I'll work through this step-by-step, analyzing Terna S.p.A. and applying S&P's methodology. ## Step 1: Identify the Relevant Industry Terna S.p.A. is described as "RETE ELETTRICA NAZIONALE" (National Electricity Grid). This is Italy's national electricity transmission system operator. Based on the methodologies provided: - Terna operates in **regulated electricity transmission**, which falls under **"Regulated Utilities"** - Specifically, it's an "Electricity National" utility with network/transmission infrastructure - The company is subject to comprehensive regulation by regulatory bodies (ARERA in Italy) This is clearly a **Regulated Utility**, specifically transmission infrastructure, which is at the low-risk end of the utility spectrum (network business, no commodity risk, very low operating risk). ## Step 2: Estimate Adjusted_Debt First, let me identify the components from the balance sheet (2022 year-end, i.e., 2023-01-01): **Reported Debt Components:** - Longterm Borrowings: 8,416,700,000 EUR - Shortterm Borrowings: 444,100,000 EUR - Current Portion Of Longterm Borrowings: 1,909,300,000 EUR **Total Reported Debt** = 8,416,700,000 + 444,100,000 + 1,909,300,000 = **10,770,100,000 EUR** **Other items to consider:** From the equity section, I need to check for hybrid instruments: - "Equity Instruments Perpetual Hybrid Bonds" = 989,000,000 EUR (in equity, but debt-like for S&P purposes) This is a perpetual hybrid bond. For S&P methodology, hybrid instruments are typically treated as 50% debt and 50% equity, or fully as debt depending on features. Given it's classified as equity but labeled as "bonds," I'll include the **full amount as debt-like** (conservative approach, or 50% if more nuanced). Actually, looking at S&P methodology for hybrids, they typically count the debt portion. For perpetual hybrids with equity classification, S&P usually treats 50% as debt. However, given the explicit "Capital Instruments Bonds Hybrid Perpetual" label, I'll use **50% as debt-like = 494,500,000 EUR**, or potentially full treatment if more conservative. Actually, re-reading: S&P typically treats hybrid capital instruments as 50% debt and 50% equity. Let me use **494,500,000 EUR** as the hybrid debt portion. **Pension/Employee Benefits:** - Noncurrent Provisions For Employee Benefits: 48,400,000 EUR This is a pension/employee benefit obligation. S&P typically treats this as debt-like if it's a net deficit. This is a provision, so it's already a liability. I need to check if this represents a net deficit or just a provision. Given it's "Provisions For Employee Benefits," this is likely the net pension liability. I'll include this as **debt-like = 48,400,000 EUR**. **Leases:** No explicit lease liabilities identified separately. Looking through the data, I don't see specific "lease liabilities" disclosed. The long-term and short-term borrowings likely include any lease obligations if material, or they may be immaterial for Terna. **Cash and Equivalents:** - Cash And Cash Equivalents: 2,155,100,000 EUR **Eligible Cash:** S&P typically uses 75% of cash as eligible unless restricted. However, for regulated utilities with strong cash flow visibility, they may use different treatment. Standard approach: subtract **75% of cash** = 0.75 × 2,155,100,000 = 1,616,325,000 EUR. Or if fully eligible: 2,155,100,000 EUR. Let me use a more conservative approach: **75% of cash = 1,616,325,000 EUR** or simply use reported cash if we assume it's largely unrestricted. Actually, for S&P methodology, they typically deduct "available cash" which is usually cash less restricted cash. Let me assume **2,155,100,000 EUR** as eligible (or 75% if restricted portion unknown). I'll use **75% rule: 1,616,325,000 EUR**. **Other Debt-like Items:** - Current Financial Liabilities: 44,900,000 EUR (already in current liabilities, need to check if debt-like) - Noncurrent Financial Liabilities: 247,200,000 EUR (need to check if debt-like) These "Financial Liabilities" could include derivatives or other items. Looking at the context, these might be derivative liabilities or other financial instruments. Without more detail, I'll focus on the main borrowings. Let me also check for guarantees or other debt-like items - not explicitly stated. **Calculation:** Adjusted_Debt = Reported Debt + Hybrid Debt Portion + Pension Deficit - Eligible Cash = 10,770,100,000 + 494,500,000 + 48,400,000 - 1,616,325,000 = **10,696,675,000 EUR** Or with full cash deduction: = 10,770,100,000 + 