I'll analyze Fortum Oyj step by step to estimate the S&P-adjusted debt-to-EBITDA ratio for 2022. ## Step 1: Identify the Relevant Industry Fortum Oyj is a Finnish energy company. Based on the facts provided, it operates in: - Power generation (including nuclear, hydro, thermal) - Electricity and heat distribution - Energy trading/marketing The company has both regulated utility activities (distribution networks) and unregulated power activities (generation, trading). Given the substantial presence of regulated utility operations and the company's description, I'll primarily apply the **Regulated Utilities** methodology, with consideration of unregulated elements. However, looking at the financial structure and the fact that Fortum has significant unregulated generation and trading activities, I need to be careful. The 2022 annual report shows major discontinued operations (likely the Uniper divestment), indicating significant restructuring. Given Fortum's core operations include regulated distribution networks and unregulated generation/supply, I'll use a hybrid approach but primarily follow the **Regulated Utilities** methodology for debt adjustments, with standard volatility table considerations. ## Step 2: Estimate Adjusted_Debt ### Baseline Formula: Adjusted_Debt = (reported_debt + leases + pension_deficit + guarantees + hybrid_debt_portion + other_debt_like_items) - eligible_cash ### Identifying Components from Balance Sheet: **Debt Components:** From the balance sheet, I need to identify interest-bearing liabilities. Looking at the liabilities: - Other Noncurrent Financial Liabilities (2023-01-01): 3,658,000,000 EUR - Other Current Financial Liabilities (2023-01-01): 4,127,000,000 EUR These appear to be the main debt categories. Let me also check for lease liabilities and other items. From cash flow statement: - Repayments Of Non Current Borrowings And Repayments Of Lease Liabilities: 5,888,000,000 EUR (this suggests leases are included in noncurrent borrowings) Looking more carefully at the liability structure: - Noncurrent Liabilities: 5,784,000,000 EUR (2023-01-01) - Current Liabilities (other than held for sale): 10,122,000,000 EUR (2023-01-01) The financial liabilities specifically: - Other Noncurrent Financial Liabilities: 3,658,000,000 EUR - Other Current Financial Liabilities: 4,127,000,000 EUR Total reported debt = 3,658 + 4,127 = **7,785,000,000 EUR** However, I need to check if there are derivative liabilities that should be excluded (these are typically not debt-like for S&P purposes unless they represent net liabilities from hedging): - Noncurrent Derivative Financial Liabilities: 756,000,000 EUR - Current Derivative Financial Liabilities: 3,973,000,000 EUR For S&P purposes, derivative liabilities related to hedging are typically excluded from debt unless they represent net payables from hedging. These are likely hedging-related and should be excluded. **Pension Deficit:** - Noncurrent Recognised Liabilities Defined Benefit Plan: 13,000,000 EUR (2023-01-01) This is small but should be included. **Nuclear Provisions:** - Nuclear Non Current Provisions: 966,000,000 EUR For nuclear utilities, S&P typically treats nuclear decommissioning and waste provisions as debt-like if they are not fully funded. The "Share In State Nuclear Waste Management Fund" is 966,000,000 EUR, which matches the Nuclear Non Current Provisions. This suggests these are funded provisions. S&P typically adds back unfunded nuclear provisions to debt. Since the fund share equals the provision, this appears fully funded, so no adjustment needed. **Margin Liabilities:** - Margin Liabilities: 352,000,000 EUR These are typically related to trading activities and are usually not treated as debt-like for S&P if they relate to normal course of business collateral. **Cash and Liquid Funds:** - Liquid Funds: 3,919,000,000 EUR **Eligible Cash:** S&P typically considers all cash as eligible unless restricted. Given the trading operations, some cash may be restricted for margin purposes. However, without specific information on restricted cash, I'll use 75% of liquid funds as eligible cash (standard S&P assumption for companies with trading operations): - Eligible cash = 3,919,000,000 × 0.75 = 2,939,250,000 EUR Or more conservatively, if we assume all cash is eligible (less typical for energy traders): - Eligible cash = 3,919,000,000 EUR Given Fortum's significant trading/hedging activities (evidenced by large derivative positions), I'll use 75% eligibility: - Eligible cash = 2,939,250,000 EUR ### Adjusted_Debt Calculation: Reported debt = 7,785,000,000 EUR + Pension deficit = 13,000,000 EUR + Nuclear provisions (unfunded portion) = 0 (appears funded) + Other debt-like items = 0 (no clear additional items) Less: Eligible cash = 2,939,250,000 EUR **Adjusted_Debt = 7,785,000,000 + 13,000,000 - 2,939,250,000 = 4,858,750,000 EUR** Wait - let me reconsider. Looking at 2022 year-end (which is 2023-01-01 in the data), but for 2022 fiscal year, I need the year-end 2022 position. The data shows 2022-01-01 and 2023-01-01 as balance sheet dates. So 2023-01-01 is the year-end for 2022 fiscal year. Let me also check if there are lease liabilities embedded. The cash flow shows "Repayments Of Non Current Borrowings And Repayments Of Lease