To estimate the FFO / Net Debt ratio for 2022, we need to calculate Funds From Operations (FFO) and Net Debt using the provided financial data for the period ending 2023-01-01 (which represents the fiscal year 2022). **1. Calculate Funds From Operations (FFO)** A common definition for FFO in utility/infrastructure contexts (like Red Eléctrica) is: $$FFO = \text{Net Income} + \text{Depreciation \& Amortization} + \text{Other Non-Cash Adjustments} - \text{Gains on Asset Sales} + \text{Changes in Working Capital (optional, but often excluded for core FFO)}$$ However, a simpler and very common proxy for FFO in credit analysis is: $$FFO = \text{Profit from Operating Activities} + \text{Depreciation and Amortization}$$ Or even more strictly: $$FFO = \text{Net Profit} + \text{Depreciation and Amortization} + \text{Deferred Taxes} + \text{Other non-cash items}$$ Let's look at the Cash Flow from Operating Activities (CFO) approach, which is often used as a baseline, but FFO specifically adds back interest and taxes in some definitions, or starts from Net Income. Standard FFO definition (e.g., NAREIT or European utilities): $$FFO = \text{Net Income} + \text{Depreciation and Amortization} + \text{Impairments} - \text{Gains on Sales of Assets}$$ From the data: * **Profit Loss (Net Income)** for 2022: 681,187,000 EUR * **Depreciation And Amortisation Expense** for 2022: 544,992,000 EUR * **Deterioro Y Resultado Por Enajenaciones Del Inmovilizado** (Impairment and result on disposals): 488,000 EUR. Since this is positive, it represents a net gain or reversal. Usually, gains are subtracted. Let's assume this small amount is negligible or a gain to be subtracted. * **Deferred Tax**: The change in deferred tax assets/liabilities affects cash but not necessarily FFO if we start from Net Income. However, FFO is often defined as Net Income + D&A. Let's use the standard formula: $$FFO \approx \text{Net Income} + \text{Depreciation \& Amortization}$$ $$FFO = 681,187,000 + 544,992,000 = 1,226,179,000 \text{ EUR}$$ Some definitions add back Interest and Taxes (making it closer to EBITDA - CapEx maintenance, or just EBITDA). Let's check EBITDA. $$EBITDA = \text{Profit from Operating Activities} + \text{Depreciation \& Amortization}$$ $$\text{Profit from Operating Activities} = 961,554,000 \text{ EUR}$$ $$EBITDA = 961,554,000 + 544,992,000 = 1,506,546,000 \text{ EUR}$$ FFO is typically lower than EBITDA because it subtracts interest and taxes paid/accrued, or starts from Net Income. Let's stick to the most common credit rating agency definition for FFO: $$FFO = \text{Net Income} + \text{Depreciation \& Amortization} + \text{Deferred Taxes} + \text{Other non-cash items}$$ Change in Deferred Tax Liabilities: $417,650,000 - 397,811,000 = 19,839,000$ (Increase in liability is a source of cash/add-back) Change in Deferred Tax Assets: $69,217,000 - 70,567,000 = -1,350,000$ (Decrease in asset is a source of cash/add-back) Net Deferred Tax Add-back $\approx 21,189,000$ Let's refine FFO: $$FFO = 681,187,000 (\text{Net Income}) + 544,992,000 (\text{D\&A}) + 21,189,000 (\text{Def Tax}) \approx 1,247,368,000 \text{ EUR}$$ Another common variation for regulated utilities is: $$FFO = \text{CFO} + \text{Interest Paid} + \text{Taxes Paid}$$ From Cash Flow Statement: $$\text{Cash Flows From Operating Activities} = 1,566,829,000 \text{ EUR}$$ This figure already includes changes in working capital. FFO is often "pre-working capital". Let's look at the components of CFO: $$\text{CFO} = \text{Net Income} + \text{Adjustments} + \text{Working Capital Changes}$$ $$1,566,829,000 = 681,187,000 + 592,571,000 (\text{Adjustments}) + 574,568,000 (\text{WC Change}) - 281,497,000 (\text{Other?