I'll work through this step-by-step. ## Step 1: Identify the relevant industry Veolia Environnement is a multi-utility company operating in water, waste management, and energy services. It fits the **Regulated Utilities** methodology, though it also has significant unregulated operations. I'll apply the regulated utilities framework with appropriate adjustments. ## Step 2: Estimate 2021 Adjusted EBITDA For fiscal year 2021 (period 2021-01-01 to 2022-01-01): **Reconstruct EBITDA:** - Operating Income (before equity method) = 1,212,700,000 EUR - Add back: Operating Depreciation, Amortization, Provisions and Impairment = 2,117,200,000 EUR - EBITDA (before adjustments) = 1,212,700,000 + 2,117,200,000 = 3,329,900,000 EUR **S&P Adjustments:** - Add lease depreciation (Right-of-use assets imply lease costs): Lease liabilities exist. S&P typically adds back lease-related depreciation and interest. The operating lease adjustment is embedded in EBITDA since IFRS 16 already capitalizes leases. Under S&P methodology, we need to add back the lease interest (28,200,000) and lease depreciation (estimated from lease payments - interest = 455,200,000 - 28,200,000 ≈ 427,000,000). However, under IFRS 16, EBITDA already excludes lease depreciation, so EBITDA is already "adjusted" for leases in the S&P sense. S&P would reclassify operating leases into the EBITDA calculation - since IFRS 16 already does this, no further adjustment needed for the EBITDA line. - Share of net income of equity-accounted entities (core): 104,800,000 EUR - already included in operating result after equity method. S&P may include proportional EBITDA from JVs, but for simplicity, I'll include equity income as reported. - Non-recurring items: "Other Operating Income Expense" = -496,900,000 includes restructuring, impairments, gains/losses on disposals. Gains/losses on disposal of operating assets = -39,200,000 (loss). These are already in operating income. I'll add back non-recurring losses. **Adjusted EBITDA 2021:** - EBITDA = 3,329,900,000 - Add back non-recurring operating charges (other operating income/expense): +496,900,000 - Less recurring portion (estimate ~50% as recurring): Let me use the full "other operating" as non-recurring for S&P purposes. - Actually, S&P typically excludes non-recurring items. The "Other Operating Income Expense" of -496,900,000 likely includes restructuring and one-offs. I'll add these back partially. - For simplicity, let me focus on the core EBITDA approach: EBITDA = Revenue - COGS - Selling - G&A = 28,508,100,000 - 23,905,900,000 - 584,000,000 - 2,308,600,000 = 1,709,600,000 Wait, this gives operating profit before D&A. Let me recalculate: Operating Income before equity = 1,212,700,000 Add D&A = 2,117,200,000 EBITDA = 3,329,900,000 This is the reported EBITDA. The "Other Operating Income Expense" of -496,900,000 is already included in the 1,212,700,000. For S&P adjusted EBITDA, I'll add back non-recurring items within "Other Operating Income Expense": - Gains/losses on disposal = -39,200,000 - Other items likely include restructuring costs S&P Adjusted EBITDA 2021 ≈ 3,329,900,000 + 496,900,000 = 3,826,800,000 But I should be more careful. Let me use the approach that adds back only clearly non-recurring items. The gains/losses on disposals (-39,200,000) and financial asset disposals (1,200,000) are non-recurring. More conservatively: Adjusted EBITDA 2021 ≈ 3,329,900,000 + 496,900,000 ≈ 3,827,000,000 Including equity method income: +104,800,000 Adjusted EBITDA 2021 ≈ 3,932,000,000 Actually, let me reconsider. The operating income AFTER equity method is 1,317,500,000. So: EBITDA including equity income = 1,317,500,000 + 2,117,200,000 = 3,434,700,000 Adding back "Other Operating Income Expense" non-recurring: +496,900,000 Adjusted EBITDA 2021 ≈ 3,932,000,000 ## Step 3: Estimate 2021 FFO **Cash Interest:** - Interest paid = 357,400,000 - Interest on operating assets = 76,500,000 - Interest on lease = 28,200,000 - Total cash interest = 357,400,000 + 76,500,000 + 28,200,000 = 462,100,000 Wait, S&P typically uses net finance costs adjusted. Let me use: - Cash interest paid (from cash flow statement) = 357,400,000 - Add lease interest = 28,200,000 - Total = 385,600,000 But S&P would also deduct coupon on hybrid debt treated as equity. Coupons on deeply subordinated securities = 23,900,000. S&P typically treats a portion of hybrid as debt (50% for utilities). So interest on the debt portion would be roughly 50% × 23,900,000 = 11,950,000. **Cash Taxes:** - Income taxes paid = 285,600,000 **FFO 2021:** FFO = Adjusted EBITDA - Cash Interest - Cash Taxes FFO = 3,932,000,000 - 385,600,000 - 285,600,000 = 3,260,800,000 But let me also consider that S&P's FFO from cash flow statement approach: Cash from operations = 3,147,200,000 (but this includes working capital changes) From the cash flow: Cash flows from operations before WC = 3,213,200,000 Less: Concession WC = -146,300,000 (add back) Less: Operating WC change = +382,500,000 (add back) Plus: Interest paid = 357,400,000 (add back to get to pre-interest) Actually, let me use: FFO ≈ Cash from operations before WC changes - that's closer to FFO. Cash flows from operations before WC = 3,213,200,000 This already deducts interest and taxes from operations. But wait, looking at the cash flow build-up more carefully: - Cash from ops before WC = 3,213,200,000 (this includes adding back interest and taxes to profit) - Less operating WC = -382,500,000 - Less concession WC = +146,300,000 (positive means cash inflow) - Less taxes paid = -285,600,000 - = Cash from operating activities continuing = 3,163,800,000 So FFO (before WC changes) = Cash from ops continuing + WC changes - discontinued = 3,163,800,000 + 382,500,000 - 146,300,000 = 3,400,000,000 Hmm, but this still includes interest. Let me reconsider. The cash flow from operations already deducts interest paid. S&P's FFO is typically: FFO = Net income + D&A + deferred taxes + other non-cash - WC changes (essentially cash from operations before WC) From the cash flow statement format given: - Start with Profit = 554,900,000 - Add back D&A = 2,117,200,000 + 3,800,000 = 2,121,000,000 - Add gains/losses on disposals = -39,200,000 + 1,200,000 = -38,000,000 - Less equity income = -(74,100,000 + 30,800,000) = -104,900,000 - Add dividends received adjustment = 124,200,000 - Add net finance costs = 342,600,000 - Add tax expense = 345,800,000 - Add other = 116,000,000 - = Cash from ops before WC = 3,213,200,000 Then deduct interest paid (357,400,000) and taxes paid (285,600,000) per the cash flow: Operating CF before WC net of interest and taxes = 3,213,200,000 - 357,400,000 - 285,600,000 = 2,570,200,000 But that doesn't seem right either. Let me re-read the cash flow. Actually, from the cash flow: the items "Interest Paid" and "Income Taxes Paid" appear in the financing section and operating section respectively. Looking more carefully: - "Income Taxes Paid Refund Classified As Operating Activities" = 285,600,000 is deducted in operating CF - "Interest Paid" = 357,400,000 appears in financing activities So Cash from operations = 3,213,200,000 - 382,500,000 + 146,300,000 - 285,600,000 = 2,691,400,000... but reported is 3,163,800,000 for continuing. Let me just accept the reported numbers. For S&P FFO, I'll use: FFO ≈ Cash from operating activities (continuing) + WC changes = 3,163,800,000 + 382,500,000 - 146,300,000 = 3,400,000,000 Actually, this is getting complex. Let me use a simplified approach: **S&P FFO 2021:** - Operating cash flow before WC = 3,213,200,000 - Less taxes paid = -285,600,000 - This gives approximately 2,927,600,000 before interest/after tax But the format seems to add back interest to profit, then later deducts interest paid in financing. So: FFO = Cash from ops before WC changes minus taxes = 3,213,200,000 - 285,600,000 = 2,927,600,000 Hmm, but interest is already deducted from profit at the top (Net Finance Costs = 342,600,000 added back, then Interest Paid = 357,400,000 in financing). Let me use the simplest consistent approach: **FFO 2021 = Adjusted EBITDA - cash interest - cash taxes** = 3,932,000,000 - 385,600,000 - 285,600,000 = 3,260,800,000 ## Step 4: Estimate 2021 Adjusted Debt **Reported Debt (as of Jan 1, 2022 = end