Liabilities" together, suggesting leases are in the 3,658,000,000 figure. Actually, looking more carefully - I should check the 2022-01-01 figures too for comparison, but the ratio is for 2022 year-end. Let me recalculate with potentially more complete debt identification: Looking at 2022-01-01 (beginning of year 2022): - Other Noncurrent Financial Liabilities: 8,701,000,000 EUR - Other Current Financial Liabilities: 8,519,000,000 EUR And 2023-01-01 (end of year 2022): - Other Noncurrent Financial Liabilities: 3,658,000,000 EUR - Other Current Financial Liabilities: 4,127,000,000 EUR The reduction is dramatic, likely due to the Uniper divestment/discontinued operations. For year-end 2022 (2023-01-01 balance sheet): Total financial liabilities = 3,658 + 4,127 = 7,785 million EUR Let me verify by looking at total liabilities and equity: - Equity: 7,737 million - Total liabilities: 15,905 million - Total = 23,642 million (matches Assets) The derivative liabilities are large but typically excluded for debt calculations. **Revised Adjusted_Debt:** Reported debt = 7,785,000,000 + Pension deficit = 13,000,000 - Eligible cash (75% of 3,919) = -2,939,250,000 Adjusted_Debt = **4,858,750,000 EUR** However, I want to check if there are other provisions that should be treated as debt-like. The "Other Longterm Provisions" of 118,000,000 and "Other Shortterm Provisions" of 13,000,000 - these are typically operating provisions, not debt-like. Also, checking deferred tax liabilities: 152,000,000 - these are not debt-like. Let me also consider if margin liabilities should be included. For energy trading companies, margin payables can be significant but are typically operating items, not debt. ## Step 3: Estimate Adjusted_EBITDA ### Baseline Formula: Adjusted_EBITDA = EBITDA (reported or reconstructed) + adjustment_leases + nonrecurring_losses - nonrecurring_gains ± pension_adjustments ± joint_venture_proportional_EBITDA ± other_normalization_adjustments From the income statement, I can reconstruct EBITDA: **Method 1: Using Operating Profit Before Depreciations** "Operating Profit Before Depreciations Ebitda" 2022: 1,842,000,000 EUR But this is for continuing operations? Let me check. Looking at the structure: - "Comparable Operating Profit" 2022: 1,871,000,000 EUR - "Items Affecting Comparability" 2022: -593,000,000 EUR - "Profit Loss From Operating Activities" 2022: 1,277,000,000 EUR So: 1,871 + (-593) = 1,278 ≈ 1,277 (rounding difference) The "Operating Profit Before Depreciations Ebitda" 2022: 1,842,000,000 EUR Wait, this seems low compared to comparable operating profit of 1,871. Let me check: - Comparable EBITDA 2022: 2,436,000,000 EUR This is explicitly provided as "Comparable Ebitda" - this is likely the management-adjusted figure. Let me reconstruct from components: Revenue: 8,804,000,000 + Other Income: 101,000,000 - Materials And Services: -5,350,000,000 - Employee Benefits: -504,000,000 - Other Expense By Nature: -615,000,000 = Operating profit before D&A: 8,804 + 101 - 5,350 - 504 - 615 = 2,436,000,000 Yes! This matches "Comparable Ebitda" of 2,436,000,000 EUR. Then: - Depreciation And Amortisation: -566,000,000 = Comparable Operating Profit: 2,436 - 566 = 1,870,000,000 ≈ 1,871 So the starting EBITDA for S&P purposes should be based on continuing operations. **Reported EBITDA from continuing operations:** Using the reconstruction: Revenue + Other Income - Materials - Employee - Other Expenses (before D&A) = 2,436,000,000 EUR Or using: Profit Loss From Operating Activities + D&A = 1,277 + 566 = 1,843,000,000 EUR But this includes items affecting comparability. The "Items Affecting Comparability" is -593,000,000 EUR. So: 1,277 (reported operating profit) = 1,871 (comparable) - 593 (items) - 1 (rounding) Wait: 1,871 - 593 = 1,278 ≈ 1,277. Yes. For S&P purposes, we typically start with reported EBITDA and make adjustments, or use comparable EBITDA and adjust for non-recurring items. Let me use: **Reported EBITDA = 1,842,000,000 EUR** (from "Operating Profit Before Depreciations Ebitda") Or is this already adjusted? Looking at the cash flow: "Operating Profit Before Depreciations Ebitda" 2022: 1,842,000,000 EUR "Adjustments For Alternative Performance Measures" 2022: -593,000,000 EUR So: 1,842 - 593 = 1,249? No wait, let me check the cash flow reconciliation. Actually, looking at cash flow statement: "Operating Profit Before Depreciations Ebitda" 2022: 1,842,000,000 + "Adjustments For Depreciation And Amortisation Expense": 566,000,000 - This would give operating profit of 1,842 - 566 = 1,276? No, EBITDA already includes adding back D&A. Wait, "Operating Profit Before Depreciations Ebitda" means EBIT before depreciation, i.e., EBITDA. Then adding D&A would double count. Let me re-read: "Operating Profit Before Depreciations Ebitda" - this is EBITDA. Then "Adjustments For Depreciation And Amortisation Expense" is 566,000,000. In cash flow from operations, we start with EBITDA and add back D&A? That doesn't make sense unless this is a reconciliation from operating profit to cash flow. Actually, looking at standard cash flow statement format: Start with operating profit Add: D&A Add: other non-cash items = Cash flow before working capital But here it says "Operating Profit Before Depreciations Ebitda" which is unusual terminology. Let me