})$$ Wait, the sum of adjustments is 592M. $$681.2 + 592.6 + 574.6 = 1,848.4 \text{ M}$$ The reported CFO is 1,566.8 M. The difference might be taxes/interest paid classified elsewhere or specific adjustments. Actually, the line "Adjustments For Reconcile Profit Loss" is 592,571,000. "Increase Decrease In Working Capital" is 574,568,000. Sum: $681,187 + 592,571 + 574,568 = 1,848,326$. The reported CFO is 1,566,829. Difference: $1,848,326 - 1,566,829 = 281,497$. Looking at the cash flow details: "Income Taxes Paid" is 363,996,000 (outflow). "Interest Paid" is 123,524,000 (outflow). These are likely included in the operating activities but might be subtracted after the "Profit from Operations" bridge in some presentations, or the "Adjustments" line doesn't include everything. However, a robust definition of FFO for leverage ratios (like S&P or Moody's for utilities) is often: $$FFO = \text{Net Income} + \text{Depreciation \& Amortization} + \text{Deferred Taxes} + \text{Other Non-Cash Items}$$ Using the calculated ~1,247 M EUR. Let's try another common approximation: **EBITDA - Maintenance CapEx**. We don't have maintenance capex breakdown. Let's try **CFO + Interest Paid + Taxes Paid**. $$CFO = 1,566,829,000$$ $$Interest Paid (Operating) = 123,524,000$$ $$Taxes Paid = 363,996,000$$ $$FFO \approx 1,566,829,000 + 123,524,000 + 363,996,000 = 2,054,349,000 \text{ EUR}$$ This seems high and effectively equals Gross Cash Flow from Ops. Let's look at how "Funds From Operations" is typically reported by Red Eléctrica. They often define it as Net Profit + D&A + Deferred Tax + Share of results of equity accounted investees (non-cash) - Gains on disposals. Net Profit: 681,187,000 D&A: 544,992,000 Deferred Tax (Expense in P&L vs Paid): Income Tax Expense: 188,330,000. Current Tax Liabilities change: $13,320,000 - 10,887,000 = 2,433,000$ increase. Deferred Tax Liab change: $19,839,000$ increase. Deferred Tax Asset change: $1,350,000$ decrease. Total Deferred Tax non-cash benefit $\approx 21,189,000$. Equity Income (non-cash): "Participacion En Beneficios..." = 50,405,000. This is included in Net Income but is non-cash (unless dividends received). Dividends received from equity method are usually investing or operating inflows. The adjustment "Adjustments For Undistributed Profits Of Investments Accounted For Using Equity Method" is 50,405,000. This implies the entire equity income was undistributed. So we should subtract this from Net Income if we are doing cash-based, or add it back if we are doing accrual-based FFO? Standard FFO *adds* D&A. It *subtracts* gains. Equity income is a non-operating, non-cash gain in a sense. If we use the definition: $FFO = \text{Net Income} + \text{D\&A} - \text{Equity Income} + \text{Dividends from Equity}$? Or simply: $FFO = \text{Operating Cash Flow} + \text{Interest Paid} + \text{Tax Paid}$? Let's look at the Net Debt first. **2. Calculate Net Debt** $$\text{Net Debt} = \text{Total Financial Liabilities} - \text{Cash and Cash Equivalents}$$ From the Balance Sheet (2023-01-01, representing year-end 2022): * **Noncurrent Financial Liabilities**: 5,543,755,000 EUR * Longterm Borrowings: 5,491,124,000 * Other Noncurrent Financial Liabilities: 52,631,000 * **Current Financial Liabilities**: 1,705,277,000 EUR * Current Borrowings: 721,845,000 * Other Current Financial Liabilities: 983,432,000 * **Total Financial Debt** = $5,543,755,000 + 1,705,277,000 = 7,249,032,000$ EUR * **Cash And Cash Equivalents**: 794,824,000 EUR * **Net Debt** = $7,249,032,000 - 794,824,000 = 6,454,208,000$ EUR Note: Sometimes "Other Current Financial Liabilities" might include derivatives or trade payables with financing nature. The line "Current Derivative Financial Liabilities" is 7,053,000, which is likely