# EDP, S.A. - S&P Adjusted Debt-to-EBITDA Analysis ## Step 1: Identify the Relevant Industry EDP, S.A. operates in "generation, transmission, distribution and supply of electricity and supply of gas." This company is a **regulated utility** (specifically, a multi-utility operating in the electricity and gas sectors). The relevant S&P methodology is **Regulated Utilities**, which emphasizes: - Regulatory advantage assessment - Industry-specific adjustments for debt and EBITDA calculations - Treatment of lease obligations - Pension adjustments --- ## Step 2: Estimate Adjusted_Debt ### Components of Adjusted Debt: **2.1 Reported Debt (as of 2022-01-01, which is the end of 2022 fiscal year):** - Long-term borrowings: 15,299,588,000 EUR - Current borrowings and current portion of non-current borrowings: 1,518,348,000 EUR - **Total reported debt = 16,817,936,000 EUR** **2.2 Lease Obligations (Operating Leases):** - Right-of-use assets (2022): 1,007,029,000 EUR - This represents the balance sheet value of lease obligations that should be added back for debt calculations. - **Lease adjustment = 1,007,029,000 EUR** **2.3 Pension Deficit:** - Noncurrent provisions for employee benefits (2022): 940,266,000 EUR - Current provisions for employee benefits (2022): 179,534,000 EUR - **Total pension-related provisions = 1,119,800,000 EUR** - For S&P analysis, we treat unfunded pension obligations as debt-like. Using the provisions as a proxy: **1,119,800,000 EUR** **2.4 Institutional Partnerships (Debt-like Obligations):** - Institutional partnerships in North America (2022): 2,259,741,000 EUR - These are financing arrangements similar to project financing and should be treated as debt. - **Institutional partnerships = 2,259,741,000 EUR** **2.5 Other Financial Liabilities:** - Other noncurrent financial liabilities (2022): 3,039,975,000 EUR - Other current financial liabilities (2022): 2,781,101,000 EUR - **Total other financial liabilities = 5,821,076,000 EUR** - This includes items that may include derivatives and other debt-like obligations. However, these must be examined carefully. The noncurrent portion (3,039,975,000) and current portion (2,781,101,000) need clarification on what portion represents actual debt vs. trade payables or other liabilities. Looking more carefully at the balance sheet structure, "Other noncurrent financial liabilities" and "Other current financial liabilities" are separate from "Trade Payables and Other Liabilities from Commercial Activities." Therefore, these appear to be financial liabilities (debt-like instruments). Let me reconsider: The methodology indicates we should capture debt-like items. Given the company structure, I should focus on items clearly debt-related: **Revised Adjusted Debt Calculation:** - Long-term borrowings: 15,299,588,000 EUR - Current borrowings: 1,518,348,000 EUR - Right-of-use assets (lease capitalization): 1,007,029,000 EUR - Pension/employee benefit provisions: 1,119,800,000 EUR - Institutional partnerships in North America: 2,259,741,000 EUR - Other noncurrent financial liabilities: 3,039,975,000 EUR - Other current financial liabilities: 2,781,101,000 EUR **Gross debt before cash adjustment = 27,025,582,000 EUR** **2.6 Less: Eligible Cash:** - Cash and cash equivalents (2022): 3,222,409,000 EUR **Adjusted_Debt = 27,025,582,000 - 3,222,409,000 = 23,803,173,000 EUR** --- ## Step 3: Estimate Adjusted_EBITDA **3.1 Reconstruct EBITDA from Income Statement (2022):** From the financial statements for 2022 (2022-01-01 to 2023-01-01): - Profit before financial income/expenses and income tax: 2,529,993,000 EUR - Add: Depreciation, amortisation, and impairment loss: 1,979,007,000 EUR - Add: Finance costs: 1,753,220,000 EUR - Less: Finance income: 843,000,000 EUR - Less: Provisions expenses: 14,539,000 EUR **Preliminary EBITDA = 2,529,993,000 + 1,979,007,000 + 1,753,220,000 - 843,000,000 - 14,539,000** **= 5,404,681,000 EUR** **Alternative verification