check if this means "Operating Profit Before Depreciation (i.e., EBITDA)". Given the number 1,842 and the comparable EBITDA of 2,436, there's a difference. Let me check: 2,436 (comparable EBITDA) - 593 (items affecting comparability) = 1,843 ≈ 1,842 Yes! So "Operating Profit Before Depreciations Ebitda" of 1,842 is the **reported** EBITDA, while "Comparable Ebitda" of 2,436 is the **management-adjusted** figure. For S&P purposes, we typically: 1. Start with reported EBITDA, OR 2. Start with comparable EBITDA and adjust for items S&P considers non-recurring The "Items Affecting Comparability" of -593,000,000 EUR consists of: - Impairment Loss Reversal: 905,000,000 - Capital Gains And Other Related Items: 785,000,000 - Changes In Fair Values Of Derivatives Hedging Future Cash Flow: 393,000,000 - Other Adjustments Affecting Comparability: 80,000,000 Total positive items: 905 + 785 + 393 + 80 = 2,163,000,000 But "Items Affecting Comparability" is shown as -593,000,000. This suggests these are gains that reduced the reported operating profit (i.e., they are positive items that need to be subtracted to get to comparable, or the sign convention is different). Wait: "Items Affecting Comparability" 2022: -593,000,000 And "Comparable Operating Profit" 2022: 1,871,000,000 "Profit Loss From Operating Activities" 2022: 1,277,000,000 So: 1,871 + (-593) = 1,278 ≈ 1,277 This means the -593 is actually a negative adjustment (i.e., a loss or charge). But the components listed (impairment reversals, capital gains) are positive items. Let me re-read: The items listed under "Items Affecting Comparability" components are all positive numbers for 2022: - Impairment Loss Reversal: 905,000,000 - Capital Gains: 785,000,000 - Changes in Fair Values: 393,000,000 - Other Adjustments: 80,000,000 But "Items Affecting Comparability" is -593,000,000. This suggests the detailed components might have different signs or there's additional information. Actually, looking at 2021: "Items Affecting Comparability" is 2,897,000,000 (positive), and components are: - Impairment: 35,000,000 - Capital Gains: 2,673,000,000 - Changes in Fair Values: -264,000,000 - Other: 6,000,000 For 2021: 35 + 2,673 - 264 + 6 = 2,450 ≠ 2,897. So these don't directly sum. Perhaps the detailed items are shown as absolute values or with different sign conventions. The "Items Affecting Comparability" line item is what matters. For 2022: -593,000,000 means this is a negative item (charge/loss) in the comparable-to-reported reconciliation. So to go from comparable to reported, we subtract 593 (i.e., reported is lower by 593). Actually, looking at: Comparable Operating Profit (1,871) + Items Affecting Comparability (-593) = Reported Operating Profit (1,277). So the items are charges/losses of 593 that are excluded from comparable. But the detailed breakdown shows positive items (gains). This is confusing. Perhaps the detailed items are not the full reconciliation. Let me just use the explicit "Comparable Ebitda" of 2,436,000,000 as the starting point, as this is what management considers the normalized figure. For S&P, we need to assess if the items in "Items Affecting Comparability" are truly non-recurring: - Impairment reversals: typically non-recurring, S&P would add back (if they were losses) or subtract (if gains) - Capital gains: typically non-recurring, S&P would exclude - Fair value changes on hedges: these are typically recurring for energy companies and should NOT be adjusted - Other adjustments: need case-by-case assessment Given the complexity and the fact that "Comparable Ebitda" is 2,436,000,000 EUR, let me use this as the base and make further S&P-specific adjustments. **Starting point: Comparable EBITDA = 2,436,000,000 EUR** **Adjustments needed:** 1. **Leases**: If operating leases were not already included in comparable EBITDA, add back lease expense and subtract depreciation. But under IFRS 16, leases are typically in EBITDA already. The cash flow shows "Repayments Of Non Current Borrowings And Repayments Of Lease Liabilities" together, suggesting IFRS 16 treatment. No adjustment needed. 2. **Nonrecurring items in comparable EBITDA**: The comparable EBITDA already excludes items affecting comparability. But S&P may have different views. 3. **Joint ventures**: "Share Of Profit Loss Of Associates And Joint Ventures" 2022: -629,000,000 EUR (loss) For S&P, when using proportional consolidation for JVs, we should add back the equity-accounted loss and include proportional EBITDA. However, without detailed JV financials, this is complex. The standard approach is to add back the equity income/loss and include proportional debt and EBITDA. Given the large loss of 629,000,000, this likely relates to Uniper or other JVs. For 2022, Fortum was divesting Uniper (classified as discontinued operations), so this JV loss may be non-recurring. Actually, looking at the income statement structure, the -629,000,000 is in continuing operations (it's listed before finance items). This is the equity method result. For S&P adjusted EBITDA, we typically: - Add back equity income/loss to EBITDA (to move from equity to proportional) - Include proportional EBITDA of JVs But without JV financial details, a common approximation is to add back the equity income/loss (since it was deducted after operating profit). However, EBITDA is before this line item, so no adjustment needed for EBITDA itself if we're already at comparable EBITDA. Wait - is comparable EBITDA before or after equity income? Looking at the structure: - Profit Loss From Operating Activities: 1,277 - Share Of Profit Loss Of Associates: -629 - Interest Expense: -179 - etc. So operating profit is BEFORE equity income. EBITDA (operating profit + D&A) is also before equity income. Therefore, no adjustment needed for equity income in EBITDA calculation. 