I'll work through this step-by-step, first identifying the industry for HERA S.P.A., then calculating Adjusted_Debt and Adjusted_EBITDA. ## Step 1: Identify the Relevant Industry for HERA S.P.A. HERA S.P.A. is an Italian multi-utility company. Based on the name and the data provided (revenue from regulated utility activities, infrastructure assets, etc.), this falls under the **Regulated Utilities** sector, specifically **Multi-utilities**. The company provides essential infrastructure services (water, gas, power, waste management) with regulated tariffs. ## Step 2: Estimate Adjusted_Debt For Regulated Utilities, S&P's baseline formula applies with potential adjustments for seasonal working capital and securitized debt. Let me identify the components from the balance sheet: **Reported Debt Components:** - Noncurrent Financial Liabilities (2022-01-01): 3,716,000,000 EUR - Current Financial Liabilities (2022-01-01): 499,700,000 EUR - **Total Reported Debt** = 3,716,000,000 + 499,700,000 = **4,215,700,000 EUR** **Leases:** - Noncurrent Lease Liabilities (2022-01-01): 53,200,000 EUR - Current Lease Liabilities (2022-01-01): 43,400,000 EUR - **Total Leases** = 53,200,000 + 43,400,000 = **96,600,000 EUR** **Pension Deficit:** - Noncurrent Provisions For Employee Benefits (2022-01-01): 105,400,000 EUR - This represents pension/employee benefit obligations. We need to check if this is a deficit. The cash flow shows "Adjustments For Increase Decrease In Employee Benefit Liabilities" of -12,700,000 EUR for 2022, suggesting some liability reduction. I'll treat the full provision as a debt-like item = **105,400,000 EUR** **Other items:** - No explicit guarantees or hybrid debt mentioned in the data - No securitized debt mentioned (S&P would deconsolidate if present) **Eligible Cash:** - Cash And Cash Equivalents (2022-01-01): 885,600,000 EUR **Adjusted_Debt calculation:** Adjusted_Debt = (4,215,700,000 + 96,600,000 + 105,400,000) - 885,600,000 Adjusted_Debt = 4,417,700,000 - 885,600,000 **Adjusted_Debt = 3,532,100,000 EUR** Note: For regulated utilities with seasonal working capital, S&P may allow netting inventory against short-term borrowings. However, the 2022 inventory is 368,000,000 EUR and current financial liabilities are 499,700,000 EUR. If we apply this adjustment, we'd reduce debt by 368,000,000 EUR, but this is typically done when "very confident of near-term cost recovery." I'll use the more conservative approach without this adjustment, but note it could be lower. ## Step 3: Estimate Adjusted_EBITDA For Regulated Utilities, we reconstruct EBITDA from the income statement: **Starting from Profit Loss From Operating Activities (Operating Profit):** - 2022: 533,800,000 EUR **Add back Depreciation and Amortization:** - Amortisation Depreciation And Provisions (2022): 667,100,000 EUR However, "Amortisation Depreciation And Provisions" includes provisions. The cash flow statement gives us cleaner data: - Adjustments For Depreciation And Amortisation Expense And Impairment Loss (2022): 478,600,000 EUR **Reconstructing EBITDA:** Operating Profit + Depreciation/Amortization = 533,800,000 + 478,600,000 = 1,012,400,000 EUR But wait - let me verify by reconstructing from revenue: Revenue: 20,082,000,000 Other Revenue: 548,200,000 Total Revenue = 20,630,200,000 Less: - Raw Materials And Consumables Used: 16,730,000,000 - Services Expense: 2,105,800,000 - Employee Benefits Expense: 601,100,000 - Other Expense By Nature: 74,900,000 - Other Work Performed By Entity And Capitalised: -82,500,000 (capitalized, so add back) Subtotal expenses = 16,730,000,000 + 2,105,800,000 + 601,100,000 + 74,900,000 - 82,500,000 = 19,429,300,000 EBITDA = Total Revenue - Cash Operating Expenses (before D&A) = 20,630,200,000 - 19,429,300,000 = 1,200,900,000 EUR Wait, this doesn't match. Let me use the operating profit approach more carefully. Operating Profit = 533,800,000 This already includes D&A and provisions of 667,100,000 So EBITDA = Operating Profit + D&A = 533,800,000 + 667,100,000 = 1,200,900,000 EUR But the cash flow shows "Adjustments For Depreciation And Amortisation Expense And Impairment Loss" of 478,600,000, not 667,100,000. The difference (667,100,000 - 478,600,000 = 188,500,000) matches "Allocation To Provisions Excluding Change In Provision For Risks And Charges" of 188,500,000. So pure D&A = 478,600,000 EUR And provisions allocation = 188,500,000 EUR For EBITDA, we add back only D&A, not provisions (which are operating items): EBITDA = Operating Profit + D&A = 533,800,000 + 478,600,000 = 1,012,400,000 EUR Or using the cash flow "Cash Flows From Used In Operations Before Changes In Working Capital" = 1,202,000,000 EUR. This is essentially EBITDA less working capital changes and some other items... actually this is closer to operating cash flow before working capital. Let me use: EBITDA = 1,012,400,000 EUR (Operating Profit + D&A) **Adjustments for leases:** For operating leases that were capitalized, we need to add back lease expense and subtract depreciation on right-of-use assets. However, under IFRS 16, leases are already on balance sheet. The income statement likely already reflects this. Looking at the data, we have Right-of-use Assets of 101,600,000 EUR at start of 2022. For S&P purposes, we typically add back the lease expense (as if operating lease) and subtract depreciation. But with IFRS 16, this is complex. A simpler approach: S&P often adds 1.5x lease expense or uses the full lease liability * cost of debt. Actually, for S&P adjusted EBITDA with IFRS 16, we typically: - Add back the depreciation of right-of-use assets (already in D&A) - Add back interest on lease liabilities (part of finance costs) But the standard S&P adjustment is to add back operating lease expense. Let me check if there's explicit lease expense in the data. Not directly visible. Given the complexity and that IFRS 16 is already implemented, I'll use a practical approach: the EBITDA already includes the lease depreciation. For S&P comparability, we can add back the lease interest (part of finance costs) or use a multiplier on lease payments. Looking at cash flows: "Payments Of Lease Liabilities Classified As Financing Activities" = 43,400,000 EUR for 2022. This is principal repayment. The total lease liability change suggests interest was minimal. For a practical estimate, S&P often adds 1.0x to 1.5x the lease expense. Given total lease liabilities of 96,600,000 EUR and assuming 5% cost, annual lease expense ~4,830,000 interest + ~19,320,000 principal = ~24,150,000 total. But this is speculative. I'll use a simpler approach: for regulated utilities, the lease adjustment is often less critical. Let me use EBITDA as 1,012,400,000 EUR and note that lease adjustments would add a small amount. Actually, let me recalculate more carefully using the cash flow statement approach: Cash Flows From Used In Operations Before Changes In Working Capital = 1,202,000,000 EUR This equals roughly: Operating Profit + D&A - Change in provisions + other non-cash items - dividends received as operating - finance income received + finance costs paid + taxes... Actually, this is messy. Let me use a cleaner approach. From the income statement, reconstructing: EBITDA = Revenue + Other Revenue - Raw Materials - Services - Employee Benefits - Other Expense + Other Work Capitalized = 20,082,000,000 + 548,200,000 - 16,730,000,000 - 2,105,800,000 - 601,100,000 - 74,900,000 + 82,500,000 = 20,630,200,000 - 19,429,300,000 = 1,200,900,000 EUR Wait, this includes no D&A. But "Other Expense By Nature" might include some items. Let me check: the Operating Profit is 533,800,000, which is after D&A of 667,100,000. So: Gross Profit = Revenue - Raw Materials = 20,082,000,000 - 16,730,000,000 = 3,352,000,000 Other Revenue = 548,200,000 Total Gross-like = 3,900,200,000 Less: Services 2,105,800,000; Employee Benefits 601,100,000; Other Expense 74,900,000; add back capitalized 82,500,000 = 3,900,200,000 - 2,105,800,000 - 601,100,000 - 74,900,000 + 82,500,000 = 1,200,900,000 Then D&A = 667,100,000 Operating Profit = 1,200,900,000 - 667,100,000 = 533,800,000 ✓ So EBITDA = 1,200,900,000 EUR **Adjustments for S&P:** - Nonrecurring items: "Capital Gains Losses And Other Non Monetary Elements" in cash flow = 41,600,000 EUR (2022). This could be nonrecurring gains/losses. The sign is positive in adjustments, meaning it was a gain deducted or loss added. Looking at cash flow: this is added back to operating