To estimate the FFO / Net Debt ratio for VERBUND AG for the year 2022 (period 2022-01-01 to 2023-01-01) based on S&P methodology, we need to calculate Funds From Operations (FFO) and Net Debt. **1. Calculate Funds From Operations (FFO)** According to S&P Global Ratings methodology, FFO is generally calculated as: $$FFO = \text{Net Income} + \text{Depreciation and Amortization} + \text{Other Non-Cash Items} + \text{Changes in Working Capital (sometimes excluded in simple proxies, but S&P usually starts with EBITDA or Net Income and adjusts)}$$ A common simplified S&P proxy for FFO is: $$FFO = \text{EBITDA} - \text{Cash Taxes Paid} - \text{Cash Interest Paid} + \text{Other Adjustments}$$ However, a more standard definition often used is: $$FFO = \text{Net Income} + \text{Depreciation \& Amortization} + \text{Impairment Losses} - \text{Reversal of Impairment Losses} + \text{Other Non-Cash Charges} - \text{Non-Cash Gains}$$ Let's look at the provided data for the period 2022-01-01 to 2023-01-01: * **Profit Loss (Net Income):** 1,948,767,000 EUR * **Depreciation And Amortisation Expense:** 462,694,000 EUR * **Impairment Loss:** 197,761,000 EUR * **Reversal Of Impairment Loss:** 125,973,000 EUR * **Valuation And Realisation of Energy Derivatives:** -857,961,000 EUR (This is a non-cash or mark-to-market item. In utility FFO calculations, unrealized gains/losses on derivatives are often added back if they are non-cash, or treated specifically. S&P often adds back non-cash valuation changes. Here it is a negative expense, i.e., a gain/positive impact on income? No, it's listed as an expense line item with a negative value, which implies a gain or income contribution. Wait, let's check the sign convention. * 2021: -269,667,000. EBITDA was 1,578,959,000. * Let's check the P&L flow. * Revenue: 10,346,088,000 * Expenses (Purchases): 6,802,383,000 * Fuel Expenses: 522,109,000 * Employee Benefits: 428,446,000 * Other Expense: 403,487,000 * Valuation Derivatives: -857,961,000 (Negative expense = Income) * Depreciation: 462,694,000 * Impairment: 197,761,000 * Reversal: -125,973,000 (Negative expense = Income) -> Wait, the line item is "Reversal Of Impairment Loss" with value 125,973,000. Usually reversals reduce the expense. * Let's verify EBITDA calculation from the top down to understand the sign of the derivative line. * Operating Profit (EBIT) approx = Revenue - Purchases - Fuel - Employee - Other + Derivatives(Gain) - Depreciation - Impairment + Reversal? * Let's use the provided EBITDA: 3,160,679,000 EUR. * S&P FFO is often approximated as EBITDA - Cash Interest - Cash Taxes + Change in Working Capital (or just EBITDA - Cash Interest - Cash Taxes for a quick proxy if working capital is stable, but utilities have significant working capital swings). * A more precise S&P FFO definition: Net Income + Depreciation + Amortization + Non-cash items (like impairments, deferred taxes, etc.). * Let's try: $FFO = \text{Net Income} + \text{Depreciation \& Amortization} + \text{Net Impairment} + \text{Deferred Tax Expense} + \text{Non-cash Derivative Losses} - \text{Non-cash Derivative Gains}$. * Net Income: 1,948,767,000 * Add: Depreciation & Amortization: 462,694,000 * Add: Net Impairment (Loss - Reversal): $197,761,000 - 125,973,000 = 71,788,000$ * Add: Deferred Tax Expense? We have "Income Tax Expense Continuing Operations" (583,352,000) and "Income Taxes Paid" (343,100,000). The difference is roughly the change in deferred/current tax liabilities. S&P adds back deferred taxes. * Deferred Tax Liabilities 2022: 486,851,000; 2023: 800,452,000. Increase = 313,601,000. * Deferred Tax Assets 2022: 35,811,000; 2023: 35,839,000. Negligible change. * So Deferred Tax Expense approx 313,601,000. * Adjust for Derivatives: The line "Valuation And Realisationof Energyderivatives" is -857,961,000. This reduced expenses (increased income). Is this cash or non-cash? "Valuation" implies non-cash mark-to-market. "Realisation" implies cash. S&P typically adds back *unrealized* gains/losses. Without a split, this is tricky. However, looking at the Cash Flow statement: * Cash Flow from Operations: 2,019,859,000. * Adjustments for Derivative Financial Assets: 548,678,000. * Adjustments for Derivative Financial Liabilities: -1,360,527,000. * These large working capital adjustments in the indirect cash flow method suggest the P&L derivative number includes significant non-cash components or timing differences. * Standard S&P FFO for utilities often starts with EBITDA and subtracts cash interest and cash taxes. * $FFO \approx EBITDA - \text{Cash Interest} - \text{Cash Taxes}$ * EBITDA: 3,160,679,000 * Cash Interest Paid: 36,100,000 (from "Interest Paid Classified As Operating Activities") * Cash Taxes Paid: 343,100,000 (from "Income Taxes Paid Classified As Operating Activities") * $FFO \approx 3,160,679,000 - 36,100,000 - 343,100,000 = 2,781,479,000$ EUR. Let's refine this. S&P defines FFO as net income plus depreciation, amortization, and other non-cash items. Net Income: 1,948,767,000 + Depreciation/Amortization: 462,694,000 + Net Impairment: 71,788,000 + Deferred Taxes: ~313,601,000 (Calculated as Increase in DTL - Increase in DTA) + Share of Loss/Profit of Associates (Equity method is non-cash until dividend): The share of profit is 4,293,000. This is included in Net Income but is non-cash. We should subtract it if we are adding back non-cash income, or rather, FFO usually adds back the equity pickup loss and subtracts the pickup gain. Here it's a gain, so subtract 4,293,000. + Derivatives: The -857M is a gain. If it's largely non-cash (valuation), we should subtract it. If it's realized, it's cash. The cash flow statement shows massive changes in derivative assets/liabilities. The "Valuation and Realisation" line likely mixes both. S&P often normalizes this. Given the complexity, the EBITDA - Cash Interest - Cash Taxes proxy is robust for utilities if we assume working capital changes are temporary. However, S&P also adjusts for "maintenance capex" vs "growth capex" in Free Operating Cash Flow, but FFO is pre-capex. Let's stick to the widely accepted S&P proxy: $FFO = \text{EBITDA} - \text{Cash Interest} - \text{Cash Taxes}$ $FFO = 3,160,679,000 - 36,100,000 - 343,100,000 = 2,781,479,000$ EUR. Another check: Cash Flow from Operations (CFO) is 2,019,859,000. S&P FFO is often higher than CFO because CFO deducts changes in working capital. The difference between EBITDA and CFO here is large due to working capital swings (Derivatives). S&P typically adds back the change in working capital related to derivatives if it's considered volatile/non-operational for the core rating metric, or uses the EBITDA-based proxy. Let's use the calculated FFO of ~2,781 million EUR. **2. Calculate Net Debt** Net Debt = Total Financial Debt - Cash and Cash Equivalents. Sometimes "Net Debt" for rating agencies includes other liquid assets or excludes certain types of debt, but standard Net Debt is Gross Debt minus Cash. From the Balance Sheet at 2023-01-01 (End of 2022): * **Noncurrent Financial Liabilities:** 2,844,559,000 EUR * **Current Financial Liabilities:** 1,109,297,000 EUR * **Total Financial Debt:** $2,844,559,000 + 1,109,297,000 = 3,953,856,000$ EUR * **Cash And Cash Equivalents:** 409,252,000 EUR * **Net Debt:** $3,953,856,000 - 409,252,000 = 3,544,604,000$ EUR Note: S&P might also adjust debt for things like hybrid capital or lease liabilities. * Lease Liabilities: "Rightofuse Assets" are 146,613,000. "Payments Of Lease Liabilities Classified As Financing Activities" are 11,447,000. The balance sheet doesn't explicitly separate lease liabilities from financial liabilities, but "Noncurrent Financial Liabilities" likely includes them. S&P typically treats lease liabilities as debt. So the figure above stands. * Are there any other debt-like items? "Noncurrent Derivative Financial Liabilities" are 1,069,177,000 and "Current Derivative Financial Liabilities" are 1,491,588,000. These are derivatives, not debt principal. They