494,500,000 + 48,400,000 - 2,155,100,000 = **10,157,900,000 EUR** Let me use a middle approach with 75% cash: **10,696,675,000 EUR** or round to **10,697 million EUR** Actually, let me reconsider: For regulated utilities, S&P may use different treatment. Let me also check if there are any securitizations or special items. The "Other Noncurrent Liabilities" of 971,400,000 EUR and "Other Current Liabilities" of 669,900,000 EUR might include some debt-like items, but without specificity, I'll be conservative. Let me recalculate with full cash (assuming largely unrestricted for a regulated utility with predictable cash flows): Adjusted_Debt = 10,770,100,000 + 494,500,000 + 48,400,000 - 2,155,100,000 = **10,157,900,000 EUR** ## Step 3: Estimate Adjusted_EBITDA For regulated utilities, EBITDA is typically straightforward. Let me reconstruct from the income statement: **Revenue:** 2,898,100,000 EUR **Operating Profit (Profit Loss From Operating Activities):** 1,333,500,000 EUR **Depreciation and Amortization:** 725,700,000 EUR (from "Depreciation Amortisation And Impairment Loss Reversal Of Impairment Loss Recognised In Profit Or Loss") **EBITDA** = Operating Profit + Depreciation and Amortization = 1,333,500,000 + 725,700,000 = **2,059,200,000 EUR** Let me verify this another way using the expense by nature: - Revenue And Operating Income: 2,964,500,000 EUR - Expense By Nature: 1,631,000,000 EUR - Profit Loss From Operating Activities: 1,333,500,000 EUR Check: 2,964,500,000 - 1,631,000,000 = 1,333,500,000 ✓ Now, what's in "Expense By Nature"? Looking at components: - Raw Materials And Consumables Used: 247,800,000 - Services Expense: 276,900,000 - Employee Benefits Expense: 348,100,000 - Depreciation Amortisation And Impairment: 725,700,000 - Other Expense By Nature: 32,500,000 Total: 247.8 + 276.9 + 348.1 + 725.7 + 32.5 = 1,631,000,000 ✓ So EBITDA = Revenue And Operating Income - (Raw Materials + Services + Employee Benefits + Other Expense) = 2,964,500,000 - (247,800,000 + 276,900,000 + 348,100,000 + 32,500,000) = 2,964,500,000 - 905,300,000 = 2,059,200,000 ✓ Or using Revenue: 2,898,100,000 + Other Revenue 66,400,000 = 2,964,500,000 revenue total. **Adjustments for EBITDA:** For regulated utilities, S&P typically makes limited adjustments to EBITDA unless there are non-recurring items, pass-through costs, or other distortions. Looking at the data: - "Finance Income Cost" of 22,700,000 EUR - this is net finance income/cost, not operating - "Share Of Profit Loss Of Associates And Joint Ventures" = -1,000,000 EUR (loss) For regulated utilities, S&P may adjust for: - Non-recurring items - Pass-through costs (if revenue is just passed through with no margin) - Joint venture proportional EBITDA Looking at Terna's revenue structure: - "Revenue From Sale Of Goods Related Party Transactions" = 1,718,700,000 EUR (59% of total revenue) - This is likely transmission tariff revenue, which is regulated The "Other Revenue" of 66,400,000 EUR and "Other Revenue Of Which Related Parties Transactions" of 800,000 EUR are small. For a regulated transmission utility, the main revenue is the regulated transmission tariff. There don't appear to be significant pass-through costs that would distort EBITDA (unlike some utilities that pass through commodity costs). **Joint Venture Adjustment:** Share of loss of associates/JVs = -1,000,000 EUR. This is already below operating profit. S&P may add back proportional EBITDA from JVs if material, but this is very small. I'll ignore given immateriality. **Non-recurring Items:** Looking through the data, I don't see explicit non-recurring gains/losses broken out. The "Other Expense By Nature" of 32,500,000 EUR might include some, but it's not specified. **Capitalized Personnel:** - Employee Benefits Expense Capitalised Personnel Expenses: -116,100,000 EUR (negative means capitalized) This is already accounted for in the expense by nature (the net Employee Benefits Expense is 348,100,000, which includes the capitalization). The capitalization affects the balance sheet (PP&E) but the expense is already net in the income statement. **Interest Costs Capitalised:** 24,800,000 EUR (from cash flow statement) This is capitalized interest, which is added to PP&E rather than expensed. For EBITDA purposes, this is typically already excluded from operating profit (it's a financing cost), so no EBITDA adjustment needed. However, for S&P adjusted EBITDA, they sometimes add back capitalized interest to get a better picture