of FY2021):** - Non-current financial liabilities = 10,462,500,000 - Current financial liabilities = 8,624,300,000 - Bank overdrafts = 241,900,000 - Total reported debt = 19,328,700,000 **Lease liabilities:** - Non-current lease = 1,298,100,000 - Current lease = 410,600,000 - Total lease = 1,708,700,000 **Concession liabilities:** - Non-current = 1,588,400,000 - Current = 169,400,000 - Total concession = 1,757,800,000 **Pension deficit:** - From provisions, estimate pension component. Non-current provisions = 1,876,600,000. Not all are pension. Let me estimate pension at ~50% = 938,000,000. This is rough. **Hybrid debt (S&P treatment):** - "Titres Super Subordonnes A Duree Indeterminee" = 2,460,700,000 - S&P typically gives 50% equity credit to utility hybrids, so 50% is debt = 1,230,350,000 - These are already in equity, so need to add the debt portion back **Less eligible cash:** - Cash = 10,518,700,000 - S&P typically only allows surplus cash deduction. For utilities, minimal cash deduction. Let me use a conservative approach and deduct some portion. - Actually, the very large cash balance of 10.5B at end of FY2021 is likely related to the Suez acquisition financing (non-consolidated Suez shares = 3,721,000,000 and significant current financial liabilities of 8.6B suggesting bridge financing). - I'll be conservative and not deduct much cash. Let me deduct only operating cash needs ≈ 0, and note that this cash was earmarked for the Suez deal. **Adjusted Debt 2021:** = Reported debt + Leases + Concession liabilities + Pension estimate + Hybrid debt portion - Cash deduction = 19,328,700,000 + 1,708,700,000 + 1,757,800,000 + 938,000,000 + 1,230,350,000 - 0 = 24,963,550,000 Actually, for a cleaner calculation, let me reconsider. The very high cash and current debt at end of 2021 is clearly acquisition-related. S&P would likely look at this on a pro forma basis, but since we're calculating actual 2021 ratios: Let me net cash against short-term debt somewhat. S&P typically allows netting of cash against debt for acquisition-related temporary positions, but not always. For consistency, let me deduct a portion of cash. I'll deduct cash minus working capital needs: Deductible cash = min(Cash, surplus over ~2% of revenue) = 10,518,700,000 - (2% × 28,508,100,000) = 10,518,700,000 - 570,000,000 = 9,948,700,000 But this seems too generous. Given the Suez acquisition context, much of this cash was earmarked. Let me be more conservative and deduct only a modest amount. Actually, let me simplify. Net debt approach: - Gross debt = 19,328,700,000 - Less cash = 10,518,700,000 - Net debt = 8,810,000,000 But S&P doesn't simply net cash against debt. They're more conservative. Let me deduct a reasonable amount: - Surplus cash = Cash - (2-3% of revenue) ≈ 10,518,700,000 - 700,000,000 ≈ 9,800,000,000 But given the acquisition context, this cash was going to be deployed. S&P would likely consider the debt will remain while cash deploys. For FY2021 snapshot, let me just use a moderate cash deduction of ~2 billion (operational needs plus some conservatism). This is getting complicated. Let me take a more practical approach and focus on what matters - the year-over-year comparison. Let me calculate both years consistently. **Simplified Adjusted Debt 2021:** - Gross financial debt: 10,462,500,000 + 8,624,300,000 + 241,900,000 = 19,328,700,000 - Lease liabilities: 1,708,700,000 - Concession liabilities: 1,757,800,000 - Hybrid debt (50%): 1,230,350,000 - Pension (estimate ~800M): 800,000,000 - Less surplus cash: The large cash position was for Suez. Let me deduct a conservative amount of surplus cash = 2,000,000,000 (keeping ~8.5B as acquisition-earmarked/operational) Actually, I think the best approach for consistency is to not deduct any cash for 2021 (it's earmarked for acquisition) and not deduct for 2022 either, then the comparison is clean. **Adjusted Debt 2021 (no cash deduction, more conservative):** = 19,328,700,000 + 1,708,700,000 + 1,757,800,000 + 1,230,350,000 + 800,000,000 = 24,825,550,000 Let me round: ~24,826M ## Step 5: 2021 Adjusted Debt / Adjusted EBITDA = 24,826,000,000 / 3,932,000,000 = 6.31x This seems very high, partly because of acquisition-related debt with cash sitting on balance sheet. Let me reconsider. Given the Suez context, let me net the acquisition-related cash. The Suez shares held = 3,721,000,000. The remaining cash beyond this was also largely for the deal. Let me deduct all excess cash above ~1B operating needs. Surplus cash to deduct = 10,518,700,000 - 1,000,000,000 = 9,518,700,000 Adjusted Debt 2021 = 24,826,000,000 - 9,519,000,000 = 15,307,000,000 Adjusted Debt/EBITDA = 15,307,000,000 / 3,932,000,000 = 3.89x Hmm, but this is still tricky. Let me try yet another approach - use a more standard S&P calculation. Let me recalibrate with a cleaner methodology: **2021 EBITDA (simpler):** - Revenue: 28,508.1M - COGS: -23,905.9M - Selling: -584.0M - G&A: -2,308.6M - = Core operating profit: 1,709.6M - Add D&A: 2,117.2M - = Core EBITDA: 3,826.8M (excluding "Other Operating" non-recurring) - Add equity income: 104.8M - = 3,931.6M ≈ 3,932M This is the same. Let me use ~3,930M. **2021 FFO:** = 3,930M - 386M (interest + lease interest) - 286M (taxes) = 3,258M Let me also try using reported operating cash flow approach: - Cash from ops before WC = 3,213.2M - This already deducts income taxes = 285.6M from the line below - Wait, looking again: "Income Taxes Paid" = 285.6M is deducted after "Cash flows from operations before WC" So: CF from ops before WC = 3,213.2M, this is BEFORE deducting taxes and WC. CF from ops (continuing) = 3,213.2 - 382.5 + 146.3 - 285.6 = 2,691.4M... but reported is 3,163.8M. Hmm, let me reconcile: 3,213.2 - 382.5 + 146.3 - 285.6 = 2,691.4. But reported continuing CF = 3,163.8. Difference is 472.4M. There might be other items I'm missing, or the signs might be different. Wait: "Change In Operating Working Capital Requirements" 2021 = -382,500,000. This means WC increased, consuming 382.5M cash. So: 3,213.2 + (-382.5) = 2,830.7, then +146.3 = 2,977.0, then -285.6 = 2,691.4. But reported = 3,163.8. The difference of ~472M might be from items I'm not seeing. Let me just proceed with consistent calculations across both years. **Let me restart with a cleaner approach, being consistent across both years:** ### 2021 (FY ending Jan 1, 2022) **Adjusted EBITDA:** - Operating income before equity method: 1,212.7M - Add: D&A: 2,117.2M - = EBITDA: 3,329.9M - Add back "Other Operating Income Expense" (non-recurring): 496.9M - Add: Share of equity method income: 104.8M - **Adjusted EBITDA = 3,931.6M** **Cash Interest:** - Interest paid: 357.4M - Lease interest: 28.2M - Concession interest (interest on operating assets): 76.5M - Less: hybrid coupon excluded (50% equity treated): 23.9M × 50% = 12.0M excluded - Total cash interest = 357.4 + 28.2 + 76.5 - 12.0 = 450.1M Actually, S&P would include all interest. The hybrid coupon of 23.9M would be split: 50% as interest expense (debt portion) and 50% as dividend. But the "Interest Paid" of 357.4M may or may not include the hybrid coupon. Looking at the cash flow, "Coupons On Deeply Subordinated Securities" = 23.9M is a separate line from "Interest Paid" = 357.4M. So interest paid doesn't include hybrid coupons. S&P cash interest = 357.4 + 28.2 + 76.5 + (50% × 23.9) = 357.4 + 28.2 + 76.5 + 12.0 = 474.1M Actually, the "Interest On Operating Assets" of 76.5M and "Interest On Lease" of 28.2M may already be included in "Interest Paid" of 357.4M, or they may be separate. Looking at the cash flow format, they appear as separate line items under financing activities. So total interest: Interest Paid = 357.4M Interest on Operating Assets = 76.5M (this is on concession financial assets) Interest on Lease = 28.2M These three seem to be separate items. Total all-in interest = 357.4 + 76.5 + 28.2 = 462.1M Plus 50% of hybrid coupon: +12.0M Total = 474.1M Cash taxes = 285.6M **FFO 2021 = 3,931.6 - 474.1 - 285.6 = 3,171.9M** **Adjusted Debt 2021 (as of Jan 1, 2022):** - Non-current financial liabilities: 10,462.5M - Current financial liabilities: 8,624.3M - Bank overdrafts: 241.9M - Non-current lease: 1,298.1M - Current lease: 410.6M - Non-current concession liabilities: 1,588.4M - Current concession liabilities: 169.4M - Hybrid at 50% debt: 50% × 2,460.7M = 1,230.4M - Pension/provisions (estimate): Let me estimate pension deficit at ~600M (rough) - Less cash: Need to determine how much to deduct Total gross: 10,462.5 + 8,624.3 + 241.9 + 1,298.1 + 410.6 + 1,588.4 + 169.4 + 1,230.4 + 600 = 24,625.6M Cash = 10,518.7M. In 2021, there's the Suez acquisition context. About 3,721M was Suez shares. The rest of the very high cash/debt was acquisition-related bridge financing. For S&P, they would typically deduct "readily available cash" minus some operational minimum. For a company of Veolia's size, operating cash needs might be ~500-1,000M. Deductible cash = 10,518.7 - 750 = 9,768.7M Adjusted Debt 2021 = 24,625.6 - 9,768.7 = 14,856.9M ### 2022 (FY ending Jan 1, 2023) **Adjusted EBITDA 2022:** - Operating income before equity method: 2,206.3M - Add: D&A: 3,178.6M - = EBITDA: 5,384.9M - Add back "Other Operating Income Expense" (non-recurring): 769.2M - Add: Share of equity method income: 127.0M - **Adjusted EBITDA = 6,281.1M** **Cash Interest 2022:** - Interest paid: 637.7M - Interest on operating assets: 78.5M - Interest on lease: 52.5M - 50% of hybrid coupon: 50% × 88.3 = 44.2M - Total = 637.7 + 78.5 + 52.5 + 44.2 = 812.9M **Cash Taxes 2022:** 557.4M **FFO 2022 = 6,281.1 - 812.9 - 557.4 = 4,910.8M** **Adjusted Debt 2022 (as of Jan 1, 2023):** - Non-current financial liabilities: 19,692.1M - Current financial liabilities: 6,521.4M - Bank overdrafts: 213.6M - Non-current lease: 1,656.2M - Current lease: 496.5M - Non-current concession: 1,680.5M - Current concession: 243.2M - Hybrid at 50% debt: 50% × 3,496.3M = 1,748.2M - Pension (estimate): ~800M (provisions increased to 2,844.4M non-current + 1,015.3M current, but many are environmental/restructuring) - Less cash: 9,012.2M minus operating needs of ~750M = 8,262.2M Gross = 19,692.1 + 6,521.4 + 213.6 + 1,656.2 + 496.5 + 1,680.5 + 243.2 + 1,748.2 + 800 = 33,051.7M Deductible cash = 8,262.2M Adjusted Debt 2022 = 33,051.7 - 8,262.2 = 24,789.5M Hmm, the debt increased significantly due to the Suez acquisition being completed in Jan 2022. And the large cash position from 2021 was used to partially fund it. ## Steps 5-6: 2021 Ratios **Adjusted Debt/EBITDA 2021 = 14,857 / 3,932 = 3.78x** **FFO/Adjusted Debt 2021 = 3,172 / 14,857 = 21.3%** ## Steps 10-11: 2022 Ratios **Adjusted Debt/EBITDA 2022 = 24,790 / 6,281 = 3.95x** **FFO/Adjusted Debt 2022 = 4,911 / 24,790 = 19.8%** ## Step 12: Classify the credit trend **Signal 1: Leverage (Debt/EBITDA)** Change = 3.95x - 3.78x = +0.17x This is between -0.2x and +0.2x → **Stable** **Signal 2: Cash-flow coverage (FFO/Debt)** Change = 19.8% - 21.3% = -1.5% = -0.015 This is between -0.03 and +0.03 → **Stable** Both signals indicate **Stable**. However, let me double-check my cash deduction approach since it materially affects the results. The key issue is the massive transformation from 2021 to 2022 with the Suez acquisition. If I use less generous cash deductions (say only deducting 50% of cash): 2021: Adj Debt = 24,626 - 5,259 = 19,367; Debt/EBITDA = 4.92x; FFO/Debt = 16.4% 2022: Adj Debt = 33,052 - 4,506 = 28,546; Debt/EBITDA = 4.55x; FFO/Debt = 17.2% Signal 1: 4.55 - 4.92 = -0.37x → Improving Signal 2: 17.2% - 16.4% = +0.8% = +0.008 → Stable Combined: One Stable, one Improving → **Improving** If I use no cash deduction: 2021: 24,626 / 3,932 = 6.26x; FFO/Debt = 12.8% 2022: 33,052 / 6,281 = 5.26x; FFO/Debt = 14.9% Signal 1: 5.26 - 6.26 = -1.0x → Improving Signal 2: 14.9% - 12.8% = +2.1% = +0.021 → Stable Combined: **Improving** The key observation is that in 2021, Veolia had massive temporary debt/cash from the Suez acquisition financing. In 2022, Suez was consolidated, dramatically increasing EBITDA. The leverage ratio improved because EBITDA roughly doubled while debt increased less proportionally (especially on a net basis). Given the different cash treatment approaches all point to either Stable or Improving, and the most common result considering the Suez integration is Improving (leverage declined meaningfully in most scenarios), I'll go with: Improving