I'll work through this step-by-step, analyzing REN - REDES ENERGÉTICAS NACIONAIS, SGPS, S.A. based on the provided financial data. ## Step 1: Identify the Relevant Industry REN is Portugal's national electricity and gas transmission network operator. Based on the description: - It operates electricity transmission and gas infrastructure - It's subject to comprehensive regulation - It provides essential infrastructure services with few substitutes - It's shielded from competition This clearly fits the **Regulated Utilities** sector, specifically "Electricity National" and "Gas" subsectors. REN operates as a regulated utility with natural monopoly characteristics in electricity transmission and gas distribution. ## Step 2: Estimate Adjusted Debt For regulated utilities, S&P's baseline formula applies with specific considerations: - Reported debt includes long-term and current borrowings - We need to consider lease liabilities (payments of lease liabilities are shown in financing activities) -1. **Reported Debt**: - Long-term borrowings (2023-01-01): 1,695,362,000 EUR - Current borrowings and current portion of non-current borrowings (2023-01-01): 638,944,000 EUR - **Total reported debt**: 1,695,362,000 + 638,944,000 = **2,334,306,000 EUR** 2. **Leases**: From cash flow statement, we see "Payments Of Lease Liabilities" = 2,157,000 EUR and "Payments Of Lease Interests" = 26,000 EUR. These indicate lease obligations exist. However, the lease liability amount isn't explicitly stated on the balance sheet. Looking at the financing cash flows, the lease payments suggest modest lease obligations. For regulated utilities, IFRS 16 leases are typically included in debt. Given the small payments (2.16M annually), lease liability is likely small. I'll estimate based on typical lease terms - roughly 5-8x annual payments, so approximately **15,000,000 EUR** (conservative estimate). However, looking more carefully at the data, I don't see explicit lease liabilities disclosed. Given the small amounts, this may be immaterial. Let me check if leases are already embedded in borrowings. Actually, looking more carefully: "Payments Of Lease Liabilities Classified As Financing Activities" = 2,157,000 EUR. This is the principal repayment. The interest portion is 26,000 EUR. Total lease liability would be small. I'll use **10,000,000 EUR** as a reasonable estimate for remaining lease liability (very rough given data limitations, but likely immaterial to overall debt). Wait - let me reconsider. In many European utility financial statements, lease liabilities are separately disclosed or included in "Other long-term provisions" or similar. Looking at the balance sheet, I don't see explicit lease liability line items. The "Other Longterm Provisions" is only 10,576,000 EUR. Given the small lease payments, lease liabilities are likely already in borrowings or immaterial. I'll assume **0** for separate lease adjustment to be conservative, or check if IFRS 16 was applied. Given the data structure and lack of explicit lease liability line item, I'll proceed with **0 additional lease liability** beyond what's in reported debt, noting this is conservative. 3. **Pension deficit**: "Noncurrent Provisions For Employee Benefits" = 64,939,000 EUR. This includes pension obligations. We need to assess if this is a deficit. For S&P purposes, pension deficit = pension obligations - plan assets. We don't have plan assets data. The 64,939,000 EUR is the provision. I'll use this as **pension deficit estimate: 64,939,000 EUR** (conservative, assuming no plan assets or net position). 4. **Guarantees, hybrid debt, other debt-like items**: No explicit data. The "Asset Related To The Transitional Gas Price Stabilization Regime" and corresponding liability suggest a pass-through mechanism. The 1,000,000,000 EUR asset and liability related to Decree Law 84-D/2022 appears to be a regulatory balancing account - this is typically **not debt** for S&P purposes as it's a pass-through regulatory mechanism. 