# Workflow Execution: S&P FFO/Adjusted_Debt Ratio for TenneT Holding B.V. ## Step 1: Identify the Relevant Industry **Analysis:** - Company: TenneT Holding B.V. - Description: Transmission system operator (TSO) - Principal activity: Electricity transmission - Ownership: Dutch State (100%) - Location: Netherlands (Arnhem) TenneT is a regulated transmission system operator for electricity. This clearly falls under the **"Regulated Utilities"** methodology provided in the guidelines, specifically the electricity transmission subsector. **Key characteristics confirming regulated utility status:** - Operates as a natural monopoly in electricity transmission - Subject to comprehensive regulation by Dutch energy regulator (ACM) - Provides essential infrastructure service - No direct competition - Operates under regulatory framework with predetermined tariff mechanisms ## Step 2: Estimate Adjusted_EBITDA **Baseline Formula for Regulated Utilities:** ``` Adjusted_EBITDA = EBITDA + adjustment_leases + nonrecurring_items + pension_adjustments + JV_proportional_EBITDA ``` **Step 2a: Reconstruct EBITDA from Income Statement (2022 fiscal year)** Using fiscal year 2021-01-01 to 2022-01-01 (the 2022 reporting period): ``` Revenue 5,524 M EUR Operating Expense (5,861) M EUR ________ Profit/Loss from Operating Activities: (275) M EUR Add back: Depreciation & Amortisation 1,165 M EUR ________ EBITDA (reconstructed) 890 M EUR ``` **Step 2b: Adjustments for Leases** Per S&P regulated utilities guidance, lease adjustments normalize operating lease obligations: - Current Lease Liabilities (2022-01-01): 169 M EUR - Noncurrent Lease Liabilities (2022-01-01): 235 M EUR - Total Lease Liabilities: 404 M EUR For EBITDA add-back, we use an approximation. Operating lease adjustment should reflect the implicit interest and rental: - Using typical lease capitalization approach: Add back lease expense (approximated as portion of lease liability) - Lease adjustment: ~15-20 M EUR (estimated from interest on lease obligations) **Using conservative 20 M EUR estimate** **Step 2c: Nonrecurring Items** - Other Gains/Losses (2021-01-01 to 2022-01-01): (4) M EUR (operating loss, already reflected) No material nonrecurring gains or losses to adjust beyond what's reported. **Step 2d: Pension Adjustments** - Noncurrent Recognised Liabilities Defined Benefit Plan (2022-01-01): 351 M EUR For pension adjustment, we add back the operating pension benefit cost (not the full liability). Based on movement in pension liability from prior year and typical pension service costs: estimate ~10-15 M EUR annual adjustment. **Using 12 M EUR estimate** **Step 2e: Joint Venture Adjustments** Share of profit loss of Associates and Joint Ventures (2021-01-01 to 2022-01-01): 62 M EUR This represents equity method accounting. For proportional consolidation adjustment: - Investments in JVs and Associates: 638 M EUR + 34 M EUR = 672 M EUR - Add back share of JV earnings (already deducted): 62 M EUR **Using 62 M EUR adjustment** **Step 2f: Calculated Adjusted_EBITDA (2022)** ``` EBITDA (reconstructed) 890 M EUR + Lease adjustment 20 M EUR + Pension adjustment 12 M EUR + Share of JV profit add-back 62 M EUR ________ Adjusted_EBITDA (2022) 984 M EUR ``` ## Step 3: Estimate FFO **Formula:** ``` FFO = Adjusted_EBITDA - Cash_Interest - Cash_Taxes ``` **Step 3a: Cash Interest Paid** From Cash Flow Statement (2021-01-01 to 2022-01-01): - Interest Paid (Financing Activities): 174 M EUR **Step 3b: Cash Taxes Paid** From Cash Flow Statement (2021-01-01 to 2022-01-01): - Income Taxes Paid: 246 M EUR **Step 3c: Calculated FFO (2022)** ``` Adjusted_EBITDA 984 M EUR - Cash Interest Paid (174) M EUR - Cash Taxes Paid (246) M EUR ________ FFO (2022) 564 M EUR ``` ## Step 4: Estimate Adjusted_Debt **Formula for Regulated Utilities:** ``` Adjusted_Debt = (Reported_Debt + Operating_Leases + Pension_Deficit + Guarantees + Hybrid_Debt_Portion) - Eligible_Cash ``` **Step 4a: Reported Debt (as of 2022-01-01)** - Long-term Borrowings: 12,366 M EUR - Short-term Borrowings: 1,339 M EUR - Current Bank Overdrafts: 64 M EUR ``` Total Reported Debt: 13,769 M EUR ``` **Step 4b: Operating Lease Adjustments** Per S&P guidelines for regulated utilities, capitalize operating leases: - Current Lease Liabilities (2022-01-01): 169 M EUR - Noncurrent Lease Liabilities (2022-01-01): 235 M EUR ``` Total Lease Liability: 404 M EUR ``` **Step 4c: Pension Deficit Adjustment** S&P adjusts underfunded pension obligations: - Noncurrent Recognised Liabilities Defined Benefit Plan (2022-01-01): 351 M EUR This represents the unfunded liability. Add to debt: ``` Pension Adjustment: 351 M EUR ``` **Step 4d: Hybrid Capital** Per the accounts: - Hybrid Capital (2022-01-01): 2,125 M EUR S&P typically treats hybrid capital as 50% debt, 50% equity for rating purposes: ``` Hybrid Capital treated as Debt (50%): 1,063 M EUR ``` **Step 4e: Guarantees and Other Debt-Like Items** No material guarantees identified in the financial statements. **Step 4f: Eligible Cash** Per S&P guidelines, cash and equivalents can be netted from debt: - Cash and Cash Equivalents (2022-01-01): 3,204 M EUR For regulated utilities, we typically net available cash (not restricted): ``` Eligible Cash to Deduct: 3,204 M EUR ``` **Step 4g: Calculated Adjusted_Debt (2022)** ``` Reported Debt 13,769 M EUR + Operating Leases 404 M EUR + Pension Deficit 351 M EUR + Hybrid Capital (50%) 1,063 M EUR ________ Total Adjusted Debt (before cash) 15,587 M EUR - Eligible Cash (3,204) M EUR ________ Adjusted_Debt (2022) 12,383 M EUR ``` ## Step 5: Calculate FFO / Adjusted_Debt Ratio **Formula:** ``` FFO / Adjusted_Debt = 564 / 12,383 ``` **Calculation:** ``` 564 รท 12,383 = 0.455477... ``` **Rounding to four decimal places:** ``` 0.4555 ``` --- 0.4555