I'll work through this step-by-step, identifying the relevant industry, calculating Adjusted Debt and Adjusted EBITDA, then computing the ratio. ## Step 1: Identify the Relevant Industry for IBERDROLA SA IBERDROLA SA is a major Spanish utility company. Based on the facts provided and industry knowledge, IBERDROLA operates in **multiple utility segments**: - **Regulated utilities** (electricity distribution and transmission networks) - **Unregulated power and gas** (renewable generation, mainly wind and hydro; also some retail/supply) The company is primarily known as a **renewables-focused integrated utility** with significant regulated network operations. Given the methodology descriptions, IBERDROLA fits best under a combination of **Regulated Utilities** and **Unregulated Power And Gas**. For S&P purposes, IBERDROLA is typically classified as a **regulated utility** with significant unregulated generation. The methodology notes that for companies with mixed operations, we need to consider which table applies. Given IBERDROLA's substantial regulated operations (networks) and its "strongly protected unregulated revenue" (long-term PPAs, feed-in tariffs for renewables), the **medial volatility table** would likely apply. However, for the **debt and EBITDA adjustments**, I'll apply the general formulas with utility-specific modifications as needed. ## 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 the Facts: **Reported Debt:** From the balance sheet, I need to identify total debt (financial liabilities): Noncurrent Financial Liabilities (2022-01-01): 37,175,000,000 EUR - Deudas Con Entidades De Credito Y Obligaciones U Otros Valores Negociables: 31,179,000,000 EUR - Instrumentos De Capital Con Caracteristicas De Pasivo Financiero No Corriente: 525,000,000 EUR - Noncurrent Derivative Financial Liabilities: 1,673,000,000 EUR - Noncurrent Lease Liabilities: 2,253,000,000 EUR - Other Noncurrent Financial Liabilities: 1,545,000,000 EUR Current Financial Liabilities (2022-01-01): 21,297,000,000 EUR - Deudas Con Entidades De Credito Y Obligaciones U Otros Valores Negociables Corrientes: 9,984,000,000 EUR - Instrumentos De Capital Con Caracteristicas De Pasivo Financiero Corriente: 100,000,000 EUR - Current Derivative Financial Liabilities: 2,111,000,000 EUR - Current Lease Liabilities: 158,000,000 EUR - Other Current Financial Liabilities: 2,980,000,000 EUR - Trade And Other Payables To Trade Suppliers: 5,964,000,000 EUR (trade payables, not debt) Wait - let me re-read. "Trade And Other Payables To Trade Suppliers" is typically **not** debt. Let me check "Other Current Financial Liabilities" more carefully. Looking more carefully at Current Financial Liabilities: 21,297,000,000 EUR total. This includes: - Deudas Con Entidades De Credito...: 9,984,000,000 - Instrumentos De Capital...: 100,000,000 - Current Derivative Financial Liabilities: 2,111,000,000 - Current Lease Liabilities: 158,000,000 - Other Current Financial Liabilities: 2,980,000,000 - Trade And Other Payables To Trade Suppliers: 5,964,000,000 Hmm, but 9,984 + 100 + 2,111 + 158 + 2,980 + 5,964 = 21,297. So Trade Payables are included in "Current Financial Liabilities." For S&P purposes, **trade payables are typically NOT counted as debt** - they're operating liabilities. However, looking at the structure, "Trade And Other Payables To Trade Suppliers" might be grouped differently. Let me check if there's a separate "Other Current Financial Liabilities" that might include non-trade items. Actually, re-reading: "Other Current Financial Liabilities" = 2,980,000,000 EUR. This likely includes items like accrued interest, dividends payable, etc. - some may be debt-like. For S&P utility analysis, **reported debt** typically includes: - Bank borrowings and bonds (short and long-term) - Capital market debt - Finance lease obligations - Hybrid instruments (if debt-like) **Excludes:** - Trade payables - Derivative liabilities (unless net debt position) - Operating accruals Let me reconstruct more carefully: **Debt items:** - Noncurrent: Deudas Con Entidades De Credito... 31,179,000,000 + Instrumentos De Capital... 525,000,000 + Other Noncurrent Financial Liabilities 1,545,000,000 = 33,249,000,000 - Less: Noncurrent Derivative Financial Liabilities (1,673,000,000) - typically excluded unless net - Less: Noncurrent Lease Liabilities (2,253,000,000) - will be added back as leases Actually, S&P typically includes **leases** as debt. So: - Noncurrent debt excluding derivatives and leases: 31,179 + 525 + 1,545 = 33,249,000,000 Wait, let me check: "Other Noncurrent Financial Liabilities" - could include pension-related or other items. For utilities, this needs scrutiny. For **Current**: - Deudas Con Entidades De Credito... 9,984,000,000 - Instrumentos De Capital... 100,000,000 - Other Current Financial Liabilities: 2,980,000,000 (need to check if debt-like) - Less: Current Derivative Financial Liabilities (2,111,000,000) - Less: Current Lease Liabilities (158,000,000) - added as leases - Less: Trade And Other Payables To Trade Suppliers (5,964,000,000) So current debt-like: 9,984 + 100 + 2,980 = 13,064,000,000 (but need to verify "Other Current Financial Liabilities") Actually, let me step back. The **total financial liabilities** are: - Noncurrent Financial Liabilities: 44,216,000,000 (2023) / 37,175,000,000 (2022) - Current Financial Liabilities: 25,079,000,000 (2023) / 21,297,000,000 (2022) For 2022 year-end (which is 2023-01-01 opening, or we use 2022-01-01 as previously stated for 2021 year-end): Actually, I need to be careful about dates. The labels are confusing: - "2023-01-01" = opening balance for 2023, which is closing balance for 2022 - "Previously Stated Member" 2022-01-01 = opening balance for 2022, which is closing balance for 2021 So for **FY2022** (year ended Dec 31, 2022), we need the **closing balance 2022**, which is **2023-01-01**. Let me use **2023-01-01** values for 2022 year-end balances. **2022 Year-end (2023-01-01) Financial Liabilities:** Noncurrent Financial Liabilities: 44,216,000,000 - Deudas Con Entidades De Credito...: 36,129,000,000 - Instrumentos De Capital...: 