additional remuneration that guarantees the time value of money equivalence, whose financial effect is recognized as interest income in Trenord's accounts

Economic and Financial Plan (EFP) – Operating costs

Costs expected to increase due to higher production and service provided
- o Expected inflationary dynamics
- o Renewal of the National Collective Bargaining Agreement
- o Average annual increase in production of +1.8% p.a.

• Effectiveness and efficiency targets are identified in the PART

o Reduction in unit operating cost (€/train-km deflated at 2022 prices) of -1.9% p.a. by 2028, target set higher than level required by ART

Overview

EFP Highlights

EFP Guidelines

Appendix

Regional railway service in Lombardy at a glance

Railway transportation - Regulatory framework

EU and Italian regulatory framework

EU Regulation n° 1370/2007 (amended by EU Regulation n° 2016/2338) sets the rules national and international operation of public passenger transport services by rail and road, including award of public service contracts (PSC) and "reasonable profit" principle
Legislative Decree n° 422/1997, n° 50/2017 (Art. 27 - 48) regulate LPT transportation at national level, transferring all the competencies at regional authorities
Regional Law n° 6/2012 – "Regulation of the transportation sector" and n° 4/2014 – "Integrated regional public transport fare system"
Structure of new PSC subject to Transportation Regulation Authority (ART): Deliberation n° 48/2017, n° 120/2018 and n° 154/2019. remuneration for rail transportation set by the ART currently at a nominal pre-tax WACC of 7.45% (Deliberation n° 49/2023)

Main highlights ex. ART decision n° 154/2019 and n° 120/2018

New regulatory framework will be composed of the Economic Financial Plan (EFP) and Plan for Achievement of Regulatory Targets (PART)
Remuneration of operating costs incurred in the fulfillment of Public Service Obligation (PSO), not covered by the revenues generated in the fulfillment of PSOs (i.e. Net Cost methodology) determine variable compensation over the life of the contract calculated as the net financial effect of the PSOs
Model envisages a RAB based regime on which to apply the WACC for the calculation of reasonable profit, including rolling stock under lease as by IFRS16
Guarantee financial equilibrium: (a) present value of revenues must be equal to present value of costs, discounted using WACC; (b) in case of fixed remuneration, the present value of the resulting "financial adjustments" (Poste Figurative) must be equal to zero; (c) IRR of pretax operating cash flows must be equal to WACC
Ticket sales linked to a price-cap yearly dynamic based on actual inflation and quality indicators, differentiated across the different components of the integrated regional public transport fare system (ex. STIBM, STIL, IVOL and IVOP)
Inflation, traffic, WACC and other relevant parameters are updated at the beginning of each 5 year regulatory period
The PART defines the indicators of operational efficiency and effectiveness, setting time horizons for the achievement and monitoring of the objectives
The Risk Matrix provides the contractual obligations associated with the risks identified and their allocation to each contracting party

EFP - Regulatory Income Statement

Schema 1 - Conto Economico Regolatorio		12.2023	2024	2025	2026	2027	2028	2029	2030	2031	2032	1-11.2033

