Irregularities

Authority for Consumers and Markets (ACM)

In its judgement of 6 March 2015, the ACM concluded that NS had infringed articles 67 and 71 of the Railways Act by not making a reasonable offer in the Limburg tender for services and their locations at the stations, break locations, emergency stop facilities, check-in/check-out posts, or for energy costs, handling disruptions and journey information (Railways Act, Article 67). In addition, the ACM concluded that NS shared sensitive competitive information about Veolia and others with Abellio and Qbuzz (Railways Act, Article 71).

The ACM then carried out further investigations into the possible misuse by NS and its subsidiaries of their position of economic strength in the Limburg tender, based on the Competitive Trading Act and the European tendering regulations. At the start of July 2016, the ACM sent a report on the investigations to NS. NS has accordingly presented its views.ACM will now assess whether there is a violation of the Competitive Trading Act or the Railway Act has taken place-and if so, whether a penalty or fine imposed by means of a decree.

The decision taken by the ACM may include imposing a penalty on NS. Any such penalty imposed by the ACM would be based on a percentage of the turnover involved, with a legal maximum of 10% of the consolidated turnover. The bandwidth for any such fine is this from zero to the said legal maximum. At this stage, NS is not in a position to make a reliable estimate of the size of any penalty and no provision has therefore been made for it. It is possible to object to a decision to impose a fine, to appeal against it and to take it to the higher appeals court.

Veolia

NS and five associated companies are summoned on July 22 2016 by Veolia Transport Netherlands Holding B.V. and four of its affiliated companies in relation tot the tender in Limburg. Veolia seeks mainly a number of statements privilege that NS is liable for damage Veolia claims to have suffered in connection with the tender in Limburg. The basis and extent of the damage allegedly suffered by Veolia, are not sufficiently concrete. The outcome of the legal procedure (and thereby any potentially allowable claims for damages) cannot currently be estimated with certainty or reliably and has therefore not included.

Public Prosecution Service

The Public Prosecution Service (specifically, the Office for Financial, Economic and Environmental Offences in s'-Hertogenbosch) started an investigation in 2015 into possible criminal acts in connection with the tendering process for public transport in Limburg. The investigation is focusing on the actions and circumstances surrounding an alleged arrangement regarding the disclosure of business secrets. The suspected parties include the companies NS Groep N.V., Qbuzz BV, Abellio Transport Holding BV and Abellio Nederland BV. In February 2016, NS Groep N.V. received the final report of the criminal investigation. The prosecution has already decided to sue NS Groep N.V. afterwards. On December 13, 2016 a pre-trial review took place. The trial is expected to occur in the second part of 2017. How this will be done and what the financial consequences will be (level of penalties imposed, transaction, etc.) cannot be determined reliably at this point in time. As a result, no provision has been included.

Other

There is an inherent risk that additional claims will follow as a result of the irregularities that have been observed. The claims mentioned above could have a material impact on the results and equity position of NS. Because the outcome cannot be reliably estimated at this point in time, no provisions have been included for it.

Long-term contracts

There were a number of long-term financial commitments to third parties at year-end 2016. These mainly concern operating lease agreements for trains, company cars and copiers. Secondly, there are long-term contracts for services by third parties in the areas of IT, employee health and safety, maintenance and cleaning.

Operational lease agreements

The lease amounts payable for operational lease agreements (including rental agreements for offices) that cannot be cancelled fall due as follows:

• *The figures of December 31, 2015 have been corrected for the usage fees for use of rail. These were misidentified as lease.

In 2016 an amount of approximately € 350 million as an expense for operating leases.

The amounts recorded above include amounts which relate to a number of concessions in Germany which will be 1 on 1 covered by the concession grantors. These amounts are due as follows:

Energy contracts

As at the end of 2016, the purchase obligations under the energy contract in the Netherlands for the volumes already covered and the payments for the programme of responsibilities and the surcharge for green electricity over the period 2016-2024 (the remainder of the 10-year contract) came to €231 million (as opposed to €207 million at the end of 2015). The volume expected to be required for 2017 is fully covered. Transport costs and energy tax are not included in the purchase obligations shown. If the difference between the market values and the contract value exceeds a given threshold, the Group or Eneco does then have to give the other party guarantees or provide cash collateral. Any payments and liabilities are netted as they are both inextricably linked. At the end of 2016 no collateral has been granted.

With respect to the forward contracts that are used for covering fuel costs abroad, Abellio has given guarantees for a sum of €3 million.

For more detailed information about the energy contracts, please refer to note 30.

Tax group

For the purpose of income tax, all the Dutch subsidiaries belonging to the Group (with the exception of Qbuzz) are part of the NS tax group. As a result, the Group is ultimately liable for all tax liabilities of the subsidiaries included in the tax group.

