I'll work through this step-by-step. ## Step 1: Identify the relevant industry VERBUND AG is an Austrian energy company primarily focused on hydroelectric power generation. It has both regulated (grid) and unregulated (generation/trading) activities. The company's revenue mix shows: - Revenue from sale of electricity: dominant - Grid revenue: significant portion - It operates in both regulated and unregulated power sectors VERBUND is best classified as a combination of **Regulated Utilities** (grid/transmission) and **Unregulated Power and Gas** (generation). Given the mix, I'll apply the unregulated power and gas methodology primarily, with regulated utility considerations. The standard volatility table would likely apply given the mix. ## Step 2: Estimate 2021 Adjusted_EBITDA Reported EBITDA (2021): €1,578,959,000 Adjustments: - **Lease adjustment**: Right-of-use assets exist (€103,826K at start of 2021 period → €103,826K). Lease payments classified as financing: €27,523K. This represents the operating lease adjustment. Add back lease depreciation (approximated from RoU change) and add the full lease expense. S&P typically adds operating lease expense back. The lease payment of ~€27.5M is already excluded from EBITDA under IFRS 16. I'll add this back as an S&P adjustment. - **Nonrecurring items**: Impairment loss €9,869K, reversal of impairment €115,009K. Net reversal = €105,140K. These are nonrecurring. Remove net gain: -€105,140K. Wait - these are already included in the path from EBITDA to operating profit, meaning they are BELOW EBITDA. Let me check: EBITDA (1,578,959) - D&A (417,269) - Impairment (9,869) + Reversal (115,009) = 1,266,830 = Operating profit. So impairments are below EBITDA. No adjustment needed for impairments. - **Energy derivatives valuation**: The line "Valuation And Realisation of Energy Derivatives" shows -€269,667K. This is already included above EBITDA. This represents unrealized mark-to-market gains/losses. S&P would typically normalize for unrealized derivatives. However, without clarity on how much is unrealized vs realized, I'll note this but not adjust further since it's part of normal business. - **Pension adjustment**: Remeasurements are in OCI. The pension deficit change might require adjustment. Noncurrent provisions decreased from €886,219K to €832,928K. Some of this is pension-related. For simplicity and given available data: Adjusted_EBITDA (2021) ≈ €1,578,959K + €27,523K (lease add-back) ≈ **€1,606,482K** ## Step 3: Estimate 2021 FFO FFO = Adjusted_EBITDA - cash_interest - cash_taxes - Cash interest paid: €17,900K (from cash flow statement - "Interest Paid Classified As Operating Activities") - Wait, this seems low. Let me reconsider. Interest expense was €77,814K. The cash flow shows interest paid of €17,900K and interest received of €2,100K. This seems unusually low - perhaps the cash flow interest paid figure represents net or only a portion. Let me use the reported figure. - Actually, S&P typically uses cash interest. I'll use: Cash interest = €17,900K - Cash taxes: €238,200K - Lease interest component: approximately estimated. With ~€103K RoU assets and financial liabilities, lease interest might be ~€3-4M. I'll approximate lease interest at €3,500K. FFO (2021) = €1,606,482K - €17,900K - €3,500K - €238,200K = **€1,346,882K** Wait - the interest paid seems very low relative to debt. Let me reconsider. The €17.9M might represent only a portion. S&P would use gross cash interest on all debt. Let me use the reported interest expense as a proxy adjusted for non-cash items. Actually, looking more carefully, the interest paid in operating activities of €17.9M may be net of capitalized interest. I'll use a more reasonable estimate based on interest expense of €77,814K, adjusted for non-cash items. Let me use approximately €60,000K as cash interest (some portion may be non-cash/accrued). FFO (2021) = €1,606,482K - €60,000K - €238,200K = **€1,308,282K** ## Step 4: Estimate 2021 Adjusted_Debt At the balance sheet date closest to end of FY2021 (which is 2022-01-01 in the data): - Current Financial Liabilities: €1,462,453K - Noncurrent Financial Liabilities: €1,834,155K - Total reported debt: €3,296,608K Adjustments: - **Leases**: Already included in financial liabilities under IFRS 16. RoU assets = €103,826K. The lease liability is likely embedded in financial liabilities. S&P would include operating leases. Since IFRS 16 capitalizes all leases, this is already in debt. I need to verify if the lease liability needs separate treatment. Assuming it's already in financial liabilities. - **Pension deficit**: Noncurrent provisions include pension obligations. The pension-related provisions are part of €832,928K. The OCI remeasurement of defined benefit plans suggests there's a significant pension obligation. The reserve of remeasurements of defined benefit plans = -€327,822K. S&P would add unfunded pension obligations. I'll estimate the pension deficit at approximately €200,000K (portion of noncurrent provisions attributable to pensions). - **Surplus cash**: Cash = €318,562K. S&P typically allows some cash deduction. For utilities, perhaps 50% or minimal operating cash needs. I'll deduct €250,000K. Adjusted_Debt (2021) = €3,296,608K + €200,000K - €250,000K = **€3,246,608K** ## Step 5: 2021 Adjusted_Debt / Adjusted_EBITDA = €3,246,608K / €1,606,482K = **2.02x** ## Step 6: 2021 FFO / Adjusted_Debt = €1,308,282K / €3,246,608K = **0.403 (40.3%)** ## Step 7: Estimate 2022 Adjusted_EBITDA Reported EBITDA (2022): €3,160,679K Adjustments: - Lease add-back: €11,447K (lease payments from financing) - Similar normalization approach Adjusted_EBITDA (2022) ≈ €3,160,679K + €11,447K ≈ **€3,172,126K** ## Step 8: Estimate 2022 FFO - Cash interest paid: €36,100K. Again seems low. Using adjusted estimate ~€80,000K based on interest expense of €101,703K. - Cash taxes: €343,100K FFO (2022) = €3,172,126K - €80,000K - €343,100K = **€2,749,026K** ## Step 9: Estimate 2022 Adjusted_Debt At balance sheet date (2023-01-01): - Current Financial Liabilities: €1,109,297K - Noncurrent Financial Liabilities: €2,844,559K - Total reported debt: €3,953,856K Adjustments: - Pension deficit: Noncurrent provisions = €619,486K. Remeasurement reserve improved to -€205,455K. Estimated pension deficit ~€150,000K. - Surplus cash: Cash = €409,252K. Deduct ~€340,000K. Adjusted_Debt (2022) = €3,953,856K + €150,000K - €340,000K = **€3,763,856K** ## Step 10: 2022 Adjusted_Debt / Adjusted_EBITDA = €3,763,856K / €3,172,126K = **1.19x** ## Step 11: 2022 FFO / Adjusted_Debt = €2,749,026K / €3,763,856K = **0.731 (73.1%)** ## Step 12: Classify the credit trend **Signal 1 - Leverage**: Change = 1.19x - 2.02x = **-0.83x** → ≤ -0.2x → **Improving** **Signal 2 - Cash flow coverage**: Change = 0.731 - 0.403 = **+0.328** → ≥ +0.03 → **Improving** Both signals agree: **Improving** EBITDA doubled while debt increased only modestly, driven by surging electricity prices in 2022. Both leverage and coverage metrics improved dramatically. Improving