are excluded from Net Debt. So, Net Debt = 3,544,604,000 EUR. **3. Calculate FFO / Net Debt Ratio** $$Ratio = \frac{FFO}{\text{Net Debt}}$$ $$Ratio = \frac{2,781,479,000}{3,544,604,000}$$ $$Ratio \approx 0.7847$$ Let's double check the FFO calculation. Is there a better FFO number? Some definitions: $FFO = \text{Net Income} + \text{D\&A} + \text{Impairments} - \text{Gains on Sales} + \text{Deferred Tax}$. Net Income: 1,948,767,000 + D&A: 462,694,000 + Net Impairment: 71,788,000 + Deferred Tax: 313,601,000 (Increase in DTL 313.6M) - Equity Income: 4,293,000 +/- Derivatives? The -857M gain in P&L. If this is non-cash, we subtract it. If we subtract 857M, FFO drops significantly. However, the "Valuation and Realisation" line suggests part is realized (cash). If we look at CFO (2,019M) and add back the change in working capital that is considered "non-operating" or volatile? S&P often uses "EBITDA - Cash Interest - Cash Taxes" as a quick proxy for FFO in the absence of detailed non-cash adjustments, especially for regulated utilities where earnings are stable. Let's consider if "Cash Taxes Paid" is the right deduction. Yes, S&P FFO is a cash-flow based metric. Let's consider if "Cash Interest Paid" is the right deduction. Yes. Let's re-verify the Cash Interest and Tax. Interest Paid: 36,100,000. Tax Paid: 343,100,000. EBITDA: 3,160,679,000. FFO = 3,160,679,000 - 36,100,000 - 343,100,000 = 2,781,479,000. Net Debt = 3,544,604,000. Ratio = 2,781,479,000 / 3,544,604,000 = 0.7847. Let's check if there are other interpretations of Net Debt. Sometimes Net Debt includes "Current Derivative Financial Liabilities" if they are deeply in the money and treated as debt-like, but standard methodology excludes them. Sometimes Cash includes "Current Derivative Financial Assets"? No, usually just Cash and Cash Equivalents. What if we use Average Net Debt? Start of 2022 (2022-01-01): Noncurrent Fin Liab: 1,834,155,000 Current Fin Liab: 1,462,453,000 Total Debt: 3,296,608,000 Cash: 318,562,000 Net Debt Start: 2,978,046,000 End of 2022 (2023-01-01): Net Debt End: 3,544,604,000 Average Net Debt: $(2,978,046,000 + 3,544,604,000) / 2 = 3,261,325,000$ Ratio using Average Net Debt: $2,781,479,000 / 3,261,325,000 = 0.8528$ S&P typically uses year-end debt for leverage ratios unless specified otherwise, or average if the debt profile changed significantly during the year. Given the significant increase in debt (from ~3.3B to ~3.95B), using average debt is more representative of the coverage during the period. However, many simple ratio calculations use period-end debt. S&P Global Ratings' "Key Credit Ratios" usually define Debt as the average of the beginning and ending balances for the period when calculating coverage ratios like FFO/Debt. Let's assume S&P methodology implies **Average Net Debt**. FFO = 2,781,479,000 EUR Average Net Debt = 3,261,325,000 EUR Ratio = 0.8528 Let's refine the FFO calculation again. Does S&P add back "Valuation of Energy Derivatives"? In 2022, VERBUND had significant volatility in energy prices. The -857M expense (gain) likely includes substantial non-cash mark-to-market gains. If these are non-cash, they should be subtracted from Net Income/EBITDA to get to a cash-based FFO. If we subtract the full 857M gain from EBITDA: Adjusted EBITDA = 3,160,679,000 - 857,961,000 = 2,302,718,000. Then FFO = 2,302,718,000 - 36,100,000 - 343,100,000 = 1,923,518,000. Ratio (Avg Debt) = 1,923,518,000 / 3,261,325,000 = 0.59. However, the line item is "Valuation AND Realisation". The realized part is cash. The valuation part is non-cash. Looking at the Cash Flow Statement: "Adjustments For Decrease Increase In Derivative Financial Assets": 548,678,000 "Adjustments For Increase Decrease In Derivative Financial Liabilities": -1,360,527,000 Net adjustment in CFO for derivatives = 548.7M - 1,360.5M = -811.8M. This suggests that the cash flow impact of derivatives was negative (outflow) or a reduction in operating cash flow relative to the P&L gain? Actually, in the indirect method, you start with Net Income. If P&L has a gain of 857M, and CFO adjusts by -811M, it implies the cash flow was roughly $857M - 811M = 46M$ positive? Or rather, the change in working capital offsets the P&L. S&P often "normalizes" FFO by removing the volatility of mark-to-market derivatives. If we assume the entire 857M is volatile/non-recurring/non-cash valuation, we remove it. But "Realisation" is in the name. Let's look at 2021. 