profit, suggesting it was a non-cash or non-operating loss in the income statement. Actually, positive adjustment means adding back losses or subtracting gains. Given it's positive 41,600,000, this likely represents losses added back or gains subtracted. I'll treat as nonrecurring to normalize: if losses, add back; if gains, subtract. The cash flow treatment suggests these were losses (added back to get to cash), so for EBITDA, we might add back if they were in operating profit. Actually, looking more carefully: "Capital Gains Losses And Other Non Monetary Elements" of 41,600,000 is added in the cash flow reconciliation (positive number means added to profit). This suggests these were losses or non-cash items that reduced profit. For S&P EBITDA, if these are nonrecurring losses, we add them back; if recurring, we don't. Given the nature (capital gains/losses), these are likely nonrecurring. I'll add back: +41,600,000 EUR - Joint ventures: "Share Of Profit Loss Of Associates And Joint Ventures" = 10,000,000 EUR. This is equity method earnings. S&P may want proportional EBITDA. However, this is already below operating profit. For EBITDA, we'd need the underlying EBITDA of JVs. Not enough data. I'll add back the equity earnings and note we can't fully adjust. For simplicity, add back 10,000,000 and don't add proportional EBITDA (conservative). - Provisions: "Change In Provision For Risks And Charges" = -27,800,000 (release). "Allocation To Provisions Excluding Change In Provision For Risks And Charges" = 188,500,000. The net provision charge = 188,500,000 - 27,800,000 = 160,700,000. This is part of operating profit, so already in EBITDA. For S&P, if these are nonrecurring, we might adjust. But for regulated utilities, some provisions are normal. I'll leave as is. **Adjusted_EBITDA = 1,200,900,000 + 41,600,000 + 10,000,000 = 1,252,500,000 EUR** Wait, I need to be more careful. The 10,000,000 equity earnings is below operating profit. Let me recalculate: Operating Profit = 533,800,000 Add: Finance Income Cost net = -125,000,000 (so finance costs exceed income) Profit Before Tax = 408,800,000 Share of JV profit = 10,000,000 is between operating profit and profit before tax? Actually, looking at standard format: Operating Profit 533,800,000 + Share of JV profit 10,000,000 + Finance Income 82,200,000 - Finance Costs 217,200,000 = Profit Before Tax 408,800,000 ✓ So Share of JV profit is already in Operating Profit? No wait, 533,800,000 + 10,000,000 + 82,200,000 - 217,200,000 = 408,800,000. ✓ So Operating Profit includes... actually no, the standard format has Operating Profit before JV results. Let me check: 533,800,000 + 10,000,000 = 543,800,000; plus 82,200,000 = 626,000,000; minus 217,200,000 = 408,800,000. ✓ So Operating Profit of 533,800,000 is before share of JV profit. Thus EBITDA = 533,800,000 + 667,100,000 = 1,200,900,000, and this is before JV profit. For S&P Adjusted EBITDA, we want to include proportional EBITDA of JVs or at least add back the equity earnings. Adding 10,000,000 is correct for equity earnings add-back, but ideally we'd want full proportional EBITDA. Let me use: Adjusted_EBITDA = 1,200,900,000 + 41,600,000 + 10,000,000 = 1,252,500,000 EUR Actually, I realize I need to check if the 41,600,000 is already in operating profit. The cash flow starts from Operating Profit and adds back items. "Capital Gains Losses And Other Non Monetary Elements" is added back, meaning it was subtracted in arriving at operating profit. So yes, it's in operating profit and thus in my EBITDA. For lease adjustment: under IFRS 16, the EBITDA includes lease depreciation instead of lease expense. S&P typically adjusts by adding back the lease depreciation and interest, effectively grossing up. But with limited data, I'll use a practical approach: add back the lease liability interest component. From cash flow: Payments Of Lease Liabilities = 43,400,000. Total lease liabilities decreased from 96,600,000 to 76,400,000 (53,200,000 + 43,400,000 current vs 55,100,000 + 21,300,000 at end 2022... wait let me check end of period). At 2023-01-01: Noncurrent Lease Liabilities 55,100,000 + Current 21,300,000 = 76,400,000 At 2022-01-01: 53,200,000 + 43,400,000 = 96,600,000 Decrease = 20,200,000. But