of total interest burden, but this doesn't affect EBITDA (it's below operating profit). Actually, wait - for some methodologies, if capitalized interest is included in operating activities or affects operating profit, we might adjust. But standard treatment: capitalized interest is a financing item, not operating, so it's already excluded from operating profit/EBITDA. **Final EBITDA Calculation:** Adjusted_EBITDA = 2,059,200,000 EUR With minimal adjustments needed for a regulated transmission utility. Let me check if there are any pension adjustments needed - the pension expense is likely already in Employee Benefits Expense. Let me verify with cash flow statement: - Cash Flows From Used In Operations Before Changes In Working Capital: 2,072,700,000 EUR - This is roughly EBITDA less working capital changes, plus adjustments Actually, 2,072,700,000 is close to my EBITDA of 2,059,200,000. The difference is about 13.5 million, which could be working capital or other items. Let me recheck: Cash Flows From Used In Operations Before Changes In Working Capital includes: - Adjustments For Depreciation And Amortisation: 736,100,000 (note: this is 736.1 vs 725.7 in P&L - difference of 10.4 million) - Accruals To Provisions: 51,700,000 - Adjustments For Gain Loss On Disposals: -6,900,000 - Adjustments For Finance Income Cost: 101,500,000 - Adjustments For Income Tax Expenses: 356,700,000 - Cash Flows From Other Non Cash Movements: -24,100,000 Starting from Profit Loss From Operating Activities: 1,333,500,000 + 736,100,000 (D&A) = 2,069,600,000 + 51,700,000 = 2,121,300,000 - 6,900,000 = 2,114,400,000 + 101,500,000 = 2,215,900,000 (finance costs added back) + 356,700,000 = 2,572,600,000 (tax added back) - 24,100,000 = 2,548,500,000 Hmm, this doesn't reconcile cleanly. The "Cash Flows From Used In Operations Before Changes In Working Capital" of 2,072,700,000 seems to be after some adjustments. Actually, re-reading: this is "Cash Flows From Used In Operations Before Changes In Working Capital" - the "Used In" suggests it's a use, so negative means outflow. But the number is positive 2,072,700,000. Let me check sign convention. Looking at other items: "Cash Flows From Used In Operating Activities" is 2,323,700,000 positive. This is likely cash generated, not used. So 2,072,700,000 is pre-working capital operating cash flow, roughly equivalent to EBITDA with some adjustments. Let me stick with my calculated **EBITDA = 2,059,200,000 EUR** as it's clean and based on standard definition. For S&P adjustments, let me consider: - Add back proportional EBITDA from JVs if we have it: not available, but share of loss is only 1M, so immaterial - Lease adjustments: if operating leases were capitalized, but under IFRS 16 they're already in debt and EBITDA Given IFRS 16 implementation, leases are already capitalized on balance sheet and the depreciation/interest is split. The EBITDA already includes the "lease depreciation" effectively. So no further lease adjustment to EBITDA needed. **Final Adjusted_EBITDA = 2,059,200,000 EUR** ## Step 4: Calculate Adjusted_Debt / Adjusted_EBITDA Using: - Adjusted_Debt = 10,157,900,000 EUR (with full cash deduction) or 10,696,675,000 EUR (with 75% cash) - Adjusted_EBITDA = 2,059,200,000 EUR **Scenario 1 (Full Cash):** 10,157,900,000 / 2,059,200,000 = **4.93x** **Scenario 2 (75% Cash):** 10,696,675,000 / 2,059,200,000 = **5.19x** Let me reconsider the hybrid treatment. If we use 100% hybrid as debt (more conservative): - Hybrid debt portion = 989,000,000 EUR - Adjusted_Debt = 10,770,100,000 + 989,000,000 + 48,400,000 - 2,155,100,000 = 9,652,400,000 + 989,000,000 = wait let me recalc Actually: 10,770,100,000 + 989,000,000 + 48,400,000 - 2,155,100,000 = **10,652,400,000 EUR** Then ratio = 10,652,400,000 / 2,059,200,000 = **5.17x** Or with 50% hybrid: 10,157,900,000 / 2,059,200,000 = **4.93x** (but with 50% hybrid: 10,157,900,000 + 494,500,000 = 10,652,400,000, wait I'm confusing myself) Let me be precise: - Base debt: 10,770,100,000 - 50% hybrid: 494,500,000 - Pension: 48,400,000 - Less cash: -2,155,100,000 = 10,770,100,000 + 494,500,000 + 48,400,000 - 2,155,100,000 = **9,157,900,000 EUR?