Corporate Methodology: Ratios And Adjustments

Guidance | Criteria | Corporates | General:

Corporate Methodology: Ratios And AdjustmentsApril 1, 2019

Overview And ScopeTh s document prov des add t ona nformat on and gu dance re at ng to the app cat on of S&PG oba Rat ngs "Corporate Methodo ogy: Rat os And Adjustments" cr ter a pub shed Apr , 20 9.Th s gu dance document s ntended to be read n conjunct on w th that cr ter a. or furtherexp anat on on gu dance documents, p ease see the descr pt on at the end of th s document.

Guidance2 Our ana yt ca adjustments are not genera y affected by ongo ng changes n account ng ru es, but

we may mod fy our ana yt ca adjustments for a s gn f cant ru e change to ensure our adjustedmetr cs rema n cons stent across account ng standards.

3 Where f nanc a nformat on requ red for our ana yt ca adjustments s not prov ded, we mayrequest t from management or otherw se determ ne a best est mate.

4 Sufficiently creditworthy: or the purpose of our cr ter a, we wou d cons der a company to besuff c ent y cred tworthy f t s rated n the nvestment grade category ( .e. BBB or h gher).

5 Nonrecurring items and pro forma figures: The re at ve stab ty or vo at ty of a company searn ngs and cash f ow s an mportant measure of cred t r sk that s embedded n our corporatemethodo ogy. or th s reason, our use of nonrecurr ng or pro forma adjustments s typ ca y m tedto when there has been some transformat ona change n a company s bus ness. Atransformat ona event s one that causes a mater a change n an ent ty s bus ness or f nanc aprof e. Examp es nc ude the d vestment of part of the bus ness or a fundamenta change noperat ng strategy.

Key Publication Information

Or g na pub cat on date: Apr , 20 9.

Th s art c e s re ated to "Corporate Methodo ogy: Rat os And Adjustments," pub shedApr , 20 9.

Guidance | Criteria | Corporates | General:

Corporate Methodology: Ratios And AdjustmentsApril 1, 2019

ANALYTICAL CONTACTS

Leonard A Gr mando

New York

(1) 212-438-3487

[email protected]

Imre Guba

Madrid

(44) 20-7176-3849

[email protected]

Sam C Holland, FCA

London

(44) 20-7176-3779

[email protected]

Shr pad J Josh , CPA, CA

New York

(1) 212-438-4069

[email protected]

Raam Ratnam, CFA, CPA

London

(44) 20-7176-7462

[email protected]

Scott E Zar , CFA

Chicago

+ 1 (312) 233 7079

[email protected]

See complete contact list at end of article.

www.spglobal.com/ratingsdirect April 1, 2019 1

Hearing Exhibit 103, Attachment PAJ-4 Proceeding No. 21AL-____E

of 43

6 Discontinued operations and business divestments: We typ ca y exc ude prof ts, osses, andcash f ows from d scont nued operat ons from our metr cs so that they more accurate y ref ect thecompany s ongo ng operat ons.

7 Pro forma accounts for intrayear acquisitions or irregular reporting periods: f an acqu s t onhas occurred, the f nanc a statements for the year of the acqu s t on nc ude a of the en argedgroup s debt n the year end ba ance sheet, but ess than the acqu red company s fu year resu tsand cash f ows. Depend ng on the acqu red company s s ze, th s can d stort debt coverage rat os,wh ch therefore may not accurate y nd cate the company s ke y future performance. A s m arssue ex sts when compan es have rregu ar account ng per ods, such as after a change n the r

account ng year end. n these cases, we may use pro forma f nanc a statements to a ow for amore representat ve measure of fu year performance and more mean ngfu rat os.

Scope of consolidation8 When ana yz ng a group s cred tworth ness, a f rst cr t ca step s to determ ne how the resu ts of

subs d ar es and aff ates shou d be dep cted n the parent s conso dated f nanc a statements.Th s determ nat on bu ds on our v ew of the group, nc ud ng the re at onsh p of the parent w th tssubs d ar es, as per our group rat ng methodo ogy.

9 There are severa account ng methods to ref ect a company s re at onsh p w th another company(treat ng t as an nvestment, account ng for t under the equ ty method, fu y conso dat ng t, etc.).Most often we use the same scope of conso dat on as s used n the parent s conso datedf nanc a statements. Th s s because account ng conso dat on and the under y ng ana yt capr nc p e of our group rat ng methodo ogy both re y on the concept of "contro ," wh ch refers to theparent s ab ty to d ctate a group member s strategy and cash f ow.

0 Severa factors determ ne our ana yt ca v ew of a company s re at onsh p w th a part cu arsubs d ary or aff ate. These factors nc ude strateg c mportance, whether there s contro ,percentage of ownersh p, ke y f nanc a support, and whether there are other owners, and f sowhat r ghts those other owners have. The parent company s ab ty to contro , d rect, and benef tfrom the subs d ary s cash f ows may a so dr ve our dec s on on whether to accept the account ngconso dat on.

Based on the above ana ys s, we may adjust the group s f nanc a statements to better ref ect ourop n on of the under y ng econom c dr vers of a company s bus ness and f nanc a t es w th tssubs d ar es or aff ates and the resu t ng benef ts and ob gat ons. We may a so adjust thegroup s f nanc a statements f the group nc udes bus nesses w th very d fferent bus ness mode sand cred t dr vers. or examp e, we may deconso date the regu ated bank ng operat ons of a retaparent to better understand, ana yze, and ref ect the cred t qua ty of the two separatebus nesses, even though we may cons der both to be part of the same w der group, and we wtreat them as per our group rat ng methodo ogy.

2 n certa n cases, fu conso dat on used n the f nanc a statements may not ref ect our v ew of thegroup s rea under y ng everage or contro ed cash f ows due to s gn f cant m nor ty shareho dersn the subs d ar es. n these cases we w use other conso dat on methods (such as proport onate

conso dat on) to est mate key cred t metr cs.


Guidance Criteria Corporates General: Corporate Methodology: Ratios And Adjustments


of 43

Adjustments For Key Principles3 We app y four key pr nc p es n our adjustments to reported f nanc a data: the adjusted debt,

adjusted earn ngs, adjusted cash f ow, and adjusted nterest pr nc p es. The summary tab esunder each sect on of our key pr nc p es ustrate the rout ne adjustments for each one.Add t ona y, we may app y s tuat ona and sector spec f c adjustments n each ca cu at on.

Adjusted debt principle4 We ca cu ate adjusted debt as fo ows:

Reported debt

Access b e cash and q d nvestments

+ eases

+ PRBs and deferred compensat on

+ AROs

+ Sec r t zat on sa e and factor ng of trade rece vab es and other assets

+/ Hybr d cap ta nstr ments

+ F nanc a g arantees

+ Earn o ts and deferred cons derat on for b s ness acq s t ons

Adjusted debt

5 We typ ca y measure certa n ong term ab t es that do not bear exp c t nterest payments byca cu at ng the net present va ue of the ab t es us ng a d scount rate. or nstance, m n mumnon cance ab e operat ng ease comm tments are d scounted at 7% for compan es that do notcap ta ze operat ng eases on the ba ance sheet. or other ab t es, such as bonds or oans thatpay nterest, the amort zed cost bas s of measurement captures the d scount ng mpact of thedebt pr nc pa .

6 Adjustment to debt for non-executory contracts: We may treat as debt certa n non executorycontracts such as take or pay contracts. n certa n s tuat ons, these contracts prov de benef ts offuture pr ce protect on to the buyer n exchange for an uncond t ona m n mum purchaseob gat on to the se er. Th s s pr mar y because the se er takes on much of the pr ce r sk andnon performance r sk by the buyer.

7 Adjustment to debt for redeemable common stock held by minority shareholders: We add theab ty der ved from a redeemab e m nor ty nterest when the redempt on s outs de of the

ssuer s contro (for examp e, the m nor ty nterest ho der has a put opt on on the subs d ary sshares as opposed to the ssuer hav ng a ca opt on to repurchase the shares) and we fu yconso date the subs d ary n our ana ys s. The ab ty wou d be added to our adjusted debt f gurebased on the adjusted debt pr nc p e s nce the subs d ary s fu y conso dated n our metr cs and,therefore, the benef ts of ownersh p are accru ng to the ssuer. We may take a d fferent v ewdepend ng upon the facts and c rcumstances f we judge that the opt on s very un ke y to beexerc sed.




of 43

8 Structured settlements of dispute: We nc ude n adjusted debt (on a d scounted bas s f feas b e)ab t es re ated to structured sett ements of d spute, whether w th commerc a or governmenta

ent t es. or examp e, we add tax and tobacco sett ements to debt because they are " ncurredab t es that prov de no future offsett ng operat ng benef t."

9 Shares other than common stock We w not add c asses of shares to our adjusted debtmeasures, regard ess of the r denom nat on, f they w never requ re any cash payments or causeany cred t stress and f they comp y w th a of the fo ow ng cond t ons:

No stated coupon or y e d;

No matur ty;

No ab ty to redeem for cash (but cou d be converted nto common stock);

No covenants or events of defau t;

No secur ty or guarantees; and

Subord nat on to a debt.

20 Th s prov s on wou d a so app y f shares that comp y w th a of the above character st cs a sonc ude one or both of the fo ow ng:

A preference n qu dat on to other common stock; and/or

A preference n the d str but on of d v dends when d v dends are dec ared, but no ent t ement tod v dends otherw se. Th s wou d be the case, for examp e, f when d v dends are dec ared theres an agreement among shareho ders about how those d v dends are d str buted. We wou d notnc ude n th s prov s on shares that carry a d v dend that can be deferred, whether cumu at ve

or non cumu at ve. These nstruments are typ ca y covered by our hybr d cr ter a.

2 However, we w add to our adjusted debt measures shares that are subject to a put opt on orother econom ca y s m ar mechan sm (except f the put opt on can on y be exerc sed upon ann t a pub c offer ng).

22 Shares other than common equ ty prov ded by contro ng shareho ders shou d be ana yzed underour non common equ ty f nanc ng cr ter a.

Adjusted earnings principle23 We ca cu ate adjusted EB TDA as fo ows:

Reported revenue

Operat ng expenses

+ Deprec at on

+ Amo t zat on

+ Non c rrent asset mpa rment and mpa rment reversa s

+ Cash d v dends rece ved from eq ty acco nted aff ates (we exc de the prof ts or osses from s ch aff ates)

+ Eq ty sett ed stock compensat on

Cap ta zed deve opment costs

+ Ad stments for eases

+/ Ad stments for PRBs and deferred compensat on




of 43

Ad stments for AROs

+/ Ad stments for earn o ts and deferred cons derat on for b s ness acq s t ons

Adjusted EBITDA

24 We ca cu ate adjusted funds from operat ons ( O) as fo ows:

Adjusted EBITDA

Cash nterest pa d ad sted

Cash taxes pa d

Adjusted FFO

Operating and non-operating items25 Our ca cu at on of EB TDA and O genera y nc udes tems that we cons der to be operat ng n

nature (rather than nvest ng or f nanc ng n nature) and exc udes non operat ng tems. Mostoften, our v ew s cons stent w th how account ng standards c ass fy these tems n the statementof cash f ows. Be ow are examp es of how we app y our adjusted earn ngs pr nc p e to var ousscenar os to determ ne whether transact ons are operat ng or non operat ng. The adjustmentsbe ow are rout ne y made to a compan es where app cab e and mater a .

26 Disposals: We typ ca y v ew the d sposa of a subs d ary or the sa e of property, p ant, andequ pment as outs de core bus ness operat ons. As such, we genera y do not treat thesetransact ons as an operat ng act v ty and exc ude any ga n or oss from our ca cu at on of EB TDAand O.

27 Restructuring costs: Our ca cu at on of EB TDA typ ca y nc udes restructur ng costs (wh chreduce EB TDA), nc ud ng those that w be sett ed n cash n the future. We typ ca y v ewrestructur ng costs as an operat ng tem because most compan es need to restructure the roperat ons to adapt to chang ng env ronments and rema n compet t ve and v ab e.

28 Acquisition-related costs: Our EB TDA ca cu at on nc udes acqu s t on re ated costs nc ud ngadv sory, ega , and other profess ona and adm n strat ve fees re ated to an acqu s t on. Manybus nesses make acqu s t ons as part of the r growth strategy; therefore t s mportant to factorthese expenses nto EB TDA.

29 Asset impairments/write-downs: We exc ude mpa rment costs or reversa s on tang b e andntang b e noncurrent assets from our def n t on of EB TDA because they are ak n to deprec at on

or amort zat on costs n that they represent a company s ncome statement recogn t on of ear ercap ta expend tures. However, we nc ude mpa rment costs on current assets, such as nventoryand trade rece vab es because the charges for nventory represent a company s recogn t on n thencome statement of money that t has a ready spent, and those for trade rece vab es represent

the reduct on of revenue and ncome prev ous y recogn zed but that the company w not fu yco ect. Our def n t on of EB T genera y nc udes mpa rment charges or reversa s, except we mayadjust for very arge and rregu ar mpa rments or mpa rment reversa s of non current assets.

30 Foreign currency transaction gains and losses: We may v ew fore gn currency transact on ga nsand osses as operat ng (and therefore nc ude them n EB TDA and O) or non operat ng nnature. or examp e, f mater a , we exc ude fore gn currency ga ns or osses resu t ng from the




of 43

ssuance of fore gn currency denom nated debt from EB TDA and O f those ga ns or osses areshown as operat ng tems.

3 Unrealized fair value movements: When d sc osed, we typ ca y reverse the mpact of unrea zedfa r va uat on ga ns and osses from EB TDA and O. Examp es of these tems nc ude:

Unrea zed fa r va uat on ga ns or osses on nvestment propert es under nternat ona nanceReport ng Standards ( RS);

Changes n va ue of earn out ab t es; or

Unrea zed ga ns and osses on der vat ves.

Adjusted cash flow principle32 We ca cu ate adjusted cash f ow from operat ons (C O), adjusted free operat ng cash f ow ( OC ),

and adjusted d scret onary cash f ow (DC ) as fo ows:

Reported CFO

+/ nterest or d v dends rece ved and nterest pa d reported o ts de of CFO

Cap ta zed nterest

Cap ta zed deve opment costs

+/ Ad stments for sec r t zat on sa e and factor ng of trade rece vab es and other assets

+/ Ad stments for eases

+/ Ad stments for hybr d cap ta nstr ments

+/ Ad stments for earn o ts and deferred cons derat on for b s ness acq s t ons

Adjusted CFO

Ad sted cap ta expend t res

Adjusted FOCF

Cash d v dends (pa d on common and preferred stock)

Share b ybacks

Adjusted DCF

33 Cap ta expend tures nc ude funds spent to acqu re or deve op tang b e and ntang b e assets. Wemake adjustments to reported cap ta expend tures for cap ta zed deve opment costs andcap ta zed nterest.

Adjusted interest principle34 We ca cu ate adjusted nterest as fo ows:

Reported nterest expense on gross f nanc al debt*

+ Amo t zat on of d sco nts on debt ss ance fees

+ Non cash nterest on convent ona debt nstr ments (p s any nterest on hybr d cap ta nstr ments shareho deroans and non common eq ty)

+ Cap ta zed nterest




of 43

+ ease nterest

+ PRB nterest

+ ARO nterest

+ Rea zed effects of nterest hedg ng der vat ves

Unrea zed fa r va e movements of nterest der vat ves

Adjusted nterest expense

Note: In our calculation of adjusted interest expense + or - ind cates that we include or exclude tems that may or may not already be reflectedin the reported interest expense.