1.a	Ricavi da traffico	29,2	365,7	393,5	434,8	468,3	501,2	541,1	571,0	604,4	634,5	590,3
1.b	Altri ricavi e proventi inerenti al servizio	1,3	15,8	16,3	16,8	17,3	17,8	18,3	18,8	19,3	19,8	18,5
ਜ	Totale ricavi generati dall'assolvimento degli OSP	30,4	381,5	409,8	451,6	485,6	519,0	559,4	589,7	623,7	654,2	608,8
2	Effetti positivi di rete indotti	0,3	3,6	3,7	3,7	3,8	3,9	4,0	4,0	4,1	4,2	3,9
3.a	Costi di materie prime, sussidiarie, di consumo e merci	3,3	40,	34,4	36,1	36,	36,9	37,2	37,7	38,0	38,3	35,4
3.b	Costi per servizi di terzi	32,6	408,9	417,3	445,6	450,7	464,3	471,0	475,1	481,0	487,0	451,6
3.c	Costi per godimento beni di terzi	1,0	11,2	12,7	13,4	13,8	14,2	14,6	15,0	15,4	15,9	15,0
3.d	Costo del personale	24,8	315,3	328,2	349,0	359,2	370,01	376,5	383,4	389,8	397,1	372,6
3.d.i	di cui: personale operativo	14,8	188,8	196,7	211,6	219,8	228,0	233,3	238,6	243,4	248,0	231,8
3.e	Variazioni delle rimanenze di materie prime sussidiarie, di consumo e merci
3.f	Oneri diversi di gestione	0,1	1,8	1,8	1,8	1,9	1,9	2,0	2,0	2,0	2,1	1,9
ന	Totale costi operativi	61,8	777,6	794,4	845,9	861,9	887,3	901,2	913,2	926,2	940,4	876,5
4 = 1+2- 3	Risultato operativo lordo (EBITDA)	(31,1)	(392,5)	(381,0)	(390,6)	(372,6)	(364,5)	(337,9)	(319,4)	(298,4)	(282,0)	(263,8)
5	Totale ammortamenti	15,1	137,7	139,9	138,0	137,8	133,6	136,0	137,0	139,1	139,8	122,3
	6 = 4-5 Risultato operativo netto (EBIT)	(46,2)	(530,2)	(520,9)	(528,6)	(510,4)	(498,1)	(473,9)	(456,4)	(437,5)	(421,8)	(386,1)

N.B. Tables prepared in accordance with ART guidelines in order to compute the required PSC compensation which covers Public Service Obligations and guarantees the reasonable profit. May not coincide with Trenord's actual results and should not be intended as financial projections.

EFP – Regulatory Income Statement (reasonable profit)

Doesn't consider the financial effect arising from the payment of a constant installment (see slide 14 for details)

EFP – Regulatory Balance Sheet

Schema 2 - Stato Patrimoniale Regolatorio		2023	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033

1.a	Immobilizzazioni immateriali	19,0	22,6	21,7	21,1	19,9	19,8	19,0	18,7	18,6	19,7	20,8
1.b	Immobilizzazioni materiali con separata indicazione di quelle concesse in locazione finanziaria	947,4	935,5	922,5	833,4	727,9	636,0	544,1	440,3	340,1	237,1	134,5
1.b.i	di cui: terreni e fabbricati
1.b.ii	di cui: impianti e macchinari
1.b.ii.1	di cui: materiale rotabile autofinanziato *	618,1	602,5	614,3	555,5	476,2	396,8	317,5	238,1	158,7	79,4
1.b.iii	di cui: attrezzature industriali e commerciali
1.b.iv	di cui: altre
	Totale immobilizzazioni	966,4	958,0	944,2	854,5	747,8	655,8	563,1	459,0	358,7	256,8	155,3
2.a	Rimanenze	121,5	117,8	118,2	120,5	120,5	120,6	120,5	120,5	118,0	115,5	112,9
2.b	Crediti	171,9	149,7	145,9	147,6	150,7	155,2	159,1	162,4	160,1	156,2	152,5
2.b.i	di cui: commerciali **	141,8	117,6	111,0	109,7	110,9	114,6	119,2	124,3	125,6	126,6	128,9
2.b.ii	di cui: altri crediti	30,1	32,1	34,9	38,0	39,9	40,6	40,0	38,1	34,6	29,7	23,6
2	Totale attivo circolante	293,4	267,5	264,1	268,1	271,3	275,7	279,7	282,8	278,1	271,7	265,4
3.a	Debiti	326,3	314,4	300,7	302,4	298,4	299,8	297,0	291,0	287,8	283,8	279,5
3.a.i	di cui: debiti verso fornitori	256,4	244,4	230,8	232,4	228,4	229,9	227,1	221,0	217,8	213,8	209,6
3	Totale debiti	326,3	314,4	300,7	302,4	298,4	299,8	297,0	291,0	287,8	283,8	279,5
4=1+2- 3	Capitale investito netto	933,5	911,1	907,5	820,2	720,7	631,7	545,8	450,8	349,0	244,7	141,2