5. **Eligible cash**: Cash and cash equivalents = 365,292,000 EUR. For regulated utilities, S&P typically allows netting of cash against debt when confident of near-term cost recovery. However, standard practice is to deduct most cash. I'll use **365,292,000 EUR** as eligible cash. **Adjusted Debt calculation**: - Reported debt: 2,334,306,000 EUR - Leases: 0 (or immaterial, included in borrowings) - Pension deficit: 64,939,000 EUR - Guarantees/hybrid/other: 0 - Less: Eligible cash: (365,292,000 EUR) **Adjusted Debt = 2,334,306,000 + 0 + 64,939,000 - 365,292,000 = 2,033,953,000 EUR** Wait - let me reconsider the regulatory asset/liability. The "Asset Related To The Transitional Gas Price Stabilization Regime Decree Law84D2022" and "Liability Related To The Transitional Gas Price Stabilization Regime Decree Law84D2022" are both 1,000,000,000 EUR. Per S&P methodology for regulated utilities: "Where substantial seasonal working capital requirements...distort leverage measures, we adjust inventory and debt balances by netting the value of inventory against outstanding short-term borrowings." Also: "We deconsolidate securitized debt (and associated revenue and expense) that has been accorded specialized recovery provisions." This 1B EUR appears to be a regulatory balancing account - essentially a pass-through mechanism for gas price stabilization. Per S&P methodology, this should likely be **excluded from debt** as it's not true debt but a regulatory timing difference. The liability is already not in borrowings - it's in current liabilities as a separate line item. So our debt calculation using only borrowings is correct. However, let me verify: Current Liabilities = 2,524,360,000 EUR includes: - Current borrowings: 638,944,000 - Trade payables: 885,416,000 - Tax liabilities: 0 - Gas stabilization liability: 1,000,000,000 So the 1B is not in borrowings. Good. Revised Adjusted Debt: **2,033,953,000 EUR** ## Step 3: Estimate Adjusted EBITDA For regulated utilities, EBITDA is typically reconstructed from operating profit plus depreciation/amortization. From the income statement: - Profit Loss From Operating Activities: 239,721,000 EUR - Depreciation And Amortisation Expense: 249,276,000 EUR **Reported EBITDA** = Operating profit + D&A = 239,721,000 + 249,276,000 = **488,997,000 EUR** Let me verify with revenue approach: - Revenue And Operating Income: 824,683,000 EUR - Operating Expense: 584,962,000 EUR - Operating profit: 824,683,000 - 584,962,000 = 239,721,000 ✓ Now adjustments for S&P purposes: 1. **Lease adjustments**: If we added lease liability to debt, we'd add back lease expense to EBITDA. But since lease liability is immaterial/unclear, and no explicit lease expense is shown (likely in services expense), we'll assume leases are already properly treated or immaterial. 2. **Nonrecurring items**: - "Revenue Recognised On Exchanging Construction Services For Intangible Asset": 197,420,000 EUR - This is IFRIC 12 construction revenue for concession assets. For S&P purposes, this is **not true revenue** - it's a financing mechanism. S&P typically **excludes** this from EBITDA as it's self-funded construction, not operating cash flow. Actually, per S&P regulated utilities methodology: For utilities with "regulatory accounting," they focus on "economics and actual cash flow generation." The IFRIC 12 accounting creates a non-cash revenue/expense pairing. The construction revenue is matched by "Costs With Construction Of Concession Assets" of 175,095,000 EUR. Net impact on operating profit: 197,420,000 - 175,095,000 = 22,325,000 EUR positive. But this is not true operating cash flow - it's capital work in progress. S&P typically adjusts for this by **removing both the revenue and costs** as they're non-operating, or treats them as financing. Let me check if this affects EBITDA. Actually, looking more carefully: Revenue 197,420,000 and Costs 175,095,000 are both in operating items. The net 22,325,000 contributes to operating profit. But this is not sustainable operating cash flow - it's a regulatory construction accounting mechanism. For S&P adjusted EBITDA, we should **exclude the net impact of IFRIC 12 construction activities** as they're financing/capital in nature, not operations. Adjustment: **-22,325,000 EUR** (remove the net IFRIC 12 contribution) 3. **Pension adjustments**: Interest on pension obligations. We don't have explicit data. The pension expense is likely in employee benefits. Given data limitations, we'll assume this is already properly reflected or immaterial. 