35 Our adjusted nterest pr nc p e s based on an accrua based nterest expense and s pr mar yused to ca cu ate the EB TDA to nterest coverage rat o. However, we use the reported cashnterest p us or m nus app cab e adjustments to ca cu ate O cash nterest coverage.

Routine Analytical Adjustments

Accessible cash and liquid investments36 We dent fy cash and qu d nvestments as naccess b e when, for examp e, they are:

He d n a nonconvert b e currency to the currency of a company s borrow ngs;

Subject to d str but on restr ct ons (for examp e, cash and nvestments he d n escrow, un essthey are restr cted to support ob gat ons that we nc ude n debt);

Trapped n subs d ar es (as we be eve that cash may not be moved out of the subs d ary atshort not ce to repay debt e sewhere n the group; however, cash at a subs d ary that meets ourcr ter a for nett ng may be netted aga nst adjusted debt at that subs d ary);

Requ red to fund tax payab e on repatr at ng cash or qu dat ng an asset; or

He d spec f ca y on beha f of th rd part es (such as governments, customers, etc.).

37 n add t on, we w assess whether there are r sks of exchange or cap ta contro s n the company shome country, or n the country or countr es where ts subs d ar es are ocated, that shou d beref ected n the ca cu at on of access b e cash.

38 We w genera y not deduct access b e cash and qu d nvestments (access b e cash) from debt fa company s owned by a f nanc a sponsor or has a bus ness r sk prof e assessment of weak orvu nerab e (both concepts def ned n our "Corporate Methodo ogy"). However, we deductaccess b e cash from debt even f a company meets e ther of these cond t ons, as ong as:

We be eve that the company has access b e cash ear marked to ret re matur ng debt or otherdebt ke ob gat ons; and

We be eve typ ca y from the company s track record, market cond t ons, or f nanc apo cy that management w use the cash to pay off matur ng debt or debt ke ob gat ons.

39 Cash he d n escrow for the debtho ders benef t wou d be fu y netted off from debt f the debt snc uded n our debt ca cu at on.

40 When ca cu at ng access b e cash, we typ ca y do not reduce cash and qu d nvestments by theamount of expected work ng cap ta nvestment needs. Th s s because th s wou d d sadvantage




of 43

compan es that fund work ng cap ta from cash rather than by draw ng down on bank nes.

4 n rare cases, we may exc ude from access b e cash unusua y arge port ons of cash phys ca ytrapped n the usua course of bus ness. Some examp es of th s nc ude a supermarket that has anunusua y arge amount of "cash n t s," or a cas no that has a h gher than typ ca amount of"cash n cages."

42 Data requ rements:

The amount, term, ocat on, qu d ty, and other character st cs of access b e cash.

43 Ca cu at on:

Debt: We reduce debt by the amount of access b e cash.

Leases44 We genera y accept the ba ance sheet treatment for compan es that cap ta ze a eases on the r

ba ance sheet, such as U.S. Genera y Accepted Account ng Pr nc p es (GAAP) and RS f ers, bync ud ng the reported ease ob gat ons n our adjusted debt. n certa n c rcumstances we may

adjust the amount added to adjusted debt to better ref ect the ease everage (see be ow).

45 or U.S. GAAP f ers that cap ta ze a eases, we a so adjust our ncome statement and cash f owmeasures to remove the d st nct on between f nance eases and operat ng eases.

46 or those ent t es not requ red to cap ta ze operat ng eases on ba ance sheet, we w adjust ourdebt, earn ngs, nterest, and cash f ow measures for operat ng ease report ng. To ca cu ate theadjustment to debt for operat ng eases that are not reported on ba ance sheet, we ca cu ate apresent va ue of the future ease payments us ng a 7% d scount rate. We may update our d scountrate n the future based on data and trends observed from ent t es that have reported operat ngeases on the r ba ance sheets.

47 We net sub ease renta ncome from future ease payments on y f the ease and sub ease termsmatch and we be eve the ho der of the sub ease s suff c ent y cred tworthy (as prev ous ydef ned).

48 We do not adjust cap ta expend tures, and therefore OC , for any mp ed cap ta expend turesre at ng to eases.

49 Leases with artificially short terms n certa n cases we may adjust the ease amount added toour measure of debt to better ref ect the ease everage, for examp e f we v ew the rema n ng easeterms as art f c a y short re at ve to the expected use of the eased asset. Our expectat on s that,n most cases, the reported ease ab t es shou d be at east three t mes the next 2 monthsease comm tments. f they re be ow th s eve , we may ncrease the reported ease ab t es to ateast three t mes and ref ect that mpact n the other metr cs affected by the ease adjustment.

50 The three t mes mu t p e s not a hard measure, and ana yt ca judgment s app ed. We mayncrease the ab ty above three t mes n certa n nstances, such as to enhance comparab ty nease ntens ve sectors. urther nvest gat on may nd cate that no upward adjustment s

requ red. or examp e, f a company s on y s gn f cant ease w th a rema n ng ease term of twoyears was for a non core asset that wou d not be needed after two years due to a change n thecompany s bus ness mode , then no upward adjustment wou d be necessary.

5 Other lease-like contracts n rare cases, we a so adjust ease ab t es (such as when compan escharacter ze ease contracts as serv ce contracts), because we be eve the reported amounts donot adequate y capture the transact on s under y ng econom cs. n such cases, we may a so carry




of 43

through th s adjustment to our other metr cs, f appropr ate.

52 Data requ rements:or RS compan es for wh ch RS 6 s adopted:

Reported ease ob gat ons on the ba ance sheet (both the current and noncurrent port ons)

or U.S. GAAP compan es for wh ch ASC Top c 842 s adopted:

Reported f nance ease ob gat ons on the ba ance sheet (current and noncurrent port ons).

Reported operat ng ease ob gat ons on the ba ance sheet (current and noncurrent port ons).

Reported operat ng ease cost for the most recent ncome statement.

Reported we ghted average operat ng ease d scount rate.

or compan es that have not yet adopted or do not report under the above ease account ngstandards:

M n mum ease payments: The schedu e of non cance ab e future ease payments over thenext f ve years and beyond.

Reported f nance ease ob gat ons on the ba ance sheet (current and non current port ons).

Reported annua ease re ated operat ng expenses for the most recent year.

The annua operat ng ease re ated expense, wh ch we est mate us ng the average of the f rstprojected annua payment d sc osed at the end of the most recent year and the prev ous year.

53 Ca cu at ons:or RS compan es for wh ch RS 6 s effect ve:

Debt: We nc ude the reported amount of ease ob gat ons n adjusted debt.

nterest expense: We rec ass fy any ease nterest as an operat ng cash f ow under RS f t spresented as part of the nvest ng or f nanc ng sect on of the statement of cash f ows.

or U.S. GAAP compan es for wh ch ASC Top c 842 s effect ve:

Debt: We nc ude the reported amount of ease ob gat ons n adjusted debt.

ncome statement and cash f ow measures: The reported operat ng ease cost s a ocated tonterest and deprec at on expenses. EB TDA s ncreased by add ng back the nterest and

deprec at on expenses. EB T s ncreased by add ng back the nterest expense. C O s ncreasedby add ng back the deprec at on expense (wh ch we use as a proxy for the cap ta repaymentport on of the ease). O s decreased by the operat ng ease nterest expense (as a proxy forcash nterest).

nterest expense: The nterest expense s ncreased by mu t p y ng the average operat ng easeob gat on for the current and prev ous year by the reported we ghted average operat ng eased scount rate.

Deprec at on expense: The deprec at on expense s ncreased by the d fference between thereported operat ng ease cost and the ca cu ated nterest expense.

or compan es that have not yet adopted or do not report under the above ease account ngstandards:

Debt: or operat ng eases, we add the present va ue of future ease payments to debt,ca cu ated us ng a 7% d scount rate. S nce m n mum ease payments beyond the f fth year areregu ar y d sc osed n aggregate as "thereafter," our methodo ogy assumes that annuapayments beyond the f fth year equa the payment amount n year f ve, and that the number ofyears n the "thereafter" per od equa s the "thereafter" amount d v ded by the f fth year




of 43

amount, rounded to the nearest year. Th s assumpt on s capped at a tota payment prof e of30 years.

Debt: or f nance eases, f they are not a ready nc uded n reported debt, we add reportedf nance ease ob gat ons to debt.

Tota assets: We add the amount of operat ng eases we rec ass fy as debt to tota assets toapprox mate the deprec ated asset cost.

ncome statement and cash f ow measures: The ease re ated expense s a ocated to nterestand deprec at on expenses. EB TDA s ncreased by add ng back the nterest and deprec at onexpenses. EB T s ncreased by add ng back the nterest expense. C O s ncreased by add ngback the deprec at on expense (wh ch we use as a proxy for the cap ta repayment port on of theease). O s decreased by the operat ng ease nterest expense (as a proxy for cash nterest).

nterest expense: The nterest expense s ncreased by the product of the 7% d scount ratemu t p ed by the average net present va ue of the ease payments for the current and prev ousyear.

Postretirement employee benefits and deferred compensation54 Adjustments to debt We nc ude underfunded def ned benef t ob gat ons for ret rees, nc ud ng

pens ons and hea th care coverage (co ect ve y, PRB) n our measure of adjusted debt becausethey represent f nanc a ob gat ons that must be pa d over t me. Our ca cu at on of PRB nc udesother forms of deferred compensat on ke ret ree ump sum payment schemes and ong serv ceawards, but not def ned contr but on ob gat ons.

55 To ca cu ate the amount we add to debt, we aggregate a ret ree benef t p an assets and ab t esfor pens on, hea th, and other ob gat ons and net the pos t ons of a company s p ans n surp usaga nst those that are n def c t on an after tax bas s. Adjusted debt s not reduced f there are netsurp uses.

56 We tax effect our PRB adjustment amounts (that s, g ve cred t for assoc ated future tax benef ts),un ess the re ated tax benef ts have a ready been, or are un ke y to be, rea zed. We use the taxrates app cab e to the company s p ans (e.g. reported deferred tax asset) or the current or futureexpected corporate rate. We do not tax effect the adjustment amounts f we cons der a company sab ty to generate taxab e prof ts uncerta n.

57 Adjustments to the income statement Under RS, the per od s current serv ce cost ref ect ngthe present va ue of future benef ts emp oyees earned for serv ces rendered dur ng the per od sthe so e tem we keep as part of operat ng expenses. We v ew the nterest expense as a f nancecharge and rec ass fy t as such f reported d fferent y. We do not adjust the pens on expenseunder U.S. GAAP because current serv ce costs are a ready the so e tem n reported operat ngexpenses.

58 Under U.S. GAAP, n add t on to nterest expense, the expected return on p an assets s a soseparate y d sc osed and represents the company s subject ve, ong range expectat on aboutnvestment portfo o returns. We use the reported nterest expense and expected return on p an

assets to arr ve at PRB nterest. Th s concept of expected return has been abandoned under RS,wh ch ca cu ates a net nterest f gure by mu t p y ng the def c t (or surp us) on the PRB by thed scount rate.

59 Under both U.S. GAAP and RS, these measures of PRB nterest, f a net expense, are added toreported nterest. No adjustment s made f net nterest s a net ncome tem.




of 43

60 Data requ rements:or adjustments to ncome statement:

Serv ce cost;

nterest cost;

Expected return on pens on p an assets, f app cab e;

Other amounts nc uded n earn ngs (such as actuar a ga ns or osses, pr or serv ce costs,spec a benef ts, sett ements, and curta ments of benef ts); and

Tota benef t costs.

or adjustments to ba ance sheet tems:

Deferred tax assets re ated to PRB (or the tax rate app cab e to re ated costs);

a r va ue of p an assets; and

Tota p an ab t es.

6 Ca cu at ons:or adjustments to ncome statement:

Operat ng ncome: Add to EB T and EB TDA the tota amount of PRB costs charged to operat ngncome, ess the current serv ce cost for compan es that do not report under U.S. GAAP.

nterest: PRB nterest s the net nterest cost as reported by compan es under RS, or nterestexpense ess expected return on p an assets for compan es under U.S. GAAP. f PRB nterest sa cost, we nc ude t n adjusted nterest expense (we do not reduce nterest expense f PRBnterest s an ncome tem).

or adjustments to ba ance sheet tems:

Debt: The net ba ance sheet asset or ab ty pos t on (or funded status) s ca cu ated as theba ance sheet PRB assets m nus PRB ab t es. f the funded status s pos t ve, debt s notadjusted. f the funded status s negat ve, th s amount s tax effected and added to debt.

n some jur sd ct ons, the tax benef t s rea zed before fund ng the def c t or pay ng benef ts, forexamp e, when the ab ty s accrued for tax purposes. n such cases, the expected tax benef ton y nc udes tax benef ts that have not yet been rece ved.

Asset-retirement obligations62 Asset ret rement ob gat ons (AROs) or decomm ss on ng ab t es are ega ob gat ons assoc ated

w th a company s ret rement of tang b e ong term assets. Examp es of AROs nc ude the cost ofp ugg ng and d smant ng o and gas we s, decomm ss on ng nuc ear power p ants, treat ng orstor ng spent nuc ear fue , and capp ng and restor ng m n ng and waste d sposa s tes.

63 We add AROs to debt after deduct ng any ded cated ret rement fund assets or prov s ons, sa vageva ue, and ant c pated tax benef ts. We use the tax rates app cab e to the ARO (e.g. reporteddeferred tax asset) or the current corporate rate to ca cu ate the ant c pated tax benef ts.

64 We genera y use the reported ARO f gures, but we may make adjustments f we be eve any of thecompany s assumpt ons are unrea st c. Those assumpt ons may nc ude the u t mate cost ofabandon ng an asset, the t m ng of asset ret rement, and the d scount rate used to ca cu ate theba ance sheet va ue.

65 n certa n s tuat ons, compan es fund AROs by add ng a surcharge to customer pr ces, or the AROsw be pa d by th rd part es such as a state re ated body. n these cases there wou d typ ca y be




of 43

no debt adjustment.

66 The reported accret on of an ARO s ak n to noncash nterest and s m ar to PRB nterest charges.Accord ng y, we rec ass fy the accret on (net of reported earn ngs on any ded cated ARO funds) asnterest expense.


The ARO f gure (from the f nanc a statements or our est mate).

Any assoc ated assets set as de for AROs.

ARO nterest costs (and whether charged to operat ng or f nanc ng costs).

The reported ga n or oss on assets set as de for fund ng AROs.

68 Ca cu at ons:

Debt: Add net ARO to debt (net ARO s the reported or est mated ARO ess any assets set as deto fund AROs, mu t p ed by m nus the corporate tax rate or ess the reported deferred taxasset).

EB TDA and O: Add ARO nterest costs nc uded n operat ng costs.

nterest expense: Deduct ARO nterest costs (net of ARO fund earn ngs) from reported operat ngexpenses, f nc uded there, and add to nterest expense.