2021 Derivatives: -269M (Gain). 2021 EBITDA: 1,578M. 2021 FFO (Proxy): 1,578 - 17.9 (Int) - 238.2 (Tax) = 1,321.9M. 2021 Net Debt (End 2021): Debt: 1,202,154 (Noncurr) + 84,056 (Curr) = 1,286,210. Cash: 318,562. Net Debt: 967,648. Ratio 2021: 1,321.9 / 967.6 = 1.36. If we removed the 269M gain in 2021: FFO = 1,321.9 - 269 = 1,052.9. Ratio = 1.052.9 / 967.6 = 1.08. S&P ratings for VERBUND are typically in the A range. A ratio of 0.85 is consistent with an A rating (usually >0.6 or >0.7). A ratio of 0.59 is lower. Let's look at the "Cash Flows From Used In Operating Activities" directly. CFO 2022: 2,019,859,000. S&P FFO is usually CFO + Changes in Working Capital (excluding cash) + Cash Interest + Cash Taxes? No, FFO is a source of funds. Standard S&P Formula: $FFO = \text{Net Income} + \text{Depreciation} + \text{Amortization} + \text{Non-cash items}$. If we take Net Income (1,948M) + D&A (462M) + Net Impairment (71M) + Deferred Tax (313M) - Equity Income (4M) = 2,790M. This is very close to the EBITDA - Cash Int - Cash Tax proxy (2,781M). The difference is small (~9M). The derivative gain/loss is embedded in Net Income. If it is non-cash, it should be removed. However, if the derivative positions are hedging future sales, S&P might treat them differently. Given the explicit "Valuation AND Realisation", and the fact that utilities often have realized gains/losses from trading books, removing the *entire* amount might be too aggressive unless we know the split. However, note the magnitude. 857M gain on 10B revenue is significant. If we assume the standard proxy (EBITDA - Cash Int - Cash Tax) is what is expected for this type of problem where detailed non-cash splits aren't provided, we stick with ~2,781M. Let's calculate the ratio with Year-End Net Debt vs Average Net Debt. S&P "Key Credit Ratios" documentation states: "Debt is defined as... average of the beginning and ending balances." So Average Net Debt is the correct denominator. Numerator: 2,781,479,000 EUR Denominator: 3,261,325,000 EUR Result: 0.85286... Let's check if "Net Debt" should include "Derivative Financial Liabilities". Generally, no. Derivatives are not debt. Let's check if "Cash" should include "Current Derivative Financial Assets". Generally, no. Let's check if there are "Minority Interests" adjustments. FFO is usually pre-minority interest? Or attributable to parent? S&P FFO is usually consolidated, including non-controlling interests, because the debt is also consolidated. Our Net Income (1,948M) includes non-controlling interests (231M). Our EBITDA (3,160M) is consolidated. So the numerator is consistent with the consolidated debt. One final check on Cash Taxes. "Income Taxes Paid Classified As Operating Activities": 343,100,000. "Income Tax Expense Continuing Operations": 583,352,000. The difference is the deferred tax and change in current tax liabilities. Using Cash Taxes is correct for a cash-flow based FFO. One final check on Cash Interest. "Interest Paid Classified As Operating Activities": 36,100,000. "Interest Expense": 101,703,000. The difference is capitalized interest or change in interest payable. Using Cash Interest is correct for FFO. So, FFO = 2,781.5 million EUR. Avg Net Debt = 3,261.3 million EUR. Ratio = 0.85. If I were to use Year-End Net Debt (3,544.6 million): Ratio = 2,781.5 / 3,544.6 = 0.78. Which one does S&P use? S&P Global Ratings' "Corporate Methodology" states: "We calculate leverage ratios using average debt for the period." Therefore, 0.85 is the more methodologically accurate answer. 0.85