4. **Pension adjustments**: Small, likely immaterial. 5. **Discontinued operations**: The company has significant discontinued operations (Uniper divestment). For S&P, when calculating metrics for the ongoing entity, we typically focus on continuing operations. The discontinued operations loss is -11,302,000,000 EUR, but this is excluded from continuing operations EBITDA. However, for debt, we need to consider if debt was transferred with discontinued operations. The massive reduction in debt from 2022-01-01 to 2023-01-01 suggests debt related to Uniper was removed. Given the 2022 year-end balance sheet (2023-01-01) reflects the post-divestment position, and we're using 2022 year-end debt, we should use 2022 continuing operations EBITDA. **Adjusted_EBITDA = 2,436,000,000 EUR** (Comparable EBITDA from continuing operations) But let me verify if S&P would make additional adjustments. The "Items Affecting Comparability" of -593,000,000 (which are charges excluded from comparable) - are these truly non-recurring? Looking at the components again (even though they don't sum perfectly): - Impairment reversals: 905,000,000 - Capital gains: 785,000,000 - Fair value changes: 393,000,000 - Other: 80,000,000 If these are gains excluded from comparable, then comparable EBITDA is lower than reported by excluding gains. But "Items Affecting Comparability" is negative (-593), suggesting it's a net charge. I think the safest approach is to use **Comparable EBITDA of 2,436,000,000 EUR** as the starting point, as this is management's normalized figure and likely closer to S&P's adjusted EBITDA. However, S&P typically makes additional adjustments for: - Non-recurring items that management includes in comparable - Differences in treatment of hedging gains/losses For energy companies with significant trading, S&P may adjust for unrealized gains/losses on hedges. The "Changes In Fair Values Of Derivatives Hedging Future Cash Flow" of 393,000,000 might be such an item. Given the complexity, let me also consider using reported EBITDA and making explicit adjustments: **Reported EBITDA** = Operating Profit + D&A = 1,277 + 566 = 1,843,000,000 EUR Or from the explicit line: 1,842,000,000 EUR Then add back items S&P considers non-recurring or normalizing: - The "Items Affecting Comparability" of -593,000,000 is a charge, so reported EBITDA already includes it. If S&P considers these charges non-recurring, we should add them back: 1,842 + 593 = 2,435 ≈ 2,436. This confirms: Reported EBITDA (1,842) + Items affecting comparability charges (593) = Comparable EBITDA (2,436). So the -593 represents charges that management excludes. If S&P agrees these are non-recurring, then 2,436 is appropriate. For S&P purposes, I need to assess if these charges are truly non-recurring: - Given the massive restructuring in 2022 (Uniper divestment), many items are likely non-recurring - However, S&P is typically more conservative than management in defining "non-recurring" Let me use **Adjusted_EBITDA = 2,436,000,000 EUR** as the base, but consider if S&P would make further adjustments. Actually, looking more carefully at the methodology for Regulated Utilities, S&P mentions they may use regulatory accounts as proxy for earnings stability. For Fortum, with significant unregulated operations, this is complex. Given the discontinued operations and restructuring, S&P might use a more normalized figure. But with the information given, I'll use: **Adjusted_EBITDA = 2,436,000,000 EUR** However, I want to check if there are any additional S&P-specific adjustments mentioned in the methodology: For Regulated Utilities: - "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." - Not applicable here. - "We deconsolidate securitized debt (and associated revenue and expense) that has been accorded specialized recovery provisions." - Not evident here. For the EBITDA calculation, I should also consider if the "Other Adjustments For Noncash Items" of 153,000,000 in the cash flow statement should be considered. These are already in the reconciliation from operating profit to cash flow. Let me also verify my debt calculation by looking at total interest-bearing debt more carefully. From the balance sheet 2023-01-01: - Other Noncurrent Financial Liabilities: 3,658,000,000 - Other Current Financial Liabilities: 4,127,000,000 Total: 7,785,000,000 But I should check if there are other debt-like items: - Margin Liabilities: 352,000,000 - these are trading-related, typically not debt - Trade Payables: 1,657,000,000 - operating, not debt - Other Shortterm Provisions: 13,000,000 - operating - Current Tax Liabilities: not separately shown, but tax assets are 71,000,000 What about the derivatives? - Noncurrent Derivative Financial Liabilities: 756,000,000 - Current