4. **Joint venture proportional EBITDA**: "Share Of Profit Loss Of Associates And Joint Ventures" = 11,812,000 EUR. This is equity method earnings, already in operating profit. For S&P, we typically want proportional EBITDA from JVs. However, we don't have JV-level D&A. The equity earnings are already in operating profit. No clear adjustment needed unless we want to gross up - but data insufficient. 5. **Other normalizations**: - "Changes In Other Provisions": -2,230,000 EUR (negative = release). This is non-cash/non-recurring. Add back as it's a provision release. - "Impairment Loss Reversal": 1,437,000 EUR. Non-recurring gain. Deduct. Net from these: -2,230,000 + 1,437,000 = -793,000 EUR (net release, so reduce EBITDA by 793,000? Actually, provision releases are typically added back if they were previously expensed, but here it's already in operating profit. Let me think... Actually, "Changes In Other Provisions" of -2,230,000 means a release (credit to P&L). This artificially inflates current profit. We should **subtract** this as non-recurring. "Impairment Loss Reversal" of 1,437,000 also inflates profit. **Subtract** this. Total non-recurring adjustments: -2,230,000 - 1,437,000 = **-3,667,000 EUR** 6. **Energy Sector Extraordinary Contribution**: This is 28,019,000 EUR in the period, but it's below operating profit line. Not in EBITDA. Let me recalculate more carefully: Starting EBITDA: 488,997,000 EUR IFRIC 12 adjustment: The 197,420,000 revenue and 175,095,000 costs are both in operating items. For regulated utilities with concession accounting, S&P focuses on "actual cash flow generation." The IFRIC 12 accounting is non-cash in nature (construction work creates an intangible asset, not cash revenue). However, looking at cash flows: "Cash Flows From Used In Operating Activities" = 613,466,000 EUR. This is actual cash from operations. Let me compare to reported operating profit 239,721,000 + D&A 249,276,000 = 488,997,000 EBITDA. But cash from operations is 613,466,000, which is higher. The difference: 613,466,000 - 488,997,000 = 124,469,000. This includes working capital changes, tax payments, etc. Actually, for S&P purposes, we typically use reported EBITDA with adjustments, not cash-based EBITDA. Let me reconsider the IFRIC 12 treatment. In regulated utilities with concession assets, the "Revenue Recognised On Exchanging Construction Services For Intangible Asset" is often treated as **debt-like or financing** by S&P because it's self-funded construction. However, some analysts treat it as operating if it's core to the utility's regulatory model. Given Portugal's regulatory framework for REN, this IFRIC 12 revenue is part of the regulated return mechanism. However, S&P's methodology states: "Our financial analysis focuses on the economics and actual cash flow generation." The IFRIC 12 revenue is not actual cash - it's an accounting entry. I will **exclude the net IFRIC 12 impact**: subtract 22,325,000 EUR from EBITDA. Also, the "Miscellaneous Other Operating Income" of 27,225,000 EUR - need to assess if recurring. For regulated utilities, miscellaneous income may include various items. Without detail, assume mostly recurring. "Revenue From Sale Of Goods" 96,000 EUR - immaterial. **Adjusted EBITDA**: - Base EBITDA: 488,997,000 - Less: Net IFRIC 12 contribution: (22,325,000) - Less: Non-recurring provision release and impairment reversal: (3,667,000) - **Adjusted EBITDA = 488,997,000 - 22,325,000 - 3,667,000 = 463,005,000 EUR** Wait - let me reconsider the non-recurring items. The "Changes In Other Provisions" of -2,230,000 and "Impairment Loss Reversal" of 1,437,000 are already reflected in operating profit of 239,721,000. So they're already in my base EBITDA. If I want to normalize, I should: - Remove the provision release (it reduced expenses, increasing profit): so subtract 2,230,000 - Remove the impairment reversal (it increased profit): so subtract 1,437,000 Yes, that's correct. But actually, let me verify: "Changes In Other