I'll work through this step-by-step, identifying the industry, calculating Adjusted Debt and Adjusted EBITDA, then computing the ratio. ## Step 1: Identify the Relevant Industry REDEIA CORPORACION SA (Red Eléctrica Corporación, S.A.) is Spain's national electricity transmission system operator. This is a **regulated utility** - specifically an electricity transmission company. The company operates under regulated tariff frameworks with cost-of-service regulation. Key characteristics: - Electricity transmission (national grid operator) - Regulated tariffs with cost recovery mechanisms - Natural monopoly with comprehensive regulatory oversight - Essential infrastructure service with no substitutes This fits squarely in the **Regulated Utilities** sector described in the methodology. ## Step 2: Estimate Adjusted Debt For regulated utilities, S&P's baseline formula applies with some specific considerations: - We deconsolidate securitized debt with specialized recovery provisions (none evident here) - Seasonal working capital adjustments may apply for gas utilities, but less relevant for transmission **Reported Debt Components:** From the balance sheet (2022 year-end, i.e., 2023-01-01): - Noncurrent Financial Liabilities: 5,543,755,000 EUR - Longterm Borrowings: 5,491,124,000 EUR - Other Noncurrent Financial Liabilities: 52,631,000 EUR - Current Financial Liabilities: 1,705,277,000 EUR - Current Borrowings and Current Portion of Noncurrent Borrowings: 721,845,000 EUR - Other Current Financial Liabilities: 983,432,000 EUR **Total Reported Debt** = 5,543,755,000 + 1,705,277,000 = **7,249,032,000 EUR** Now I need to check for other debt-like items: - **Leases**: Not separately disclosed in the data provided; likely embedded in other categories or immaterial - **Pension deficit**: Not separately disclosed; "Other Longterm Provisions" of 139,822,000 EUR may include some, but these appear to be general provisions - **Guarantees**: Not separately disclosed - **Hybrid debt portion**: Not evident in the data - **Derivative financial liabilities**: These are mark-to-market items, not debt-like in the S&P framework (they're hedging instruments) For regulated utilities, S&P notes: "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." Looking at the data: - Inventories: 41,321,000 EUR (relatively small) - Current Borrowings: 721,845,000 EUR This doesn't appear to be a seasonal working capital situation (gas utility type), so no adjustment needed. **Eligible Cash:** - Cash And Cash Equivalents: 794,824,000 EUR However, for regulated utilities, we need to consider what cash is truly available to repay debt. Given the regulated nature and working capital needs, we typically don't subtract all cash, but the baseline formula says "eligible_cash." Without specific guidance on restricted cash, I'll use reported cash. But let me reconsider: S&P typically uses "surplus cash" or available cash. For regulated utilities with construction programs, some cash may be earmarked. Without specific information on restricted cash, I'll use the full cash figure as the baseline, but note that S&P often makes adjustments. Actually, looking more carefully at S&P methodology: for regulated utilities, they generally subtract available cash. Let me use 75% of cash as a conservative estimate of eligible cash, or look for specific restricted cash disclosures. Since none are evident, I'll use the full cash figure but this is a common area for analyst judgment. Let me use a more standard approach: subtract full cash and cash equivalents as the baseline. **Adjusted Debt** = 7,249,032,000 - 794,824,000 = **6,454,208,000 EUR** Wait - let me reconsider. Looking at the 2022-01-01 figures (beginning of 2022) vs 2023-01-01 (end of 2022). The question asks for 2022 fiscal year. I need to determine whether to use average, ending, or beginning balance. S&P typically uses ending or average debt for leverage ratios. For debt/EBITDA, they often use ending debt or average debt. Let me check both. Actually, for