Derivative Financial Liabilities: 3,973,000,000 For S&P, derivative liabilities are typically excluded from debt if they are hedging-related and the company has matching derivative assets. Looking at derivative assets: - Noncurrent Derivative Financial Assets: 343,000,000 - Current Derivative Financial Assets: 1,486,000,000 Total derivative assets: 1,829,000,000 Net derivative liabilities: (756 + 3,973) - (343 + 1,486) = 4,729 - 1,829 = 2,900,000,000 S&P typically does not include net derivative payables in debt unless they represent net liabilities from hedging that are not matched. Given the energy trading nature, these are likely normal course hedging positions. However, for energy trading companies, S&P may include a portion of net derivative liabilities if they represent effective debt-like obligations. This is complex and company-specific. Given the conservative approach and lack of specific guidance, I'll exclude derivatives from debt. **Revised Adjusted_Debt calculation:** Reported debt (financial liabilities): 7,785,000,000 + Pension deficit: 13,000,000 + Unfunded nuclear provisions: 0 (appears funded based on fund matching provision) - Eligible cash (75% of liquid funds): -2,939,250,000 Adjusted_Debt = 4,858,750,000 EUR Wait - I want to double-check the nuclear provision funding. The balance sheet shows: - Nuclear Non Current Provisions: 966,000,000 - Share In State Nuclear Waste Management Fund: 966,000,000 These are equal, suggesting the provision is fully funded by the fund. So no adjustment needed. But actually, for S&P purposes, even funded nuclear obligations may be treated as debt-like if the fund is restricted. The "Share In State Nuclear Waste Management Fund" is an asset, but it may be restricted and not available for general corporate purposes. If so, we should: - Not add the provision to debt (since it's funded) - But also not count the fund as eligible cash I've already excluded the fund from eligible cash (only using Liquid Funds of 3,919,000,000). Let me verify what "Liquid Funds" includes. Looking at the balance sheet: - Liquid Funds: 3,919,000,000 - This is separate from Margin Receivables, Trade Receivables, etc. So Liquid Funds appears to be cash and cash equivalents plus possibly short-term investments. The "Cash And Cash Equivalents" from cash flow statement 2023-01-01 is not explicitly shown, but "Liquid Funds" likely equals or approximates this. Actually, looking at 2022-01-01: Cash And Cash Equivalents: 7,592,000,000, but Liquid Funds: 7,592,000,000. They match! For 2023-01-01: Cash And Cash Equivalents is not explicitly shown in the balance sheet section, but Liquid Funds is 3,919,000,000. And in the cash flow statement ending 2023-01-01: Cash And Cash Equivalents: 3,919,000,000. So Liquid Funds = Cash And Cash Equivalents = 3,919,000,000 EUR. Now, is the Share In State Nuclear Waste Management Fund included in "Other Noncurrent Financial Assets" or "Other Current Financial Assets"? Looking at the balance sheet: - Other Noncurrent Financial Assets: 624,000,000 - Other Current Financial Assets: 660,000,000 These don't match the 966,000,000 fund share. The fund share is listed separately as "Share In State Nuclear Waste Management Fund" under noncurrent assets. For S&P purposes, this restricted asset should not be included in eligible cash. I've already only used Liquid Funds, so this is correct. Let me also check if there's any debt in the "Other Longterm Provisions" or "Other Shortterm Provisions" that should be treated as debt-like. These are typically operating provisions (warranty, environmental, restructuring, etc.), not debt-like. What about "Other Noncurrent Liabilities" of 121,000,000? These could include various items, but without detail, I'll assume they're not debt-like. **Final Adjusted_Debt: 4,858,750,000 EUR** Actually, I want to reconsider the eligible cash percentage. For a regulated utility with trading operations, S&P might use a higher percentage. Let me consider 100% eligible cash if the trading operations are not significant enough to require restricted cash. Looking at the derivative positions: - Current Derivative Financial Assets: 1,486,000,000 - Current Derivative Financial Liabilities: 3,973,000,000 - Noncurrent Derivative Financial Assets: 343,000,000 - Noncurrent Derivative Financial Liabilities: 756,000,000 Net derivative position: liabilities exceed assets by 2,900,000,000 EUR. This suggests the company is net short derivatives, which could indicate hedging positions or trading positions. For energy companies, margin requirements can be significant. However, the "Margin Receivables" of 2,607,000,000 and "Margin Liabilities" of 352,000,000 suggest the company has more margin receivables than payables, which is positive. Given the net derivative liability position and trading activities, some cash is likely needed for collateral. I'll stick with 75% eligible cash. But let me also consider an alternative: if S&P uses 100% eligible cash for the regulated utility portion and lower for trading. Given the mixed business, 75% is reasonable. **Alternative Adjusted_Debt with 100% eligible cash:** = 7,785 + 13 - 3,919 = 3,879,000,000 EUR This would give a very different ratio. Let me think about which is more appropriate. Given Fortum's significant trading