Provisions" is listed as -2,230,000. In the income statement structure, this is an expense line. Negative expense = income/release. So yes, it boosted profit. Similarly, "Impairment Loss Reversal Of Impairment Loss" is positive 1,437,000, meaning a reversal (gain). So my adjustment is correct. However, I want to double-check: should I also adjust for the "Miscellaneous Other Operating Income" and "Miscellaneous Other Operating Expense"? These are likely recurring operational items. Also, for regulated utilities, S&P mentions: "We do not adjust GAAP earnings or balance-sheet figures to remove the effects of regulatory accounting." So IFRIC 12 might stay. But IFRIC 12 is not US GAAP regulatory accounting - it's IFRS accounting for concessions. S&P says "While IFRS does not currently provide for any recognition of the effects of rate-setting for financial reporting purposes, our financial analysis focuses on the economics and actual cash flow generation." The "economics and actual cash flow generation" suggests we should focus on true cash flows. The IFRIC 12 revenue is not cash - it's a barter transaction (construction services for intangible asset). So excluding it makes sense for "actual cash flow generation." Let me also consider: the "Costs With Construction Of Concession Assets" of 175,095,000 EUR - are these true operating costs? No, they're capital in nature, just recorded as expense under IFRIC 12 to match the "revenue." The net is what matters. I'll proceed with **Adjusted EBITDA = 463,005,000 EUR** But let me also consider an alternative: maybe S&P would include IFRIC 12 as it's part of regulated operations. In that case: Alternative Adjusted EBITDA = 488,997,000 - 3,667,000 = 485,330,000 EUR Given the explicit S&P focus on "actual cash flow generation," I'll use the more conservative figure excluding IFRIC 12 net impact. Actually, re-reading: S&P says "We do not adjust GAAP earnings or balance-sheet figures to remove the effects of regulatory accounting." This suggests they accept regulatory accounting as-is for US GAAP utilities. For IFRS, they say they focus on "economics and actual cash flow generation." The IFRIC 12 is not regulatory accounting - it's concession accounting. It's a specific accounting standard (IFRIC 12) for service concessions. I think excluding the net IFRIC 12 impact is appropriate for "actual cash flow generation." Final Adjusted EBITDA: **463,005,000 EUR** ## Step 4: Calculate Adjusted Debt / Adjusted EBITDA Ratio = 2,033,953,000 / 463,005,000 = **4.39** Let me recalculate with more precision: 2,033,953,000 / 463,005,000 = 4.3930... Rounded to two decimal places: **4.39** Wait - let me reconsider if I should include IFRIC 12. Many European utilities are rated with IFRIC 12 included in EBITDA as it's part of their regulated business model. If I include it: Adjusted EBITDA = 485,330,000 Ratio = 2,033,953,000 / 485,330,000 = 4.19 The difference is material. Let me think more carefully... S&P's key phrase: "our financial analysis focuses on the economics and actual cash flow generation." The IFRIC 12 accounting creates: - Revenue: 197,420,000 (non-cash, creates intangible asset) - Cost: 175,095,000 (non-cash, reduces intangible asset or creates liability) - Net: 22,325,000 to operating profit But the cash flow reality: actual construction spending is in investing activities: "Purchase Of Intangible Assets Classified As Investing Activities" = 201,572,000 EUR. This is the actual cash spent. The IFRIC 12 "revenue" and "costs" are accounting constructs to show the utility earning a return on construction work. The actual cash is the construction spending. For credit analysis, the key question is: does this generate stable cash flows? Yes, through future regulated returns. But the accounting "revenue" and "cost" in the current period are not cash. However, S&P's ratio is Debt/EBITDA, which is a proxy for cash flow coverage. Using accounting EBITDA that includes non-cash IFRIC 12 items may overstate coverage. I think the conservative approach is to exclude net IFRIC 12. But let me check if S&P has specific guidance... Actually, looking at European utility ratings, S&P typically does NOT adjust out IFRIC 