576,000,000 - Noncurrent Derivative Financial Liabilities: 3,690,000,000 - Noncurrent Lease Liabilities: 2,287,000,000 - Other Noncurrent Financial Liabilities: 1,534,000,000 Current Financial Liabilities: 25,079,000,000 - Deudas Con Entidades De Credito...: 10,458,000,000 - Instrumentos De Capital...: 87,000,000 - Current Derivative Financial Liabilities: 3,398,000,000 - Current Lease Liabilities: 151,000,000 - Other Current Financial Liabilities: 5,058,000,000 - Trade And Other Payables To Trade Suppliers: 5,927,000,000 Wait, let me add: 10,458 + 87 + 3,398 + 151 + 5,058 + 5,927 = 25,079. Yes. For S&P debt calculation: - **Reported debt** = borrowings + bonds + capital instruments with debt characteristics + other debt-like items - **Exclude**: derivatives, trade payables, operating accruals **Debt at 2022 year-end:** - Noncurrent borrowings/bonds: 36,129,000,000 - Noncurrent capital instruments (debt-like): 576,000,000 - Other noncurrent financial liabilities (need to assess): 1,534,000,000 - Current borrowings/bonds: 10,458,000,000 - Current capital instruments: 87,000,000 - Other current financial liabilities (need to assess): 5,058,000,000 For "Other Current Financial Liabilities" = 5,058,000,000: This likely includes accrued interest, dividends payable, and other items. Some may be debt-like (accrued interest on debt), others not (dividends payable). Without detail, I'll include it as debt-like for conservatism, or exclude if clearly operating. Actually, S&P typically **excludes accrued interest and dividends payable** from adjusted debt as they're operating/non-debt accruals. But "Other Financial Liabilities" may include items like deposits received, which are debt-like. For utilities, a common adjustment is to look at **total interest-bearing debt**. Let me use a cleaner approach: **Total Financial Liabilities less derivatives and trade payables and leases** (since leases are added separately). Total Financial Liabilities (noncurrent + current) = 44,216 + 25,079 = 69,295,000,000 Less: Derivatives (3,690 + 3,398) = 7,088,000,000 Less: Trade payables = 5,927,000,000 Less: Leases (2,287 + 151) = 2,438,000,000 Reported debt = 69,295 - 7,088 - 5,927 - 2,438 = 53,842,000,000 Wait, but "Other Current Financial Liabilities" and "Other Noncurrent Financial Liabilities" - are these debt-like? Let me check if trade payables are the only operating item. Actually, looking more carefully, "Trade And Other Payables To Trade Suppliers" = 5,927,000,000 is clearly operating. But "Other Current Financial Liabilities" = 5,058,000,000 - this might include accrued expenses, deferred income, etc. Hmm, but the naming suggests "Financial Liabilities" - these are likely debt-like (e.g., accrued interest, financial guarantees, etc.). Let me try a different approach. For European utilities, S&P typically uses: - **Total debt** = short-term debt + long-term debt + current portion of long-term debt From the cash flow statement, we can see: - "Emisiones Y Disposiciones De Deudas Con Entidades De Credito Y Obligaciones U Otros Valores Negociables" (Issuances of debt) = 14,826,000,000 - "Reembolso De Deudas..." (Repayments) = -10,272,000,000 This suggests gross debt movements. But we need balance sheet figures. Let me use the most straightforward interpretation: **Debt = Deudas Con Entidades De Credito... + Instrumentos De Capital... + Other Financial Liabilities (debt-like portion)** For conservatism and standard S&P practice, I'll use: - **Reported debt** = 36,129 + 576 + 1,534 + 10,458 + 87 + 5,058 = 53,842,000,000 (excluding derivatives, leases, and trade payables from current fin liab) Actually wait - I need to check: is "Other Current Financial Liabilities" part of the 25,079? Yes. And is "Trade And Other Payables To Trade Suppliers" part of current financial liabilities? Yes, based on the sum check. But "Trade And Other Payables To Trade Suppliers" is typically **not** a financial liability under IFRS - it's an operating liability. The fact that it's grouped under "Current Financial Liabilities" in this data suggests the taxonomy might be different, or it's a broader grouping. For S&P purposes, **trade payables are excluded from adjusted debt**. So let me exclude them. **Reported debt** = Total Financial Liabilities - Derivatives - Leases - Trade Payables = 69,295 - 7,088 - 2,438 - 5,927 = 53,842,000,000 But this includes "Other Current Financial Liabilities" = 5,058 and "Other Noncurrent Financial Liabilities" = 1,534. These could include pension deficits, guarantees, etc. that S&P adds separately, or they could be debt-like. Actually, looking at the balance sheet more carefully, there are separate line items for: - Noncurrent Provisions For Employee Benefits: 1,226,000,000 - Other Longterm Provisions: 2,999,000,000 - Current Provisions For Employee Benefits: 42,000,000 - Other Shortterm Provisions: 880,000,000 These **provisions** may include pension deficits. S&P adds **pension deficits** to debt. Also: "Deferred Tax Liabilities" = 11,682,000,000 - typically not added to debt. "Noncurrent Government Grants" = 1,247,000,000 - these are deferred income, not debt. "Instalaciones Cedidas Y Financiadas Por Terceros" = 5,673,000,000 - this is "assets transferred and financed by third parties" - could be debt-like if it's finance-related. For S&P utility analysis, let me use a standard approach: **Base Debt** = Interest-bearing borrowings + bonds = 36,129 (noncurrent borrowings) + 10,458 (current borrowings) + 576 (noncurrent capital instruments) + 87 (current capital instruments) = 47,250,000,000 **Leases** = 2,287 + 151 = 2,438,000,000 (already capitalized under IFRS 16, so already in debt if included above, or add if not) Actually under IFRS 16, leases are on balance sheet. The "Deudas Con Entidades De Credito..." may or may not include lease liabilities. Looking at the structure, lease liabilities are shown separately, so borrowings likely exclude leases. So **Reported Debt** including leases = 47,250 + 2,438 = 49,688,000,000 But "Other Financial Liabilities" = 1,534 + 5,058 = 6,592,000,000 - need to assess. For S&P, **reported debt** typically includes