and hedging activities (evidenced by large derivative positions), and the S&P methodology note that "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," there are specific considerations for working capital-intensive operations. However, for cash eligibility, S&P's general corporate methodology typically uses 100% of cash and liquid investments that are truly available. The 75% adjustment is more conservative and used when there's clear evidence of restricted cash needs. Given that Fortum's "Liquid Funds" are explicitly labeled as such and separated from margin receivables and other working capital items, I'll use **100% eligible cash** = 3,919,000,000 EUR. Revised Adjusted_Debt = 7,785,000,000 + 13,000,000 - 3,919,000,000 = **3,879,000,000 EUR** ## Step 4: Calculate Adjusted_Debt / Adjusted_EBITDA Using: - Adjusted_Debt = 3,879,000,000 EUR - Adjusted_EBITDA = 2,436,000,000 EUR Ratio = 3,879 / 2,436 = **1.59** Wait, let me reconsider if I should use reported EBITDA or comparable EBITDA. S&P typically starts with reported financials and makes their own adjustments. Using reported EBITDA: - Reported EBITDA = 1,842,000,000 EUR - Plus S&P adjustments for non-recurring items The "Items Affecting Comparability" of -593,000,000 represents charges. If S&P considers these non-recurring, they would add them back to reported EBITDA, giving 1,842 + 593 = 2,435 ≈ 2,436. But are these truly non-recurring? In 2021, "Items Affecting Comparability" was +2,897,000,000 (positive, meaning gains). The volatility suggests these are indeed non-recurring or irregular items. For a more conservative S&P approach, they might not add back all items. Let me consider what the items represent: - Impairment reversals: typically non-recurring - Capital gains: typically non-recurring - Fair value changes on hedges: could be recurring for energy companies - Other: unknown If S&P only adds back impairment and capital gains but not fair value changes: 905 + 785 = 1,690 (but these are 2022 figures, and the -593 net suggests there are offsetting charges) Actually, I realize the component breakdown doesn't sum to -593, so I can't reliably use it. The -593 is the net items affecting comparability, and it's a charge (negative for reported results). Given S&P's conservative approach and the uncertainty, let me use a range: - Conservative: Use reported EBITDA = 1,842, ratio = 3,879/1,842 = 2.11 - Moderate: Use comparable EBITDA = 2,436, ratio = 3,879/2,436 = 1.59 For a regulated utility with some unregulated operations, S&P would likely use a normalized EBITDA. The comparable EBITDA is management's normalization, and S&P often uses this as a starting point. However, I want to check if there are any additional adjustments S&P would make to comparable EBITDA: 1. **Leases**: Under IFRS 16, leases are in EBITDA. No adjustment needed. 2. **Pension service cost**: If included in operating expenses, it's part of EBITDA. The interest cost on pension deficit is below EBITDA. No adjustment needed for EBITDA. 3. **JV proportional EBITDA**: As discussed, equity income is below operating profit, so EBITDA is unaffected. 4. **Non-recurring items in comparable EBITDA**: Management may include some recurring items in "comparable." S&P might differ. Given the information, I'll use **Adjusted_EBITDA = 2,436,000,000 EUR** (comparable EBITDA). But wait - I need to check if comparable EBITDA includes discontinued operations. Looking at the income statement, "Profit Loss From Operating Activities" and "Comparable Operating Profit" are likely for continuing operations, as "Profit Loss From Discontinued Operations" is shown separately below. The cash flow statement also separates continuing and discontinued operations: - Cash Flows From Used In Operating Activities Continuing Operations: 2,104,000,000 - Cash Flows From Used In Operating Activities Discontinued Operations: -10,870,000,000 So yes, the EBITDA figures are for continuing operations. Let me also verify my debt figure by checking if there was debt associated with discontinued operations that was removed. The massive reduction in assets and liabilities from 2022-01-01 to 2023-01-01 is due to the Uniper deconsolidation. At 2022-01-01: - Assets: 149,661,000,000 - At 2023-01-01: 23,642,000,000 This is an 84% reduction! The Uniper divestment was clearly transformative. For 2022 year-end debt, using the 2023-01-01 balance sheet is correct as it reflects the post-divestment Fortum. However, for EBITDA, if we're using 2022 full-year comparable EBITDA of 2,436, this may include operations that were later divested or restructured. Let me check if comparable EBITDA is pro forma or historical. Given the income statement shows 2022-01-01 to 2023-01-01 period, this is the historical figure for the year, including operations that may have been discontinued during the year. The discontinued operations are separately identified. Actually, looking more carefully: "Profit Loss From Discontinued Operations" 2022: -11,302,000,000 EUR. This is the result of the Uniper disposal. For S&P, when calculating leverage for the ongoing entity, they might use pro forma figures that exclude discontinued operations for the full year, or they might use reported figures if the discontinuation occurred at year-end. Given Uniper was likely deconsolidated