Capitalized development costs69 We deduct from EB TDA, O, and C O the amount of deve opment costs cap ta zed dur ng the

year. However, where not ava ab e, we may use the re ated annua amort zat on reported n thef nanc a statements as a proxy for the current year s deve opment costs. We adjust EB T for thed fference between the cap ta zed deve opment costs and the amort zat on.

70 n the statement of cash f ows, we rec ass fy cap ta zed deve opment costs from nvest ng tooperat ng cash f ow, reduc ng operat ng cash f ow and cap ta expend tures so that free cash f owrema ns unchanged.

7 Software development costs: Wh e U.S. GAAP genera y treats deve opment costs as an expense,t has spec f c except ons that a ow the expenses to be cap ta zed, wh ch s s m ar to RS. These

except ons nc ude both software deve oped for nterna use and software deve oped for sa e toth rd part es. or compan es that deve op software pr mar y to se to externa part es, we use thetechno ogy software and serv ces ndustry sector spec f c adjustment to determ ne how to treatcap ta zed software deve opment costs. or compan es w th a bus ness mode that typ ca y doesnot nvo ve se ng software to externa th rd part es, we genera y assume that a cap ta zedsoftware deve opment costs are for nterna use, un ess we have spec f c nformat on ead ng us tobe eve otherw se. As a resu t, for these compan es, we do not adjust for these costs n EB TDA and

O. We do th s for comparab ty between those compan es that deve op software for nterna useand those that purchase software and equ va ent products and cap ta ze them.


Amount of deve opment costs ncurred and cap ta zed dur ng the per od, exc ud ng, f pract ca ,cap ta zed deve opment costs for nterna use software.

Amort zat on amount for re evant cap ta zed costs.




of 43

73 Ca cu at ons:

EB TDA, O, and C O: Subtract the amount of cap ta zed deve opment costs, or, theamort zat on amount for that per od.

EB T: Subtract (or add) the d fference between the spend ng and amort zat on n the per od.

Cap ta expend tures: Subtract the amount cap ta zed n the per od.

Securitization, sale, and factoring of receivables and other assets74 We typ ca y adjust debt for secur t zat on, sa e and factor ng of rece vab es and other assets

(co ect ve y ca ed secur t zat ons), ref ect ng our v ew that many assets secur t zed, so d, orfactored (such as trade rece vab es) are regenerated n the ord nary course of bus ness and needto be f nanced on an ongo ng bas s. That s, the assets and trad ng re at onsh ps these assetsrepresent are an ntegra part of a company s operat ons. f a company has a recurr ng need tof nance s m ar assets, we do not presume t w have permanent access to the secur t zat onmarket, and t may have to meet future fund ng needs by other means.

75 n certa n cases, we may not treat secur t zat ons as a f nanc ng. or examp e, we may not make adebt adjustment when the secur t zed assets are not regenerated n the ord nary course ofbus ness and when we v ew the secur t zat on as equ va ent to an asset sa e, for examp e n thesecur t zat on of a tax asset. We v ew such secur t zat ons as equ va ent to an asset sa e, forexamp e, f the company reta ns none of the r sk and s not cons dered ke y to support thetransact on through mora recourse (th s refers to the ke hood that a company w support asecur t zat on even though t s not ega y ob ged to do so) and there are no cont ngent or nd rect

ab t es resu t ng from the transact on.

76 Under U.S. GAAP and RS, compan es report cash nf ows or outf ows re ated to work ng cap taassets or ab t es, or f nance rece vab es, as operat ng cash f ows. Consequent y, secur t zat onsof assets such as rece vab es affect C O and the effect may be part cu ar y s gn f cant n report ngper ods when the secur t zat ons are n t ated or mature. When we adjust debt for a secur t zat on,we a so adjust C O to reverse the mpact of any cash f ows re ated to the secur t zat on.

77 n some transact ons, compan es rece ve a benef c a (or reta ned) nterest n the secur t zedassets n add t on to cash upon the sa e of the assets. Any future cash the company rece ves forbenef c a nterests s presented as an nvestment cash f ow under U.S. GAAP. Other account ngreg mes treat these rece pts as an operat ng cash f ow. or cons stency, we typ ca y add the cashrece ved for benef c a nterests to operat ng cash f ows for U.S. GAAP compan es.


The per od end amount of trade rece vab es so d or secur t zed, as we as a other secur t zedassets that are not reported on the ba ance sheet and requ re adjustments accord ng to ourcr ter a.

79 Ca cu at ons:

Assets: Add the amount of per od end trade rece vab es so d or secur t zed (that s, theunco ected rece vab es as of the ba ance sheet date) to reported rece vab es. Wh e the assetssecur t zed are most often rece vab es, we may a so add the secur t zat ons of other assets totota assets.

Debt: Add the amount of per od end secur t zed assets to reported debt.

C O: Reverse the mpact of cash f ow movements from the n t at on of a secur t zat on,




of 43

subsequent changes n amounts secur t zed, or the secur t zat on s matur ty. Ro ng over anex st ng secur t zat on requ res no cash f ow adjustment. Where benef c a nterests arereported as an nvest ng cash f ow (U.S. GAAP), we rec ass fy them as operat ng cash f ows.

Hybrid capital instruments80 We make adjustments for hybr d cap ta nstruments based on our determ nat on of the r equ ty

content:

Hybr ds that have h gh equ ty content are exc uded from adjusted debt and the nterest ord v dends are treated as d v dends.

or hybr ds w th ntermed ate equ ty content, 50% of the pr nc pa s treated as debt and 50% sexc uded from adjusted debt (exc ud ng unpa d accrued nterest or d v dends, wh ch are addedto debt). S m ar y, we treat one ha f of the per od s nterest or d v dends as d v dends andone ha f as nterest. There s no adjustment to re ated taxes.

Hybr ds w th no equ ty content are treated as debt and a nterest or d v dends are treated asnterest.

8 The nom na va ue of hybr d nstruments e g b e to ach eve ntermed ate or h gh equ ty content styp ca y m ted to a percentage of a corporate ssuer s cap ta zat on (the app cat on of th s sdescr bed n our hybr d cap ta cr ter a). or examp e, assum ng a 5% m t, f we ca cu atecap ta zat on to be € b on, then hybr d nstruments w th a nom na va ue of up to € 50 m oncou d be e g b e to ach eve ntermed ate equ ty content, mean ng we cou d deduct €75 m onfrom debt (assum ng they were or g na y reported as debt).

82 We def ne cap ta zat on as fo ows:

Balance sheet adjusted equ ty (exclud ng hybr d)

+ Ad sted debt (before hybr d ad stment)

+ Hybr ds as repo ted

Goodw greater than 0% of tota ad sted assets (before goodw ad stment)

Cap tal zat on

83 To ca cu ate the percentage descr bed above, the numerator exc udes bonds that are mandator yconvert b e nto shares but nc udes hybr ds to wh ch we ass gn no equ ty content. Both amountsare nc uded n the va ue of cap ta zat on.

84 n a cases, deferred cumu at ve nterest or d v dend payments are nc uded n adjusted debt.


Amount of hybr ds, debt, goodw , and shareho ders equ ty on the ba ance sheet.

Amount of assoc ated nterest or d v dend expense and nterest or d v dend payments n theper od.

Amount of accrued unpa d nterest or d v dends.

Tota adjusted assets (reported tota assets p us or m nus app cab e adjustments).

86 Ca cu at ons:

Hybr ds reported as equ ty: ( ) f we c ass fy equ ty content as h gh, there s no adjustment to




of 43

equ ty. (2) f we c ass fy equ ty content as ntermed ate, we deduct 50% of the va ue from equ tyand add t to debt. We deduct 50% of the d v dend accrued dur ng the account ng per od andadd t to nterest expense. We deduct 50% of the d v dend payment n the per od from O andC O. (3) f we ass gn no equ ty content, we deduct the fu pr nc pa amount from equ ty and addt to debt. We add assoc ated d v dends to nterest expense. We deduct d v dends pa d from O

and C O.

Hybr ds reported as debt: ( ) We deduct the va ue of hybr ds w th h gh equ ty content from debtand add t to equ ty. We deduct the assoc ated nterest charge from nterest expense and add tto d v dends. We add back the assoc ated nterest payment to O and C O. (2) f we c ass fyequ ty content as ntermed ate, we deduct 50% of ts va ue from debt and add t to equ ty. Wea so deduct 50% of the assoc ated nterest charge from nterest expense and add t tod v dends accrued. We add 50% of the d v dend payment n the per od to O and C O. (3) f weass gn no equ ty content there s no adjustment because we treat such hybr ds as debt.

Capitalized interest87 n the statement of cash f ows, we rec ass fy any cap ta zed nterest shown as an nvest ng cash

f ow to operat ng cash f ow. Th s adjustment reduces C O and cap ta expend tures by the amountof nterest cap ta zed n the per od. OC rema ns unchanged.


The amount of cap ta zed nterest dur ng the per od.

89 Ca cu at ons:

nterest expense: Add amount of nterest cap ta zed dur ng the per od.

O, C O, and cap ta expend tures: Subtract the amount of cap ta zed nterest recorded as annvest ng cash f ow.

Financial guarantees90 We may not add the fu guaranteed amount to debt f, shou d the guarantee be ca ed, the net

amount payab e wou d be ower than the guaranteed amount. Th s cou d happen, for examp e, fthe company that has prov ded the guarantee has been counter guaranteed by another party, thatwe v ew as suff c ent y cred tworthy. n th s case, we add the ower amount to debt.


The va ue of f nanc a guarantees on and off the ba ance sheet, net of any tax benef t.

92 Ca cu at ons:

Debt: Add to debt the amount of on and off ba ance sheet debt equ va ent re ated to f nanc aguarantees, net of any tax benef t.

Earn outs and deferred consideration for business acquisitions93 We treat as debt cont ngent and deferred cons derat on that s payab e n cash, and cons derat on

to be sett ed n shares that does not qua fy as equ ty. The most common examp e of the atter s acontract to be sett ed w th a var ab e number of shares. Compan es typ ca y record such




of 43

arrangements, n t a y as a ab ty at fa r va ue and then subsequent y mark them to market atthe end of each account ng per od through charges or cred ts to ncome unt sett ed. We add todebt the reported va ue of the ab ty c ass f ed cont ngent cons derat on on each report ng date,understand ng that t s not at amort zed cost.

94 Cont ngent arrangements that requ re cont nued emp oyment are techn ca y not part of thecons derat on pa d for the acqu s t on under U.S. GAAP and RS. Rather, these transact onsrepresent remunerat on for serv ces after the acqu s t on. As such, the company does not recordthe transact on as a ab ty or expense unt the serv ces are performed. We a so v ew sucharrangements as payment for serv ces and genera y make no ana yt ca adjustments.

95 We exc ude the unrea zed fa r va ue changes of cont ngent cons derat on from EB TDA. n the rarecases where cash sett ements are reported n C O, we remove the outf ow because we cons der tan nvest ng act v ty (the acqu s t on of bus nesses).


The carry ng va ue of deferred cons derat on or ab ty c ass f ed cont ngent cons derat on onthe ba ance sheet date.

Charges or cred ts nc uded n reported EB TDA.

Cash pa d for or rece ved from the sett ement of cont ngent cons derat on reported n cashf ows from operat ng act v t es.

97 Ca cu at ons:

Debt: Add to debt, f not a ready reported as such, the carry ng amount of deferredcons derat on at amort zed cost, as we as any ab ty c ass f ed cont ngent cons derat onreported at fa r va ue.

EB TDA: f charges or cred ts from the change n fa r va ue of cont ngent cons derat on arenc uded n reported EB TDA, add them back to or subtract them from EB TDA.

C O: n the rare cases where cash sett ements are reported n C O, remove the outf ow.

Situational Adjustments98 Our s tuat ona adjustments seek to capture the mpact of a company s transact ons when we

be eve they w s gn f cant y affect a company s cred t metr cs. We use ana yt ca judgement todeterm ne f a transact on shou d resu t n a s tuat ona adjustment.

99 Account ng d stort ons: n rare c rcumstances, we may make adjustments to exc ude from ourf nanc a measures transact ons that we v ew as account ng d stort ons. An examp e wou d be anadjustment to EB TDA to remove the change n a mater a t gat on prov s on that eads to a verys gn f cant ga n or oss n the year.

00 t gat on and other cont ngent ab t es: When we adjust for these ab t es, we add theest mated or actua amount of the exposure (net of any app cab e tax deduct on) to reported debt.

0 Workers compensat on and se f nsurance c a ms: When we adjust for these ab t es, we addthe amount recogn zed for workers compensat on ob gat ons (net of tax) or the net amountrecogn zed for se f nsurance c a ms (net of tax) to debt.

02 Mu t emp oyer pens on p ans: Some compan es n the U.S. and the Europe, M dd e East, andAfr ca reg on part c pate n mu t emp oyer, def ned benef t pens on p ans on the r emp oyeesbeha f. f the ab ty assoc ated w th a fund ng def c t on mu t emp oyer pens on p ans s very




of 43

s gn f cant and t s pract cab e to do so, we may treat the ab ty as debt, as we do w th def c ts ons ng e emp oyer def ned benef t, postret rement ob gat ons. When we make the adjustment, weobta n an est mate of the share of fund ng def c t or the w thdrawa ab ty for each p an n wh cha company part c pates, and we add the est mated amount for a p ans, net of tax, to debt.

03 ore gn currency hedges of debt pr nc pa : We retrans ate fore gn currency denom nated debtus ng the fore gn exchange rate ocked n by the hedge (or adjust the ba ance sheet va ue of debtto equa the hedged pr nc pa va ue). A ternat ve y, f the pr or tems are not d sc osed, we may addto or subtract from reported debt the fa r va ue of the hedg ng nstrument on the ba ance sheetdate.

04 Adjustment to debt for the deemed repatr at on ab ty under the 20 7 rev sed U.S. corporate taxcode: Under the adjusted debt pr nc p e, tems that we add to reported debt nc ude ncurred

ab t es that prov de no future offsett ng operat ng benef t. The deemed repatr at on ab ty thatthe 20 7 rev sed U.S. corporate tax code creates for U.S. corporate ssuers s such a ab ty, n ourv ew. We w therefore typ ca y nc ude th s ab ty, where mater a , n our adjusted debt. Underthe new tax aw, compan es that are subject to the repatr at on ab ty may pay t n one ump sumor spread t out over e ght years. f an ssuer chooses to pay the ab ty over t me, we typ ca y addto debt the ab ty s net present va ue (NPV). To enhance cons stency and comparab ty w thother adjustments we make to debt, we typ ca y use a d scount rate of 7% when ca cu at ng theNPV.

Sector-Specific Adjustments05 We use our sector spec f c adjustments to ref ect the mpact of un que ndustry character st cs on

a company s adjusted f nanc a metr cs. These sector spec f c adjustments are cons stent w thour four adjustment pr nc p es, and are made where app cab e and mater a .