all interest-bearing obligations. Let me include "Other Noncurrent Financial Liabilities" as likely debt-like (1,534), but "Other Current Financial Liabilities" may include accrued interest, which is already part of debt service, or other items. Actually, for consistency with S&P's typical treatment of European utilities, let me use **total financial liabilities less derivatives** as a starting point, then adjust. Total Financial Liabilities less derivatives = 69,295 - 7,088 = 62,207,000,000 Less trade payables (operating) = 62,207 - 5,927 = 56,280,000,000 This includes leases and other financial liabilities. Since leases are already capitalized, and we're adding them explicitly in the formula, let me separate: Reported debt (excluding leases) = 56,280 - 2,438 = 53,842,000,000? Wait, I already subtracted leases. Let me recalculate: Total FL = 69,295 Less derivatives = -7,088 → 62,207 Less trade payables = -5,927 → 56,280 This 56,280 includes leases (2,438) and other items. So debt excluding leases = 56,280 - 2,438 = 53,842 But this includes "Other Current Financial Liabilities" = 5,058 and "Other Noncurrent Financial Liabilities" = 1,534, totaling 6,592. For S&P, these "other" financial liabilities may or may not be debt-like. If they include items like accrued interest on debt, they're not additional debt. If they include items like financial guarantees or deposits, they may be debt-like. Given the uncertainty, let me use a more conservative but standard approach: **Reported Debt** = Borrowings + Bonds + Capital Instruments + Other Financial Liabilities (debt-like) = 36,129 + 10,458 + 576 + 87 + 1,534 + (portion of 5,058 that is debt-like) For simplicity, let me use **53,842,000,000** as reported debt (excluding derivatives, leases, trade payables), then add leases back explicitly in the formula. Actually, re-reading the S&P formula: "reported_debt + leases + ..." - this suggests reported_debt may or may not include leases. If reported_debt includes leases, we'd double count. So reported_debt should exclude leases. Let me define: **Reported Debt** = Total interest-bearing debt excluding leases = 53,842,000,000 But wait, I calculated 53,842 by excluding leases from the 56,280. Let me verify: 56,280 - 2,438 = 53,842. Yes. However, this includes "Other Current Financial Liabilities" = 5,058. If this is not debt-like, reported debt would be lower. For European utilities, S&P typically focuses on **gross financial debt** which includes: - Bank borrowings - Bonds - Commercial paper - Capital instruments treated as debt - Finance leases - Fair value of derivatives (if liability) And excludes: - Trade payables - Deferred tax liabilities - Provisions (unless pension deficit) Let me try: Gross debt = 36,129 + 10,458 + 576 + 87 + 2,438 (leases) + 1,534 + 5,058 = 56,280,000,000 This equals total FL less derivatives less trade payables = 62,207 - 5,927 = 56,280. Yes. So **Reported Debt including leases** = 56,280,000,000 Then in the S&P formula: Adjusted_Debt = (56,280 + 0 leases already included + pension_deficit + ...) - cash This makes more sense. Let me use: **Reported Debt** = 56,280,000,000 (including capitalized leases, excluding derivatives and trade payables) ### Leases: Already included in reported debt above (2,438). So additional leases = 0, or if we want to show separately, reported debt excludes leases. Let me use cleaner separation: **Reported Debt (excluding leases)** = 56,280 - 2,438 = 53,842,000,000 **Leases** = 2,438,000,000 ### Pension Deficit: Need to calculate from provisions. We have: - Noncurrent Provisions For Employee Benefits: 1,226,000,000 - Current Provisions For Employee Benefits: 42,000,000 - Total employee benefit provisions = 1,268,000,000 But we also have "Deferred Tax Assets" = 6,321,000,000 and "Deferred Tax Liabilities" = 11,682,000,000. For pension deficit, S&P looks at the **funded status** of pension plans. The balance sheet shows provisions, but we need the deficit (liability less plan assets). We don't have explicit pension plan assets. The "Noncurrent Financial Assets" include various items, but no specific pension asset is identified. In the absence of specific pension asset data, S&P typically uses the **balance sheet provision for employee benefits** as a proxy for unfunded liability, or makes a standard adjustment. For IBERDROLA, looking at the provisions: 1,268,000,000 total employee benefits. But this may include other post-employment benefits, not just pensions. Actually, we have "Adjustments For Finance Income Cost" in cash flow = 1,842,000,000, and various other items. Given limited data, let me check if there's a pension deficit. The provision for employee benefits is 1,268,000,000. If we assume this represents the net liability (after any plan assets), this could be the pension deficit. But S&P typically adds **unfunded pension deficits** to debt. If the provision is already net of plan assets, then the deficit = 1,268,000,000. However, for many European companies, pension obligations are partially funded. Without specific plan asset data, I'll use a conservative approach. Actually, looking more carefully: "Noncurrent Provisions For Employee Benefits" = 1,226,000,000 and "Current Provisions For Employee Benefits" = 42,000,000. These are **provisions**, not necessarily net pension liabilities. For S&P, the typical adjustment is to add the **net pension liability** (if unfunded) or **deficit** (if underfunded). Given IBERDROLA's size and European base, pensions are likely partially funded. Without specific funded status, I'll use the provision amount as a proxy for the unfunded portion, or make a standard assumption. Actually, for simplicity and given data limitations, let me check if IBERDROLA has significant pension deficits. Spanish companies often have smaller pension obligations due to public pension systems. Let me use **0** for pension deficit as a simplifying assumption, or include the provision if clearly unfunded. Given uncertainty, I'll include **1,268,000,000** as potential pension-related adjustment, but note this may overstate. ### Guarantees: No specific guarantee data provided. Use **0**. ### Hybrid Debt Portion: The "Instrumentos De Capital Con Caracteristicas De Pasivo Financiero" = 576 + 87 = 663,000,000. These are capital instruments with debt characteristics - already included in reported debt. For hybrid equity treatment: S&P may treat some hybrid instruments as 50% debt / 50% equity, or based on features. Without detail on terms, I'll include fully in debt (conservative) or apply standard 50% equity credit if they qualify as hybrids. Actually, the name suggests these are already classified as financial liabilities (debt), so they're fully in debt. If S&P gives equity credit, we'd reduce debt. But for conservatism, I'll leave as is. ### Other Debt-Like Items: "Instalaciones Cedidas Y Financiadas Por Terceros" = 5,673,000,000 - assets transferred and financed by third parties. This could represent: - Assets built by third parties on utility land (like telecom towers, solar installations) - Finance arrangements where third parties own assets but utility operates them If these are **off-balance sheet** or **operating leases** not capitalized, they could be debt-like. But under IFRS 16, most leases are capitalized. Actually, this item is on the **liability side** of the balance sheet (between equity and noncurrent liabilities). It's 5,673,000,000 EUR. Looking at the balance sheet structure: - Noncurrent Government Grants: 1,247,000,000 - Instalaciones Cedidas Y Financiadas Por Terceros: 5,673,000,000 - Then Noncurrent Provisions... This appears to be a **noncurrent liability**. The name suggests "assets transferred and financed by third parties" - this could be similar to **service concession arrangements** or **customer-funded assets**. For utilities, when customers or third parties pay for assets that the utility operates, this can create a **debt-like obligation** if the utility must repay or provide service in lieu. S&P typically treats **customer advances and similar obligations** as debt-like if they represent a contractual obligation to provide future service or repayment. Given IBERDROLA's regulated utility operations, this could represent **regulatory liabilities** or **customer-funded infrastructure**. For conservatism, I'll include **50% of this as debt-like**, or check if it's already in financial liabilities. Actually, looking at the balance sheet, this item is **NOT** in "Noncurrent Financial Liabilities" - it's a separate line before provisions. So it's not currently in our debt calculation. This could be: - **Regulatory liabilities** (deferred revenue from rate base adjustments) - **Customer advances** for connection fees - **Third-party financing** of assets For S&P, **regulatory liabilities** are often treated as **quasi-equity** or **deferred income**, not debt, if they don't require cash repayment. However, "financiadas por terceros" (financed by third parties) suggests third-party funding. This could be **debt-like**. Let me include **5,673,000,000** as other debt-like, or a portion thereof. Given uncertainty, I'll use **0** for now and note this as a potential understatement, or include 50%. Actually, for Spanish utilities, this item often represents **assets ceded to the company but financed by third parties** - essentially a form of concession or lease. Under IFRS 16, if the company controls the asset, it should be capitalized. If not, it might be off-balance sheet. Given it's on the liability side and not in financial liabilities, this likely represents **debt-like obligations** to third parties for asset use. I'll include **5,673,000,000 × 50% = 2,836,500,000** as debt-like, or the full amount. For conservatism, let me use **full amount: 5,673,000,000** as other debt-like. But wait - this might double count with leases or other items. Let me be more careful. Actually, re-reading: "Instalaciones Cedidas Y Financiadas Por Terceros" = facilities ceded and financed by third parties. This sounds like **assets that third parties built and own, but ceded to IBERDROLA for operation**. The financing by third parties suggests IBERDROLA doesn't owe them money directly - rather, the third parties financed the assets themselves. This could be similar to **third-party owned generation** that IBERDROLA operates under PPA or similar. If IBERDROLA has no repayment obligation, this is not debt. However, if IBERDROLA must repay the financing over time through service payments, it could be debt-like. Given the ambiguity, I'll use **0** for this item to avoid overstatement, or include a portion. ### Eligible Cash: Cash And Cash Equivalents = 4,608,000,000 (2022 year-end) S&P typically uses **100% of cash** as eligible for debt reduction, unless restricted. For utilities, some cash may be restricted for regulatory purposes. I'll use **4,608,000,000** as eligible cash, or perhaps reduce by some portion if restricted. Actually, looking at current assets, there's also "Current Financial Assets" = 4,813,000,000, which includes: - Other Current Financial Assets: 2,964,000,000 - Current Derivative Financial Assets: 1,849,000,000 These may include short-term investments, deposits, etc. "Other Current Financial Assets" could be liquid investments. For S&P, **liquid investments** beyond cash may also reduce debt. But standard practice is to use only **cash and cash equivalents**. Let me use 4,608,000,000 as eligible cash. ### Recalculating Adjusted Debt: Let me be more systematic. I'll use: **Reported Debt** = Interest-bearing debt including capitalized leases = 56,280,000,000 Wait, I need to verify this number. Let me recalculate from 2023-01-01: Noncurrent Financial Liabilities: 44,216 - Deudas...: 36,129 - Instrumentos...: 576 - Derivatives: 3,690 (exclude) - Lease Liabilities: 2,287 (keep as debt/lease) - Other: 1,534 Current Financial Liabilities: 25,079 - Deudas...: 10,458 - Instrumentos...: 87 - Derivatives: 3,398 (exclude) - Lease Liabilities: 151 (keep) - Other: 5,058 - Trade Payables: 5,927 (exclude) Total excluding derivatives and trade payables = 44,216 - 3,690 + 25,079 - 3,398 - 5,927 = 56,280 This includes: - Borrowings/Bonds: 36,129 + 10,458 = 46,587 - Capital Instruments: 576 + 87 = 663 - Leases: 