# S&P Credit Trend Analysis for VERBUND AG ## Step 1: Identify the Relevant Industry VERBUND AG is an Austrian energy company operating in: - Electricity generation and distribution - Grid operation - Energy trading Based on the facts provided, VERBUND operates in multiple business segments: - **Regulated utilities** (grid operations, regulated electricity distribution) - **Unregulated power** (electricity generation, trading, merchant power exposure) The company's revenue structure shows: - Grid Revenue: EUR 734.99M (2021) and EUR 1,309.25M (2022) - **regulated** - Revenue from Sale of Electricity: EUR 3,833.26M (2021) and EUR 8,747.42M (2022) - **mixed (regulated + merchant)** - Other Revenue: EUR 208.39M (2021) and EUR 289.41M (2022) Given that VERBUND has significant exposure to unregulated power (electricity generation and trading), and given the large swings in "Valuation and Realisation of Energy Derivatives" (EUR -269.67M in 2021 vs EUR -857.96M in 2022), the company should be classified as a **Mixed Regulated/Unregulated Power and Gas utility**. However, the dominant methodology applicable is **Regulated Utilities** combined with **Unregulated Power and Gas** considerations, leaning toward the regulated utilities baseline given the grid revenue component, but with adjustments for merchant power exposure. --- ## Step 2: Calculate 2021 Adjusted_EBITDA **Reported EBITDA (2021):** EUR 1,578,959,000 **Adjustments needed:** - Lease adjustment (ROU assets present): EUR 110,663,000 (noncurrent right-of-use assets) - Non-recurring items and energy derivative impacts: The "Valuation and Realisation of Energy Derivatives" (EUR -269.67M) represents mark-to-market losses on hedging positions. Per S&P methodology for utilities, these derivative positions related to operational hedging should be normalized. **Lease Adjustment:** - Operating lease expense approximation: Using right-of-use asset depreciation proxy. Given ROU assets of EUR 110.66M (2021), annual rent expense ≈ EUR 10-15M (using typical 10% depreciation). Conservative estimate: EUR 15M. **Energy Derivatives Adjustment:** - The EUR -269.67M represents unrealized/realized losses on energy derivatives used for hedging. For a utility, this should be normalized as it doesn't reflect underlying operational performance. - Adjustment: +EUR 269.67M **Adjusted_EBITDA (2021):** ``` Adjusted_EBITDA = 1,578,959 + 15 + 269,670 = 1,848,644 thousand EUR = EUR 1,848.64M ``` --- ## Step 3: Calculate 2021 FFO **Formula:** ``` FFO = Adjusted_EBITDA - Cash_Interest - Cash_Taxes ``` **Data extraction:** - Interest Expense (2021): EUR 77,814,000 - Income Tax Expense (2021): EUR 279,365,000 - Cash taxes paid (2021): EUR 238,200,000 (from cash flow statement) - Cash interest paid (2021): EUR 17,900,000 (from cash flow statement) **Calculation:** ``` FFO = 1,848,644 - 17,900 - 238,200 = 1,592,544 thousand EUR = EUR 1,592.54M ``` --- ## Step 4: Calculate 2021 Adjusted_Debt **Components:** - Noncurrent Financial Liabilities: EUR 1,202,154,000 - Current Financial Liabilities: EUR 84,056,000 - Reported Debt Subtotal: EUR 1,286,210,000 **Adjustments:** - Lease liabilities (ROU adjustment): EUR 110,663,000 (noncurrent) + estimated current portion ≈ EUR 120,000,000 - Pension deficit: No explicit pension liability data; deferred tax liabilities partially reflect this (EUR 797,055,000), but without specific pension asset/liability data, conservative approach is to exclude - Cash and equivalents to deduct: EUR 49,203,000 **Adjusted_Debt (2021):** ``` Adjusted_Debt = (1,202,154 + 84,056 + 120,000) - 49,203 = 1,357,007 thousand EUR = EUR 1,357.01M ``` --- ## Step 5: Calculate 2021 Adjusted_Debt / Adjusted_EBITDA ``` Leverage Ratio (2021) = 1,357.01 / 1,848.64 = 0.734x ``` --- ## Step 6: Calculate 2021 FFO / Adjusted_Debt ``` FFO Coverage (2021) = 1,592.54 / 1,357.01 = 1.174 (or 117.4%) ``` --- ## Step 7: Calculate 2022 Adjusted_EBITDA **Reported EBITDA (2022):** EUR 3,160,679,000 **Adjustments:** - Lease adjustment: ROU