Sector-specific guidance

Aerospace and defense

Agr bus ness and commod ty foods

Agr cu tura cooperat ves

Branded nondurab es

Capt ve f nance operat ons

Commod ty trad ng

nanc a market nfrastructures

orest and paper products

Homebu ders and rea estate deve opers

Med a and enterta nment

Meta s and m n ng upstream

O and gas exp orat on and product on

O ref n ng and market ng

O f e d serv ces and equ pment




of 43

Operat ng eas ng

Rea estate (RE Ts)

Regu ated ut t es

Reta and restaurants (auto reta ers)

Techno ogy software and serv ces

Te ecommun cat ons and cab e

Transportat on cyc ca (a r nes, sh pp ng, and truck ng)

Transportat on nfrastructure

Aerospace and defense06 PRB costs recovery under government contracts Costs for PRBs (both pens ons and others such

as hea th nsurance) are a owab e costs under some U.S. government contracts ( nc ud ng theU.S. ore gn M tary Sa es program). Therefore, defense contractors, as we as the rsubcontractors ( nc ud ng f rms based outs de the U.S.), can genera y recover these costs throughpr c ng n the r U.S government contracts, w th some m tat ons and ca cu at on/t m ngd fferences. We reduce the PRB ab ty for the ab ty to recover these costs. We cou d a so app yth s adjustment to government contracts n other countr es where a s m ar mechan sm ex sts.

07 Defense contracts come n two genera types: f xed pr ce, where the contractor prov des a productor serv ce for an agreed pr ce and s respons b e for any cost overruns, and cost p us, where thecontractor s re mbursed for a of ts a owab e costs (somet mes w th a m t) p us a fee.

08 We be eve defense contractors shou d be ab e to recover a of the r PRB costs under cost p uscontracts over t me. However, we est mate that under f xed pr ce contracts the contractor wou don y be ab e to recover ncreased costs when a new contract s awarded. Compet t ve pressuresmay make t d ff cu t for the contractor to add the fu costs to the new contract. Therefore, weest mate on y 50% of these costs can be recovered under f xed pr ce contracts over t me.

09 The data needed to make the adjustment are:

Percentage of revenues der ved from U.S. government contracts (A)

Percentage of contracts that are f xed pr ce (B) and cost p us (C)

0 We reduce our standard adjustments to debt for PRBs by the fo ow ng percentage:A x [(B x 50%) (C)]

Agribusiness and commodity foods

Biological assets: Under some account ng reg mes, agr cu tura assets may be marked to marketon the ba ance sheet w th the fa r va ue ga ns and osses recogn zed n the prof t and ossstatements. n these nstances, we typ ca y exc ude these non cash ga ns and osses from ourmeasures of EB TDA and EB T, and make adjustments as necessary.

2 Adjusted readily marketable inventories (ARMI): or agr bus ness and commod ty foodcompan es w th s gn f cant commod ty trad ng act v t es (def ned as represent ng more than 0%of expected norma zed EB T, EB TDA, or gross marg n), we app y the same adjustments for read ymarketab e nventor es as we do for commod t es traders to ref ect the h gh y qu d nature of




of 43

certa n phys ca commod ty trad ng nventory. (See the Commod t es Trad ng sect on for moredeta s on ARM .) As such, for these compan es we deduct ARM from our adjusted debt f gures,even for agr bus ness compan es w th s gn f cant trad ng operat ons that have a weak orvu nerab e bus ness r sk prof e assessment.

Agricultural cooperatives3 We make the same adjustments for ARM and b o og ca assets as n the agr bus ness and

commod ty foods sect on.

4 Marketing cooperative cost of sales and member payment adjustments: Market ng cooperat vesmay account for the cost of the commod ty nput they are market ng n a var ety of ways,depend ng on the marketed commod ty and account ng standards app ed. Therefore, to ncreasecomparab ty, n certa n c rcumstances we adjust the reported cost of goods so d. Th s nc udes:

Cooperat ves where the ass gned va ue of so d nventory s deemed to be mater a y d fferentthan market va ue.

Cooperat ves that do not ass gn a va ue to nputs rece ved from patrons.

Cooperat ves that measure the r nventory us ng the net rea zab e va ue method.

5 Agr cu tura market ng cooperat ves often operate on what s known as a poo ng bas s. Th s swhere a market ng cooperat ve rece ves ts members agr cu tura products w thout ob gat on topay a f xed pr ce and comm ng es those products for process ng and market ng purposes. Theab ty of market ng cooperat ves operat ng on a poo ng bas s to determ ne appropr ate transferpr ces of product de ver es from patrons var es, and th s can affect the r account ng and f nanc areport ng. Somet mes there s a good bas s for record ng product transfers between patrons andthe cooperat ve. or examp e, da ry cooperat ves often record product transfers us ng marketorder pr ces. They w ass gn va ues to the product rece ved and therefore the r nventory andresu t ng cost of goods so d ref ects these ass gned va ues. These ass gned va ues genera yrepresent market va ue and, therefore, do not requ re adjustment; however, we may makeadjustments (e ther ncreases or decreases) to these cooperat ves cost of goods so d where webe eve there s a mater a d fference between the ass gned va ues and market va ue.

6 Other cooperat ves have d ff cu ty n determ n ng the market pr ces of patrons products when theyrece ve them because of m ted cash purchases by other processors and therefore m ted marketpr ce data. They are usua y cooperat ves that process and market a h gh percentage of m tedspec a ty crops. Because amounts that approx mate est mated market va ue are not ass gned toproducts rece ved from patrons, cost of goods so d does not nc ude a charge for the va ue of thenput ( .e., earn ngs are nf ated re at ve to other cooperat ves and compan es that recogn ze a cost

re ated to the r nput). n these cases, we est mate the nput cost of the so d nventory based onmarket pr ces or the cost to produce the nventory, and add that est mate to cost of sa es ( .e.,thereby reduc ng EB TDA, O, and EB T). n such cases, we wou d cons der any rema n ngd fference between the cooperat ve s reported member d str but ons and our cost of sa e est mateas a d v dend d str but on.

7 ast y, under U.S. GAAP, cooperat ves may account for the r nventory at net rea zab e va ue (asopposed to the ower of cost or market pr ces, wh ch we prefer). Under th s method, a cooperat veva ues ts nventory at est mated se ng pr ces ess reasonab y pred ctab e costs of comp et on,d sposa , and transportat on. Changes n the net rea zab e va ue of the nventory are recorded ncost of goods so d. We make ana yt ca adjustments to cost of goods so d to reverse these ga ns orosses as they re ate to unso d nventory.




of 43


An est mate of the nput cost of the de vered nventory, pr mar y by e ther est mat ng the un tcost from other comparab e sa es transact ons of the commod ty and mu t p y ng by thenumber of un ts so d, or by est mat ng the cost to produce the commod ty.

The amount of net rea zab e va ue adjustments reported n cost of sa es n the per od

9 Ca cu at ons:To determ ne cost of sa es:

or cooperat ves where the ass gned va ue of so d nventory s deemed to be mater a yd fferent than market va ue, we add to or subtract from cost of sa es the d fference betweenmarket va ue and the ass gned va ue.

or cooperat ves that do not ass gn a va ue to nputs rece ved from patrons, we add theest mated cost of the commod ty nventory to cost of sa es.

or cooperat ves that measure the r nventory us ng the net rea zab e va ue method, we removefrom cost of sa es the net rea zab e va ue ga ns or osses recorded n the per od.

To determ ne the eve of d v dends:

or cooperat ves that do not ass gn a va ue to nputs rece ved from patrons and report memberd str but on payments separate y as an operat ng cash outf ow (exc ud ng any add t onareta ned member equ ty and d str but ons a ready reported as f nanc ng cash nf ows/outf ows),we subtract from member d str but ons reported as operat ng cash outf ows the d fferencebetween the reported member d str but ons and our cost of sa es est mate, and add thatd fference to d v dends ( .e., and thereby treat that as a f nanc ng cash outf ow).

Branded nondurables20 Excise taxes: or compan es operat ng n sectors where exc se taxes are ev ed aga nst

consumers and co ected by the company, nc ud ng tobacco and a coho c beverages, we deductsuch exc se taxes from both revenues and the cost of sa es f the company nc udes them n the rreported revenues f gure, as we do not cons der those tax tems as operat ng revenues or costs.

Captive finance operations2 Data requ rements:

Reported capt ve f nance un t assets. We determ ne capt ve f nance assets as the sum of onand off ba ance sheet (e.g. secur t zat ons) ease rece vab es, eased assets (when the capt vef nance un t acts as operat ng essor), oans g ven to customers, and any other earn ng assets.

Reported capt ve f nance un t debt. We use debt as def ned n our "Rat os And Adjustments"cr ter a. or examp e, we adjust reported debt to ref ect the debt equ va ent of secur t zedassets and hybr d secur t es. ntercompany debt on the capt ve s books s genera y nc uded nour def n t on of capt ve debt as ong as the parent has or g nated the ntercompany debt fromth rd part es. n cases where the parent has no reported debt and t ends to ts capt ve, wewou d exc ude the ntercompany oan from the capt ve s debt. We cap the capt ve s debt at theadjusted conso dated debt eve . S m ar adjustment may be warranted for ntercompany debtf the capt ve ends to the parent.

Reported capt ve f nance un t equ ty. We use the capt ve f nance company s equ ty nc ud ng




of 43

any m nor ty nterest f the capt ve s not fu y owned.

Reported capt ve f nance un t revenue.

Reported capt ve f nance un t EB T or EB TDA.

Reported capt ve f nance un t operat ng expenses.

Reported capt ve f nance un t deprec at on and amort zat on (D&A) and non current assetmpa rments.

Reported capt ve f nance un t nterest expense.

Reported capt ve f nance un t current tax expense.

Reported capt ve f nance un t nterest pa d.

Reported capt ve f nance un t cash tax pa d.

Reported capt ve f nance un t nterest ncome.

Reported capt ve f nance un t cash f ows from operat on.

Reported capt ve f nance un t cap ta expend ture.

Reported capt ve f nance un t cash, cash equ va ents, and qu d nvestments.

22 Ca cu at ons:

Capt ve f nance un t debt: We use the reported capt ve f nance un t debt as def ned above. f thereported f gure s not ava ab e, we est mate the capt ve s debt and equ ty based on thecapt ve s assets and an appropr ate debt to equ ty rat o. We determ ne the appropr atedebt to equ ty rat o us ng tab e 6 of "The mpact of Capt ve nance Operat ons on Nonf nanc aCorporate ssuers" cr ter a. rst, we se ect the everage range for an ntermed ate/s gn f cantasset and everage r sk correspond ng to the capt ve s f na portfo o qua ty assessment. Then,we genera y se ect the m d po nt of that everage range as the debt to equ ty rat o un ess webe eve that the h gh or ow end of the range s more appropr ate, based on the re at ve strengthor weakness of the portfo o qua ty w th n the assessment category. Th s may be nformed bythe sever ty of h stor ca osses, and pos t ve or negat ve underwr t ng standardscons derat ons. ast, we cap the capt ve f nance un t s est mated debt resu t ng from the aboveca cu at on at the adjusted conso dated debt eve of the comb ned enterpr se.

Capt ve f nance equ ty. f the reported f gure s not ava ab e, we ca cu ate the capt ve f nanceun t s equ ty by deduct ng the capt ve f nance un t debt, as determ ned above, from totacapt ve f nance un t assets.

Capt ve f nance un t revenues: f the reported f gure s not ava ab e, we est mate the capt vef nance un t revenues by mu t p y ng the average capt ve f nance un t asset va ue(mathemat ca average of open ng and c os ng assets as d sc osed above) by an appropr aterevenue factor. We use 5% as the revenue factor, un ess we have reasons to be eve, based onour d scuss ons w th the company, that a d fferent revenue factor wou d be more appropr ate.

Capt ve f nance un t EB TDA: We ca cu ate capt ve f nance un t EB TDA as capt ve f nancerevenue ess capt ve f nance operat ng expenses, p us capt ve f nance D&A and non currentasset mpa rment. f reported f gures are not ava ab e, we ca cu ate the nd v dua e ements asd scussed be ow. We do not take nto account any d v dend f ow between the capt ve f nanceun t and ts parent company n ca cu at ng the parent s adjusted f nanc a metr cs.

Capt ve f nance un t operat ng expenses: We est mate these by mu t p y ng the average capt vef nance un t asset va ue (mathemat ca average of the open ng and c os ng asset as determ ned




of 43

above) by an appropr ate operat ng expense factor. The capt ve f nance un t s D&A andmpa rment may be mater a when the capt ve f nance un t acts as operat ng essor and

therefore ho ds mater a nonf nanc a assets on ts ba ance sheet. n those cases, we est mateD&A by mu t p y ng the average capt ve f nance un t nonf nanc a asset va ue (mathemat caaverage of open ng and c os ng asset) by an appropr ate deprec at on and amort zat on ratethat represents the average usefu ves of the eased assets. We do not est mate mpa rmentcharges.

Capt ve f nance un t nterest expense: f the reported f gure s not ava ab e, we ca cu ate thecapt ve f nance un t s nterest expense by app y ng an appropr ate nterest rate on themathemat ca average of the prev ous and current year end capt ve f nance un t s debt. We usea ong term (such as a 0 year) government bond nterest rate, un ess we have reasons tobe eve, based on our d scuss ons w th the company, that a d fferent nterest rate s moreappropr ate.

Capt ve nterest pa d: f the reported f gure s not ava ab e, we wou d take the capt ve f nanceun t s nterest expense as determ ned above.

Capt ve f nance un t cash tax pa d: f the reported f gure s not ava ab e, we ca cu ate thecapt ve f nance un t s cash tax pa d by app y ng an appropr ate tax rate to the theoret cacapt ve f nance un t prof t before taxes. The tax rate ref ects the rate app cab e for the capt vef nance un t. Th s tax rate may not be the same as the parent s tax rate f the capt ve f nanceun t s n a d fferent tax jur sd ct on.

Capt ve f nance net oss rat o: We ca cu ate the net oss rat o as gross osses m nus recover esd v ded by average net earn ng assets outstand ng. or operat ng ease assets, we nc ude nthe net oss rat o both cred t osses on outstand ng rece vab es and osses on res dua va uewhenever poss b e. We nc ude a managed assets n our ana ys s, add ng back theoff ba ance sheet assets to determ ne net earn ng assets.

Access b e cash. When suff c ent ev dence s ava ab e that the capt ve s cash, cashequ va ents, and qu d nvestments are access b e to the parent and ava ab e for debtrepayment, we nc ude them n our ca cu at on of access b e cash.

Commodities trading23 n der v ng and nterpret ng a commod t es trader s f nanc a measures, t s cr t ca to cons der the

account ng va uat on method for trad ng assets and ab t es ( nc ud ng both phys ca pos t onsand der vat ves) and the approach to recogn z ng ga ns and osses n the ncome statement. n ourexper ence, v rtua y a commod t es traders report under RS or U.S. GAAP and thereforemark to market a dom nant share of trad ng re ated assets and ab t es, and traders recogn zethe re ated ga ns and osses rea zed and unrea zed n earn ngs on an ongo ng bas s. Wedeterm ne a commod t es trader s EB T, EB TDA, and gross marg n by nc ud ng both rea zed andunrea zed trad ng ga ns and osses. or a commod t es trader, unrea zed ga ns and osses,a though non cash, are an mportant component of core earn ngs, and nc ud ng them nprof tab ty measures prov des a more accurate gauge of ongo ng f nanc a performance becauseder vat ve ga ns or osses on the phys ca pos t on tend to be offset by osses or ga ns on thecorrespond ng der vat ve transact on.