using operating data:** - Revenue: 20,650,764,000 EUR - Cost of energy sales and other: 14,529,713,000 EUR - Gross margin: 6,121,051,000 EUR - Other income: 927,450,000 EUR - Operating expenses: - Services expense: 1,103,668,000 EUR - Employee benefits: 770,800,000 EUR - Other expense by nature: 829,724,000 EUR - Impairment losses: 60,199,000 EUR - Operating profit before depreciation: - 6,121,051,000 + 927,450,000 - 1,103,668,000 - 770,800,000 - 829,724,000 - 60,199,000 - = 4,284,110,000 EUR - Plus: Depreciation and amortisation: 1,979,007,000 EUR - **Implied EBITDA ≈ 6,263,117,000 EUR** Let me use the more direct approach from P&L: **Profit Loss Before Financial Income/Expenses and Income Tax:** 2,529,993,000 EUR This is defined as "Profit Loss Before Financial Income And Financial Expenses Income Tax Expense And Extraordinary Contribution To The Energy Sector CESE" This equals EBIT (operating profit after depreciation). **EBITDA = EBIT + D&A** - EBIT: 2,529,993,000 EUR - D&A: 1,979,007,000 EUR - **EBITDA = 4,509,000,000 EUR** **3.2 Adjustments to EBITDA:** **a) Lease adjustments:** - Operating lease rent expense should be captured. Based on capitalized leases of 1,007,029,000 EUR and typical lease capitalization conventions, we estimate annual rent of approximately 100,000,000 EUR (using a rough 10% imputed rate). - However, S&P guidance suggests we adjust EBITDA for the operating lease component. The precise adjustment would require detailed lease schedules. - Estimated lease EBITDA add-back: **100,000,000 EUR** (conservative estimate) **b) Non-recurring or one-time items:** - Gains/losses on disposal: -4,377,000 EUR (loss, so would add back for normalization) - This is relatively immaterial. **c) Joint venture adjustments:** - Share of JV profits: 239,429,000 EUR - These are already captured in the profit before depreciation, but if we're calculating proportional EBITDA, we need to understand the exact treatment. - Looking at the statement: "Joint Ventures And Associates" is a line item showing positive income of 239,429,000 EUR - For consistency with the equity method, this should remain in EBITDA as reported. **d) Pension adjustments:** - No specific pension adjustment needed beyond what's captured in operating expenses and provisions. **3.3 Adjusted EBITDA:** **Adjusted_EBITDA = 4,509,000,000 + 100,000,000 (lease adjustment) = 4,609,000,000 EUR** However, let me reconsider the EBITDA calculation. The item "Profit Loss Before Provisions Amortisation And Impairment Financial Income And Financial Expenses" is reported as 4,523,539,000 EUR for 2022. This is stated as: "Profit Loss Before Provisions Amortisation And Impairment Financial Income And Financial Expenses Income Tax Expense And Extraordinary Contribution To The Energy Sector CESE" This appears to be EBIT (before D&A). Then: - Provisions expenses: 14,539,000 EUR - D&A: 1,979,007,000 EUR So: 4,523,539,000 - 14,539,000 - 1,979,007,000 = 2,529,993,000 EUR ✓ (matches reported EBIT) Therefore: **EBITDA = 4,523,539,000 EUR** (before provisions, which is the clean operating metric) With lease adjustment: **Adjusted_EBITDA = 4,523,539,000 + 100,000,000 = 4,623,539,000 EUR** --- ## Step 4: Calculate Adjusted Debt / Adjusted EBITDA Ratio **Adjusted_Debt / Adjusted_EBITDA = 23,803,173,000 / 4,623,539,000 = 5.15** --- ## Verification and Reasonableness Check - **Adjusted Debt:** 23.8 billion EUR (includes reported debt, leases, pension obligations, institutional partnerships, and other financial liabilities minus cash) - **Adjusted EBITDA:** 4.6 billion EUR (operating profit before D&A and provisions, plus lease adjustments) - **Ratio:** 5.15x This ratio reflects a highly capital-intensive regulated utility with significant debt financing, which is typical for utilities. The ratio is in the range that would typically support investment-grade ratings for European regulated utilities, though it is at the higher end of the range. 5.15