I'll work through this step-by-step. ## Step 1: Identify the relevant industry ERG S.p.A. is an Italian renewable energy company operating wind and solar power generation across Europe. Based on the description, ERG fits the **Unregulated Power and Gas** sector (renewable generation company). They don't have traditional regulated utility operations - they're primarily a wind/solar generator. ## Step 2: Estimate 2021 Adjusted EBITDA From the data: - EBITDA (2021) = 396,680,000 EUR (reported as "Profit Loss From Operating Activities Before Interest Taxes Depreciation And Amortisation Expense") - Lease adjustment: Right-of-use assets exist (126,663,000 at end of 2021), with lease liabilities. S&P typically adds back lease depreciation and adds lease interest to EBITDA. However, since EBITDA is already before D&A (which includes ROU depreciation), and lease payments are operating, I need to consider lease adjustments. For S&P, the key adjustment is adding operating lease payments back and treating them as financing. Since IFRS 16 already capitalizes leases, the reported EBITDA already excludes lease depreciation. S&P typically reverses IFRS 16 and adds back the full lease payment as an operating expense adjustment, but since we're working with reported EBITDA which already reflects IFRS 16 treatment (lease costs not in EBITDA), the EBITDA figure is already "adjusted" in that sense. The discontinued operations in 2021 generated significant profit (88,488,000). ERG was divesting its hydroelectric/thermoelectric operations. For ongoing credit analysis, I'll focus on continuing operations EBITDA. However, looking at the cash flow statement, operating cash flows include discontinued operations. For a comprehensive view, I'll use the reported EBITDA of 396,680,000 as a starting approximation for continuing operations. **2021 Adjusted EBITDA ≈ 396,680,000 EUR** (continuing operations) Adding lease adjustments: S&P adds lease payments (~8,337 in 2022 for payments; 2021 was ~4,139 for lease liability payments + ~4,000 interest on leases ≈ ~8,000). Under S&P methodology, we add the imputed lease depreciation portion back. Since leases are already capitalized under IFRS 16 and EBITDA excludes D&A, the reported EBITDA is approximately correct. **2021 Adjusted EBITDA ≈ 397,000,000 EUR** (rounding) ## Step 3: Estimate 2021 FFO FFO = Adjusted EBITDA - cash interest - cash taxes - Cash interest (2021): Interest paid = 32,399,000 EUR - Cash taxes (2021): Income taxes paid = 38,010,000 EUR - Lease interest (S&P adjustment): Approximately 4,000,000 EUR (estimated from lease liabilities) FFO = 397,000,000 - 32,399,000 - 38,010,000 = 326,591,000 EUR **2021 FFO ≈ 326,591,000 EUR** ## Step 4: Estimate 2021 Adjusted Debt At end of 2021 (January 1, 2022): - Non-current financial liabilities: 2,064,088,000 - Non-current financial liabilities at FV: 44,763,000 - Current financial liabilities (other): 1,342,688,000 - Current financial liabilities at FV: 170,857,000 - Non-current lease liabilities: 122,663,000 - Current lease liabilities: 6,282,000 Total gross financial debt = 2,064,088 + 44,763 + 1,342,688 + 170,857 = 3,622,396,000 However, the current financial liabilities at FV (170,857) likely include derivative liabilities, and current financial assets at FV (154,154) include derivative assets. Similarly, non-current FV liabilities (44,763) are likely derivatives. Let me separate derivatives from debt: - Core debt: Non-current other financial liabilities (2,064,088) + Current other financial liabilities (1,342,688) = 3,406,776,000 - Derivatives (net): FV liabilities (44,763 + 170,857) - FV assets (154,154 + 984) = 215,620 - 155,138 = 60,482,000 (these are typically excluded from S&P debt) Lease liabilities: 122,663 + 6,282 = 128,945,000 S&P debt = Core debt + lease liabilities = 3,406,776 + 128,945 = 3,535,721,000 Cash deduction: S&P typically allows some cash offset. Cash = 860,352,000. However, S&P is conservative about cash deductions, particularly for companies with large held-for-sale assets. I'll deduct a portion. Given the company had significant held-for-sale assets (776,220,000) and associated liabilities (23,790,000), some of this cash may relate to those operations. Let me be conservative and deduct about 50% of cash (given operational needs and restricted amounts): ~430,000,000. Actually, looking more carefully, the "Other Current Financial Assets" of 424,282,000 may