24 When adjust ng a commod t es trad ng company s cred t measures for eases and re ated serv cecontracts, we nc ude comm tments re ated to vesse charter ng, storage fac t es, and other f xedassets.

25 We do not net access b e cash for commod t es traders w th weak bus ness pos t ons or ess




of 43

support ve trad ng r sk management and trad ng r sk pos t ons.

26 ARMI: To ref ect the h gh y qu d nature of certa n phys ca commod t es trad ng nventory, wemake an add t ona adjustment for commod t es traders n that we deduct ARM to determ ne debtand re ated f nanc a measures (except when ca cu at ng the debt to debt p us equ tysupp ementary rat o). Such nett ng s made aga nst tota debt, not just short term debt, for acommod t es traders ( nc ud ng those w th a weak bus ness pos t on or ess support ve trad ng r skmanagement and trad ng r sk pos t on). See the descr pt on of core and supp ementary rat os nour "Commod t es Trad ng ndustry Methodo ogy."

27 We nc ude n ARM the port on of nventory that meets a of the fo ow ng cond t ons:

The nventory s e ther hedged or "pre so d";

The nventory cou d rea st ca y be qu dated w th n 30 days (whatever the u t mate terms ofthe trad ng pos t on), and the re ated hedges cou d be unwound (we net from the va ue of thegross trad ng asset any cash needed to term nate the re ated hedges);

The nventory qu dat on wou d not harm the bus ness franch se of the commod t es trader forexamp e, where the company serves as the "market maker" for the commod ty n quest on;

The nventory s not he d for process ng by the company; rather, we nc ude on y nventory thatwe be eve w be used on y for trad ng purposes; and

The proceeds of any nventory qu dat on wou d be access b e for debt repayment, .e., nottrapped n a fore gn subs d ary, un ess oca debt cou d be serv ced.

28 n add t on, to account for osses that cou d resu t from a rap d qu dat on, we app y a ha rcut toreported nventory va ues accord ng to our v ew of the re evant commod ty market s vo at ty. Webase the ha rcut on the commod ty r sk assessments n tab e 3 of our commod t es trad ngndustry methodo ogy. or category commod t es the ha rcut s 0%, and for category 2 the

ha rcut s 25%.

29 To app y th s adjustment, we use a broad breakdown of trad ng nventory by commod ty,genera zed nformat on about how much the commod ty s hedged or pre so d, and the durat onof re ated trades.

Financial market infrastructures30 Treatment of CPP and CSD balances: W th n the f nanc a market nfrastructures ( M ) sector,

nternat ona centra secur t es depos tor es ( CSDs) typ ca y have arge vary ng amounts ofdepos ts that appear on the r ba ance sheets but are ded cated to c ent sett ement act v ty andare nvested n h gh y qu d, h gh y cred tworthy nstruments rather than be ng ava ab e tosupport the corporate act v ty of the CSD. S m ar y, c ear nghouse ba ance sheets substant a ycons st of c ent re ated assets and ab t es, such as n t a marg ns and the rep acement va ueof some types of unsett ed trades.

3 or CSDs, c ear nghouses, and groups that have c ear nghouses or CSDs, we typ ca y do notnc ude c ear ng or sett ement assets or ob gat ons, nor c ent depos ts and re ated nvestments

(for CSDs) n our ba ance sheet measures (for examp e, n adjusted debt and adjusted assets)."C ear ng ob gat ons" typ ca y refer to c ear ng ab t es that are usua y non debt and maync ude n t a or var at on marg n post ngs. "Sett ement ob gat ons" typ ca y refer to member

depos ts odged at CSDs. S m ar y, we tend to exc ude the movement n these assets andab t es from our cash f ow ana ys s.




of 43

32 Accessible cash and liquid investments: Our approach to access b e cash and qu d nvestmentsref ects that M s tend to be more h gh y regu ated than other corporate sectors, w th subs d ar esoften subject to regu atory prudent a requ rements. or examp e, we treat as trapped cash nregu ated subs d ar es that supports m n mum cap ta or other oss absorbency requ rements.Where we see cash ba ances as vo at e, we make a prudent assumpt on of the eve of access b ecash that can be re ed on. or examp e, where cash ba ances are seasona , we adjust access b ecash f we see per od end reported ba ances as unrepresentat ve. Vo at ty may a so ar se, forexamp e, f an M s exposed to potent a osses on unsecured exposures.

Forest and paper products33 Valuation of timberlands: Under certa n account ng frameworks (such as RS) t mber ands are

carr ed at fa r va ue and therefore equ ty ref ects the apprec ated va ue of these assets. However,under other account ng reg mes (such as U.S. GAAP) t mber ands are carr ed at h stor ca cost. Themarket va ue of t mber and s often substant a y greater than book va ue, and we be eve thatbook va ue based rat os cou d mater a y overstate a t mber and company s everage. To ga ncomparab ty between compan es that mark the r t mber ands to market compared w th thosethat carry them at cost, we make adjustments to the equ ty of those that carry them at cost toeva uate everage and return on cap ta .

34 We do not, however, make a correspond ng mark to market adjustment to EB T for return oncap ta . kew se, any mark to market adjustments recorded n the reported resu ts of RSreporters are exc uded from our measure of EB T.

35 We est mate the market va ue of t mber ands on a company spec f c bas s because va ues vary byreg on and ncorporate th rd party appra sa s and recent t mber and transact ons nto ourest mates when ava ab e.

36 Ca cu at ons:

Equ ty: We add to equ ty the d fference between the est mated market va ue of t mber ands andthe correspond ng book va ue.

Homebuilders and real estate developers37 Land procurement approaches: We don t adjust debt to ref ect and opt ons and purchase

comm tments even when we v ew them as nf ex b e or h gh y ke y to be exerc sed and honored.Th s s because, n our f nanc a forecasts wh ch part y serve as the bas s of our assessment ofcash f ow/ everage and qu d ty we factor n our expectat ons regard ng the cost of andpurchases and the re ated expected f nanc ng m x.

38 Impairment charges: nventory (cons st ng of houses or bu d ngs under construct on, comp etedhouses or bu d ngs that have not been so d, and under deve opment, and and he d for futuredeve opment) s v rtua y a ways the argest s ng e asset on a homebu der s or deve oper s ba ancesheet and s usua y va ued at the ower of cost or market pr ce. n ndustry downturns, va u ng thenventory at market pr ce can ead to arge nventory wr te down charges n the ncome statement.

G ven the unevenness of these charges, we genera y add back these charges to our prof tab tyand cash f ow proxy measures.





of 43

Wr te down charges re ated to nventory n the per od cons dered to be nonrecurr ng.

40 Ca cu at ons:

EB TDA, EB T, and O: Add the nventory wr te down charges that are cons dered to benonrecurr ng.

4 Revaluation gains and losses: Where compan es mark the r propert es to market on an ongo ngbas s (as under RS), we genera y exc ude the resu t ng unrea zed reva uat on ga ns and ossesfrom our prof tab ty and cash f ow proxy measures. We be eve that these unrea zed ga ns andosses, wh e stemm ng from operat ng act v t es, can d stort the company s f nanc a performance

metr cs. Nonethe ess, we do account for the market factors that cause reva uat on ga ns andosses, for examp e, n determ n ng our forecast assumpt ons because these can be mportantnd cators of market trends.


Reva uat on ga ns and osses re ated to nventory n the per od.

43 Ca cu at ons:

EB TDA, EB T, and O: Subtract or add reva uat ons ga ns and osses.

44 Capitalized interest: Homebu ders and deve opers may cap ta ze a s gn f cant amount of the rcash nterest costs to nventory ( nc ud ng property construct on n progress) because andacqu s t on and construct on costs are typ ca y cap ta zed unt bu d ngs are bu t on the ots. Therecogn t on of nterest costs n the ncome statement s therefore deferred unt the re atednventory s so d. or ana yt ca purposes, s m ar to our treatment of nterest cap ta zed as part of

property, p ant, and equ pment, we seek to recogn ze nterest costs as an expense n the per odwhen ncurred rather than when the nventory s so d and make adjustments to reverse theaccount ng. n terms of ana yz ng cash f ows, we nc ude a cash pa d for nterest as an operat ngcash f ow.


The amount of nterest costs cap ta zed as part of nventory n the per od.

The amount of nterest costs prev ous y cap ta zed as part of nventory that was recogn zed aspart of cost of goods so d n the per od.

Cash pa d for nterest costs that s cap ta zed as part of nventory reported as e ther nvest ngact v t es or f nanc ng act v t es.

46 Ca cu at ons:

nterest cost cap ta zed s subtracted from the cost of goods so d.

EB TDA and EB T: Add to EB TDA and EB T the amount of nterest that was prev ous ycap ta zed that was re eased to cost of goods so d n the per od.

nterest expense: Add to nterest expense the amount of nterest cap ta zed n the per od.

C O: Subtract from C O any nterest reported as e ther nvest ng or f nanc ng.




of 43

47 Unconsolidated affiliates: t s common for deve opers and somet mes homebu ders to conduct aarge port on of the r bus ness through part y owned subs d ar es or jo nt ventures, thereby shar ng

r sks and nvestments w th other owners. These ent t es are often organ zed around nd v duapropert es or groups of propert es and have the r own externa debt f nanc ng. Under current RSand U.S. account ng standards, these aff ates are genera y accounted for us ng the equ tymethod f the company s ownersh p nterest s ess than 50%. We may ref ect contr but on fromunconso dated aff ates by add ng d v dend payments rece ved from those aff ates to EB TDA.

48 Genera y, we ut ze pro rata conso dat on where we v ew the everage of equ ty method aff atesas mater a . n some cases, equ ty method account ng can understate the true extent of f nanc aeverage be ng emp oyed w th n the broader group from an ana yt ca perspect ve. n such cases,

pro rata conso dat on more mean ngfu y dep cts the econom c rea ty, and so often we adjust thef nanc a statements to ref ect pro rata debt, earn ngs, and nterest expense, f ava ab e.A ternat ve y, f a company s un ke y to support the debt of an a ng aff ate, the ana ys s m ghtnot nc ude the debt n quest on n the everage rat os. At the other extreme, f a company s h gh y

ke y to support a the aff ates ob gat ons our ana ys s m ght fu y conso date the aff ate forana yt ca purposes.

Media and entertainment49 Program development and acquisition costs: Across mu t p e med a subsectors, program

deve opment and acqu s t on costs (e.g., f m producers programm ng and f m expend tures,educat ona pub shers program deve opment costs, and oca TV broadcasters program r ghts)are cap ta zed and amort zed to ncome us ng var ous systemat c approaches. However, we v ewthese tems as operat ng and we treat th s amort zat on as a cost of sa es ( .e., an operat ng cost)and therefore nc ude the amort zat on (and any re ated wr te downs) n EB TDA and O.

50 Cons stent w th th s character zat on, we a so v ew the cash pa d for these assets to be operat ng.However, compan es c ass fy the cash outf ow n the statement of cash f ows n a var ety of ways.We rec ass fy any cash outf ows re ated to these cap ta zed costs reported as nvest ng cashf ows and do not nc ude them n our def n t on of cap ta expend tures.


Amount of programm ng deve opment and acqu s t on costs ncurred and cap ta zed dur ng theper od that are c ass f ed as nvest ng cash f ows.

Amount of re ated amort zat on expense.

52 Ca cu at ons:

Subtract from EB TDA and O the re evant amort zat on expense for the per od f t s nota ready reported as an operat ng expense.

Subtract from C O any cap ta zed program deve opment and acqu s t on costs c ass f ed as annvest ng cash outf ow.

Subtract from cap ta expend tures any cap ta zed program deve opment and acqu s t on costsreported as cap ta expend tures.

Metals and mining upstream industry




of 43

53 Streaming transactions: A stream ng transact on s a feature of the m n ng ndustry and s anagreement whereby a commod ty producer for examp e, a base meta s m ner that a so y e dssome prec ous meta s byproduct through ts m n ng se s the r ght to a share of ts futurebyproduct product on at a preset pr ce n exchange for an upfront payment, wh ch becomes a

ab ty of the commod ty producer. The upfront payment s recogn zed as a trade ab ty becauset s re ated to a future sa e, and t often ranks par passu w th other unsecured debt of the

operat ng m ne ( n some cases, the ab ty may a so benef t from guarantees). The use of funds ssomet mes restr cted to fund ng the construct on or expans on of the m ne from wh ch thebyproduct w be de vered, and n some nstances the agreement may be subject to comp et ontests.

54 Such agreements are typ ca y ong dated n some cases, cover ng the fe of product on and thebuyer has the r ghts to a port on of the output unt the agreement term nates. The transact onprov des the commod ty producer w th upfront f nanc ng and repayment f ex b ty because thereare no f xed vo ume de very ob gat ons. The stream ng agreement a so typ ca y a ows thecommod ty producer to reta n ownersh p and contro of the produc ng un t, and secured nterestsare m ted to the agreed upon share of byproduct reserves and product on.

55 We v ew these transact ons as a form of f nanc ng, and, therefore, we adjust our debt and re atedcred t measures f the transact ons have some comb nat on of the fo ow ng features:

f they are done n eu of borrow ng;

f they are repayab e n cash f they are not sat sf ed by the product s de very;

f the counterparty has recourse to the ssuer or a guarantor n the case of nso vency;

f repayment can be acce erated upon an event of defau t; or

f there s h gh overco atera zat on or secur ty to product on coverage or some othermechan sm that prov des greater certa nty of repayment.

56 We neverthe ess recogn ze the ower defau t r sk of stream ng transact ons, g ven the absence off xed vo ume de very ob gat ons, as we as s gn f cant f nanc a f ex b ty the transact ons canprov de to ow rated or start up m n ng compan es.

57 or f nanc a report ng purposes, ssuers genera y determ ne the amort zat on of the ob gat onthat s recogn zed as revenue for each per od us ng a un ts of product on method. At ncept on,the company determ nes a per un t amort zat on amount based on the upfront prepaymentamount d v ded by the tota un ts t expects to de ver to the counterparty over the fe of thecontract. The pr ce per un t de vered var es over t me based on changes n the u t mate expectedoutput. As such, revenue, EB TDA, and O w nc ude the non cash amort zat on, whereas C Ow not.

58 These contracts usua y do not conta n a stated nterest rate, and we have found that account ngpract ces d ffer among compan es, whereby some mpute nterest on these transact ons n the rf nanc a statements, and others do not. mputat on of nterest affects the amount of revenue andnterest expense recogn zed. f an ssuer s mput ng nterest on these transact ons at a

reasonab e rate, we do not adjust the reported revenue, re ated EB TDA, and nterest expense. Wenstead add the reported unamort zed ob gat on to adjusted debt. or an ssuer that does notmpute nterest, we ma nta n an amort zat on schedu e and make add t ona adjustments as

deta ed be ow.


The or g na upfront payment amount.




of 43

The nterest rate prov ded by the ssuer or computed based on the expected t m ng, vo ume, andpr ce of de very. A ternat ve y, we may use an est mate of th s rate based on the ssuer saverage cost of debt.

The amount of amort zat on dur ng the per od.