Investment commitments

At the end of 2016, the Group had outstanding investment commitments of €1,428 million (2015: approximately €838 million), primarily for purchasing and upgrading trains and investments in the areas around the stations.

Contingent liabilities

The Group has paid €28 million (after conversion) into its share in the issued share capital of Eurofima AG (a sum of €112 million after conversion). The Group has a liability for full payment on demand of the shares and other guarantee commitments totalling €252 million. Payment of the liability can be demanded if Eurofima AG’s own equity position gives reason to do so. For Eurofima loans that are not part of the cross-border lease finance arrangements, collateral has been provided in the form of pledges on rolling stock.

The IC Brussels is part of agreements within the context of the entire HRN concession. Operating results from IC Brussels are settled upon agreement with the Belgian carrier. The size of the result is to be settled, depending on the realised operational result on this route.

A number of investigations are ongoing and various claims have been submitted against NS and/or its group companies, which NS is contesting. Although the outcome cannot be predicted with certainty, it is expected that these will not have negative financial consequences of any material significance.

Guarantees

The Group has provided for an amount of € 869 million of guarantees for the implementation of the various concessions.

Concessions

The Group has the following concessions:

Explanation

A net contract is a contract with a revenue risk in respect of passenger revenues.

A gross contract is a contract without revenue risk in respect of passenger revenues.

A mixed contract is a net contract with certain anti-takeover measures in respect of passenger revenues.

Main rail network

The main rail network concession is awarded by the Ministry of Infrastructure and the Environment and it covers passenger transport by rail on the main rail network in the Netherlands. The old main rail network concession and the HSL concession (see next paragraph) ended in 2014 and the ministry decided in December 2014 to award a new integrated main rail network concession to NS for the period from 1 January 2015 to 31 December 2024. The train services on the HSL South are also covered by this concession from 1 January 2015 onwards. It has been stipulated in the concession that performance must improve during the term of the concession. The interim evaluation and final evaluation will take place in 2019 and 2024 respectively. If NS does not achieve the target values for 2019 or 2024 respectively, NS will be obliged to pay a sum from €1.5 million up to a maximum of €19.5 million for each performance indicator not attained at each evaluation moment. If NS does meet the conditions, a maximum bonus of €10 million can be earned for each evaluation. In addition, the ministry can impose a fine of a maximum of €6.5 million a year if NS does not achieve the baseline minimum values for the concession performance indicators. In 2014, that maximum was still €2.75 million. The performance indicators are measured for the following performance areas: general (customer satisfaction), the door-to-door journey, comfortable journeys (transport capacity at peak times), journey information (in the event of disruptions), safety (including personal safety) and reliability (punctuality for passengers). In 2016, NS received a fine from the Ministry of Infrastructure and the Environment for an amount of €0.5 million.

The agreements made with the governmental authorities include ones on the production resources (rolling stock in particular) that are to be used for operating the main rail network concession. Depending on the ownership details and the form of tendering, the production resources may be leased in the event of complete or partial loss of the main rail network concession to a subsequent concession holder, sold at book value and/or their leases may be transferred unchanged to the subsequent concession holder.

The overall fees for track use and the concession for the integrated main rail network/HSL South concession were €314 million in 2016. The negotiation agreement of 2011 included an adjustment mechanism for avoiding the liquidation of HSA. This adjustment mechanism has been included in the implementation agreement for the concession. It essentially means the following: if the average return on investment for the concession holder over a fixed period turns out to be lower than the threshold value (4%), then the holder will be entitled to an adjustment to the concession price (equal to the difference between the actual return and 4%, with the adjustment over the entire duration of the concession being capped at the equivalent of €144 million at 2010 prices). There is no entitlement to any such adjustment over 2015. Any entitlement to an adjustment is first calculated over 2016 over the average return on investment for 2015 and 2016, and thereafter on a rolling basis over the previous three years. An entitlement to an adjustment to the concession price deriving from the implementation agreement will not then lapse if at any moment in subsequent years the return on investment is higher than the threshold value. Payment of any entitlement that may have arisen to an adjustment to the concession fee will be spread in instalments, as per the implementation agreement.

The concession also includes an adjustment mechanism for a settlement of any windfalls in energy price changes over the concession period. This adjustment will be calculated cumulatively, with NS owing the Ministry of Infrastructure and the Environment 75% of the difference between the actual energy prices and the forecast energy prices according to the business case, with no adjustment being made at times when the cumulative actual return on investment falls below the cumulative norm return. Separately from the calculation outlined above, NS is liable for an unconditional one-off sum of €56 million to the ministry for 2015; this payment is being amortised linearly over the entire term of the concession. This arrangement is capped at €290 million (including the one-off sum) and will never result in a payment to NS by the Ministry of Infrastructure and the Environment. No energy cost adjustment is owed for 2016.