the fiscal year ended December 31, 2022, the 2023-01-01 figures represent the year-end 2022 balance sheet. The 2022-01-01 figures represent beginning of 2022. For leverage ratios, S&P can use: - Point-in-time (year-end) debt - Average debt I'll use year-end 2022 debt (2023-01-01 figures) as this is most common, but note that average might also be used. Year-end 2022 debt (2023-01-01): - Noncurrent Financial Liabilities: 5,543,755,000 - Current Financial Liabilities: 1,705,277,000 - Total: 7,249,032,000 Beginning 2022 debt (2022-01-01): - Noncurrent Financial Liabilities: 5,953,434,000 - Current Financial Liabilities: 2,144,425,000 - Total: 8,097,859,000 Average debt: (7,249,032,000 + 8,097,859,000) / 2 = 7,673,445,500 I'll use year-end debt as is common for published ratios, but average is also defensible. Let me use year-end as the more conservative (lower debt) figure, or check if S&P prefers one. Actually, for regulated utilities with significant capex programs, average debt often better reflects the capital structure during the year. But I'll use year-end as the standard reporting convention unless specified otherwise. Let me recalculate with year-end: **Adjusted Debt (year-end)** = 7,249,032,000 - 794,824,000 = **6,454,208,000 EUR** ## Step 3: Estimate Adjusted EBITDA For regulated utilities, S&P focuses on EBITDA. Let me reconstruct from the income statement data for 2022 (2022-01-01 to 2023-01-01): Starting points: - Revenue: 2,015,036,000 EUR - Profit Loss From Operating Activities: 961,554,000 EUR To get EBITDA from operating profit, I need to add back depreciation and amortization: - Depreciation And Amortisation Expense: 544,992,000 EUR **Reported EBITDA** = Profit Loss From Operating Activities + Depreciation And Amortisation Expense = 961,554,000 + 544,992,000 = **1,506,546,000 EUR** Let me verify this another way: Revenue: 2,015,036,000 Less: Operating costs (need to back out) From the income statement items: - Other Work Performed By Entity And Capitalised: 62,903,000 (negative expense, i.e., income) - Aprovisionamientos: 37,061,000 (purchases/supplies) - Employee Benefits Expense: 210,614,000 - Miscellaneous Other Operating Expense: 467,088,000 - Depreciation And Amortisation Expense: 544,992,000 - Imputacion De Subvenciones De Inmovilizado No Financiero YOtras: -15,780,000 (grant income, negative expense) - Deterioro YResultado Por Enajenaciones Del Inmovilizado: 488,000 (impairment/gain on disposal) Let me try: Revenue + Other Work - Aprovisionamientos - Employee - Misc Operating Expense - D&A + Grants - Impairment = Operating Profit 2,015,036,000 + 62,903,000 - 37,061,000 - 210,614,000 - 467,088,000 - 544,992,000 + 15,780,000 - 488,000 = ? = 2,077,939,000 - 37,061,000 = 2,040,878,000 - 210,614,000 = 1,830,264,000 - 467,088,000 = 1,363,176,000 - 544,992,000 = 818,184,000 + 15,780,000 = 833,964,000 - 488,000 = 833,476,000 This doesn't match the 961,554,000 operating profit. Let me check if I'm missing items or misinterpreting signs. Actually, looking more carefully at the items: - "Participacion En Beneficios De Sociedades Valoradas Por El Metodo De La Participacion" = 50,405,000 (share of profits of equity-accounted investments) - this is likely after operating profit or part of it Let me try a different approach. The operating profit is given as 961,554,000. The standard EBITDA calculation is: EBITDA = Operating Profit + D&A = 961,554,000 + 544,992,000 = 1,506,546,000 But I need to check if there are other items to normalize. For regulated utilities, S&P mentions: - Pass-through costs that distort EBITDA margin (like congestion revenue or third-party revenue collection) - Regulatory accounting effects Looking at the revenue: 2,015,036,000. For a transmission operator, some revenue may be pass-through (like collecting transmission charges for third parties). However, without specific disclosure, I cannot adjust for this. Also, "Other Work Performed By Entity And Capitalised" of 62,903,000 - this is capitalized costs, not revenue. It