payments were 43,400,000. So new leases/additions = 43,400,000 - 20,200,000 = 23,200,000. Interest on leases = part of Finance Costs. Total Finance Costs = 217,200,000. This includes interest on all debt including leases. For a rough estimate, if lease interest is 5% of average lease liability: 5% × (96,600,000 + 76,400,000)/2 = 5% × 86,500,000 = 4,325,000. Adding this to EBITDA (as S&P would for lease adjustment): 1,252,500,000 + 4,325,000 ≈ 1,256,825,000. Small impact. I'll use Adjusted_EBITDA = 1,252,500,000 EUR (ignoring small lease interest as it's in the noise for this estimate). Actually, let me reconsider. S&P's standard approach for IFRS 16 is to add back the full lease expense (as if operating lease) and subtract only the depreciation portion that's "pure" asset depreciation. This is complex. Given the small lease amounts relative to total, I'll proceed with 1,252,500,000. ## Step 4: Calculate Adjusted_Debt / Adjusted_EBITDA Adjusted_Debt = 3,532,100,000 EUR Adjusted_EBITDA = 1,252,500,000 EUR Ratio = 3,532,100,000 / 1,252,500,000 = 2.819... Let me recalculate with more precision: 3,532,100,000 ÷ 1,252,500,000 = 2.819... Or using slightly different EBITDA: If we use 1,200,900,000 (no nonrecurring adjustment): 3,532,100,000 / 1,200,900,000 = 2.941 If we use 1,012,400,000 (operating profit + cash flow D&A): 3,532,100,000 / 1,012,400,000 = 3.489 Given S&P methodology emphasizes normalization, I'll stick with 1,252,500,000. Actually, let me reconsider the EBITDA calculation. The cash flow "Cash Flows From Used In Operations Before Changes In Working Capital" = 1,202,000,000. This is essentially: Operating Profit + D&A + other non-cash items - dividends received + finance income received - finance costs paid - taxes... no wait. Standard calculation: Operating Profit 533,800,000 + D&A 478,600,000 + Provisions allocation 188,500,000 - Change in provision for risks -27,800,000 (release, so subtract) - Undistributed profits of JVs -10,000,000 (subtract because it's equity earnings not received) + Finance income cost adjustment 135,000,000 (this is finance costs paid minus finance income received, or net finance costs added back) + Capital gains/losses 41,600,000 - Employee benefit liability change -12,700,000 Let me check: 533,800,000 + 478,600,000 + 188,500,000 - 10,000,000 + 135,000,000 + 41,600,000 - 12,700,000 - 27,800,000 = 1,327,000,000? That doesn't equal 1,202,000,000. Hmm, let me look at the cash flow more carefully. The items listed are "Adjustments" to reconcile profit to cash. So: Profit (which profit?) + adjustments = Cash Flow Before Working Capital If starting from Operating Profit: 533,800,000 + 478,600,000 (D&A) + 188,500,000 (provisions) - 10,000,000 (undistributed JV profits - subtract because not cash) + 135,000,000 (finance income/cost - this is odd, why add back finance costs?) + 41,600,000 (capital gains/losses) - 12,700,000 (employee benefits) - 27,800,000 (change in provision for risks) = 533,800,000 + 478,600,000 + 188,500,000 - 10,000,000 + 135,000,000 + 41,600,000 - 12,700,000 - 27,800,000 = 1,327,000,000? Still not 1,202,000,000. Wait, I need to check: "Adjustments For Finance Income Cost" = 135,000,000. If finance costs are 217,200,000 and finance income is 82,200,000, net is 135,000,000. But in cash flow, this is added back? That would mean we're starting from a profit measure before finance costs. Actually, looking at standard IFRS cash flows: you start from Profit Before Tax, add back finance costs, subtract finance income, etc. Or start from Operating Profit which is before finance. Let me try starting from Profit Before Tax: 408,800,000 + Finance Costs 217,200,000 - Finance Income 82,200,000 + D&A 478,600,000 + Provisions 188,500,000 - JV profits 10,000,000 + Capital gains/losses 41,600,000 - Employee benefits 12,700,000 - Change in risk provision 27,800,000 = 408,800,000 + 217,200,000 - 82,200,000 + 478,600,000 + 188,500,000 - 10,000,000 + 41,600,000 - 12,700,000 - 27,800,000 = 1,202,000,000 ✓ Great! So "Cash Flows From Used In Operations Before Changes In Working Capital" = 1,202,000,000 EUR starts from Profit Before Tax and adds back tax-affected items. For S&P EBITDA, we want pre-tax, pre-interest, pre-D&A. So from Profit