12 for regulated utilities because it's part of the regulated asset base and return mechanism. The "revenue" will convert to cash through future regulated tariffs. Excluding it would understate the utility's earning power. However, for a pure "cash flow generation" view, one might exclude it. Given the ambiguity, let me consider both approaches and see which is more standard. For REN specifically, this is a Portuguese regulated utility. The IFRIC 12 is core to its business model (building concession assets for the state). I'll use the **inclusive approach** (include IFRIC 12) as it's more standard for regulated utility credit analysis, but note this is a judgment call. The regulated utility methodology doesn't explicitly address IFRIC 12. Revised Adjusted EBITDA = 488,997,000 - 3,667,000 = 485,330,000 EUR Ratio = 2,033,953,‍000 / 485,330,000 = 4.1909... ≈ **4.19** Hmm, but let me re-check. The "Changes In Other Provisions" and "Impairment Loss Reversal" - are these definitely non-recurring? "Changes In Other Provisions" of -2,230,000: This could be recurring (annual provision movements). But the negative amount suggests a release, which is typically one-off. "Impairment Loss Reversal" of 1,437,000: This is definitely non-recurring. Actually, looking more carefully at prior year: "Changes In Other Provisions" was -365,000 in 2021-2022, and "Impairment Loss Reversal" was 1,313,000. These are small and somewhat recurring. Maybe I shouldn't adjust these out? If I don't adjust for these small items: Adjusted EBITDA = 488,997,000 (with IFRIC 12) or 466,672,000 (without IFRIC 12) Let me think about what's most standard for S&P. They typically make material adjustments only. The 3.7M net is less than 1% of EBITDA - immaterial. I'll keep it for precision but it won't change the rounded ratio. With IFRIC 12, no small adjustments: 488,997,000 / 2,033,953,000 = 4.16 Without IFRIC 12, no small adjustments: 466,672,000 / 2,033,953,000 = 4.36 Given S&P's focus on "actual cash flow generation" and the explicit statement about IFRS utilities, I think **excluding IFRIC 12** is more consistent with their philosophy. The 22.3M net IFRIC 12 impact is material (~5% of EBITDA). Final calculation: Adjusted Debt = 2,033,953,000 EUR Adjusted EBITDA = 466,672,000 EUR (488,997,000 - 22,325,000) Ratio = 4.358... ≈ **4.36** Wait, I need to be more careful. Let me recalculate: Base EBITDA = Operating profit 239,721,000 + D&A 249,276,000 = 488,997,000 IFRIC 12 net = 197,420,000 - 175,095,000 = 22,325,000 Adjusted EBITDA excluding IFRIC 12 = 488,997,000 - 22,325,000 = 466,672,000 But wait - is the IFRIC 12 revenue and cost both included in "Revenue And Operating Income" and "Operating Expense"? Let me check: Revenue And Operating Income = 824,683,000 Components: - Revenue From Sale Of Goods: 96,000 - Revenue From Rendering Of Services: 588,130,000 - Revenue Recognised On Exchanging Construction Services For Intangible Asset: 197,420,000 - Share Of Profit Loss Of Associates: 11,812,000 - Miscellaneous Other Operating Income: 27,225,000 Total: 96,000 + 588,130,000 + 197,420,000 + 11,812,000 + 27,225,000 = 824,683,000 ✓ Operating Expense = 584,962,000 Components: - Cost Of Sales: 901,000 - Costs With Construction Of Concession Assets: 175,095,000 - Services Expense: 82,516,000 - Employee Benefits Expense: 58,519,000 - Depreciation And Amortisation Expense: 249,276,000 - Changes In Other Provisions: -2,230,000 - Impairment Loss Reversal: 1,437,000 (negative expense = gain) - Miscellaneous Other Operating Expense: 14,988,000 Total: 901,000 + 175,095,000 + 82,516,000 + 58,519,000 + 249,276,000 + (-2,230,000) + (-1,437,000) + 14,988,000 = 577,628,000... Wait, that doesn't equal 584,962,000. Let me recheck. Actually, "Impairment Loss Reversal Of Impairment Loss Recognised In Profit Or Loss" = 1,437,000. This is a reversal, so it's a negative expense (gain). But in my sum I used -1,437,000 which is wrong - it should be -1,437,000 as expense (i.e., gain reduces expenses). Let me recalculate: 901,000 + 175,095,000 + 82,516,000 + 58,519,000 + 249,276,000 - 2,230,000 - 1,437,000 + 14,988,000 = 577,628,000. Still not 584,962,000. Hmm, difference is 7,334,000. Let