Okay, let’s go through the workflow step by step. --- **Step 1 – Identify the relevant industry** HERA S.P.A. is an Italian multi-utility company providing gas, electricity, water, and waste management services. From the description and the nature of its activities, the most relevant S&P methodology is **Regulated Utilities**. --- **Step 2 – Estimate 2021 Adjusted EBITDA** We start with a reconstruction of EBITDA from the income statement. 2021 figures: - Revenue: 10,555,300,000 EUR - Other Revenue: 400,100,000 EUR - Other Work Performed by Entity and Capitalised: 60,800,000 EUR - Raw Materials and Consumables Used: (6,668,500,000 EUR) - Services Expense: (2,464,600,000 EUR) - Employee Benefits Expense: (592,800,000 EUR) - Other Expense by Nature: (66,500,000 EUR) Operating profit before depreciation/amortization and provisions: = 10,555,300,000 + 400,100,000 + 60,800,000 – 6,668,500,000 – 2,464,600,000 – 592,800,000 – 66,500,000 = 1,223,800,000 EUR Add back Amortisation, Depreciation and Provisions: 612,100,000 EUR EBITDA = 1,223,800,000 + 612,100,000 = **1,835,900,000 EUR** No obvious non-recurring items stated separately; leasing adjustment not applied here because IFRS 16 leases are already within EBITDA and debt. We’ll use this as Adjusted EBITDA for 2021. **Adjusted EBITDA 2021 = 1,835,900,000 EUR** --- **Step 3 – Estimate 2021 FFO** FFO = Adjusted EBITDA – cash interest – cash taxes - Finance Costs (total): 300,300,000 EUR - Finance Income: 82,300,000 EUR Net finance cost = 300,300,000 – 82,300,000 = 218,000,000 EUR (We’ll use this as proxy for cash interest, absent better data) - Income taxes paid (from cash flow statement): 156,300,000 EUR FFO = 1,835,900,000 – 218,000,000 – 156,300,000 = **1,461,600,000 EUR** --- **Step 4 – Estimate 2021 Adjusted Debt** Adjusted Debt = reported debt + leases + pension deficit + other debt-like items – eligible cash Reported debt = Noncurrent Financial Liabilities + Current Financial Liabilities = 3,716,000,000 + 499,700,000 = 4,215,700,000 EUR Leases = Noncurrent Lease Liabilities + Current Lease Liabilities = 53,200,000 + 43,400,000 = 96,600,000 EUR Pension deficit = Noncurrent Provisions for Employee Benefits = 105,400,000 EUR Other long-term provisions (528,000,000 EUR) – these may be partly debt-like; for simplicity, we exclude unless industry-specific adjustment dictates otherwise. Cash and cash equivalents = 885,600,000 EUR Adjusted Debt = 4,215,700,000 + 96,600,000 + 105,400,000 – 885,600,000 = **3,532,100,000 EUR** --- **Step 5 – 2021 Adjusted Debt / Adjusted EBITDA** = 3,532,100,000 / 1,835,900,000 ≈ **1.92x** --- **Step 6 – 2021 FFO / Adjusted Debt** = 1,461,600,000 / 3,532,100,000 ≈ **0.414** --- **Step 7 – Estimate 2022 Adjusted EBITDA** Same calculation for 2022: Revenue: 20,082,000,000 Other Revenue: 548,200,000 Other Work Capitalised: 82,500,000 Raw Materials: (16,730,000,000) Services: (2,105,800,000) Employee: (601,100,000) Other Expense: (74,900,000) Operating profit before D&A = 20,082,000,000 + 548,200,000 + 82,500,000 – 16,730,000,000 – 2,105,800,000 – 601,100,000 – 74,900,000 = 1,200,900,000 EUR Add back D&A: 667,100,000 EUR EBITDA = 1,200,900,000 + 667,100,000 = **1,868,000,000 EUR** Adjusted EBITDA 2022 = **1,868,000,000 EUR** --- **Step 8 – Estimate 2022 FFO** Net finance cost: 217,200,000 – 82,200,000 = 135,000,000 EUR Taxes paid: 165,900,000 EUR FFO = 1,868,000,000 – 135,000,000 – 165,900,000 = **1,567,100,000 EUR** --- **Step 9 – Estimate 2022 Adjusted Debt** Noncurrent Financial Liabilities: 5,689,900,000 Current Financial Liabilities: 650,100,000 Total reported debt = 6,340,000,000 EUR Leases: 55,100,000 + 21,300,000 = 76,400,000 EUR Pension provisions: 92,000,000 EUR Cash: 1,942,400,000 EUR Adjusted Debt = 6,340,000,000 + 76,400,000 + 92,000,000 – 1,942,400,000 = **4,566,000,000 EUR** --- **Step 10 – 2022 Adjusted Debt / Adjusted EBITDA** = 4,566,000,000 / 1,868,000,000 ≈ **2.44x** --- **Step 11 – 2022 FFO / Adjusted Debt** = 1,567,100,000 / 4,566,000,000 ≈ **0.343** --- **Step 12 – Classify trend** **Signal 1 (Leverage):** 2021: 1.92x → 2022: 2.44x → change = +0.52x → **Deteriorating** (≥ 0.2x) **Signal 2 (Coverage):** 2021: 0.414 → 2022: 0.343 → change = –0.071 → **Deteriorating** (≤ –0.03) Both signals agree. --- **Final Answer** Deteriorating