should be excluded from revenue for EBITDA purposes or treated as a reduction of capex. For EBITDA calculation, the standard approach is: EBITDA = Revenue - Cash Operating Costs Or: EBITDA = Operating Profit + D&A + Impairments - Other non-cash items + Share of equity earnings (if included in operating profit) Let me check if share of equity earnings is in operating profit. The item "Participacion En Beneficios..." = 50,405,000. In IFRS, this is typically part of operating profit or finance income. Looking at the structure, it appears before operating profit. Actually, let me recalculate more carefully. The income statement structure in IFRS typically: Revenue + Other income - Operating expenses = Operating profit From the items listed, the operating profit of 961,554,000 is given. So: EBITDA = Operating Profit + D&A = 961,554,000 + 544,992,000 = 1,506,546,000 But wait - is D&A already included in operating expenses? Yes, that's why we add it back. Now, adjustments for regulated utilities: - Nonrecurring items: The "Deterioro YResultado Por Enajenaciones Del Inmovilizado" = 488,000 is small and positive (loss), so it reduced operating profit. This is nonrecurring. Add back: +488,000 - Share of equity-accounted earnings: 50,405,000 - need to check if this is in operating profit or not. Looking at typical IFRS presentation, this is usually in operating profit for utilities. Actually, let me check: "Profit Loss From Operating Activities" in IFRS includes share of profit of associates and joint ventures accounted for using equity method. So 50,405,000 is likely included in the 961,554,000. For S&P purposes, when calculating EBITDA for leverage, they sometimes want proportional EBITDA from JVs rather than just the equity income. However, for regulated utilities with equity investments, this is less common unless significant. Looking at the balance sheet: "Investment Accounted For Using Equity Method" = 891,617,000 at year-end, up from 587,983,000. This is significant (about 6% of assets). For S&P methodology, if the equity method investment is significant, we might need to add proportional EBITDA. However, the standard approach for debt/EBITDA is to use the reported EBITDA which includes equity income. Actually, looking more carefully at S&P's general approach: for JVs, they may make proportional consolidation adjustments in some sectors, but for regulated utilities, this is less common unless specified. Let me check if there are other adjustments needed: - Leases: No finance lease adjustment evident (no right-of-use assets separately disclosed) - Pension adjustments: Not evident - Nonrecurring gains/losses: The impairment/gain on disposal is 488,000 (small, loss) For the baseline, I'll use: **Adjusted EBITDA** = 1,506,546,000 + 488,000 (nonrecurring loss) = **1,507,034,000 EUR** Or more simply, just use reported EBITDA of 1,506,546,000 given the immateriality of the adjustment. But let me reconsider the "Other Work Performed By Entity And Capitalised." This is 62,903,000. In some presentations, this is shown as revenue (reducing external costs). If it's capitalized labor costs, it might be included in revenue or as a separate line. If it's in revenue, it inflates revenue without being true external revenue. However, for EBITDA purposes, if it's offset against costs, it would increase EBITDA. Actually, "Other Work Performed By Entity And Capitalised" typically means the company's own labor capitalized into assets. This is not revenue - it's a reduction of operating expenses (capitalized costs). In the income statement, it's often shown as a separate line item that reduces total expenses. If my earlier calculation didn't work, let me try: Revenue + Capitalized work - operating expenses = Operating profit? Actually, looking at Spanish GAAP/IFRS format, "Other Work Performed By Entity And Capitalised" is often added to revenue or shown as a reduction of costs. Let me assume the 961,554,000 operating profit is correct and move forward. Let me also check 2021 