2,287 + 151 = 2,438 - Other Financial Liabilities: 1,534 + 5,058 = 6,592 Total: 46,587 + 663 + 2,438 + 6,592 = 56,280 ✓ Now, for S&P adjustments: - **Leases**: Already included at 2,438. The formula adds leases, so if reported_debt excludes leases, add them. If included, don't add. Let me define: **Reported Debt (excluding leases)** = 56,280 - 2,438 = 53,842 Then: Adjusted_Debt = (53,842 + 2,438 + pension_deficit + guarantees + hybrid_portion + other_debt_like) - eligible_cash **Pension Deficit**: From provisions: Employee benefits = 1,226 + 42 = 1,268 But are these pension deficits or total provisions? "Provisions For Employee Benefits" typically include pensions, post-retirement medical, etc. For funded plans, the balance sheet shows net liability (plan assets - obligations). For unfunded, it's the full obligation. Given IBERDROLA operates in Spain, UK, US, Brazil, etc., pension practices vary. UK and US operations likely have funded defined benefit plans. Spanish operations use public pensions. Without plan asset data, I'll estimate the **unfunded portion**. A common S&P approach is to assume 50% funded for mature plans, or use the provision as proxy for net liability. Given the relatively small amount (1,268 vs 56,280 debt), I'll use **1,268,000,000** as pension deficit to add. **Guarantees**: 0 (no data) **Hybrid Debt Portion**: The "Instrumentos De Capital Con Caracteristicas De Pasivo Financiero" = 663,000,000. These are already in reported debt. If S&P gives equity credit (typically 50% for qualifying hybrids), we'd reduce debt by 50% of 663 = 331,500,000. But the formula says "+ hybrid_debt_portion" - this suggests adding the portion treated as debt. If these instruments are 50% debt/50% equity, then 331,500,000 is already in debt (as full liability) and we'd need to... actually, the formula is ambiguous. Re-reading: "reported_debt + leases + pension_deficit + guarantees + hybrid_debt_portion + other_debt_like_items" If reported_debt includes the full 663, but S&P treats 50% as equity, then we'd subtract 331,500,000 (equity portion) or the "hybrid_debt_portion" refers to additional hybrid equity treated as debt. Actually, I think "hybrid_debt_portion" means: if a company has hybrid equity instruments that S&P treats as debt, add the debt portion. But here we have instruments classified as debt that might get equity credit. For conservatism, I'll **not adjust hybrids** (treat as debt). So hybrid_debt_portion = 0 (no additional amount to add). **Other Debt-Like Items**: - "Instalaciones Cedidas Y Financiadas Por Terceros" = 5,673,000,000 I'll include **50%** of this as debt-like = 2,836,500,000, or use full amount. Actually, let me research typical S&P treatment for this item. For utilities, "assets financed by third parties" or "customer advances" are often treated as **deferred revenue** or **regulatory liabilities**, not debt, if they don't require cash repayment. However, if they represent **obligations to provide future service at below-market rates**, they have a debt-like quality (present value of future subsidy). Given ambiguity, I'll use **0** for this to be conservative, or include a portion. Let me check if this is significant enough to matter. At 5,673, it's about 10% of debt. For precision, I'll include **50% = 2,836,500,000**. **Eligible Cash**: 4,608,000,000 ### Calculating Adjusted Debt: Adjusted_Debt = 53,842 + 2,438 + 1,268 + 0 + 0 + 2,836.5 - 4,608 = 53,842 + 2,438 = 56,280 + 1,268 = 57,548 + 2,836.5 = 60,384.5 - 4,608 = **55,776,500,000** Or approximately **55,777 million EUR** Let me also consider an alternative without "Instalaciones": Adjusted_Debt = 53,842 + 2,438 + 1,268 - 4,608 = 52,940,000,000 And with full "Instalaciones": = 53,842 + 2,438 + 1,268 + 5,673 - 4,608 = 58,613,000,000 I'll use the middle ground: **55,777 million** or round to **55,776.5 million** Actually, let me reconsider. The "Other Current Financial Liabilities" = 5,058 - this likely includes **accrued interest, dividends payable, and other non-debt items**. S&P typically excludes accrued dividends and some accrued expenses from debt. If I exclude "Other Current Financial Liabilities" as non-debt-like: Reported Debt = 46,587 + 663 + 1,534 = 48,784 (noncurrent other only) + leases = 2,438 → total 51,222 Then Adjusted_Debt = 51,222 + 0 (leases already in) + 1,268 + 2,836.5 - 4,608 = 50,718.5 This seems too low. Let me check: 46,587 (borrowings) + 663 (capital instruments) + 1,534 (other noncurrent) = 48,784. Plus leases 2,438 = 51,222. But "Other Noncurrent Financial Liabilities" = 1,534 - what is this? Could be debt-like (deferred acquisition payments, etc.) or not. For consistency with S&P's typical European utility analysis, let me use a **reported debt figure closer to total financial debt**. Actually, I recall that for IBERDROLA specifically, S&P has historically used **gross debt** around 45-50 billion EUR range. My calculation of ~56 billion seems high if I'm including too much. Let me reconsider: "Other Current Financial Liabilities" = 5,058. This is large. What could it be? Looking at current financial liabilities: 25,079 total. After removing derivatives (3,398), trade payables (5,927), leases (151), borrowings (10,458), capital instruments (87), we have 5,058 left. This 5,058 could include: - Accrued interest on debt: ~500-1,000 (typical for this debt size) - Current portion of noncurrent debt: may already be in borrowings - Dividends payable: IBERDROLA pays dividends, maybe 500-1,000 - Other accrued expenses If only 50% is debt-like, then 2,529 is debt-like. For conservatism, I'll include **full 5,058** as debt-like (since it's classified as financial liability, not operating). So my base calculation stands: **Adjusted_Debt ≈ 55,777 million EUR** Let me also verify with 2021 year-end to see consistency: 2021 year-end (2022-01-01): Noncurrent FL = 37,175, Current FL = 21,297, total = 58,472 Less derivatives (1,673 + 2,111 = 3,784), trade payables (5,964) = 58,472 - 3,784 - 5,964 = 48,724 2022 year-end: 69,295 - 7,088 - 5,927 = 56,280 Increase of ~7,556, which seems reasonable given capex and investments. ## Step 3: Estimate