Regional rail concessions

This concerns passenger transport by rail on the routes listed below. The concessions specify the conditions with respect to frequency, accessibility, level of service, etc.

During 2016, NS operated the following four concessions, which will run for the periods stated:

• Gouda – Alphen aan den Rijn until 11 December 2031

• Zwolle – Kampen until 9 December 2017

• Zwolle – Enschede until 9 December 2017

• Rotterdam – Hoek van Holland Strand until 31 March 2017

The concessions have been awarded by the provinces or metropolitan regions in question. For the operation of the concessions, a fee is received from the authority granting the concession.

Merseyrail concession

This concession is operated as a 50-50 joint venture with Serco, a listed British company. It concerns passenger transport on the rail network in the region around Liverpool. There is an obligation to operate defined services (timetable, quality of the service) for a fixed fee paid by the regional authorities. Every five years there is an evaluation that includes checking whether the operations are still ‘efficient’. Merseyrail have completed 2 successful reviews with the third due in 2018. The concession runs for 25 years (through to 20 July 2028). There is an option for a five-year extension. The annual payment received from the authorities (grant) is determined in the contract and is index- linked annually.

Greater Anglia concession (East Anglia)

Abellio was the operator of the previous Greater Anglia concession, which expired in October 2016, and won the new Greater Anglia concession in August 2016. This concession is operated by the full subsidiary Abellio East Anglia Ltd. It has recently been announced that a 40% share of the concession is proposed to be sold to Mitsui. The concession operates passenger transport on the rail network in the Anglia region in the east of England. The number of train-kilometres for this concession is around 29 million per annum. The concession started operation on 16 October 2016 and runs to 12 October 2025, with an option for a further extension of a year. There is an obligation for the replacement of the entire current fleet, with 1,043 new vehicles by September 2020 to run on the Rural, Intercity, Stansted Express, West Anglia and Great Eastern routes. This will increase the number of seats into London in the peak by 55%. Other obligations include a commitment to invest £120m in depot facilities, £60m in station upgrades and £115 million in other expenses and investments.

ScotRail concession

Abellio won the ScotRail concession in October 2014. The concession started on 1 April 2015 and will run for a minimum of 7 years. An extension to 31 March 2025 is possible by mutual consent after an evaluation in Year 5, with an option for a further extension of 2 years through to 31 March 2027. The ScotRail concession was awarded by Transport Scotland and is operated by the fully-owned subsidiary Abellio ScotRail Ltd, providing intercity, regional and provincial passenger transport by train on the Scottish national rail network. There is an obligation to provide the specified services (timetable, quality of the services) for a predetermined fee paid by the government (grant), which is index-linked on an annual basis.

Concessions in Germany

Abellio currently operates various train services in the North Rhine-Westphalia (NRW) and Central Germany regions for a fixed payment by the government, which is index-linked on an annual basis. The concessions run for periods that end at various points between 2019 and 2030.

In December 2016, the Niederrhein-Netz rail concession started the German part of operations. From April 2017 onwards trains will also commute between the Netherlands and Germany.

In June 2015, Abellio won two routes of the Rhine-Ruhr-Express (RRX) with a two-step start of operations; the first will run from Münster to Dortmund, Düsseldorf, Cologne and Aachen in 2018 and the second from Düsseldorf to Essen, Dortmund, Paderborn and Kassel in 2020.

In November 2015, Abellio won the Stuttgarter Netze concession. From June 2019 onwards, Abellio will be running 43 new trains in the Baden-Württemberg region.

In addition, Abellio won the Saxony-Anhalt diesel network (DISA) concession in December 2015. From December 2018 onwards, Abellio will be running 12 routes in the Saxony-Anhalt region.

In July 2016, Abellio won the S-Bahn Rhein-Ruhr concession. From December 2019 onwards, Abellio will be running 6 routes in the NRW region.

In December 2016, Abellio successfully defended the Ruhr Sieg Netz concession. From 2019 on, Abellio will operate the concession with 18 trains.

Concessions in London

Abellio London operates 49 bus routes in London from 5 depots representing 8% of the market, and 21 bus routes in Surrey from one depot. The concessions in London have terms of 5 years on average with an option for an extension of 2 years, depending on the attainment of various performance criteria.

Qbuzz concessions

Qbuzz operates regional bus concessions in Friesland (until December 2016, after which the concession was handed over to Arriva), Groningen-Drenthe (until December 2019) and Utrecht (December 2014 until December 2023).