Before Tax: PBT 408,800,000 + Finance Costs 217,200,000 + D&A 478,600,000 = 1,104,600,000? But this misses the provisions and other items. Actually, EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization. It should include operating profit before these items, with JVs and other operating items. Let me use: Operating Profit before JV + D&A = 533,800,000 + 10,000,000 + 478,600,000 = 1,022,400,000? No, Operating Profit is 533,800,000 which is before JV share of 10,000,000. Actually standard format: Operating Profit 533,800,000 includes operations before financing and JVs? No, looking at the calculation: 533,800,000 (Operating Profit) + 10,000,000 (Share of JV) + 82,200,000 (Finance Income) - 217,200,000 (Finance Costs) = 408,800,000 PBT. So Operating Profit 533,800,000 is before JVs and financing. Thus: EBITDA = Operating Profit + D&A = 533,800,000 + 478,600,000 = 1,012,400,000? But earlier I calculated 1,200,900,000 from revenue. The discrepancy: 1,200,900,000 - 1,012,400,000 = 188,500,000, which equals the provisions allocation. So Operating Profit 533,800,000 is after all operating expenses including provisions, and D&A of 478,600,000 is the pure depreciation. The 667,100,000 "Amortisation Depreciation And Provisions" includes 188,500,000 provisions. So correct EBITDA = Operating Profit + D&A (pure) = 533,800,000 + 478,600,000 = 1,012,400,000? Or should we add back provisions too since they're non-cash? Actually, EBITDA typically excludes provisions if they're non-recurring or non-operating. But "Allocation To Provisions" for regulated utilities might be recurring (e.g., bad debt provisions, regulatory provisions). For S&P Adjusted EBITDA, we normalize. The 188,500,000 provisions - if these are recurring operating provisions (like credit losses), they stay. If non-recurring, we adjust. Given the cash flow treatment, these provisions are part of operating cash flow generation. I'll include them in EBITDA for now, giving 1,200,900,000 from the revenue approach, or equivalently 533,800,000 + 478,600,000 + 188,500,000 - adjustments... Actually, let me just use: EBITDA = 1,200,900,000 (from revenue reconstruction) or 1,012,400,000 + 188,500,000 provisions = 1,200,900,000. Same result. For S&P Adjusted EBITDA: - Start with 1,200,900,000 - Add back nonrecurring losses/gains: The 41,600,000 "Capital Gains Losses" was added in cash flow, meaning it reduced profit. If it's a loss, add back: +41,600,000 - For JVs: Add equity earnings to get to proportional, or better, add full proportional EBITDA. With limited data, add back 10,000,000 equity earnings. Adjusted_EBITDA = 1,200,900,000 + 41,600,000 + 10,000,000 = 1,252,500,000 EUR Or if we consider the 188,500,000 provisions as potentially normalizable (e.g., if above/below trend), but no info on that. Let me also consider: for regulated utilities, S&P may use "Funds From Operations" (FFO) which is closer to 1,202,000,000. FFO to debt is the preferred metric. But for Debt/EBITDA, we need EBITDA. Final calculation: Adjusted_Debt = 3,532,100,000 Adjusted_EBITDA = 1,252,500,000 Ratio = 3,532,100,000 / 1,252,500,000 = 2.819... ≈ 2.82 Let me verify with alternative: if we don't add back the 41,600,000 as nonrecurring (maybe it's normal): Adjusted_EBITDA = 1,210,900,000 (just add JV earnings) Ratio = 3,532,100,000 / 1,210,900,000 = 2.917 ≈ 2.92 Or if we use pure EBITDA without any adjustments: 1,200,900,000 Ratio = 3,532,100,000 / 1,200,900,000 = 2.941 ≈ 2.94 Given S&P's conservative approach and the regulated utility sector, I'll use the more normalized EBITDA with nonrecurring add-back. Actually, re-reading: "Capital Gains Losses And Other Non Monetary Elements" - if this is gains, we should subtract; if losses, add. The cash flow adds it back (positive adjustment), meaning it was a deduction to get to profit. So if capital losses were deducted, we add back. If capital gains were included, we'd subtract. "Capital Gains Losses" is ambiguous - could be net gains or losses. Given it's added back, it reduced profit, so likely losses. For S&P, if these are non-recurring losses from asset sales, we add back. If recurring, we don't. I'll assume nonrecurring. Final answer: 3,532,100,000 / 1,252,500,000 = 2.819... Rounding: 2.82 2.82