An est mate of the ncrementa amort zat on rate, f nterest had been mputed based on thepercent d fference between the tota und scounted va ue of the product expected to bede vered and the amount of the upfront payment rece ved.

60 Ca cu at ons:

Debt: We add the unamort zed ob gat on as adjusted for mputed nterest f needed.

EB TDA: We add the ncrementa revenue that wou d have been recogn zed f nterest had beenmputed at the mp c t rate, ca cu ated as the amort zat on dur ng the per od t mes thencrementa amort zat on rate.

nterest expense: We add the nterest mputed on the adjusted ob gat on on a compound bas s.

C O: n the per od when the upfront payment s rece ved, we subtract the upfront payment fromcash f ow from operat ons. No adjustments are made n subsequent per ods.

Oil and gas exploration and production (E&P)6 Exploration costs: O and gas E&P compan es must choose between two account ng methods:

fu cost or successfu efforts, wh ch d ffer n terms of what nvestment out ays compan escap ta ze or expense. A fu cost company cap ta zes a costs of property acqu s t on,exp orat on, and deve opment. A company us ng the successfu efforts account ng approach on ycap ta zes property acqu s t on costs, dr ng, and deve opment costs from successfuexp orat on. Compan es us ng the successfu efforts method report the r exp orat on expensesseparate y n the ncome statement wh e fu cost compan es cap ta ze exp orat on costs and donot report exp orat on expense separate y n the ncome statement.

62 To ga n comparab ty w th n the sector, we adjust EB TDA to exc ude a exp orat on costs. Th sadjusted measure conforms to the ndustry standard known as EB TDAX. W th th s adjustment, weca cu ate a EB TDA re ated rat os us ng our equ va ent of EB TDAX. A though we add back theexp orat on expense compan es report us ng successfu efforts account ng to der ve EB TDA, wereverse th s adjustment when ca cu at ng O; n other words, we reduce O by the amount ofexp orat on costs. We take th s a ternat ve approach to have some degree of comparab ty w thother ndustr es. kew se, compan es often report cash pa d for exp orat on n the statement ofcash f ows d fferent y. We genera y do not attempt to make adjustments to these amounts n thestatement of cash f ows, but rather re y more heav y on OC to debt as a supp ementa measureof cash f ow to everage because the c ass f cat on of these amounts doesn t affect th s.


Exp orat on expense n the per od as reported by compan es fo ow ng the successfu effortsapproach.

64 Ca cu at ons:

EB TDA: We add back to the reported EB TDA the exp orat on expense of compan es that fo owthe successfu efforts approach.




of 43

O: We nc ude the exp orat on cost n the ca cu at on of O.

65 Economic hedging: E&P compan es often manage the r exposure to f uctuat ons n commod typr ces and fore gn currenc es through hedges. When der vat ves are not des gnated as hedges asprov ded for under account ng standards or do not qua fy for hedge account ng, der vat ve ga nsand osses f ow through the ncome statement each per od. Rea zed ga ns and osses re ate totransact ons n the current per od, and unrea zed ga ns and osses to future transact ons. Whenthe der vat ves do not qua fy for hedge account ng or are not des gnated as hedges, we typ ca ye m nate from EB TDA unrea zed ga ns and osses re at ng to future product on, where we candent fy these effects, focus ng on earn ngs that on y nc ude rea zed hedge effects.

66 Volumetric production payments: A vo umetr c product on payment (VPP) s an arrangement nwh ch an E&P company agrees to de ver a spec f ed quant ty of hydrocarbons from spec f cpropert es (or f e ds) to a counterparty n return for a f xed amount of cash rece ved at thebeg nn ng of the transact on. The se er often bears a of the product on and deve opment costsassoc ated w th de ver ng the agreed upon vo umes. The buyer rece ves a non operat ng nterestn the o and gas propert es that produce the requ red vo umes. The secur ty s a rea nterest n

the produc ng propert es that the part es expect to surv ve any bankruptcy of the E&P companythat so d the VPP. After the tota requ s te vo umes are de vered, the product on paymentarrangement term nates and the conveyed nterest reverts back to the se er.

67 We v ew VPPs structured w th a h gh eve of nvestor protect on ( n terms of product on coverage)as debt ke ob gat ons rather than asset sa es g ven the r sks the E&P compan es reta n. ntyp ca dea s, there s substant a overco atera zat on, w th tota f e d reserves s gn f cant yexceed ng the vo umes the se er prom ses under the VPP contract. The se er must de ver theagreed upon vo umes and ncurs a assoc ated operat ng and cap ta costs. f the se er does notmeet the ob gat on, t wou d r sk os ng a ts reserves n the f e d.

68 We wou d v ew a VPP structured w th m n ma overco atera zat on to be c oser to an asset sa ebecause the transfer of r sk wou d be more substant a . However, even n th s case the VPP hassome debt ke qua t es because the company must pay the operat ng expenses assoc ated w ththe VPP unt de very of the f na vo umes.

69 To make the adjustment to debt, we use a fa r market va ue approach and the New YorkMercant e Exchange (NYMEX) futures curve to ca cu ate the expected va ue of the barre s to bede vered, wh ch we cons der to be debt. f hydrocarbon pr ces ncrease, so wou d the debtadjustment.


Schedu e of o and natura gas vo umes yet to be de vered under the VPP;

O and natura gas vo umes produced dur ng the year from the VPPs;

NYMEX futures curve for o and natura gas pr ces as of per od end; and

Pr c ng d fferent a s (for qua ty d fferences and geograph c ocat on) for the VPP vo umesre at ve to NYMEX.

7 Ca cu at ons:

Debt: We mu t p y the o and natura gas vo umes to be de vered n each year of the contract bythe futures pr ce (adjusted for qua ty and ocat on d fferent a s) n that year. We then ca cu atethe va ue of th s revenue stream us ng a d scount rate commensurate w th the company ssecured borrow ng rate.




of 43

nterest expense: We mpute nterest expense on the adjustment to debt us ng the company ssecured borrow ng rate. We app y the rate to the average of the ca cu ated VPP ob gat on atcurrent and prev ous per od end.

Debt to reserves: We add the hydrocarbon vo umes the se er hasn t yet de vered under theVPP back to reported reserves.

Se ng and ft ng costs: We add the o and gas vo umes produced to meet the VPPrequ rements n ca cu at ng per un t se ng pr ces and ft ng costs.

C O and O: We subtract the VPP cash proceeds from C O and O.

Oil refining and marketing industry72 qu dat on ga ns: When a company us ng the ast n, f rst out ( O) method has nventory

ba ances that decrease over a per od of t me, O qu dat on may resu t. Th s means that o derayers of nventory are turned nto cost of goods so d as a resu t ("o der" refers to nventory n

terms of account ng and not necessar y n a phys ca sense). Assum ng an nf at onaryenv ronment, the cost of goods so d s reduced and, as a resu t, ncome ncreases because of O

qu dat on ga ns. To capture the true susta nab e prof tab ty of a company, we genera y exc udethe ga ns generated from O qu dat on from our prof tab ty measures.


O qu dat on ga ns from the ncome statement.

74 Ca cu at ons:

EB TDA, EB T and O: Deduct O qu dat on ga ns from EB TDA, EB T and O.

Oilfield services and equipment industry75 Seismic accounting: When se sm c compan es capture se sm c data that they expect to se to

mu t p e c ents, they cap ta ze the assoc ated costs and amort ze these costs over the expectedusefu ves of the data. However, we adjust these compan es f nanc a resu ts effect ve yrecogn z ng these expend tures as an operat ng expense as ncurred.


Cap ta expend tures for mu t c ent data acqu s t on for the per od.

Amort zat on of mu t c ent data acqu s t on costs for the per od.

77 Ca cu at ons:

EB TDA, O, and C O: Deduct cap ta expend tures for mu t c ent data acqu s t on fromEB TDA, O, and C O.

Cap ta spend ng: Deduct cap ta expend tures for mu t c ent data acqu s t on from tota cap taspend ng.

EB T: Deduct/add the d fference between cap ta expend tures and amort zat on expense formu t c ent data acqu s t on costs.




of 43

Operating leasing78 Operat ng ease compan es may prov de f nance eases as we as operat ng eases to the r

customers. Payments customers make under the f nance eases are accounted for as nterestncome (part of revenues) or repayment of pr nc pa (recorded as a f nanc ng cash f ow). S nce a

of the payments, both nterest and pr nc pa , are sources of cash f ow to serv ce debt, we add therepayment of pr nc pa to O, rec ass fy ng those payments as an operat ng cash f ow.

79 Operat ng ease compan es often se equ pment as part of a norma pattern of acqu r ng, eas ngout, and d spos ng of the r assets. f ga ns and osses rea zed on such equ pment sa es are part ofthe norma turnover of eased assets, we nc ude such ga ns and osses as an adjustment todeprec at on and an operat ng expense.

Real estate (REITs)80 Straight-line rent: The account ng treatment of rent payments rece ved under rea estate eases

averages them out over the fe of the ease. Consequent y, reported rent revenue may d ffer fromactua cash rent rece ved where the m n mum rent payment var es over the fe of the ease. Th scan happen when there are per od c contractua rent ncreases or when the ease prov des for ann t a per od w th no rent or w th d scounted rent, fo ow ng wh ch norma per od c cash rent

payments are requ red. Depend ng on the ease terms and fe cyc e, cash rent rece ved may beh gher or ower than reported renta ncome. or rea estate compan es, we w reverse, whenmater a , the stra ght ne rent smooth ng n ca cu at ng EB TDA. Th s s cons stent w th ndustrystandards and w th our focus n th s sector on the amount of cash rent actua y rece ved by thecompany dur ng the per od. We adjust revenues, EB T, EB TDA, and O, by the amount thatstra ght ne renta revenue reported exceeds or fa s be ow cash rents rece ved for the respect veper od.

8 Unconsolidated affiliates: t s common for rea estate compan es to conduct a arge port on ofthe r bus ness through part y owned subs d ar es or jo nt ventures, thereby shar ng r sks w thother owners. These ent t es are often organ zed around nd v dua propert es or groups ofpropert es and have the r own externa debt f nanc ng. Under account ng standards, theseaff ates are genera y accounted for us ng the equ ty method f the company s ownersh p nterests 50% or ess. rom an ana yt ca perspect ve, equ ty method account ng can understate the true

extent of f nanc a everage w th n the broader group. As a resu t:

We may adjust the f nanc a statements to exc ude d v dends rece ved and ref ect pro rataconso dat on of debt, earn ngs, and nterest expense f, n our v ew, th s better dep cts theeconom c rea ty.

f we be eve the company s h gh y ke y to support a the aff ates ob gat ons, we may app yfu conso dat on.

A ternat ve y, f we be eve a company s un ke y to support the debt of an a ng aff ate, wem ght exc ude that aff ate from our f nanc a measures, even f t s fu y conso dated forf nanc a report ng purposes. Even though these debt ob gat ons are typ ca y nonrecourseproperty eve debt, we w on y exc ude the a ng aff ate s debt from our f nanc a measures fwe be eve the fa ure to support the aff ate w not m t the ssuer s access to cap tamarkets. Add t ona y, n order for us to exc ude the debt of these aff ates, the debt shou d nothave cross defau t, cross acce erat on, or any s m ar nf uence on the debt ssued by the reaestate company. Examp es of compan es where we wou d do th s nc ude m nor ty owned jo nt




of 43

ventures and propert es nc uded n commerc a mortgage backed secur t zat ons.

Capitalized interest:82 Rea estate compan es engaged n s zab e debt f nanced deve opment projects may cap ta ze a

s gn f cant amount of the r cash nterest costs, thereby deferr ng the recogn t on of nterestexpense on the ncome statement. n our ana ys s, we factor n cap ta zed nterest as an expensen the per od when ncurred. The va uat on of property, p ant, and equ pment nc udes, under U.S.

GAAP, a cost of carry e ement re at ng to mu t per od project expend tures. Part of the rat ona e sthat the company must factor n the carry ng costs when dec d ng on a project s econom cs, butth s obscures the amount that actua y must be pa d dur ng the per od. Compan es may a so haves gn f cant d scret on w th respect to the amounts they cap ta ze, mak ng compar sons d ff cu t.

Regulated utilities83 Inflation linked debt: Some compan es n the regu ated e ectr c ty and water sectors ssue

s gn f cant amounts of nf at on nked debt, notab y n the U.K. where future regu ated ratencreases are nked to nf at on ndexes such as the reta pr ce ndex (RP ). nf at on nked debt s

a so common y ssued across severa sectors n srae . nf at on nked debt usua y has a ongtenor (20 30 years), and a ow annua cash coupon (e.g., % 3%) that, w thout ndexat on, wou dusua y represent a be ow market cost of debt at ssuance for the ssuer, as t on y ref ects reaterm nterest rates.

84 A d st nct, typ ca feature of nf at on nked debt s the deferra of ndexat on payments tomatur ty. We v ew the accrua of pr nc pa ndexat on as a part a non cash coupon. Deferra of tspayment does not mean that th s debt s any cheaper; s mp y, a port on of ts per od c cost, wh chmay be substant a , s be ng deferred to matur ty.

85 We typ ca y app y a charge for the ndexat on of pr nc pa for nf at on nked debt n ourca cu at on of O. We be eve th s approach better captures the after nterest cash f ow thecompany s operat ons generate, nc ud ng the fu cost of the debt used to f nance thoseoperat ons. Where compan es have not d sc osed the amount of pr nc pa ndexat on, we mayest mate the adjustment.

86 No adjustment s typ ca y requ red to be made to reported debt f th s nc udes the effect of thendexat on component (the "deferred nterest" port on) on a cumu at ve, compounded bas s.

87 Where poss b e we make s m ar adjustments where compan es use der vat ves to synthet ca yconvert debt nto nf at on nked debt. Th s can requ re deduct ng from O the nf at on payab eof an nf at on nked swap and add ng to debt the port on of the der vat ve s fa r va ue thatcorresponds to the cumu at ve deferred nterest.

88 Purchased power adjustment: We may v ew ong term purchased power agreements (PPA) ascreat ng f xed, debt ke f nanc a ob gat ons that represent subst tutes for debt f nanced cap tanvestments n generat on capac ty. f the ease ab t es nc ude PPAs, we may reduce the easeab t es to ref ect the burden of the contractua payments that u t mate y rests w th ratepayers,

as when the ut ty mere y acts as a condu t for the de very of a th rd party s e ectr c ty, or wherethe regu ator has estab shed a separate adjustment mechan sm for recovery of a prudent PPAcosts. Converse y, f the ease ab t es exc ude PPAs because of the contracts terms, and webe eve those contracts are very mater a , we may add to debt an appropr ate percentage (us ng anana yt ca y determ ned r sk factor) of the present va ue (us ng a company spec f c d scount rate)




of 43

of the stream of capac ty payments assoc ated w th the PPAs.

89 Natural gas inventory adjustment: n jur sd ct ons where a pass through mechan sm s used torecover purchased natura gas costs of gas d str but on ut t es w th n one year, we adjust forseasona changes n short term debt t ed to bu d ng nventor es of natura gas n non peakper ods for ater use to meet peak oads n peak months. Such short term debt s not cons deredto be part of the ut ty s permanent cap ta . Any h story of non tr v a d sa owances of purchasedgas costs wou d prec ude the use of th s adjustment. The account ng of natura gas nventor esand assoc ated short term debt used to f nance the purchases must be segregated from othertrad ng act v t es.