me check if I missed something or if "Changes In Other Provisions" should be +2,230,000 (expense) not -2,230,000. Actually, looking at signs: "Changes In Other Provisions" 2022-01-01 - 2023-01-01: -2230000 EUR. The negative sign suggests a reduction in expense (release). But in standard income statement presentation, provision increases are expenses, releases are gains. Let me try: 901,000 + 175,095,000 + 82,516,000 + 58,519,000 + 249,276,000 + 2,230,000 + 1,437,000 + 14,988,000 = 584,462,000. Close but not exact - off by 500,000. Actually, I think the signs in the data might be presented as absolute values with the label indicating direction. Let me just trust the totals: Operating Expense = 584,962,000. For EBITDA calculation, we need: Revenue - Cash Operating Expenses + D&A, or Operating Profit + D&A. Operating Profit = Revenue And Operating Income - Operating Expense = 824,683,000 - 584,962,000 = 239,721,000 ✓ (matches) EBITDA = 239,721,000 + 249,276,000 = 488,997,000 ✓ Now, to exclude IFRIC 12 net impact: we need to subtract 197,420,000 from revenue and 175,095,000 from expenses, so net subtract 22,325,000 from operating profit, meaning EBITDA becomes 488,997,000 - 22,325,000 = 466,672,000. But wait - if we exclude IFRIC 12, should we also exclude associated D&A? The D&A of 249,276,000 includes amortization of concession assets. If we're excluding the construction revenue/cost, should we also exclude related amortization? This gets complicated. The D&A includes amortization of the intangible assets created by IFRIC 12 construction. If we exclude the "revenue" from construction, we might also need to exclude the amortization of those assets. However, the amortization is a real economic cost - the assets are being used up. And future regulated tariffs will need to cover this amortization. So keeping D&A makes sense. Actually, for a cleaner "cash flow" view, we might want to look at something closer to EBITDA before IFRIC 12 effects. But this is getting too complicated. Let me try a different approach: look at what S&P actually does for European utilities with IFRIC 12. In practice, they often use reported EBITDA with minimal adjustments because the IFRIC 12 is part of the regulated business model. Given the ambiguity, and that S&P says "We do not adjust GAAP earnings or balance-sheet figures to remove the effects of regulatory accounting" (for US GAAP), and for IFRS they focus on "economics and actual cash flow generation," I think the most defensible position is: 1. If we view IFRIC 12 as similar to regulatory accounting (which S&P doesn't adjust), keep it: EBITDA = 488,997,000 2. If we view it as non-cash and adjust for "actual cash flow," exclude net IFRIC 12: EBITDA = 466,672,000 The ratio difference is material: 4.16 vs 4.36. Looking at REN's actual S&P rating (I don't have it, but can infer from typical European regulated utilities), and considering that IFRIC 12 is standard for European infrastructure concessions, I believe S&P likely **includes** IFRIC 12 in EBITDA for consistency with reported financials. However, let me check one more thing: the "Revenue Recognised On Exchanging Construction Services For Intangible Asset" - is this part of "regulated operations" or separate? For REN, this is likely the regulated electricity/gas transmission construction work. It's core to operations. I'll use **EBITDA including IFRIC 12: 488,997,000 EUR**, but with a small adjustment for the clearly non-recurring impairment reversal: Actually, the 1,437,000 impairment reversal is small. And "Changes In Other Provisions" of -2,230,000 might be recurring in nature (annual provision true-ups). I'll leave them in for a clean reported EBITDA. **Final Adjusted EBITDA = 488,997,000 EUR** **Final Adjusted Debt = 2,033,953,000 EUR** Ratio = 2,033,953,000 / 488,997,000 = 4.1594... ≈ **4.16** Hmm, but I want to double-check my debt calculation. Should I include more items? Looking again at liabilities: - Noncurrent Liabilities: 2,409,702,000 - Longterm Borrowings: 1,695,362,000 - Noncurrent Provisions For Employee Benefits: 64,939,000 - Noncurrent Derivative Financial Liabilities: 73,464,000 - Other Longterm Provisions: 10,576,000 - Trade And Other Non Current Payables: 450,297,000 - Deferred Tax Liabilities: 115,064,000 - Current Liabilities: 2,524,360,000 - Current Borrowings: 638,944,000 - Trade Payables: 885,416,000 - Tax Liabilities: 0 - Gas Stabilization Liability: 1,000,000,000 For debt purposes: - Longterm Borrowings: 1,695,362,000 ✓ - Current Borrowings: 638,944,000 ✓ - Noncurrent Derivative Financial Liabilities: 73,464,000 - this is debt-like if negative value (liability). For interest rate/FX derivatives, negative mark-to-market is debt-like. Include? Typically yes for S&P if material. - Trade And Other Non Current Payables: 450,297,000 - these are operating payables, not debt - Deferred Tax Liabilities: 115,064,000 - not debt - Gas Stabilization Liability: 1,000,000,000 - regulatory timing difference, not true debt If I include derivative liabilities: Adjusted Debt = 2,033,953,000 + 73,464,000 = 2,107,417,000 Ratio = 2,107,417,000 / 488,997,000 = 4.31 This is material. S&P typically includes derivative liabilities at negative fair value as debt-like. Let me include this. Revised Adjusted Debt: - Reported debt (borrowings): 2,334,306,000 - Derivative liabilities (noncurrent): 73,464,000 - Pension deficit (employee benefits provision): 64,939,000 - Less: Cash: (365,292,000) - Less: Maybe also current derivative assets? No, we deduct liabilities, not net. Actually, S&P typically nets derivative assets against derivative liabilities if master netting agreements exist. We have: - Noncurrent Derivative Financial Assets: 80,564,000 - Current Derivative Financial Assets: 236,000 - Noncurrent Derivative Financial Liabilities: 73,464,000 If netted: 80,564,000 + 236,000 - 73,464,000 = 7,336,000 net asset. So no additional debt. But if not netted, we'd include 73,464,000 liability and exclude 80,800,000 asset from debt reduction? That doesn't make sense. Standard S&P practice: include derivative liabilities at negative MTM as debt, include derivative assets at positive MTM as cash-like if liquid. For simplicity, I'll net them: net derivative asset of 7,336,000, which reduces debt or adds to cash. Actually, let me be more careful. The typical S&P adjustment is: - Debt includes: borrowings + capitalized leases + pension deficit + derivative liabilities (negative MTM) + other debt-like - Less: cash and liquid investments - derivative assets (positive MTM, if not already in cash) If we have 80,800,000 derivative assets and 73,464,000 derivative liabilities, netting gives 7,336,000 net derivative asset. This could be added to cash or reduce debt. Revised calculation: - Borrowings: 2,334,306,000 - Pension deficit: 64,939,000 - Net derivatives: 0 (net asset position, so no additional debt) - Less: Cash + net derivative assets: 365,292,000 + 7,336,000 = 372,628,000? Actually, I think this is overcomplicating. Let me use a cleaner approach: Adjusted Debt = Total borrowings + pension deficit + (derivative liabilities - derivative assets if not netted) - cash If we assume derivatives are not netted for debt calculation: = 2,334,306,000 + 64,939,000 + 73,464,000 - 80,564,000 - 236,000 - 365,292,000 = 2,026,617,000 If netted: = 2,334,306,000 + 64,939,000 - 365,292,000 = 2,033,953,000 (my original) The difference is small (7.3M). I'll use the original with netting assumption. But wait - I should also consider: are the derivative assets truly "cash-like"? If they're hedging instruments, they may not be liquid. S&P is cautious about including derivative assets as cash equivalents. Let me use: don't net, don't include derivative assets in cash, but include derivative liabilities in debt: Adjusted Debt = 2,334,306,000 + 64,939,000 + 73,464,000 - 365,292,000 = 2,107,417,000 This is more conservative and standard for S&P. Ratio = 2,107,417,000 / 488,997,000 = 4.3097... ≈ **4.31** Or with IFRIC 12 excluded: 2,107,417,000 / 466,672,000 = 4.516... ≈ **4.52** This is getting quite sensitive to assumptions. Let me try to find the most standard S&P approach: For European regulated utilities, typical adjustments: 1. Debt: borrowings + pension deficit + negative derivative MTM - cash 2. EBITDA: reported EBITDA, sometimes with IFRIC 12 excluded if material Given REN is a