for comparison: - 2021 Operating Profit: 991,970,000 - 2021 D&A: 522,114,000 - 2021 EBITDA: 1,514,084,000 So 2022 EBITDA of ~1,506,546,000 is slightly down from 2021. ## Step 4: Calculate Adjusted Debt / Adjusted EBITDA Using year-end debt and 2022 EBITDA: Adjusted Debt = 6,454,208,000 EUR Adjusted EBITDA = 1,506,546,000 EUR (or 1,507,034,000 with nonrecurring adjustment) Ratio = 6,454,208,000 / 1,506,546,000 = **4.28x** Or with the small nonrecurring adjustment: 6,454,208,000 / 1,507,034,000 = 4.28x (same to 2 decimal places) Let me also check using average debt: Average debt = 7,673,445,500 Less: average cash? Or use year-end cash? If we use average debt and year-end cash (not ideal): 7,673,445,500 - 794,824,000 = 6,878,621,500 Ratio = 6,878,621,500 / 1,506,546,000 = 4.57x Or if we use average cash: (794,824,000 + 1,574,427,000)/2 = 1,184,625,500 Average adjusted debt = 7,673,445,500 - 1,184,625,500 = 6,488,820,000 Ratio = 6,488,820,000 / 1,506,546,000 = 4.31x Given S&P's typical practice for regulated utilities, they often use ending debt or average debt. I'll stick with the more common year-end debt approach, or perhaps use a hybrid. Actually, for more precision, let me reconsider: S&P Global Ratings typically uses "adjusted debt" as the debt at the end of the period or average, and "adjusted EBITDA" as the trailing 12 months or last fiscal year. For published ratios, year-end debt with annual EBITDA is standard. However, I want to double-check my debt calculation. Let me look more carefully at what's in "Other Current Financial Liabilities" and "Other Noncurrent Financial Liabilities." Other Noncurrent Financial Liabilities: 52,631,000 - this could include derivatives, lease liabilities, or other items Other Current Financial Liabilities: 983,432,000 - this seems large. Could this include trade payables? No, those are separate. Looking at the balance sheet structure: - Trade And Other Current Payables: 1,160,176,000 (separate line) - Current Tax Liabilities: 13,320,000 - Current Derivative Financial Liabilities: 7,053,000 So "Other Current Financial Liabilities" of 983,432,000 is likely debt-like items, possibly including: - Current portion of long-term debt - Short-term borrowings - Lease liabilities - Other financial debt Similarly, "Current Borrowings And Current Portion Of Noncurrent Borrowings" = 721,845,000 Total current financial liabilities = 721,845,000 + 983,432,000 = 1,705,277,000 (matches) For S&P purposes, all of this is likely debt except perhaps some derivative liabilities. The 7,053,000 derivative liability is separate in "Current Derivative Financial Liabilities" - wait, let me check if this is included in the 1,705,277,000 or separate. Looking at the structure: "Current Financial Liabilities" is the total, with components: - Current Borrowings And Current Portion Of Noncurrent Borrowings: 721,845,000 - Other Current Financial Liabilities: 983,432,000 And separately: "Current Derivative Financial Liabilities": 7,053,000 Is the 7,053,000 included in the 1,705,277,000? The total of the two components is 1,705,277,000, so the derivative must be included in "Other Current Financial Liabilities" or the total is wrong. Actually 721,845,000 + 983,432,000 = 1,705,277,000. So the 7,053,000 is likely additional or included. Looking at noncurrent: "Noncurrent Derivative Financial Liabilities" = 22,016,000, and "Noncurrent Financial Liabilities" total = 5,543,755,000 with components Longterm Borrowings (5,491,124,000) and Other Noncurrent Financial Liabilities (52,631,000). So the 22,016,000 derivative is likely included in Other or in the total. For S&P, derivative liabilities that are hedges are typically not counted as debt. However, without knowing the exact composition, I'll use the total financial liabilities as reported, which is conservative. Let me also check if there are any hybrid instruments or preferred shares. Looking at equity: - "Fondos Propios" (Equity/Own Funds): 4,826,318,000 - Components include ordinary shares, reserves, treasury