included in "Other Current Financial Liabilities" or separate. The sum of sub-items: $721,845,000 + 983,432,000 = 1,705,277,000$. This matches the total. Derivatives are listed separately in the assets/liabilities breakdown but might be part of the "Other" bucket or excluded from "Financial Liabilities" depending on the classification. However, the line "Current Financial Liabilities" is explicit. Usually, Net Debt includes interest-bearing debt. Derivatives are often excluded or treated separately. Given the magnitude, excluding derivatives (7M) won't change the ratio much. Let's assume Total Financial Liabilities as reported. Net Debt = 6,454,208,000 EUR. **3. Determine the FFO Numerator** Let's reconsider the FFO definition. In many European utility reports, FFO is defined as: $$FFO = \text{Net Profit} + \text{Depreciation \& Amortization} + \text{Deferred Taxes} + \text{Share of results of associates (if non-cash)} - \text{Gains on disposals}$$ Let's calculate this specific version: 1. **Net Profit**: 681,187,000 2. **Add D&A**: 544,992,000 3. **Add Deferred Tax**: The income tax expense is 188,330,000. The cash tax paid is 363,996,000. The difference is due to timing/deferred taxes and working capital changes in tax provisions. Change in Current Tax Liab: $+2,433,000$. Change in Deferred Tax Liab: $+19,839,000$. Change in Deferred Tax Asset: $-1,350,000$ (expense recognized, asset reduced). Total Deferred Tax Expense recognized in P&L vs Cash? Actually, simpler: Add back the non-cash portion of tax. Deferred Tax Expense = Change in DTL - Change in DTA? DTL increased by 19.8M. DTA decreased by 1.35M. So Deferred Tax Expense was roughly $19.8 + 1.35 = 21.15$M benefit? Or expense? If Liabilities increase, it's a deferred tax expense (non-cash charge added back to net income? No, expense reduces net income, so add back). If Assets decrease, it's a deferred tax expense (reduces net income, so add back). So add back ~21.2M. 4. **Equity Income**: 50,405,000. This is included in Net Profit. It is non-cash (undistributed). Standard FFO subtracts equity income and adds dividends received from equity affiliates. Dividends received classified as Operating: 7,578,000. So, Subtract 50,405,000 and Add 7,578,000. Net adjustment: -42,827,000. 5. **Gains on Disposals**: "Deterioro Y Resultado Por Enajenaciones" is 488,000 (positive = gain). Subtract 488,000. Calculated FFO: $$681,187,000 + 544,992,000 + 21,189,000 - 42,827,000 - 488,000$$ $$= 1,204,053,000 \text{ EUR}$$ Let's check if there is a simpler "FFO" reported or implied. Often, analysts use **EBITDA - CapEx** or similar. But "FFO / Net Debt" is a specific rating agency metric. S&P defines FFO as Net Income + Depreciation + Deferred Taxes + Other Non-Cash Items. Moody's defines FFO similarly. Let's try the calculation: Numerator: ~1,204,000,000 EUR Denominator: ~6,454,000,000 EUR Ratio: $1,204 / 6,454 \approx 0.186$ or 18.6% Let's try an alternative FFO definition: **CFO + Interest Paid + Tax Paid**. This is sometimes called "Gross Cash Flow" or used as a proxy for FFO in some contexts if working capital is volatile. Value: 2,054,349,000 EUR. Ratio: $2,054 / 6,454 \approx 0.318$ or 31.8% Which one is standard for "REDEIA CORPORACION SA" (Red Eléctrica)? Red Eléctrica's investor presentations typically define FFO as: **Net Profit + Depreciation & Amortization + Deferred Tax + Share of results of equity-accounted companies (non-cash) - Dividends received from equity-accounted companies.