Adjusted_EBITDA ### Baseline Formula: Adjusted_EBITDA = EBITDA (reported or reconstructed) + adjustment_leases (if any) + nonrecurring_losses - nonrecurring_gains ± pension_adjustments ± joint_venture_proportional_EBITDA ± other_normalization_adjustments ### Reported EBITDA: From the facts: "Beneficio Bruto De Explotacion Ebitda" 2022-01-01 - 2023-01-01: **13,228,000,000 EUR** This is FY2022 EBITDA = 13,228 million EUR ### Adjustment for Leases: Under IFRS 16, EBITDA typically includes the **lease expense** as depreciation + interest, not as operating expense. So EBITDA is already inflated compared to pre-IFRS 16. For S&P, when using reported EBITDA under IFRS 16, we may need to **add back the lease expense** that was previously operating, or adjust for comparability. Actually, under IFRS 16, the **operating lease expense is replaced by depreciation and interest**. So EBITDA (which adds back depreciation) already benefits from not having lease expense. For S&P's Adjusted_EBITDA, the typical adjustment is to **add back the full lease expense** (as if operating lease) or to **not adjust** if using reported EBITDA that already excludes lease expense. Wait - let me think more carefully. Under IFRS 16: - Old treatment: lease payment = operating expense, reduces EBITDA - New treatment: lease payment split to depreciation (non-cash, added back in EBITDA) and interest (financing, below EBITDA) So reported EBITDA under IFRS 16 is **higher** than under old IAS 17 by the amount of depreciation on right-of-use assets. For S&P comparability, they often **reduce EBITDA by the lease depreciation** or add back the **operating lease expense**. Actually, the standard S&P adjustment for leases in EBITDA is: - **Add back operating lease expense** (if EBITDA was computed with lease expense deducted) - Or **deduct lease depreciation and add lease interest** to reconstruct Since reported EBITDA already excludes lease expense (because it's in depreciation below EBITDA), there's typically **no adjustment needed** for EBITDA, or we need to normalize. For the debt calculation, we add lease liabilities. For EBITDA, if we're using reported EBITDA under IFRS 16, it's already "benefiting" from the IFRS 16 treatment. S&P's typical approach: Use **reported EBITDA** as is for IFRS 16 companies, or make **proportional adjustments** for the lease benefit. Actually, looking at S&P's methodology more carefully: For Adjusted_EBITDA, they typically **add back operating lease expense** when computing from EBIT, or use reported EBITDA with minimal adjustment. Given reported EBITDA = 13,228, and this is already post-IFRS 16, I'll use it with potential small adjustments. ### Nonrecurring Items: From the facts, looking for nonrecurring gains/losses: "Other Gains Losses" = 911,000,000 EUR (positive) This could include nonrecurring items. Need to assess if recurring or not. "Other Work Performed By Entity And Capitalised" = 847,000,000 - this is capitalized costs, already in EBITDA treatment Looking at the P&L structure: - Revenue: 53,949 - Raw Materials: -33,750 - Gross Profit: 20,199 - Employee Benefits: -3,365 - Other Work Capitalised: +847 - Gastos De Servicios: -3,602 - Other Gains Losses: +911 - Gasto Operativo Neto: -5,209 - Tax Expense Other Than Income Tax: -1,762 - EBITDA: 13,228 "Other Gains Losses" = 911 - this includes various items. For utilities, this often includes: - Gains/losses on asset sales - Impairment reversals - Provisions/releases - Other nonrecurring For S&P, we typically **exclude material nonrecurring gains** and **add back nonrecurring losses**. Without detail on composition, I'll assume "Other Gains Losses" is **largely nonrecurring or volatile**. However, for utilities, some items here may be recurring (regulatory adjustments, etc.). Given IBERDROLA's operations, let me check if 911 is recurring. The prior year (2021): Other Gains Losses = 995. So it's relatively stable, suggesting partially recurring. I'll treat as **recurring** for now, or make a small adjustment. Actually, looking at S&P's typical utility analysis, they often **don't adjust EBITDA significantly** for nonrecurring unless material one-time items are identified. ### Pension Adjustments: For EBITDA, pension adjustments typically involve: - Adding back pension service cost (already in operating expenses) - Or adjusting for pension income/expense Given the small pension provision, impact on EBITDA is likely minimal. I'll use **0** adjustment. ### Joint Venture Proportional EBITDA: IBERDROLA has "Investments In Associates Accounted For Using Equity Method" = 857,000,000 (2022 year-end), down from 1,058,000,000. The equity pickup is in "Share Of Other Comprehensive Income..." = 146,000,000, but this is OCI, not P&L. Actually, "Share Of Other Comprehensive Income Of Associates And Joint Ventures Accounted For Using Equity Method" = 146 - this is in OCI, not EBITDA. For associates, the **equity method income** is typically below EBITDA (in "Profit From Operating Activities" or below). Looking at the P&L: - Profit Loss From Operating Activities: 7,984 This 7,984 is EBIT. It likely includes equity method income. Actually, for EBITDA calculation starting from operating profit, we add back depreciation. But equity method income is already in operating profit. For S&P's proportional EBITDA: if IBERDROLA has significant JVs not consolidated, we might add proportional EBITDA. But associates are equity-accounted, so their EBITDA is not in IBERDROLA's EBITDA. Given IBERDROLA's structure, most operations are consolidated. The equity method investments are relatively small (857 vs 154,667 total assets = 0.6%). For proportional adjustment: If we take 857 as investment, and assume typical utility EBITDA margin of 40%, proportional EBITDA ≈ 857 × 0.4 / 0.5 (equity share) ≈ 686. But this is rough. Actually, S&P typically **does not add proportional EBITDA for associates** unless they're material and the equity method income is significant. The equity method income is already in EBIT. I'll use **0** for this adjustment given immateriality. ### Other Normalization Adjustments: For utilities, common adjustments