shares, retained earnings, accumulated OCI No obvious hybrid equity instruments disclosed. Now, let me also consider: for regulated utilities, S&P may adjust for "regulatory assets" and "regulatory liabilities" under U.S. GAAP regulatory accounting. But this company uses IFRS (Spanish company), and IFRS doesn't have regulatory accounting. So no adjustment needed. One more consideration: construction work in progress and AFUDC (Allowance for Funds Used During Construction). For utilities with significant construction programs, S&P may adjust EBITDA to exclude AFUDC or to capitalize interest differently. However, without specific disclosure of AFUDC or capitalized interest, I cannot make this adjustment. Looking at the cash flow statement: "Interest Paid Classified As Operating Activities" = 123,524,000. This suggests interest is expensed, not capitalized (or at least the paid portion is expensed). Let me finalize with the most straightforward calculation: **Adjusted Debt** = Total Financial Liabilities - Cash and Cash Equivalents = 7,249,032,000 - 794,824,000 = **6,454,208,000 EUR** **Adjusted EBITDA** = Operating Profit + Depreciation and Amortization = 961,554,000 + 544,992,000 = **1,506,546,000 EUR** **Ratio** = 6,454,208,000 / 1,506,546,000 = 4.284... ≈ **4.28** Wait - I want to double-check one thing. Should I use ending or beginning cash with ending debt? S&P typically matches the balance sheet items at the same point in time, so ending debt with ending cash is appropriate. However, some practitioners use average debt with TTM EBITDA. Let me see if this makes a material difference. Average debt (beginning + ending)/2 = (8,097,859,000 + 7,249,032,000)/2 = 7,673,445,500 Average cash = (1,574,427,000 + 794,824,000)/2 = 1,184,625,500 Average adjusted debt = 6,488,820,000 Ratio = 6,488,820,000 / 1,506,546,000 = 4.31 The difference is small (4.28 vs 4.31). I'll use the year-end figure as it's more standard for published financial ratios. Actually, let me reconsider one more item. The "Other Current Financial Assets" of 752,505,000 - this is described as "Current Financial Assets At Amortised Cost." Could this include restricted cash or short-term investments that should be considered available? For S&P purposes, "Cash And Cash Equivalents" is clearly eligible cash. Other current financial assets at amortized cost could include: - Short-term deposits - Loans to related parties - Trade receivables (but those are separate) - Other short-term investments If these are liquid short-term investments, they might also be considered as available cash. However, without more detail, I'll be conservative and only subtract "Cash And Cash Equivalents" as eligible cash. But wait - looking more carefully, "Current Financial Assets At Amortised Cost" of 752,505,000 is quite large compared to cash of 794,824,000. This could include significant liquid assets. However, S&P's standard definition of "cash" for debt calculations typically includes cash equivalents and sometimes marketable securities if very liquid. Given the label "At Amortised Cost," these are likely not marketable securities (which would be at fair value), but rather loans, deposits, or similar. I'll exclude them from eligible cash to be conservative. Let me also verify my EBITDA calculation one more time by working from revenue: Revenue: 2,015,036,000 + Other Work Performed By Entity And Capitalised: 62,903,000 + Participacion En Beneficios...: 50,405,000 (share of equity earnings) - Aprovisionamientos: 37,061,000 - Employee Benefits Expense: 210,614,000 - Miscellaneous Other Operating Expense: 467,088,000 - Depreciation And Amortisation Expense: 544,992,000 + Imputacion De Subvenciones...: 15,780,000 (grant income, negative expense) - Deterioro YResultado...: 488,000 = ? Let me add: 2,015,036,000 + 62,903,000 + 50,405,000 = 2,128,344,000 Minus: 37,061,000 + 210,614,000 + 467,088,000 + 544,992,000 + 488,000 - 15,780,000 = 1,244,473,000 2,128,344,000 - 1,244,473,000 = 883,871,000 This doesn't match 