** Wait: 10,770,100,000 + 494,500,000 = 11,264,600,000 + 48,400,000 = 11,313,000,000 - 2,155,100,000 = **9,157,900,000 EUR** Hmm, that doesn't match my prior. Let me recheck: 10,770.1 + 494.5 + 48.4 - 2,155.1 = 9,157.9 million. Yes. Earlier I had 10,157.9 which was wrong addition. Let me recalculate: 10,770.1 + 494.5 = 11,264.6 11,264.6 + 48.4 = 11,313.0 11,313.0 - 2,155.1 = **9,157.9 million EUR** So with 50% hybrid: **9,157,900,000 / 2,059,200,000 = 4.45x** With 100% hybrid: 10,770.1 + 989 + 48.4 - 2,155.1 = 10,652.4 / 2,059.2 = **5.17x** With 75% cash and 50% hybrid: 10,770.1 + 494.5 + 48.4 - 1,616.325 = 9,696.675 / 2,059.2 = **4.71x** Given S&P's typical treatment of hybrids (50% debt) and cash (75% or 100% depending on restrictions), and for a regulated utility with predictable cash flows, let me use **75% cash eligibility** and **50% hybrid treatment**: Adjusted_Debt = 10,770,100,000 + 494,500,000 + 48,400,000 - 1,616,325,000 = **9,696,675,000 EUR** Adjusted_EBITDA = 2,059,200,000 EUR Ratio = 9,696,675,000 / 2,059,200,000 = **4.71x** However, I want to double-check my EBITDA. Let me verify if there are any non-recurring items or if the "Other Expense By Nature" includes anything unusual. Looking at 2021 vs 2022: - Other Expense By Nature: 31.5M in 2021, 32.5M in 2022 - stable - No obvious non-recurring items Also, for regulated utilities, S&P sometimes adjusts for "regulatory assets/liabilities" or deferred costs, but this is complex and not clearly indicated in the data. Let me also check if I should add back the share of JV loss to EBITDA (since it's below operating profit): - Share Of Profit Loss Of Associates = -1,000,000 (loss) This is already below operating profit, so it's not in EBITDA. If we want proportional EBITDA from JVs, we'd need gross EBITDA, not just the net income share. Not available, and immaterial. **Final Calculation:** Let me use a slightly more conservative approach - 100% cash (assuming restricted cash is minimal for this regulated utility): Adjusted_Debt = 10,770,100,000 + 494,500,000 + 48,400,000 - 2,155,100,000 = **9,157,900,000 EUR** Ratio = 9,157,900,000 / 2,059,200,000 = **4.45x** Or with 75% cash: **4.71x** Given the range, and that S&P typically uses 75% cash for corporates unless specified otherwise, let me go with **4.71x** or round to **4.70x**. Actually, let me reconsider one more time. For regulated utilities with very stable cash flows and where cash is largely unrestricted, S&P may use higher cash deductions. But 75% is standard. However, I notice Terna has significant "Current Financial Assets" of 255,300,000 EUR and "Noncurrent Financial Assets" of 494,400,000 EUR. These could include liquid investments that might be considered "cash-like." If we include these: Cash-like items = 2,155,100,000 + 255,300,000 + 494,400,000 = 2,904,800,000 EUR 75% of total = 2,178,600,000 EUR But "Financial Assets" could include equity investments, derivatives, etc. The "Current Financial Assets At Fair Value Through Profit Or Loss" of 223,300,000 EUR is specifically mentioned as a hedging reserve item. This might not be liquid. Let me stay conservative and use just Cash And Cash Equivalents. Actually, re-looking: "Current Financial Assets" of 255,300,000 EUR and prior year 980,600,000 EUR - this dropped significantly. Could include short-term deposits, commercial paper, etc. But without knowing liquidity, I'll exclude. **Final Answer:** Using: Adjusted_Debt = 9,696,675,000 EUR (with 50% hybrid, 75% cash, pension deficit) Adjusted_EBITDA = 2,059,200,000 EUR Ratio = 4.709... ≈ **4.71** Or if we round: 4.71 Let me also try the calculation with 100% hybrid to see range: = 10,696,675,000 / 2,059,200,000 = 5.19 Given S&P's standard 50% hybrid treatment, I'll use **4.71**. Wait - I need to recheck my debt calculation once more. The "Current Portion Of Longterm Borrowings" of 1,909,300,000 - is this already included in "Longterm Borrowings" or separate? Typically, on balance sheet, "Longterm Borrowings" is non-current portion only, and current portion is separate. So total debt is correct as 8,416.7 + 1,909.3 + 444.1 = 10,770.1. But let me verify: 2023-01-01 Longterm Borrowings 8,416.7, Current Portion 1,909.3, Shortterm 444.1. Total = 10,770.1. Yes. And 2022-01-01: Longterm 8,835.0, Current Portion 1,640.0, Shortterm 1,947.0. Total = 12,422.0. Debt decreased year-over-year, which is positive. For the hybrid: it was issued in 2022 (movement of 989,000,000 in 2022). So at 2023-01-01, it's 989,000,000 in equity. Final numbers: - Adjusted_Debt = 10,770,100,000 + 494,500,000 + 48,400,000 - (0.75 × 2,155,100,000) = 10,770,100,000 + 494,500,000 + 48,400,000 - 1,616,325,000 = **9,696,675,000 EUR** - Adjusted_EBITDA = 2,059,200,000 EUR - Ratio = 9,696,675,000 / 2,059,200,000 = **4.7090...** Rounded to two decimal places: **4.71** 4.71