# S&P-Adjusted Debt-to-EBITDA Analysis for Fortum Oyj

## Step 1: Identify the Relevant Industry

Based on Fortum's annual report and business description, Fortum Oyj operates as a **Regulated Utility** and **Unregulated Power and Gas** company. The company provides electricity and heat generation services across Nordic and Baltic regions. It operates both regulated distribution networks and unregulated generation assets.

For S&P analysis purposes, given the mixed nature (regulated + unregulated), the primary methodology is **Regulated Utilities** with adjustments for unregulated segments. However, the company also has significant unregulated power generation activities.

## Step 2: Estimate Adjusted_Debt

### Gather Debt Information (as of 2022-01-01, i.e., fiscal year 2022):

**Reported Debt Components:**
- The balance sheet reports both current and noncurrent financial liabilities
- Noncurrent Financial Liabilities (Other Noncurrent Financial Liabilities): €8,701 million
- Current Financial Liabilities (Other Current Financial Liabilities): €8,519 million
- Current Derivative Financial Liabilities: €71,947 million (primarily hedging instruments, not operational debt)
- Noncurrent Derivative Financial Liabilities: €16,657 million (primarily hedging instruments)

**Adjustments for S&P Debt Calculation:**

1. **Reported Interest-Bearing Debt:**
   - Noncurrent borrowings (Other Noncurrent Financial Liabilities): €8,701 million
   - Current borrowings (Other Current Financial Liabilities): €8,519 million
   - Total reported operational debt: €17,220 million

2. **Leases:** Not separately disclosed in detail; estimated at minimal impact for utilities.

3. **Pension Obligations:**
   - Noncurrent Recognised Liabilities Defined Benefit Plan (2022): €1,190 million
   - For S&P analysis, add 50% of pension deficit as debt-like: €1,190 × 0.50 = €595 million

4. **Nuclear Provisions (Debt-like):**
   - Nuclear Non Current Provisions (2022): €3,891 million
   - Share In State Nuclear Waste Management Fund (2022): €3,515 million
   - The nuclear provision should be treated as a debt obligation: €3,891 million

5. **Other Provisions:**
   - Other Longterm Provisions (2022): €4,108 million
   - Estimate conservative 50% as debt-like: €4,108 × 0.50 = €2,054 million

6. **Derivative and Margin Liabilities:**
   - Margin Liabilities (2022): €985 million (this is collateral-related, treat as debt-like)
   - Derivatives are hedging instruments; adjust basis for accounting treatments
   - Current Derivative Financial Liabilities (€71,947 million) and Noncurrent (€16,657 million) primarily relate to hedging positions and energy price volatility
   - For S&P purposes, add 50% of net derivative position as potential debt-like exposure: (71,947 + 16,657) × 0.25 = €22,401 million

**Total Adjusted Debt (Gross):**
= €17,220 + €595 + €3,891 + €2,054 + €985 + €22,401
= €46,746 million

**Less: Eligible Cash (Liquid Funds):**
- Cash and Cash Equivalents (2022-01-01): €7,592 million

**Adjusted Debt (Net):**
= €46,746 - €7,592
= **€39,154 million**

*Note: Given the significant hedging positions and the nature of energy derivatives in 2022 (energy crisis year), a more conservative approach adjusts only operational debt plus provisions:*

**Conservative Adjusted Debt:**
= €17,220 + €595 + €3,891 + €2,054 + €985 - €7,592
= **€17,153 million**

(Using the conservative approach, which excludes derivatives as they represent hedging, not operating debt)

## Step 3: Estimate Adjusted_EBITDA

### EBITDA Reconstruction:

**From Reported Figures (Continuing Operations, 2022):**
- Operating Profit Before Depreciations EBITDA: €1,842 million
- Comparable EBITDA: €2,436 million

The "Comparable EBITDA" is the S&P-adjusted metric, which excludes items affecting comparability.

**Adjustments to Comparable EBITDA:**

1. **Base Comparable EBITDA:** €2,436 million

2. **Items Affecting Comparability (normalize):**
   - Items Affecting Comparability (2022): -€593 million (these are already excluded in Comparable EBITDA)

3. **Impairment adjustments:**
   - Impairment Loss/Reversal (2022): €905 million (add back as non-cash)
   - Adjusted EBITDA: €2,436 + €0 (already in Comparable EBITDA)

4. **Capital Gains and Other Items:**
   - Capital Gains (2022): €785 million (exclude as one-time)
   - Already considered in items affecting comparability

5. **Pension adjustments (if applicable):**
   - No significant one-time pension gains/losses requiring normalization

6. **Joint Venture/Associates adjustments:**
   - Share of Profit Loss of Associates (2022): -€629 million (loss; consider proportional EBITDA treatment)
   - For utilities, typically do not adjust for JV losses

**Adjusted EBITDA (Normalized):**

Using the Comparable EBITDA as the S&P-adjusted figure:
= €2,436 million

*Alternative calculation from operating profit:*
= Operating Profit + D&A + Adjustments
= €1,277 million + €566 million + (€593 - exceptional items normalization)
= €2,436 million ✓ (matches Comparable EBITDA)

**Final Adjusted EBITDA: €2,436 million**

## Step 4: Calculate Adjusted Debt / Adjusted EBITDA Ratio

**Using Conservative Adjusted Debt:**

Adjusted Debt to EBITDA = €17,153 / €2,436
= **7.04x**

**Sensitivity Check:**

If using broader adjusted debt (including conservative derivative adjustment):
= €39,154 / €2,436
= **16.07x** (likely overstates due to hedging derivatives)

**Reconciliation:**
The conservative estimate of 7.04x reflects:
- Operational borrowings: €17.2 billion
- Pension and provisions (debt-like): €6.5 billion
- Less eligible cash: €7.6 billion
- Normalized EBITDA: €2.4 billion

This ratio suggests elevated leverage for a regulated utility, which is consistent with Fortum's 2022 position following energy market disruptions and large derivative positions related to energy price hedging.

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