assets (2022): EUR 103,826,000. Annual lease expense proxy ≈ EUR 12-15M Conservative estimate: EUR 15M - Energy Derivatives Adjustment (2022): EUR -857,961,000 (larger mark-to-market loss) Adjustment: +EUR 857,961,000 **Adjusted_EBITDA (2022):** ``` Adjusted_EBITDA = 3,160,679 + 15 + 857,961 = 4,018,655 thousand EUR = EUR 4,018.66M ``` --- ## Step 8: Calculate 2022 FFO **Data extraction:** - Cash interest paid (2022): EUR 36,100,000 - Cash taxes paid (2022): EUR 343,100,000 **Calculation:** ``` FFO = 4,018,655 - 36,100 - 343,100 = 3,639,455 thousand EUR = EUR 3,639.46M ``` --- ## Step 9: Calculate 2022 Adjusted_Debt **Components:** - Noncurrent Financial Liabilities: EUR 1,834,155,000 - Current Financial Liabilities: EUR 1,462,453,000 - Reported Debt Subtotal: EUR 3,296,608,000 **Adjustments:** - Lease liabilities: EUR 146,613,000 (noncurrent, 2023 balance; estimate 2022 ≈ EUR 140,000,000) - Cash and equivalents to deduct: EUR 318,562,000 **Adjusted_Debt (2022):** ``` Adjusted_Debt = (1,834,155 + 1,462,453 + 140,000) - 318,562 = 3,118,046 thousand EUR = EUR 3,118.05M ``` --- ## Step 10: Calculate 2022 Adjusted_Debt / Adjusted_EBITDA ``` Leverage Ratio (2022) = 3,118.05 / 4,018.66 = 0.776x ``` --- ## Step 11: Calculate 2022 FFO / Adjusted_Debt ``` FFO Coverage (2022) = 3,639.46 / 3,118.05 = 1.167 (or 116.7%) ``` --- ## Step 12: Determine Credit Trend ### Signal 1: Leverage Change ``` Change = Leverage(2022) - Leverage(2021) = 0.776x - 0.734x = +0.042x ``` **Signal 1 Assessment:** +0.042x is between -0.2x and +0.2x (exclusive), so **Stable** ### Signal 2: Cash-Flow Coverage Change ``` Change = FFO/Debt(2022) - FFO/Debt(2021) = 1.167 - 1.174 = -0.007 ``` **Signal 2 Assessment:** -0.007 is between -0.03 and +0.03 (exclusive), so **Stable** ### Combining Signals Both signals indicate **Stable**. There is no conflict. --- ## Additional Context and Validation **Key observations supporting the conclusion:** 1. **Revenue Growth:** Revenue increased 116% (EUR 4.78B → EUR 10.35B), primarily driven by exceptional electricity price spikes in 2022 across Europe. 2. **EBITDA Growth:** Adjusted EBITDA more than doubled (EUR 1.85B → EUR 4.02B), a 117% increase, indicating strong operational leverage. 3. **Derivative Adjustments:** Both years show significant unrealized mark-to-market losses on energy derivatives (EUR -270M and EUR -858M respectively). These are non-cash items reflective of hedging positions and have been normalized in the Adjusted_EBITDA calculation, which is appropriate for utilities. 4. **Debt Increase:** Adjusted debt increased 130% (EUR 1.36B → EUR 3.12B), primarily driven by: - Current financial liabilities jumped from EUR 84M to EUR 1,462M, reflecting derivative liabilities (EUR 3,313M current derivative liabilities at end of 2022 per balance sheet) - However, this was partially offset by increased cash (EUR 49M → EUR 319M) 5. **FFO Growth:** FFO increased 128% (EUR 1.59B → EUR 3.64B), demonstrating exceptional cash generation from operations. 6. **Leverage Ratio:** Increased marginally from 0.734x to 0.776x (+0.042x), remaining very strong and indicating low financial stress. 7. **FFO Coverage:** Decreased marginally from 117.4% to 116.7%, but remains at very high levels, indicating the company can cover its debt more than once annually from cash operations. **Why the signals are stable despite the company's exceptional performance:** The credit metrics improve **relative to the size of the company**. While absolute debt increased, the company's EBITDA-generating capacity increased even more significantly (117% vs. 130% debt growth). The leverage ratio barely moved (+0.042x out of an allowable ±0.2x band), and cash-flow coverage remained essentially flat (−0.007 within the ±0.03 band), both indicating remarkable stability in the company's credit profile despite the volatile energy market environment in 2022. This is a hallmark of a well-managed, regulated/semi-regulated utility with strong operational and financial resilience. Stable