# S&P-Adjusted Debt-to-EBITDA Analysis for VERBUND AG

## Step 1: Identify the Relevant Industry

VERBUND AG is an Austrian utility company that generates and distributes electricity, with operations in:
- Electricity generation (hydropower, thermal)
- Electricity distribution (grid operations)
- Power trading and sales

Based on the business description and the fact that VERBUND operates regulated grid operations alongside generation activities, the company is primarily a **Regulated Utility** operating in the electricity sector. The S&P methodology for "Regulated Utilities" applies.

The company also has some unregulated power generation activities, but the dominant portion of cash flows comes from regulated operations (particularly the grid revenue and cost-plus regulated generation).

## Step 2: Calculate Adjusted_Debt

### Identify Debt Components (as of December 31, 2022 / 2023-01-01):

**Financial Liabilities:**
- Noncurrent Financial Liabilities: 1,834,155,000 EUR
- Current Financial Liabilities: 1,462,453,000 EUR
- **Total Reported Financial Debt: 3,296,608,000 EUR**

**Lease Obligations (Right-of-Use Assets):**
- Right-of-use Assets: 103,826,000 EUR
- This represents operating leases that should be capitalized
- **Lease Adjustment: 103,826,000 EUR**

**Derivative Financial Liabilities (Energy Derivatives):**
The company has significant derivative positions:
- Noncurrent Derivative Financial Liabilities: 734,780,000 EUR
- Current Derivative Financial Liabilities: 3,313,346,000 EUR
- Total Derivative Liabilities: 4,048,126,000 EUR

Under S&P methodology for utilities with hedging programs, derivative liabilities related to normal hedging of future commodity purchases should not be treated as debt-like items. However, we need to assess if these represent genuine hedges or trading positions. Given VERBUND's business model and the size relative to revenue, these appear to be operational hedges tied to electricity purchases and sales activities. 

**For conservative S&P analysis of regulated utilities, significant derivative positions are typically normalized.** The derivatives net position shows:
- Current Derivative Financial Assets: 1,972,632,000 EUR
- Current Derivative Financial Liabilities: 3,313,346,000 EUR
- Noncurrent Derivative Financial Assets: 525,196,000 EUR
- Noncurrent Derivative Financial Liabilities: 734,780,000 EUR

Net derivative position: (1,972,632 + 525,196) - (3,313,346 + 734,780) = 2,497,828 - 4,048,126 = **-1,550,298,000 EUR (net liability)**

Per S&P methodology, energy derivatives used for hedging operational risks in utilities are typically not added to adjusted debt. However, the significant net liability position suggests these are material hedges. Given the regulatory nature of VERBUND's business, we will treat the net derivative liability conservatively.

**Adjustment for derivatives (net liability position):** Given that these are hedges related to operational electricity purchases and sales (normal course of business for a utility), and consistent with S&P's treatment of utilities using hedges, we will **not add the full derivative liability** but will monitor it as a significant item.

**Conservative approach for S&P:** Add 50% of net derivative liability to adjusted debt:
- Adjustment: 0.5 × 1,550,298,000 = **775,149,000 EUR**

**Pension Obligations:**
- The company has actuarial gains/losses on remeasurements of defined benefit plans
- Reserve of Remeasurements: -327,822,000 EUR (asset)
- This represents a net pension asset, not a deficit
- **Pension Adjustment: 0 EUR** (no pension deficit)

**Cash and Cash Equivalents (eligible cash):**
- Cash and Cash Equivalents (2023-01-01): 409,252,000 EUR
- **Eligible Cash: 409,252,000 EUR**

### Adjusted_Debt Calculation:

```
Adjusted_Debt = Total Financial Debt + Leases + 50% Net Derivative Liability - Cash
Adjusted_Debt = 3,296,608,000 + 103,826,000 + 775,149,000 - 409,252,000
Adjusted_Debt = 3,766,331,000 EUR
```

**Alternative (More Conservative - Including Full Derivative Liability):**
```
Adjusted_Debt = 3,296,608,000 + 103,826,000 + 1,550,298,000 - 409,252,000
Adjusted_Debt = 4,541,480,000 EUR
```

**Using the intermediate approach (50% derivative adjustment) as it best reflects S&P methodology for utilities:**
**Adjusted_Debt = 3,766,331,000 EUR**

## Step 3: Calculate Adjusted_EBITDA

### Reported EBITDA (2022, year ending 2023-01-01):
- Reported EBITDA: 3,160,679,000 EUR

### Adjustments:

**1. Valuation and Realization of Energy Derivatives:**
- Reported figure: -857,961,000 EUR
- This is a non-recurring gain (negative expense) related to energy hedging
- This is already excluded from EBITDA, but the adjustment is already in the reported EBITDA
- **Adjustment: 0 EUR** (already reflected)

**2. Non-recurring items:**
- Impairment Loss: 197,761,000 EUR
- Reversal of Impairment Loss: -125,973,000 EUR
- Net impairment charge: 71,788,000 EUR
- This is included in operating profit but should be added back to EBITDA
- **Wait - EBITDA should already exclude these as they're non-cash**
- Actually, reviewing the P&L: these items affect operating profit, not EBITDA
- **Adjustment: 0 EUR** (EBITDA is before impairment)

**3. Wertminderungen (Impairment on financial assets):**
- Wertminderungen: 46,455,000 EUR
- Wertaufholungen: 0 EUR
- Net: 46,455,000 EUR
- These appear to be financial impairments, not operating
- **Adjustment: 0 EUR** (financial rather than operational)

**4. Analysis of Revenue Changes:**
The company experienced very high revenue growth (116% increase) driven by:
- Electricity price increases in the market
- Increased purchases and sales of electricity
- The "Valuation and Realization of Energy Derivatives" being negative suggests mark-to-market losses on hedging

This is NOT a non-recurring item but rather reflects market conditions. The reported EBITDA of 3,160,679,000 EUR is legitimate for 2022.

**5. Lease Adjustments:**
- Operating lease expense embedded in EBITDA should be separated
- Lease liability capitalized: 103,826,000 EUR
- Estimated annual lease expense: ~20-30 million EUR
- **Conservative Adjustment: 25,000,000 EUR** (estimated annual lease cost)

**6. Joint Venture and Associate Adjustments:**
- Share of Profit of Associates and Joint Ventures: 4,293,000 EUR
- Other Income from Subsidiaries: 8,013,000 EUR
- These are relatively small and already in reported profit
- **Adjustment: 0 EUR** (immaterial)

### Adjusted_EBITDA Calculation:

```
Adjusted_EBITDA = Reported EBITDA + Lease Normalization + Other Adjustments
Adjusted_EBITDA = 3,160,679,000 + 25,000,000 + 0
Adjusted_EBITDA = 3,185,679,000 EUR
```

## Step 4: Calculate Adjusted_Debt / Adjusted_EBITDA Ratio

```
Ratio = Adjusted_Debt / Adjusted_EBITDA
Ratio = 3,766,331,000 / 3,185,679,000
Ratio = 1.182
```

Rounding to two decimal places: **1.18**

---

## Verification of Calculations:

**Adjusted_Debt Components:**
- Financial Debt: 3,296,608,000
- Leases: 103,826,000
- Derivative Adjustment (50%): 775,149,000
- Less: Cash: (409,252,000)
- **Total: 3,766,331,000**

**Adjusted_EBITDA Components:**
- Reported EBITDA: 3,160,679,000
- Lease Adjustment: 25,000,000
- **Total: 3,185,679,000**

**Ratio: 3,766,331,000 ÷ 3,185,679,000 = 1.182**

<answer>1.18</answer>