961,554,000. I'm missing something or misinterpreting signs. Let me try: perhaps "Aprovisionamientos" is negative (i.e., it's an expense, so subtract), and some items are reversed. Actually, looking at typical Spanish income statement format: Ingresos de explotación (Operating income): - Ventas (Revenue) - Trabajos realizados por la empresa para su activo (Other work capitalized) - Subvenciones de explotación (Operating grants) - Otros ingresos (Other income) Gastos de explotación (Operating expenses): - Aprovisionamientos (Supplies/purchases) - Gastos de personal (Staff costs) - Otros gastos de explotación (Other operating expenses) - Amortización del inmovilizado (Depreciation) - Deterioro y resultado por enajenaciones (Impairment and gains/losses on disposal) So the structure is: Revenue + Other work for own assets + Grants + Other income - Supplies - Staff costs - Other operating expenses - D&A +/- Impairment and gains/losses = Operating profit From the items: +2,015,036,000 (Revenue) +62,903,000 (Other work) +50,405,000 (Share of equity earnings - wait, this is usually after operating profit or in it?) Actually, "Participacion En Beneficios De Sociedades Valoradas Por El Metodo De La Participacion" = share of profits of equity-accounted investments. In IFRS, this is typically shown AFTER operating profit, as part of "Profit before tax." Let me check... In IFRS income statement: Operating profit + Share of profit of associates and JVs + Finance income - Finance costs = Profit before tax So if 961,554,000 is "Profit Loss From Operating Activities," then the 50,405,000 is likely NOT included in it. Let me recalculate: If operating profit excludes the 50,405,000, then my EBITDA calculation is: EBITDA = Operating Profit + D&A = 961,554,000 + 544,992,000 = 1,506,546,000 And the share of equity earnings would be added to get to profit before tax: 961,554,000 + 50,405,000 + 23,161,000 (Finance Income) - 116,468,000 (Finance Costs) + ... = 869,517,000 (Profit Before Tax) Check: 961,554,000 + 50,405,000 = 1,011,959,000 + 23,161,000 = 1,035,120,000 - 116,468,000 = 918,652,000 But Profit Before Tax is 869,517,000. Difference: 918,652,000 - 869,517,000 = 49,135,000 Looking at other items: "Gains Losses On Financial Assets At Fair Value Through Profit Or Loss" = 1,196,000 and "Gains Losses On Exchange Differences" = 74,000. These total 1,270,000, not 49,135,000. Hmm, let me check: 918,652,000 + 1,196,000 + 74,000 = 919,922,000, still not 869,517,000. Wait, I need to re-read. "Finance Income Cost" = -92,037,000. This is the net of finance income and costs? Let me check: 23,161,000 - 116,468,000 = -93,307,000. Close to -92,037,000 but not exact. The difference might be the 1,196,000 + 74,000 = 1,270,000. And -93,307,000 + 1,270,000 = -92,037,000. Yes! So: Operating Profit 961,554,000 + Share of equity earnings 50,405,000 + Net finance and other financial items -92,037,000 = 919,922,000 But Profit Before Tax is 869,517,000. Difference: 50,405,000. Wait, let me re-read: 961,554,000 - 92,037,000 = 869,517,000. Yes! So the share of equity earnings 50,405,000 must be IN the operating profit of 961,554,000, or there's something else. Actually: 961,554,000 + 50,405,000 - 92,037,000 = 919,922,000, not 869,517,000. Or: 961,554,000 - 50,405,000 - 92,037,000 = 819,112,000, not right either. Let me try: 961,554,000 (which already includes 50,405,000) - 92,037,000 = 869,517,000. Yes! This works. So Operating Profit 961,554,000 includes the 50,405,000 share of equity earnings. Therefore, EBITDA = 961,554,000 + 544,992,000 = 1,506,546,000 includes the equity earnings. For S&P's debt/EBITDA, this is generally acceptable as is. However, if we wanted to be more precise and look at the core operations, we might exclude the equity earnings and instead look at proportional consolidation. But without detailed JV financials, this is impractical. Final calculation: Adjusted Debt = 6,454,208,000 Adjusted EBITDA = 1,506,546,000 Ratio = 4.2842... Rounded to two decimal places: **4.28** 4.28