include: - **Distributions from equity investments**: add if not in EBITDA - **Regulatory adjustments**: normalize for rate case timing - **Commodity timing differences**: normalize for working capital timing Given data limitations, I'll use **0** for other adjustments. ### Lease Adjustment for EBITDA: Under S&P methodology, a common adjustment is: Adjusted_EBITDA = Reported EBITDA + Lease Expense (if operating lease) - Lease Depreciation (if IFRS 16) Or more simply: For IFRS 16 companies, S&P may compute "EBITDAR" (EBITDA + Rent) for comparability. The lease depreciation is part of "Depreciation Amortisation And Impairment..." = 4,774,000,000. How much is lease depreciation? Right-of-use assets = 2,370,000,000 (2022 year-end), 2,260,000,000 (2021 year-end). Average ≈ 2,315. Assuming 5-10 year lease life, annual depreciation ≈ 230-463. Actually, looking at lease liabilities: 2,287 + 151 = 2,438. Right-of-use assets: 2,370. The difference may be due to timing, currency, or reassessment. Lease depreciation ≈ change in ROU assets + additions - disposals. Roughly, if ROU assets are stable, depreciation ≈ additions. From cash flow: "Pago De Principal De Pasivos Financieros Por Arrendamiento" (principal payments on lease liabilities) = 175,000,000. This suggests lease liability reduction. "Intereses Pagados...De Pasivos Financieros Por Arrendamiento" (interest paid on leases) = 61,000,000. Total lease payment = 175 + 61 = 236,000,000. This is the cash outflow. Under IFRS 16, the P&L has: - Depreciation of ROU: ~236 (if straight-line over remaining term) - Interest: ~61 (front-loaded, so higher in early years) Wait, interest is 61, principal is 175, total 236. If average lease liability is ~2,300, interest rate ≈ 61/2,300 = 2.7%. This seems low for EUR leases, but possible for utility PPAs/long-term leases. Depreciation would be total lease expense less interest = 236 - 61 = 175? No, that's principal repayment. Actually, the accounting is: - Depreciation = straight-line over lease term - Interest = effective interest method on liability Cash paid = depreciation + interest (approximately, with timing differences) From principal repayment 175 and interest 61, total 236 cash. The P&L expense = depreciation + interest. If average lease term is 10 years, depreciation ≈ 2,370/10 = 237. Plus interest 61 = 298 total P&L expense. But cash is 236. Difference may be new leases, terminations, or currency. Roughly, lease depreciation ≈ 200-250, lease interest ≈ 50-100. For EBITDA adjustment: Reported EBITDA already excludes lease depreciation (added back) and lease interest (excluded as financing). So EBITDA is **higher** than pre-IFRS 16 by the lease depreciation amount (~200-250). For S&P comparability with pre-IFRS 16 companies, they might **reduce EBITDA by lease depreciation** or **add operating lease expense**. Standard S&P adjustment: **Add operating lease expense** to reconstruct "EBITDAR" for debt/EBITDAR metrics. But for debt/EBITDA, they typically use reported EBITDA with lease liabilities in debt. Actually, re-reading the S&P formula: "EBITDA (reported or reconstructed) + adjustment_leases (if any)" The "+ adjustment_leases" suggests adding lease expense if EBITDA was computed with lease expense deducted. But under IFRS 16, EBITDA is computed without lease expense deduction (it's in depreciation below). So **no adjustment needed** - or rather, the adjustment is already embedded. However, for **comparability with US GAAP or pre-IFRS 16**, S&P sometimes computes: Adjusted_EBITDA = Reported EBITDA under IFRS 16 (no adjustment needed, as lease depreciation is already added back) Or they might deduct the **lease depreciation benefit** to normalize. Given the complexity, I'll use **reported EBITDA = 13,228** with **no lease adjustment**, as is standard for IFRS 16 companies in debt/EBITDA calculations. But wait - the debt formula adds lease liabilities. If EBITDA already benefits from IFRS 16 (higher than old standard), the ratio debt/EBITDA is **lower** than it would be pre-IFRS 16. This is the intended economics - capitalizing leases increases both debt and EBITDA, but the ratio effect depends on magnitudes. For S&P, this is acceptable as long as consistently applied. ### Final Adjusted_EBITDA Calculation: Adjusted_EBITDA = 13,228 + 0 (leases) + 0 (nonrecurring losses) - 0 (nonrecurring gains) + 0 (pension) + 0 (JV) + 0 (other) = **13,228,000,000 EUR** Or with minor adjustments if we consider "Other Gains Losses" as partially nonrecurring: If 50% of 911 is nonrecurring gain to exclude: 13,228 - 456 = 12,772 I'll use **13,228** as base, or perhaps **12,500-13,000** if conservative. Actually, let me check if EBITDA includes any one-time items. The revenue increase from 39,114 to 53,949 is large (+38%). This reflects commodity price increases (gas/electricity prices in 2022). The EBITDA increase from 12,006 to 13,228 is only +10%, suggesting margin compression. This seems like a **normalized** result given market conditions, not requiring significant adjustment. ## Step 4: Calculate Adjusted_Debt / Adjusted_EBITDA Using my calculations: - Adjusted_Debt = 55,776,500,000 EUR (or ~55,777 million) - Adjusted_EBITDA = 13,228,000,000 EUR Ratio = 55,776.5 / 13,228 = **4.217** Or with alternative debt calculations: - Low: 52,940 / 13,228 = 4.00 - High: 58,613 / 13,228 = 4.43 Let me verify with a tighter calculation. ### Refined Calculation: **Debt Components (2022 year-end, 2023-01-01):** 1. Borrowings and bonds: - Noncurrent: 36,129 - Current: 10,458 - Total: 46,587 2. Capital instruments (debt-like): - Noncurrent: 576 - Current: 87 - Total: 663 3. Other financial liabilities (debt-like portion): - Noncurrent: 1,534 - Current: 5,058 - Total: 6,592 4. Lease liabilities (already in debt or separate): - Noncurrent: 2,287 - Current: 151 - Total: 2,438 Subtotal financial debt: 46,587 + 663 + 6,592 + 2,438 = 56,280 Less: Derivatives (not debt): already excluded from above Less: Trade payables (operating): already excluded **Additions:** - Pension deficit: 1,268 (employee benefit provisions, net of any assets) - Instalaciones Cedidas Y Financiadas Por Terceros: 5,673 × 50% = 2,836.5 **Deductions:** - Cash and equivalents: 4,608 **Adjusted Debt** = 56,280 + 1,268 + 2,836.5 - 4,608 = **55,776.5** **Adjusted EBITDA** = 13,228 (reported) **Ratio** = 55,776.5 / 13,228 = 4.2169... Rounding: **4.22** Let me also check if I should use average debt or year-end debt. S&P typically uses **year-end debt** or **average debt**. For ratios, they often use **latest year-end** or **average of year-start and year-end**. Using 2021 year-end debt (2022-01-01): 48,724 (from above calculation) + adjustments 2021 year-end (2022-01-01): - Noncurrent FL: 37,175 - Current FL: 21,297 - Total: 58,472 - Less derivatives: 1,673 + 2,111 = 3,784 → 54,688 - Less trade payables: 5,964 → 48,724 - Less leases: 2,253 + 158 = 2,411 → 46,313 base debt Add 2021 year-end adjustments: - Pension: 1,592 (1,592 noncurrent + 27 current = 1,619? Wait, 2021 provisions: 1,592 + 27 = 1,619) - Instalaciones: 5,424 × 50% = 2,712 - Cash: 4,033 2021 Adj Debt = 46,313 + 2,411 (leases) + 1,619 + 2,712 - 4,033 = 49,022? Wait, let me recalculate 2021: Base debt (excl leases): 48,724 - 2,411 = 46,313? No, 48,724 already excluded leases? No. Let me recalculate 2021 more carefully: Total FL: 37,175 + 21,297 = 58,472 Less derivatives: 1,673 + 2,111 = 3,784 → 54,688 Less trade payables: 5,964 → 48,724 This 48,724 includes leases (2,253 + 158 = 2,411) and other items. So debt excl leases = 48,724 - 2,411 = 46,313 Then 2021 Adj Debt = 46,313 + 2,411 (leases) + 1,619 (pension) + 2,712 (instalaciones) - 4,033 (cash) = 46,313 + 2,411 = 48,724 + 1,619 = 50,343 + 2,712 = 53,055 - 4,033 = 49,022 Average 2021 and 2022 Adj Debt = (49,022 + 55,777) / 2 = 52,399.5 Ratio with average debt = 52,400 / 13,228 = **3.96** S&P typically uses **year-end debt** for leverage ratios, or **average**. Given the increase in debt during 2022, year-end is more conservative and commonly used. I'll use **year-end 2022** figures. ### Final Verification: Let me cross-check with IBERDROLA's actual S&P metrics if possible. IBERDROLA is typically rated BBB+ or similar by S&P, with debt/EBITDA around 3.5-4.5x. Given 2022's high commodity prices and increased investment, 4.2x seems reasonable. One more check: Should "Other Current Financial Liabilities" be fully included? Looking at the composition: 5,058 in current other financial liabilities. This seems high for accrued interest. Let me see if there's detail. From the cash flow, interest paid on debt (excluding leases and capitalized) = 1,495 + 61 (lease interest) = 1,556 total interest paid. Accrued interest at year-end might be ~500-800. The 5,058 likely includes: - Accrued interest: ~500-800 - Dividends payable: IBERDROLA's dividend is ~0.18 EUR/share × shares outstanding. Shares: issued capital 4,772 / par value? If par = 0.75, shares = ~6.36 billion. Dividend = 6.36 × 0.18 = ~1,145. But this is annual; interim dividends payable might be ~500-600. - Other items: customer deposits, guarantees, etc. If only 50% is debt-like, then 2,529 should be added, not 5,058. Let me try with 50% of "Other Current Financial Liabilities": Base debt = 46,587 + 663 + 1,534 + 2,529 (50% of 5,058) + 2,438 (leases) = 53,751 Adjusted Debt = 53,751 + 1,268 + 2,836.5 - 4,608 = 53,247.5 Ratio = 53,248 / 13,228 = **4.03** This is close to 4.0x, which seems reasonable. Given the ambiguity, I'll use a **midpoint** or the more conservative figure. Actually, for S&P's standard approach, "Other Financial Liabilities" that are not clearly operating (like trade payables) are typically **included in debt** if they're contractual obligations. The 5,058 is classified as "financial liabilities," not "trade payables," suggesting they're debt-like. I'll stick with **full inclusion** = 55,777 / 13,228 = **4.22** But let me also consider: should EBITDA be adjusted for the "Other Gains Losses" of 911? If this includes one-time gains, S&P would exclude. Looking at 2021: 995, so it's relatively stable. But 2022 had the energy crisis - maybe some gains from trading or asset sales. For conservatism, if I exclude 50% of 911 as nonrecurring: Adjusted_EBITDA = 13,228 - 456 = 12,772 Ratio = 55,777 / 12,772 = **4.37** Or if I use the lower debt estimate (53,248) and lower EBITDA (12,772): 53,248 / 12,772 = 4.17 Given the range of 4.0-4.4, I'll use **4.22** as a central estimate, or perhaps **4.2** rounded. Actually, let me recalculate more carefully with exact numbers: **Adjusted Debt (2022 year-end):** - Borrowings: 36,129 + 10,458 = 46,587 - Capital instruments: 576 + 87 = 663 - Other financial liabilities (debt-like): 1,534 + 5,058 = 6,592 - Lease liabilities: 2,287 + 151 = 2,438 - Subtotal reported debt: 56,280 - Pension deficit: 1,268 - Other debt-like (Instalaciones): 2,837 (50% of 5,673) - Less cash: (4,608) - **Adjusted Debt: 55,777** **Adjusted EBITDA (FY2022):** - Reported: 13,228 - Less: nonrecurring gains estimate: 0 (or small) - **Adjusted EBITDA: 13,228** **Ratio: 55,777 / 13,228 = 4.2169... → 4.22** If I use **no instalaciones adjustment**: Adjusted Debt = 56,280 + 1,268 - 4,608 = 52,940 Ratio = 52,940 / 13,228 = **4.00** If I use **full instalaciones**: Adjusted Debt = 56,280 + 1,268 + 5,673 - 4,608 = 58,613 Ratio = 58,613 / 13,228 = **4.43** Given S&P's typical treatment of such items for utilities, and IBERDROLA's specific situation, I believe **4.2x** is the most appropriate estimate. Let me verify with one more approach: using **net debt** from the balance sheet and comparing. Net debt = Gross debt - Cash Gross debt (borrowings + capital instruments + leases): 46,587 + 663 + 2,438 = 49,688 Net debt = 49,688 - 4,608 = 45,080 But this excludes other financial liabilities (6,592) and instalaciones (5,673). If we include other FL as debt: 45,080 + 6,592 = 51,672 Plus instalaciones (50%): 51,672 + 2,837 = 54,509 Plus pension: 54,509 + 1,268 = 55,777 (matches) Net debt / EBITDA = 45,080 / 13,228 = 3.41 (too low for IBERDROLA's rating) Gross debt / EBITDA = 49,688 / 13,228 = 3.76 S&P's adjusted debt is typically higher than gross debt due to add-backs. My 55,777 seems reasonable. Final answer: **4.22** or rounded to **4.2** Given the precision of inputs, I'll use **4.22**. 4.22