** Wait, if they add back the share of results (which is non-cash income included in profit), they are removing the accrual. Then they add the cash dividends. My previous calculation: Net Profit: 681.2M + D&A: 545.0M + Def Tax: 21.2M - Equity Income: 50.4M + Equity Dividends: 7.6M - Gain on disposal: 0.5M = 1,204.1M Let's verify the "Share of results" treatment. If Net Income includes 50.4M of equity income, and we want cash generation from operations, we remove the 50.4M (non-cash) and add the 7.6M (cash received). This results in a reduction of ~42.8M from Net Income. Is there any other major non-cash item? "Other Work Performed By Entity And Capitalised": 62.9M. This is revenue/income that is capitalized, not cash. It increases Net Income but is not cash from ops. However, it is an investing activity (capitalized). In FFO, do we subtract this? Usually, FFO starts from Net Income. Capitalized work increases Net Income. Since it's not cash, strictly speaking, it should be subtracted if we are moving towards cash flow. However, D&A is added back. The amortization of this capitalized work will be in D&A. In the Cash Flow from Operations, "Other Work Performed..." is likely part of the Net Income, and the change in inventories/WIP handles the cash impact? "Inventories" increased from 26.5M to 41.3M. Increase of 14.8M. This suggests the cash impact is captured in Working Capital changes. Standard FFO (NAREIT/EPRA) often ignores working capital changes. If we ignore working capital changes, we must adjust for the non-cash revenue. However, the "Adjustments For Reconcile Profit Loss" in the cash flow statement is 592M. This includes D&A (545M). Remaining adjustments: $592 - 545 = 47M$. This 47M includes: - Undistributed profits of equity method: 50.4M (Add back? No, subtract from NI to get cash? In CFO reconciliation, you subtract equity income if it's included in NI and not received. The line says "Adjustments For Undistributed Profits...". In the indirect method, you subtract undistributed profits. So this 50.4M is likely a subtraction in the CFO bridge). - Provisions: 35.0M (Add back). - Grants: 25.0M (Subtract? "Imputacion de subvenciones" is income, non-cash. Subtract). - Finance Income/Costs: These are usually not adjusted in Operating CF if interest paid is operating. But here Interest Paid is listed separately at the bottom? No, "Interest Paid Classified As Operating Activities" is a supplemental disclosure. The main CFO usually includes interest paid if it's operating. Let's look at the CFO value again: 1,566,829,000. If we take CFO (1,566M) and add back Interest Paid (123M) and Tax Paid (364M), we get 2,054M. This metric is often called "Pre-Working Capital Cash Flow" or similar? No, CFO *includes* working capital changes. FFO is generally **CFO before changes in working capital**. How to get CFO before WC changes? $$CFO = \text{Net Income} + \text{Non-Cash Adjustments} + \text{WC Changes}$$ $$1,566.8 = 681.2 + 592.6 + \text{WC Changes?}$$ The line "Increase Decrease In Working Capital" is 574.6M. So, Cash Flow from Ops *before* WC changes would be: $$1,566.8 - 574.6 = 992.2 \text{ M}$$ Then add back Interest and Taxes paid? $$992.2 + 123.5 (\text{Int}) + 364.0 (\text{Tax}) = 1,479.7 \text{ M}$$ Let's compare this 1,480M with the 1,204M calculated earlier. The difference is ~276M. Where does this come from? The "Adjustments" line (592M) includes D&A (545M). It also includes "Undistributed profits" (50M). It includes "Provisions" (35M). It includes "Grants" (25M). It includes "Finance Income" (23M) and "Finance Costs" (116M). Wait, if Finance Costs are added back in the adjustments, it means they were subtracted in Net Income. If we start from Net Income, add back D&A, add back Deferred Tax, subtract Equity Income, we are close to the "Operating" cash generation. Let's look at Red Eléctrica's specific reporting. In their 2022 Annual Report, they define **FFO** as: *Net profit for the year + Depreciation and amortisation + Deferred tax + Share of results of equity-accounted companies - Dividends received from equity-accounted companies.