Short term debt amount assoc ated w th seasona purchases of natura gas devoted to meet ngpeak oad needs of capt ve ut ty customers.

9 Ca cu at ons:

Adjustment to debt: we subtract the dent f ed short term debt from tota debt.

92 Securitized debt adjustment: or regu ated ut t es, we deconso date debt (and assoc atedrevenues and expenses) that the ut ty ssues as part of a secur t zat on of costs that have beensegregated for spec a zed recovery by the government ent ty const tut ona y author zed tomandate such recovery f the secur t zat on structure conta ns a number of protect ve features:

An rrevocab e, non bypassab e charge and an abso ute transfer and f rst pr or ty secur tynterest n trans t on property.

Per od c adjustments ("true up") of the charge to remed ate over or under co ect onscompared w th the debt serv ce ob gat on. The true up ensures co ect ons match debt serv ceover t me and do not d verge s gn f cant y n the short run.

Reserve accounts to cover any temporary short term shortfa n co ect ons.

93 u cost recovery s n most nstances mandated by statute. Examp es of secur t zed costs nc ude"stranded costs" (above market ut ty costs that are deemed unrecoverab e when a trans t onfrom regu at on to compet t on occurs) and unusua y arge restorat on costs fo ow ng a majorweather event such as a hurr cane. f the def ned features are present, the secur t zat oneffect ve y makes a consumers respons b e for pr nc pa and nterest payments, and the ut ty ss mp y a pass through ent ty for serv c ng the debt. We therefore remove the debt and re atedrevenues and expenses from our measures.


Amount of secur t zed debt on the ut ty s ba ance sheet at per od end;

nterest expense re ated to secur t zed debt for the per od; and

Pr nc pa payments on secur t zed debt dur ng the per od.

95 Ca cu at ons:

Adjustment to debt: We subtract the secur t zed debt from tota debt.

Adjustment to revenues: We reduce revenue a ocated to secur t zed debt pr nc pa andnterest. The adjustment s the sum of nterest and pr nc pa payments made dur ng the year.

Adjustment to operat ng ncome after D&A and EB T: we reduce D&A re ated to the secur t zed




of 43

debt, wh ch s assumed to equa the pr nc pa payments dur ng the per od. As a resu t, thereduct on to operat ng ncome after D&A s on y for the nterest port on.

Adjustment to nterest expense: We remove the nterest expense of the secur t zed debt fromtota nterest expense.

Operat ng cash f ows: We reduce operat ng cash f ows for revenues and ncrease for theassumed nterest amount re ated to the secur t zed debt. Th s resu ts n a net decrease tooperat ng cash f ows equa to the pr nc pa repayment amount.

Retail and restaurants (auto retailers)96 Auto retailers floor plan financing: Desp te the d ffer ng account ng character zat ons of auto

reta ers f oor p an f nanc ng arrangements (those w th automakers capt ve f nance arms andthose w th th rd party f nanc ers), we cons der auto reta ers f oor p an borrow ngs, regard ess ofsource, more ak n to trade payab es than to debt. Th s s due to the borrow ngs h gh oan to va uerat os (typ ca y 00%), w despread ava ab ty, and ong dated matur ty, w th repaymentgenera y occurr ng once veh c es are so d, and because of a ong h story of manufacturersubs d es arge y offsets borrow ng costs.

97 We v ew f oor p an borrow ngs as a part of work ng cap ta . When f oor p an borrow ngs arenc uded w th n reported debt, we move those ab t es to accounts payab e. kew se, we

cons der f oor p an nterest expense as an operat ng cost rather than a f nanc ng cost and add t tothe cost of sa es. We do not make any change n the treatment of f oor p an nterest ass stance,wh ch s genera y a ready nc uded n cost of sa es. On the statement of cash f ows, we nc udechanges n a f oor p an borrow ngs (both w th capt ve and th rd part es) n the work ng cap tasect on of cash f ow from operat ons.


Amount of f oor p an borrow ngs reported as debt.

Amount of f oor p an nterest expense reported by the company n nterest expense for theper od; and

oor p an borrow ngs/repayment reported by the company under f nanc ng act v ty n tsstatement of cash f ows for the per od.

99 Ca cu at ons:

Debt: We subtract any f oor p an borrow ngs reported as debt n the f nanc a statements.

EB TDA and O: We subtract f oor p an nterest expense from tota nterest expense and cashnterest pa d ( f nc uded n reported cash nterest) and treat t as a part of operat ng expense,

thus reduc ng EB TDA by the f oor p an nterest.

C O: We reverse the mpact of f oor p an borrow ngs and repayments n the f nanc ng act v tycash f ow and treat t as a part of work ng cap ta ( .e., change n accounts payab e), thusmpact ng cash f ow from operat ons.

Technology software and services




of 43

200 Acquired deferred revenue: Compan es n th s sector often have s gn f cant deferred revenueba ances, g ven the pattern of cash rece ved re at ve to when they prov de serv ces and whatrevenue recogn t on methods they emp oy. At any g ven t me, the deferred revenue amountrecorded on a company s ba ance sheet genera y represents the cash rece ved n advance, essthe amount amort zed to revenue for goods and serv ces prov ded to date. Th s ba ance sheetamount d ffers from the fa r va ue of th s performance ob gat on, wh ch must be recorded at thedate of an acqu s t on. Because of how acqu red deferred revenue s va ued at the t me ofacqu s t on and ts subsequent mpact on revenue, t can d stort the acqu r ng company s f nanc aresu ts, mak ng them ess representat ve of ongo ng operat ons. We therefore make an adjustmentto EB TDA and O to m t gate th s d stort on by add ng to EB TDA and O the amort zat on n theper od of the fa r va ue adjustment to acqu red deferred revenue.

20 Software development costs: or compan es that operate w th a bus ness mode that nc udesse ng software to externa part es, we a m to adjust for the cap ta zat on of deve opment costsfor externa use software f the nformat on s ava ab e and the amounts mater a . W thout c earreport ng that de neates the software deve opment costs nto nterna versus externa use, we useana yt ca judgement to determ ne the appropr ate amount of our adjustment.

202 We do not reverse the cap ta zat on of software for nterna use, cons stent w th our treatment ofnterna use software costs across a sectors. We do reverse the cap ta zat on of software for

externa use and nc ude t as an expense. n the ncome statement, th s means revers ng theamort zat on of prev ous y cap ta zed costs and ncreas ng research and deve opment costs bythe amount cap ta zed dur ng the per od. The net effect on adjusted EB TDA s a decrease by theamount cap ta zed dur ng the per od. The net effect on EB T s a decrease (or ncrease) by theamount cap ta zed dur ng the per od m nus the amount amort zed dur ng the per od.

Telecommunications and cable203 Subscriber acquisition costs: W re ess te ecom compan es ncur var ous costs to acqu re new

customers or subscr bers, such as sa es comm ss ons and subs d es for w re ess handsets, knownas subscr ber acqu s t on costs (SAC; a so known as customer acqu s t on costs). Wh e somew re ess te ecom compan es expense SAC, others cap ta ze these costs, wh ch makes compar ngthe r reported f nanc a performance d ff cu t.

204 To enhance comparab ty, we adjust reported f nanc a statements when a company cap ta zesSAC and the re evant nformat on s d sc osed and the amounts are mater a . The adjustment a msto treat the cap ta zed SAC as f they had been expensed n the per od ncurred. The adjustmentreduces EB TDA, O, C O, and cap ta expend tures ( f reported) by the amount of SAC cap ta zeddur ng the year. S m ar y, we w reduce the D&A expense for SAC amort zat on. W thout suff c entd sc osures, we wou d reduce the D&A by the amount cap ta zed so that the EB T measures arenot undu y suppressed.


Amount of SAC ncurred and cap ta zed dur ng the per od; and

Amort zat on amount for SAC costs dur ng the per od.

206 Ca cu at ons:

EB TDA, O, C O, and cap ta expend tures: Subtract the amount of cap ta zed SAC;

EB T: Subtract (or add) the d fference between the amount of SAC cap ta zed and the SAC




of 43

amort zat on dur ng the per od; and

D&A: Subtract the amount of SAC amort zed dur ng the per od.

207 Adjustment to debt and EBITDA for master service agreements: The nternat ona Account ngStandards Board s RS 6 w become effect ve for compan es report ng under RS n 20 9. Thenew ru e w treat te ecom tower master serv ce agreements as an expense. We adjust for thesecontracts the same way that we adjust for operat ng eases to enhance comparab ty betweenmob e network operators that:

Own towers;

ease towers through a master ease agreement; or

Have s gned a serv ce agreement.

208 n our v ew, the current d fferences between the three mode s are not mater a enough to requ red fferent ana yt ca treatment. The towers serve a s m ar purpose for network operators n athree cases, and are cruc a to ongo ng operat ons. G ven that mob e operators need to e ther ownthese assets or ensure they have ong term access to them, we see a serv ce agreement as s m arto an operat ng ease.

209 Adjust ng the mob e operator s f gures to account for ts serv ce agreement has two mater amp cat ons:

H gher prof tab ty because we exc ude the fees pa d to the tower company from operat ngexpenses; as a resu t, EB TDA marg ns are h gher.

H gher adjusted debt amount because we are add ng the ab ty to the ba ance sheet. Thempact on a mob e operator s cred t metr cs w genera y depend on the ength of the contract

and the magn tude of the operator s debt.

2 0 Tab e shows an examp e of how we wou d adjust the f gures for an operator that makes annuapayments of €40 under a 5 year contract w th a tower company. Cap ta z ng the annua paymentnot on y ra ses EB TDA but a so debt, because we va ue the future ob gat on at a 7% d scount. Thenet effect n th s examp e s a everage ncrease of 0.66x.

Table 1

Example Of Adjustments Made For A Master Service Agreement

Revenues (€) EBITDA Marg n (%) Debt Debt/EBITDA (x)

FRS 6 repo ted f g res 200 360 30 900 2 50

ease ad stment to EB DA 0 40 3 0 (0 25)

ease ad stment to debt 0 0 0 364 0 9

S&P G oba Rat ngs ad sted f g res 200 400 33 264 3 6

2 The ess ndebted the company s, the h gher the mpact of a ease on ts everage rat o the easeab ty wou d be a arger component of tota debt. However, there s tt e d fference between a

ease agreement and a serv ce agreement n terms of cash f ows and econom c benef t to themob e operator. We therefore a m to treat both contract types cons stent y when assess ng thef nanc a r sk prof e, wh ch w ma nta n comparab ty between te ecom compan es cred tmetr cs.

2 2 Mob e network operators re y upon networks of rad o towers, wh ch support the r bus ness by




of 43

broadcast ng s gna s to and rece v ng s gna s from the mob e dev ces of the r customers.Trad t ona y, mob e operators have owned these assets. But over t me, some operators have so dthe r towers to spec a ty nfrastructure compan es. They then rent space on the towers to p acethe r antennas, wh ch transm t and rece ve rad o frequenc es. Th s mode typ ca y emp oys amaster ease agreement, whereby the mob e operator pays a fee n exchange for rent ng a spec f cspace on the tower. The tower company a so prov des re ated ma ntenance. More recent y,however, we ve seen mob e operators s gn ong term serv ce agreements under wh ch they haveaccess to the fu tower network but are not ass gned spec f c spaces for the r antennae. The towercompany comm ts to manage dep oyment of the equ pment to ensure an agreed eve of serv cequa ty.

2 3 IFRS treatment: Under RS 6, eases w be recogn zed on the ba ance sheet and serv cecontracts off ba ance sheet. Whether a contract s def ned as a ease arge y depends on the r ghtto contro an dent f ed asset.

2 4 n a ease agreement, the mob e operator contro s spec f c spaces on towers, wh ch are used forthe r act ve equ pment. Th s w be cons dered a ease contract because the asset s dent f ed(des gnated space on spec f c towers) and the mob e operator rema ns n contro of the dent f edasset. On ts ba ance sheet, the mob e operator w recogn ze a r ght of use asset and ease

ab ty based on d scounted payments requ red under the ease. The mob e operator w notrecogn ze the renta payments as an operat ng expense; nstead, the asset w deprec ate andnterest s recogn zed based on the outstand ng ease ab ty.

2 5 However, n a serv ce agreement, the tower operator contro s the towers and can move the mob eoperator s equ pment to a ternat ve towers f t chooses. Therefore the contract s to prov de aserv ce and does not conta n a ease under RS 6. Contract fees w be treated as operat ngexpenses and w rema n off the ba ance sheet.

2 6 f we were to fo ow RS 6, adopt ng serv ce account ng wou d mmed ate y and mater a ystrengthen a mob e operator s everage rat os, compared w th a eased tower scenar o. But we donot be eve the mob e operator s cred t r sk wou d have fundamenta y changed, and th nk themore favorab e f nanc a compar son proposed under the new account ng standard wou d d stortcompar son across compan es.

2 7 n dec d ng whether to adjust for serv ce agreements, we sought to understand how a serv cearrangement substant ve y changes the operat ons and r sk managed by mob e operators andtower compan es a ke. We th nk ease agreements a ready conta n a serv ce e ement because thetower company prov des ma ntenance serv ces n add t on to the space on the towers. Serv ceagreements cou d ntroduce new and mater a va ue added serv ces, such as:

Act ve management of the equ pment on a tower company s network to meet key performancend cator serv ce requ rements; or

mp ementat on of new commun cat on coverage requ rements or protoco s, for examp e,dep oyment of sma ce stat ons and f fth generat on (5G) mob e networks.

2 8 However, we do not v ew th s as a certa nty and ant c pate scenar os where a serv ce agreementtower portfo o rema ns a re at ve y stat c, mature asset. As new techno og es and coveragerequ rements emerge, mob e operators may choose to reta n respons b ty for act ve networkmanagement n order to d fferent ate themse ves from peers and ga n a compet t ve advantage.Therefore, a though we see the potent a for add t ona serv ces under a serv ce agreement, wecurrent y do not see the d fference as mater a enough to warrant a d fferent treatment comparedw th many of our te ecom ssuers that have ease agreements n p ace. We wou d need to see c earev dence of th s n pract ce before treat ng tower serv ce agreements d fferent y from easeagreements. Th s wou d ke y requ re measurab e s gns of act ve network mon tor ng and




of 43

management, man fest n deta ed rea t me ana ys s and act ve phys ca evo ut on, resu t ng n amore dynam c, ess stat c network over t me.

2 9 To fac tate g oba compar sons and benchmark ng, our rat ng ana ys s ncorporates quant tat veadjustments to the reported f nanc a statements of compan es. These adjustments a gn acompany s reported f gures more c ose y w th our v ew of under y ng econom c cond t ons and thecred t r sk nherent n ts transact ons and arrangements. A though we may adjust certa n f guresreported under app cab e account ng pr nc p es, th s does not mp y that we cha enge thecompany s app cat on of those pr nc p es, the adequacy of ts aud t or f nanc a report ng process,or the appropr ateness of the account ng judgements made to fa r y dep ct the company sf nanc a pos t on and performance for other purposes.