during 2022 or at year-end, and the 2022 income statement shows discontinued operations separately, the continuing operations EBITDA of 2,436 should be appropriate for the ongoing Fortum. However, if the divestment occurred mid-year, continuing operations EBITDA might still include Uniper for part of the year. Without specific timing, I'll use the reported figures. **Final Calculation:** Adjusted_Debt = 3,879,000,000 EUR Adjusted_EBITDA = 2,436,000,000 EUR Ratio = 3,879 / 2,436 = 1.59236... ≈ **1.59** Let me reconsider one more time if I should use 75% or 100% eligible cash. Looking at S&P's general methodology: "We typically deduct cash and liquid investments from debt if we believe they are available to reduce debt." For energy companies with trading operations, S&P may haircut cash if there's evidence it's needed for working capital or collateral. However, Fortum's "Liquid Funds" of 3,919 million against "Margin Receivables" of 2,607 million and "Margin Liabilities" of 352 million suggests the company has more margin receivables than payables. The derivative net liability position of 2,900 million could require collateral, but this is typically managed on a net basis with ISDA agreements. Given the mixed evidence, and that S&P typically uses 100% unless there's clear restriction, let me use **100% eligible cash** but note the uncertainty. Actually, I want to double-check one thing. The S&P methodology for Regulated Utilities mentions: "Where substantial seasonal working capital requirements--for example, at natural gas distribution utilities--distort leverage measures, we adjust inventory and debt balances by netting the value of inventory against outstanding short-term borrowings." This suggests S&P does make working capital adjustments, but it's specific to seasonal inventory and short-term borrowings. For Fortum, inventories are 465,000,000 EUR and short-term borrowings (current financial liabilities) are 4,127,000,000 EUR. There's no clear seasonal distortion. Let me also verify if I should include any of the "Other Current Financial Liabilities" as trade-like rather than debt. The 4,127,000,000 EUR is labeled "Other Current Financial Liabilities" which typically means debt, not trade payables. Trade payables are separately shown as "Trade And Other Current Payables" of 1,657,000,000 EUR. So my debt classification seems correct. One more check: should I include the "Other Noncurrent Financial Liabilities" of 3,658,000,000 and "Other Current Financial Liabilities" of 4,127,000,000 as debt? Yes, these are clearly interest-bearing financial liabilities. **Final Answer:** Adjusted_Debt = 7,785,000,000 + 13,000,000 - 3,919,000,000 = 3,879,000,000 EUR Adjusted_EBITDA = 2,436,000,000 EUR Ratio = 3,879 / 2,436 = 1.592... ≈ 1.59 However, I want to consider one more alternative: using reported EBITDA with no add-backs. If S&P uses reported EBITDA of 1,842,000,000: Ratio = 3,879 / 1,842 = 2.106... ≈ 2.11 This is significantly higher. Which is more appropriate? Given that: 1. S&P typically normalizes EBITDA for non-recurring items 2. The "Items Affecting Comparability" of -593 million includes clearly non-recurring items (impairment reversals, capital gains/losses) 3. The comparable EBITDA is management's normalization and likely closer to S&P's adjusted figure I'll use **Adjusted_EBITDA = 2,436,000,000 EUR**. But let me also consider: should I add back any other items to get to S&P's definition? The cash flow shows "Other Adjustments For Noncash Items" of 153,000,000. These are non-cash items in operating profit that may need to be adjusted. However, EBITDA already excludes many non-cash items by adding back D&A. The 153 million may include items like provisions, fair value changes, etc. For S&P adjusted EBITDA, starting from operating profit before D&A (EBITDA), we don't need to add back non-cash items that are already excluded from EBITDA. Actually, let me verify: "Operating Profit Before Depreciations Ebitda" of 1,842 - is this before or after the 153 million other non-cash items? Looking at cash flow reconciliation: Operating Profit Before Depreciations Ebitda: 1,842 + Adjustments For Depreciation And Amortisation Expense: 566 + Adjustments For Alternative Performance Measures: -593 + Other Adjustments For Noncash Items: 153 + Interest Received: 84 - Interest Paid: -201 - Income Taxes Paid: -167 ... etc. Wait, this doesn't make sense as a reconciliation. Let me re-read. Actually, looking at standard cash flow from operations: Start with Operating Profit Add: D&A Add: Other non-cash items = Cash flow before working capital But here it says "Operating Profit Before Depreciations Ebitda" which is unusual. Perhaps this means "Operating Profit (before depreciation, i.e., EBITDA)". Then adding "Adjustments For Depreciation And Amortisation Expense" of 566 would be double-counting. Unless... "Operating Profit Before Depreciations Ebitda" actually means "Operating Profit (before depreciation adjustments)"? No, that doesn't make sense. Let me look at the 2021 figures: Operating Profit Before Depreciations Ebitda 2021: 4,913,000,000 Adjustments For Depreciation And Amortisation Expense 2021: 587,000,000 Adjustments For Alternative Performance Measures 2021: 2,897,000,000 If 4,913 is EBITDA, then adding 587 (D&A) would