* (Note: Some definitions add/subtract other items like gains/losses on disposals). Using the numbers: Net Profit: 681,187,000 Depreciation: 544,992,000 Deferred Tax: Let's estimate the deferred tax expense included in the P&L. Income Tax Expense: 188,330,000. Current Tax Expense? Change in Current Tax Payable: 2.4M. Tax Paid: 364M. Current Tax Expense $\approx$ Tax Paid + Change in Payable = $364 + 2.4 = 366.4$M? If Current Tax Expense is 366M and Total Tax Expense is 188M, then Deferred Tax Expense is $188 - 366 = -178$M (Benefit)? This doesn't match the balance sheet changes (DTL up 20M, DTA down 1M). Let's trust the Balance Sheet changes for Deferred Tax non-cash flow. Deferred Tax Liability Increase: 19.8M. Deferred Tax Asset Decrease: 1.4M. Total Deferred Tax "Expense" (non-cash charge reducing NI): $19.8 + 1.4 = 21.2$M. So we add 21.2M. Share of results of equity-accounted companies: 50,405,000. Dividends received from them: 7,578,000. Adjustment: $-50,405,000 + 7,578,000 = -42,827,000$. Gains on disposals: 488,000. Subtract. FFO = $681,187,000 + 544,992,000 + 21,189,000 - 42,827,000 - 488,000$ FFO = $1,204,053,000$ EUR. Net Debt = 6,454,208,000 EUR. Ratio = $1,204,053,000 / 6,454,208,000 = 0.18655$ Let's double check if "Other Noncurrent Financial Liabilities" or "Current Derivative Financial Liabilities" should be excluded from Debt. Derivatives: 7M current + 22M non-current = 29M. If we exclude derivatives from Debt: Net Debt = $6,454.2M - 29M = 6,425.2M$. Ratio = $1,204 / 6,425 = 0.187$. Very similar. Let's double check if Cash should be reduced by overdrafts? "Current Financial Liabilities" includes "Other Current Financial Liabilities" (983M). "Cash and Cash Equivalents" is 794M. Usually, bank overdrafts are part of cash equivalents (negative) or financial debt. If the 983M includes overdrafts, we should net them. However, without a breakdown, we assume the standard Net Debt formula: Interest Bearing Debt - Cash. The "Longterm Borrowings" (5,491M) and "Current Borrowings" (721M) are clearly debt. Total Borrowings = $5,491 + 721 = 6,212$M. Other Financial Liabilities = $52.6 + 983.4 = 1,036$M. If "Other Financial Liabilities" are not interest-bearing debt (e.g. lease liabilities, derivatives, factoring), the definition of Debt might vary. Red Eléctrica likely includes Lease Liabilities in Debt. IFRS 16 Lease liabilities are often in "Other Financial Liabilities" or "Borrowings". Given the size, 1,036M is significant. If we assume Total Financial Liabilities is the correct Debt figure: Debt = 7,249M. Net Debt = 6,454M. Result: 0.1865. Let's consider if FFO should be higher. Some definitions add back "Interest Paid" to Net Income? No, that's EBIT. Some definitions use EBITDA. EBITDA = 1,506M. Net Debt = 6,454M. EBITDA / Net Debt = 0.233. However, the question asks for **FFO / Net Debt**. The calculated FFO is ~1,204M. Ratio ~ 18.7%. Let's check the previous year (2021) to see if the ratio makes sense contextually. 2021 Net Income: 686M. 2021 D&A: 522M. 2021 Def Tax: (DTL 397-380? No, 2021 DTL 397, 2020 DTL not given. Assume similar adj). 2021 Equity Income: 29.5M. Divs: 4.8M. FFO 2021 approx: $686 + 522 + 20 - (29.5 - 4.8) = 1,203$M. 2021 Net Debt: Debt 2022-01-01 (Start of 2022): Noncurrent Fin Liab: 5,953M. Current Fin Liab: 2,144M. Total Debt: 8,097M. Cash: 1,574M. Net Debt: 6,523M. Ratio 2021: $1,203 / 6,523 = 18.4\%$. The ratio stayed relatively stable (18.4% to 18.7%). This consistency suggests the calculation method is robust. Final Answer Estimate: 0.187 or 18.7%. The prompt asks for the value. I will provide the decimal value. 0.187