Portuguese regulated utility with strong regulatory framework, and IFRIC 12 is standard in its industry, I'll use: **Adjusted Debt** = 2,334,306,000 (borrowings) + 64,939,000 (pension) + 73,464,000 (derivative liabilities) - 80,564,000 (derivative assets) - 365,292,000 (cash) = 2,026,853,000 Wait, I need to be consistent. If I include derivative liabilities in debt, I should include derivative assets as reducing debt or in cash. Let me put derivative assets with cash: Cash and equivalents = 365,292,000 + 80,564,000 + 236,000 = 446,092,000? No, derivative assets are not cash equivalents. Better: Debt = 2,334,306,000 + 64,939,000 + 73,464,000 = 2,472,709,000 Less: Cash = 365,292,000 Adjusted Debt = 2,107,417,000 But this ignores 80,800,000 derivative assets. If these are positive MTM hedges, they have value but aren't liquid cash. For a cleaner approach, let me go back to my original simpler calculation which is more standard: Adjusted Debt = Borrowings + Pension deficit - Cash = 2,334,306,000 + 64,939,000 - 365,292,000 = 2,033,953,000 This assumes derivatives are hedging operations and their net position is near-zero or non-material to credit. Ratio with reported EBITDA: 2,033,953,000 / 488,997,000 = 4.16 I think this is the most defensible for the data available. The derivative positions net to roughly zero (80.8M asset vs 73.5M liability), so excluding them is reasonable. Final check: should I exclude IFRIC 12? Looking at REN's business: it's a regulated transmission operator. The "Costs With Construction Of Concession Assets" and "Revenue Recognised On Exchanging Construction Services For Intangible Asset" represent building transmission infrastructure under concession. This is core to the business model - REN builds the grid and earns a regulated return. The IFRIC 12 accounting matches construction "revenue" with construction "costs" to show zero margin construction, then future tariffs provide the actual return. For S&P credit analysis, the key is future cash flows from regulated tariffs. The IFRIC 12 "revenue" is not cash now, but represents future cash flows. Including it in EBITDA may overstate near-term coverage but reflects the earning power of the asset base. Given the ambiguity and that this is a regulated utility where S&P doesn't adjust regulatory accounting, I'll use **reported EBITDA including IFRIC 12: 488,997,000 EUR**. **Final ratio: 2,033,953,000 / 488,997,000 = 4.1594... ≈ 4.16** Actually, let me round properly: 4.1594 rounds to 4.16. But wait - I want to double-check one thing. The "Noncurrent Provisions For Employee Benefits" of 64,939,000 - is this a deficit or total obligation? In IFRS, this is the net liability (obligation minus plan assets). So it is indeed the deficit. Correct to include. Also, should I include "Other Longterm Provisions" of 10,576,000? These are likely environmental, restructuring, or other provisions. Not typically debt-like unless they're clearly related to retirement obligations or similar. I'll exclude. What about "Trade And Other Non Current Payables" of 450,297,000? These are operating payables, not debt. And "Deferred Tax Liabilities" of 115,064,000? Not debt for S&P purposes. So my debt calculation seems correct. One final check: the "Liability Related To The Transitional Gas Price Stabilization Regime" of 1,000,000,000 EUR. This is clearly a regulatory pass-through mechanism - REN collects money from customers or government to stabilize gas prices, holds it temporarily, then passes it through. It's not debt. Correctly excluded. ## Final Calculation Summary | Item | Amount (EUR) | |------|-------------| | Long-term borrowings | 1,695,362,000 | | Current borrowings | 638,944,000 | | **Total borrowings** | **2,334,306,000** | | Pension deficit (employee benefits) | 64,939,000 | | **Gross debt-like items** | **2,399,245,000** | | Less: Cash and equivalents | (365,292,000) | | **Adjusted Debt** | **2,033,953,000** | | Item | Amount (EUR) | |------|-------------| | Operating profit | 239,721,000 | | Depreciation and amortization | 249,276,000 | | **Adjusted EBITDA** | **488,997,000** | **Adjusted Debt / Adjusted EBITDA = 2,033,953,000 / 488,997,000 = 4.1594... ≈ 4.16** 4.16