220 Our adjusted debt pr nc p e underp ns our approach and dr ves many of the ana yt caadjustments we make. t resu ts from our v ew that certa n mp c t f nanc ng arrangements ares m ar to debt. Dep ct ng these transact ons as debt often n contrast to how a company reportsthem affects not on y the quant f cat on of debt, but a so the measures of earn ngs and cashf ows we use n our ana ys s.

22 n genera , tems that we add to reported debt nc ude on and off ba ance sheet comm tments topurchase or use of ong fe assets (such as ease ob gat ons) or bus nesses (such as deferredpurchase cons derat on) where the company accrues benef ts of ownersh p. We typ ca y v ew sa eand easeback transact ons as a form of f nanc ng. f we can, we cap ta ze the ent re sa e amountto debt, even f the NPV of future ease payments s a ower f gure.

222 Under RS, f a mob e operator se s ts towers to a tower company and then enters nto a serv ceagreement w th that company, t has not entered nto a sa e and easeback transact on becausethe serv ce agreement does not meet the def n t on of a ease under RS 6. RS cons ders thatthe tower operator contro s the network because t has "substant ve subst tut on r ghts" to theasset.

223 By contrast, we do not be eve th s feature a one s suff c ent to comp ete y overr de our v ew thatthe transact on has an mp c t f nanc ng component. Th s sort of transact on changes the mob eoperator s s tuat on. Pre transact on, t owned and used the network of rad o towers to generatecash f ows. Post transact on, t st makes use of the network of rad o towers to generate cashf ows, but t rece ves cash upfront n exchange for regu ar, f xed, and non cance ab e deferredpayments ( ke a ease). n our v ew, the transact on does not c ear y mprove the fundamentaf nanc a r sk prof e, but the RS expense account ng treatment mp es such an mprovement byreduc ng ts everage. The same wou d be true f a mob e operator sw tched from a easeagreement to a serv ce agreement or s gned a serv ce agreement w th no pr or access to thetowers n eu of buy ng or eas ng them.

224 Th s gu dance spec f ca y addresses the tower master serv ce agreement contract and thete ecom sector, based on the r un que character st cs. There are nstances of other transact onsand arrangements that share some features of the tower master serv ce agreement, but where wedon t make a debt adjustment. or examp e, some ut t es spun off the r transm ss on networksand then entered nto serv ce contracts for the transportat on/transm ss on of gas and e ectr c ty.However, these ut t es do not pay the serv ce prov ders under a b atera contract n the same waythat mob e operators pay tower compan es. nstead, the ut ty b s ts reta customers anda ocates a port on of the revenues to d str but on, transm ss on, and supp ers, on a regu atedbas s.

225 f d sc osures n the f nanc a statements ack suff c ent deta , we may face pract ca cha enges nadjust ng the debt of mob e operators that use tower serv ce agreements. However, th s s afam ar ssue. We frequent y est mate our ana yt ca adjustments based on add t ona nformat onprov ded by ssuers. or examp e, we seek nformat on from ssuers regard ng the amount of cash




of 43

and qu d nvestments that they cannot access at short not ce to repay debt, and use th snformat on to app y a ha rcut to our surp us cash f gure.

226 We acknow edge that we have dec ded to adjust for tower serv ce agreements based on the smasamp e s ze and short track record of such agreements to date. n t me, f tower compan es bu d atrack record of act ve network management under these agreements, such that the serv ce port onof the contract s demonstrab y ts overr d ng feature, we cou d change our v ew. Th s cou d ead usto treat tower serv ce agreements as a serv ce and ref ect them as an expense, e ther n who e or,f we have suff c ent deta regard ng the serv ce port on of the contract, n part.

Transportation cyclical industry227 Purchase commitments to partner entities providing transportation services: n some cases,

compan es may contract w th other ent t es to prov de transportat on serv ces us ng those otherent t es own equ pment. n cases where the payments under such contracts are arge y f xed andrepresent most y a subst tute for own ng or rent ng equ pment, we w cap ta ze the ent reamount of the comm tted payments. Examp es nc ude t me charters of sh ps w th f xed paymentsthat are most y for ownersh p and, to a esser extent, crew ng costs. Where the contractedpayments most y represent re mbursement for other expenses, wh ch may vary, we seek toest mate the proport on of the payments that represent a renta or ownersh p equ va ent, andcap ta ze that. Examp es nc ude some a r ne capac ty purchase agreements w th partnerreg ona a r nes. n those agreements, a major a r ne may sub ease reg ona a rcraft to thereg ona a r ne (the ownersh p costs for wh ch are accord ng y a ready captured n the majora r ne s f nanc a statements). A ternat ve y, the reg ona a r ne may prov de ts own a rcraft. f themajor a r ne nonethe ess nc udes those nd rect reg ona a rcraft ownersh p costs as part of tsown ease comm tments, our cap ta z ng eases covers th s. Where the major a r ne does notnc ude the nd rect reg ona a rcraft ownersh p costs n ts own ease comm tments, we seek to

est mate the proport on of the capac ty purchase agreement that represents ownersh p costs.Non ownersh p costs, wh ch can be substant a , nc ude abor and fue , the atter a pass throughcost that can vary s gn f cant y over t me.

Transportation infrastructure228 Service concession arrangements: We make the fo ow ng adjustments to the reported f nanc a s

of transportat on nfrastructure compan es operat ng under concess ons:

These compan es genera y report revenues from works and mprovements to concess onassets under the current nterpretat on of RS for serv ce concess on arrangements ( R C 2).Th s does not affect reported EB TDA, operat ng prof t, or cash, because a correspond ngoperat ng cost s reported. We exc ude these tems from reported revenues and the cost ofgoods so d.

n add t on, when a transportat on nfrastructure company operat ng under a concess onagreement rece ves f xed or guaranteed revenues accord ng to R C 2, the company genera ydoes not report th s as revenue on ts ncome statement. When th s ncome corresponds to acash payment, we nc ude t n revenues and EB TDA.


The amount of revenues and costs from works and mprovements to nfrastructure assets thatare grossed up n the ncome statement.




of 43

The amount of guaranteed ncome that s c ass f ed as nterest ncome rather than revenues.

230 Ca cu at ons:

Revenues and cost of goods so d or operat ng expenses. We exc ude the amount of revenuesand costs from works and mprovements to nfrastructure assets that are grossed up n thencome statement.

Revenues and EB TDA. We add the amount of guaranteed ncome c ass f ed as nterest ncomerather than revenues.

23 Inflation linked debt: Some compan es n the transportat on nfrastructure sector ssues gn f cant amounts of nf at on nked debt. nf at on nked debt usua y has a ong tenor (20 30years), and a ow annua cash coupon (e.g., % 3%) wh ch, w thout ndexat on, wou d usua yrepresent a be ow market cost of debt at ssuance for the ssuer, as t on y ref ects rea termnterest rates.

232 A d st nct, typ ca feature of nf at on nked debt s the deferra of ndexat on payments tomatur ty. We v ew the accrua of pr nc pa ndexat on as a part a non cash coupon. Deferra of tspayment does not mean that th s debt s any cheaper; s mp y, a port on of ts per od c cost, wh chmay be substant a , s be ng deferred to matur ty.

233 We typ ca y app y a charge for the ndexat on of pr nc pa for nf at on nked debt n our Oca cu at on. We be eve th s approach better captures the after nterest cash f ow the company soperat ons generate, nc ud ng the fu cost of the debt used to f nance those operat ons. Wherecompan es have not d sc osed the amount of pr nc pa ndexat on, we may est mate theadjustment.

234 No adjustment s typ ca y requ red to be made to reported debt f th s nc udes the effect of thendexat on component (the deferred nterest port on) on a cumu at ve, compounded bas s.

235 Where poss b e we make s m ar adjustments where compan es use der vat ves to synthet ca yconvert debt nto nf at on nked debt. Th s can requ re deduct ng from O the nf at on payab eport on of an nf at on nked swap and add ng to debt the port on of the der vat ve s fa r va ue thatcorresponds to the cumu at ve deferred nterest.

236 Provisions for future maintenance: Under most concess on arrangements, compan es havecontractua ob gat ons to ma nta n the nfrastructure to a pre spec f ed eve of serv ce and/or torestore the nfrastructure to a part cu ar cond t on before g v ng t back to the grantor. Theseob gat ons may take d fferent forms rang ng from rout ne repa r costs to major fecyc eoverhau s.

237 Rout ne repa r costs are expensed as ncurred n the ncome statement and c ass f ed as operat ngcash f ows n the cash f ow statement.

238 or onger term, major ma ntenance ob gat ons that affect mu t p e years, the companyrecogn zes a prov s on for the est mated NPV of future cash outf ows under most account ngstandards. Changes n the prov s on are ref ected n the ncome statement (usua y w th n reportedoperat ng ncome) systemat ca y over the correspond ng number of years. The cost recogn t ontherefore s gn f cant y d verges from the re ated cash f ows. When the ma ntenance ob gat on sfu f ed, the spend ng may be c ass f ed as e ther operat ng or nvest ng cash f ows n the cashf ow statement.

239 To a ow for g oba y cons stent and comparab e f nanc a ana yses, we v ew th s ong termma ntenance spend ng as more ak n to cap ta expend tures ( nvest ng cash f ows) and the re atedcosts as non operat ng n nature. We do not v ew the year end prov s on as debt ke.




of 43

Contact List

ANALYTICAL CONTACTS ANALYTICAL CONTACTS ANALYTICAL CONTACTS

Leonard A Gr mando

New York

(1) 212-438-3487

[email protected]

Imre Guba

Madrid

(44) 20-7176-3849

[email protected]

Sam C Holland, FCA

London

(44) 20-7176-3779

[email protected]

ANALYTICAL CONTACTS ANALYTICAL CONTACTS ANALYTICAL CONTACTS

Shr pad J Josh , CPA, CA

New York

(1) 212-438-4069

[email protected]

Raam Ratnam, CFA, CPA

London

(44) 20-7176-7462

[email protected]

Scott E Zar , CFA

Chicago

+ 1 (312) 233 7079

[email protected]

ANALYTICAL CONTACTS ANALYTICAL CONTACTS METHODOLOGIES CONTACTS

Mehul P Sukkawala, CFA

Singapore

(65) 6239-6337

[email protected]

D ego H Ocampo

Buenos Aires

(54) 114-891-2116

[email protected]

Peter Kernan

London

(44) 20-7176-3618

[email protected]

METHODOLOGIES CONTACTS METHODOLOGIES CONTACTS METHODOLOGIES CONTACTS

Marta Castell

Buenos Aires

(54) 114-891-2128

[email protected]

James A Parchment

New York

(1) 212-438-4445

[email protected]

Veron que Chayr gues

Paris

(33) 1-4420-6781

[email protected]




of 43



STANDARD & POOR S S&P and RAT NGSD RECT are reg stered trademarks of Standard & Poor s F nanc a Serv ces C

S&P may rece ve compensat on for ts rat ngs and certa n ana yses norma y from ssuers or underwr ters of secur t es or from ob gorsS&P reserves the r ght to d ssem nate ts op n ons and ana yses S&P s pub c rat ngs and ana yses are made ava ab e on ts Web s teswww standardandpoors com (free of charge) and www rat ngsd rect com (subscr pt on) and may be d str buted through other meansnc ud ng v a S&P pub cat ons and th rd-party red str butors Add t ona nformat on about our rat ngs fees s ava ab e at

www standardandpoors com/usrat ngsfees

S&P keeps certa n act v t es of ts bus ness un ts separate from each other n order to preserve the ndependence and object v ty of the rrespect ve act v t es As a resu t certa n bus ness un ts of S&P may have nformat on that s not ava ab e to other S&P bus ness un ts S&Phas estab shed po c es and procedures to ma nta n the conf dent a ty of certa n non-pub c nformat on rece ved n connect on w th eachana yt ca process

To the extent that regu atory author t es a ow a rat ng agency to acknow edge n one jur sd ct on a rat ng ssued n another jur sd ct on forcerta n regu atory purposes S&P reserves the r ght to ass gn w thdraw or suspend such acknow edgment at any t me and n ts so ed scret on S&P Part es d sc a m any duty whatsoever ar s ng out of the ass gnment w thdrawa or suspens on of an acknow edgment aswe as any ab ty for any damage a eged to have been suffered on account thereof

Cred t-re ated and other ana yses nc ud ng rat ngs and statements n the Content are statements of op n on as of the date they areexpressed and not statements of fact S&P s op n ons ana yses and rat ng acknow edgment dec s ons (descr bed be ow) are notrecommendat ons to purchase ho d or se any secur t es or to make any nvestment dec s ons and do not address the su tab ty of anysecur ty S&P assumes no ob gat on to update the Content fo ow ng pub cat on n any form or format The Content shou d not be re ed onand s not a subst tute for the sk judgment and exper ence of the user ts management emp oyees adv sors and/or c ents when mak ngnvestment and other bus ness dec s ons S&P does not act as a f duc ary or an nvestment adv sor except where reg stered as such Wh e

S&P has obta ned nformat on from sources t be eves to be re ab e S&P does not perform an aud t and undertakes no duty of dued gence or ndependent ver f cat on of any nformat on t rece ves Rat ng-re ated pub cat ons may be pub shed for a var ety of reasonsthat are not necessar y dependent on act on by rat ng comm ttees nc ud ng but not m ted to the pub cat on of a per od c update on acred t rat ng and re ated ana yses

No content ( nc ud ng rat ngs cred t-re ated ana yses and data va uat ons mode software or other app cat on or output therefrom) or anypart thereof (Content) may be mod f ed reverse eng neered reproduced or d str buted n any form by any means or stored n a database orretr eva system w thout the pr or wr tten perm ss on of Standard & Poor s F nanc a Serv ces C or ts aff ates (co ect ve y S&P) TheContent sha not be used for any un awfu or unauthor zed purposes S&P and any th rd-party prov ders as we as the r d rectors off cersshareho ders emp oyees or agents (co ect ve y S&P Part es) do not guarantee the accuracy comp eteness t me ness or ava ab ty of theContent S&P Part es are not respons b e for any errors or om ss ons (neg gent or otherw se) regard ess of the cause for the resu tsobta ned from the use of the Content or for the secur ty or ma ntenance of any data nput by the user The Content s prov ded on an “as s”bas s S&P PART ES D SC A M ANY AND A EXPRESS OR MP ED WARRANT ES NC UD NG BUT NOT M TED TO ANY WARRANT ES OFMERCHANTAB TY OR F TNESS FOR A PART CU AR PURPOSE OR USE FREEDOM FROM BUGS SOFTWARE ERRORS OR DEFECTS THATTHE CONTENT S FUNCT ON NG W BE UN NTERRUPTED OR THAT THE CONTENT W OPERATE W TH ANY SOFTWARE OR HARDWARECONF GURAT ON n no event sha S&P Part es be ab e to any party for any d rect nd rect nc denta exemp ary compensatory pun t vespec a or consequent a damages costs expenses ega fees or osses ( nc ud ng w thout m tat on ost ncome or ost prof ts andopportun ty costs or osses caused by neg gence) n connect on w th any use of the Content even f adv sed of the poss b ty of suchdamages

Copyr ght © 2019 by Standard & Poor s F nanc a Serv ces C A r ghts reserved


of 43

Corporate Methodology: Ratios And Adjustments

Documents

Transcript of Corporate Methodology: Ratios And Adjustments