include deposits or restricted cash. I'll use a more standard approach and deduct excess cash above operational needs. For ERG with ~600M revenue, operational cash needs might be ~60M. **Cash deduction: ~800,000,000** (keeping ~60M for operations) But S&P is typically more conservative. Let me use a more moderate deduction. Given the significant current financial liabilities may include credit facilities drawn for working capital purposes related to derivatives collateral, I'll deduct approximately 200,000,000 of surplus cash. Adjusted Debt = 3,535,721 - 200,000 = 3,335,721,000 Actually, let me reconsider. The very large current financial liabilities (1,342,688) likely include short-term borrowings and credit facilities. Some of this is genuine debt. The cash position of 860,352 includes operational and strategic cash. S&P typically doesn't deduct much cash for speculative-grade or companies in transition. **2021 Adjusted Debt ≈ 3,336,000,000 EUR** ## Step 5: 2021 Adjusted Debt / Adjusted EBITDA Ratio = 3,336,000 / 397,000 = **8.4x** This seems very high. Let me reconsider - the large current financial liabilities likely include significant derivative-related collateral/margin obligations. Let me revisit. Looking at the cash flow statement, "Cash Flows From Used In Increase Decrease In Current Borrowings" shows 760,251,000 in 2021, suggesting significant short-term borrowing activity. And "Adjustments For Gains Losses On Change In Fair Value Of Derivatives" was 321,038,000 in 2021, confirming large derivative positions. Let me strip out derivative-related liabilities more carefully: - The "Current Financial Liabilities At Fair Value Through Profit Or Loss" (170,857) are derivatives - The "Other Current Financial Liabilities" (1,342,688) likely includes both short-term borrowings and derivative collateral Looking at the 2022 data, current borrowings decreased by 1,000,134,000, which aligns with ~1,342,688 dropping to ~389,716 (a decrease of ~953,000). This was largely repayment of short-term debt using proceeds from asset sales. So the 1,342,688 in current other financial liabilities appears to be mostly genuine short-term debt. Let me recalculate with a more reasonable cash deduction. Given the large asset sale proceeds expected (and received in 2022), much of the short-term debt was bridge financing: Adjusted Debt = 2,064,088 + 1,342,688 + 128,945 - 500,000 (cash deduction) = 3,035,721,000 2021 Leverage = 3,036,000 / 397,000 = **7.6x** This still seems high, but ERG was in a transition period (pre-sale of hydroelectric assets). Let me proceed with these numbers and note they'll improve in 2022 after the sale. ## Step 6: 2021 FFO / Adjusted Debt FFO / Debt = 326,591 / 3,036,000 = **10.8%** ## Step 7: Estimate 2022 Adjusted EBITDA From the data: - EBITDA (2022) = 499,430,000 EUR (continuing operations) Lease adjustments similar to 2021. **2022 Adjusted EBITDA ≈ 499,430,000 EUR** ## Step 8: Estimate 2022 FFO - Cash interest (2022): Interest paid = 29,146,000 EUR - Cash taxes (2022): Income taxes paid = 91,854,000 EUR FFO = 499,430,000 - 29,146,000 - 91,854,000 = 378,430,000 EUR **2022 FFO ≈ 378,430,000 EUR** ## Step 9: Estimate 2022 Adjusted Debt At end of 2022 (January 1, 2023): - Non-current other financial liabilities: 1,751,255,000 - Non-current financial liabilities at FV: 0 - Current other financial liabilities: 389,716,000 - Current financial liabilities at FV: 76,644,000 (derivatives) - Non-current lease liabilities: 150,955,000 - Current lease liabilities: 6,362,000 Core debt = 1,751,255 + 389,716 = 2,140,971,000 Lease liabilities = 150,955 + 6,362 = 157,317,000 Total = 2,298,288,000 Cash: 392,811,000 Cash deduction (conservative, ~200,000): Adjusted Debt = 2,298,288 - 200,000 = 2,098,288,000 **2022 Adjusted Debt ≈ 2,098,000,000 EUR** ## Step 10: 2022 Adjusted Debt / Adjusted EBITDA Ratio = 2,098,000 / 499,430 = **4.2x** ## Step 11: 2022 FFO / Adjusted Debt FFO / Debt = 378,430 / 2,098,000 = **18.0%** ## Step 12: Classify the year-on-year credit trend **Signal 1: Leverage change** Change = 4.2x - 7.6x = **-3.4x** → ≤ -0.2x → **Improving** **Signal 2: Cash-flow coverage change** Change = 0.180 - 0.108 = **+0.072** → ≥ +0.03 → **Improving** Both signals strongly agree: **Improving** The massive deleveraging from asset sales (hydroelectric business) and higher EBITDA from favorable energy prices drove significant improvement in both metrics. Improving