give 5,500, which doesn't match any figure. But 4,913 - 587 = 4,326, which is close to Profit Loss From Operating Activities of 4,325. Ah! So "Operating Profit Before Depreciations Ebitda" might actually mean "Operating Profit Before Depreciation" in the sense of "before adding back depreciation" - i.e., EBIT! Wait, no. Let me check: 4,913 (this item) - 587 (D&A) = 4,326 ≈ 4,325 (reported operating profit). So "Operating Profit Before Depreciations Ebitda" = EBIT + D&A adjustments? No, if subtracting D&A gives operating profit, then this item is EBITDA. Actually: EBITDA - D&A = EBIT. But "Profit Loss From Operating Activities" is 4,325, which would be EBIT (operating profit before interest and tax). So: 4,913 (this item) - 587 (D&A) = 4,326 ≈ 4,325. Yes! Therefore, "Operating Profit Before Depreciations Ebitda" = EBITDA. The naming is confusing but the math works. Then in the cash flow, adding back D&A to EBITDA would be wrong. Unless the "Adjustments For Depreciation And Amortisation Expense" is actually a negative adjustment (i.e., removing D&A that was added back). Looking at the sign: "Adjustments For Depreciation And Amortisation Expense" is shown as positive 566 in 2022. But in cash flow from operations, we add back D&A (positive adjustment). So starting from operating profit, we add D&A to get to cash-based figure. But if starting from EBITDA, we don't add D&A. The cash flow statement format here is non-standard. Let me ignore the cash flow reconciliation and focus on the income statement figures, which are clearer. From income statement: Revenue: 8,804 + Other Income: 101 - Materials: -5,350 - Employee: -504 - Other Expense: -615 - D&A: -566 = Operating Profit: 1,277 (reported) Wait, let me check: 8,804 + 101 - 5,350 - 504 - 615 - 566 = 1,870. But reported is 1,277. The difference is 593, which equals "Items Affecting Comparability"! So: 8,804 + 101 - 5,350 - 504 - 615 = 2,436 (comparable EBITDA) Then - 566 (D&A) = 1,870 (comparable operating profit) Then + (-593) (items affecting comparability) = 1,277 (reported operating profit) Wait, that doesn't work. Items affecting comparability of -593 means it's a charge. So: 1,870 (comparable operating profit) + (-593) = 1,277 (reported operating profit). Yes! But then where does D&A fit? 2,436 (comparable EBITDA) - 566 = 1,870 (comparable operating profit). Yes. And reported EBITDA would be: 1,277 (reported operating profit) + 566 = 1,843. But 2,436 (comparable EBITDA) + (-593) = 1,843. Yes! The items affecting comparability of -593 is a charge that reduces EBITDA by 593. So the components of -593 (impairment reversals, capital gains, etc.) must net to -593, or the sign convention in the detailed breakdown is different from what I thought. Actually, looking again: the detailed items are all positive numbers. But "Items Affecting Comparability" is -593. This could mean: - The detailed items are shown as absolute values or with different signs - Or there's additional information not provided Regardless, the accounting works: Comparable EBITDA (2,436) + items (-593) = Reported EBITDA (1,843). For S&P purposes, using Comparable EBITDA = 2,436,000,000 EUR is appropriate as the normalized figure. **Final calculation:** Adjusted_Debt = 3,879,000,000 EUR Adjusted_EBITDA = 2,436,000,000 EUR Ratio = 3,879 / 2,436 = 1.59236... Rounded to two decimal places: **1.59** Let me do one final verification of the debt figure. Should I include any other liabilities? Looking at total liabilities of 15,905,000,000 EUR: - Noncurrent Liabilities: 5,784 - Current Liabilities: 10,121 (10122 other than held for sale, but total current is this plus any held for sale; actually 10,122 is shown as "Current Liabilities Other Than Liabilities Included In Disposal Groups Classified As Held For Sale") Wait, let me check: "Current Liabilities Other Than Liabilities Included In Disposal Groups Classified As Held For Sale" 2023-01-01: 10,122,000,000 And total "Liabilities" 2023-01-01: 15,905,000,000 Noncurrent Liabilities 2023-01-01: 5,784,000,000 Sum: 5,784 + 10,122 = 15,906 ≈ 15,905 (rounding) So the liability breakdown is complete. Within Noncurrent Liabilities (5,784): - Other Noncurrent Financial Liabilities: 3,658 - Noncurrent Derivative Financial Liabilities: 756 - Deferred Tax Liabilities: 152 - Nuclear Non Current Provisions: 966 - Other Longterm Provisions: 118 - Noncurrent Recognised Liabilities Defined Benefit Plan: 13 - Other Noncurrent Liabilities: 121 Sum: 3,658 + 756 + 152 + 966 + 118 + 13 + 121 = 5,784. ✓ Within Current Liabilities (10,122): - Other Current Financial Liabilities: 4,127 - Current Derivative Financial Liabilities: 3,973 - Other Shortterm Provisions: 13 - Margin Liabilities: 352 - Trade And Other Current Payables: 1,657 - plus likely other items not detailed Sum of detailed: 4,127 + 3,973 + 13 + 352 + 1,657 = 10,122. ✓ So my debt identification of 3,658 + 4,127 = 7,785 is correct for financial liabilities. One final check: should "Margin Liabilities" of 352 be included as debt? These are typically collateral received from counterparties in trading operations, not debt. They may need to be returned if positions close. S&P typically excludes these from debt. Similarly, "Margin Receivables" of 2,607 are not cash but collateral posted. My calculation seems robust. 1.59