I'll work through this step-by-step. ## Step 1: Identify the relevant industry Électricité de France (EDF) is a major electric utility with both regulated and unregulated operations. It operates nuclear power plants, renewable energy, distribution networks (Enedis), and has significant regulated utility operations. EDF fits primarily into **Regulated Utilities** and **Unregulated Power and Gas**. Given its mixed profile, I'll apply a blended approach, but the core methodology for a large integrated utility like EDF applies. ## Step 2: Estimate 2021 Adjusted_EBITDA Starting with reported Operating Profit Before Depreciation and Amortisation (EBE/EBITDA proxy): - EBE 2021: €18,005M Adjustments per S&P methodology: - **Net changes in fair value on energy/commodity derivatives** (non-cash, should be added back if losses): +€215M (loss already excluded from EBE based on the income statement structure - these appear below EBE) - **Other income and expenses excluded from EBE**: €1,123M (this line is below EBE, includes items like gains/losses on disposals) - **Pension adjustments**: S&P typically adds back service costs and adjusts for cash contributions. Without detailed pension cash data, I'll use reported EBE as a reasonable proxy. - **Operating lease adjustments**: EDF reports under IFRS 16, so leases are already capitalized. The EBE of €18,005M is essentially EDF's reported EBITDA. For S&P purposes, I'll make modest adjustments: **Adjusted_EBITDA (2021) ≈ €18,005M** ## Step 3: Estimate 2021 FFO FFO = Adjusted_EBITDA - cash_interest - cash_taxes - Cash interest: Interest expense = €1,459M. Adding payments on perpetual subordinated bonds: €547M. Total ≈ €2,006M - Cash taxes: Income taxes paid = €2,276M **FFO (2021) = 18,005 - 2,006 - 2,276 = €13,723M** ## Step 4: Estimate 2021 Adjusted_Debt From the balance sheet at Jan 1, 2022 (end of FY2021): - Other noncurrent financial liabilities: €56,543M - Other current financial liabilities: €45,014M - Total reported financial liabilities: ~€101,557M However, much of current financial liabilities includes derivatives. Let me reconstruct: - Gross financial debt (noncurrent + current borrowings): Noncurrent financial liabilities €56,543M + a portion of current financial liabilities. S&P adjustments: - **Pension deficit**: Noncurrent provisions for employee benefits = €21,716M. S&P typically treats underfunded pensions as debt-like. Assume ~50-70% is pension deficit. Use €21,716M as a proxy (conservative). - **Nuclear provisions**: €62,067M - these are significant. S&P may partially treat these as debt-like, but they're typically offset by dedicated assets (€55,609M in other noncurrent financial assets includes dedicated nuclear assets). Net nuclear obligation ≈ €62,067 - ~€50,000 = ~€12,067M (rough estimate of unfunded portion). - **Hybrid debt**: S&P gives partial equity credit to perpetual subordinated bonds. Approximate 50% debt treatment. - **Cash**: €9,919M - deduct eligible portion (~75%): €7,439M Let me simplify using a more practical approach: - Gross debt (noncurrent + current financial liabilities): €56,543 + €45,014 = €101,557M - But this includes derivatives. Net debt reported by EDF is typically around €43-45B. Let me use a reasonable estimate. Using reported financial data and typical EDF net debt of ~€43B at end-2021: - Add pension deficit: ~€21,716M - Add nuclear provision net of assets: ~€12,000M - Less excess cash: Already reflected in net debt - Hybrid adjustments (50% of ~€10B hybrids as debt): ~€5B **Adjusted_Debt (2021) ≈ €43,000 + €21,716 + €12,000 + €5,000 = ~€81,716M** This seems high. Let me recalibrate. S&P typically reported EDF's adjusted debt around €75-85B range. I'll use **€80,000M** as a reasonable estimate. ## Step 5: 2021 Adjusted_Debt / Adjusted_EBITDA **80,000 / 18,005 = 4.4x** ## Step 6: 2021 FFO / Adjusted_Debt **13,723 / 80,000 = 17.2%** ## Step 7: Estimate 2022 Adjusted_EBITDA EBE 2022: **-€4,986M** This is negative EBITDA, driven by massive fuel/energy purchase costs (€121B vs €44B in 2021) due to nuclear fleet unavailability and government-imposed price caps (ARENH). **Adjusted_EBITDA (2022) ≈ -€4,986M** ## Step 8: Estimate 2022 FFO FFO = Adjusted_EBITDA - cash_interest - cash_taxes - Cash interest: €1,730M + €606M (perpetual bond payments) = €2,336M - Cash taxes: €1,282M (but this was a refund given the tax benefit of -€3,926M; looking at the cash flow, income taxes paid/refund = €1,282M appears to be a net payment) Actually, given the massive loss, cash taxes should be minimal or refunded. The €1,282M in the cash flow statement appears as "Income Taxes Paid Refund" which could be a net figure. Given the massive tax benefit (-€3,926M), the company likely received refunds. Let me treat this as a net tax payment of €1,282M (conservative). **FFO (2022) = -4,986 - 2,336 - 1,282 = -€8,604M** Wait - if taxes were refunded: FFO = -4,986 - 2,336 + 1,282 = -€6,040M. The cash flow shows it as a subtraction from operating cash flow, so it's a payment. **FFO (2022) ≈ -€8,604M** ## Step 9: Estimate 2022 Adjusted_Debt At Jan 1, 2023 (end FY2022): - Noncurrent financial liabilities: €71,058M - Current financial liabilities: €71,844M (includes large derivative positions) - Pension deficit: €16,231M - Nuclear provisions: €56,021M; noncurrent financial assets: €48,512M → net ~€7,509M - Cash: €10,948M EDF's net debt increased significantly in 2022 (they borrowed €34B new debt). Net financial debt likely increased to ~€65B+. Using similar methodology: - Net debt ≈ €65,000M (increased from ~€43B due to massive operating losses and capex) - Pension: €16,231M - Nuclear net: €7,500M - Hybrid: ~€5,000M - Less excess cash: already in net debt **Adjusted_Debt (2022) ≈ €65,000 + €16,231 + €7,500 + €5,000 = ~€93,731M** Use **€94,000M** ## Step 10: 2022 Adjusted_Debt / Adjusted_EBITDA With negative EBITDA, this ratio is negative/meaningless: **-94,000 / -4,986 = N/M (negative EBITDA)** Effectively, leverage is infinite/unmeasurable - clearly severely deteriorated. ## Step 11: 2022 FFO / Adjusted_Debt **-8,604 / 94,000 = -9.2%** ## Step 12: Classify the credit trend **Signal 1: Leverage (Adjusted_Debt / Adjusted_EBITDA)** - 2021: 4.4x - 2022: Negative (meaningless due to negative EBITDA) → massively deteriorated - Change: Severely deteriorating → **Deteriorating** **Signal 2: FFO / Adjusted_Debt** - 2021: 17.2% (0.172) - 2022: -9.2% (-0.092) - Change: -0.092 - 0.172 = -0.264 → well below -0.03 threshold → **Deteriorating** Both signals clearly agree: **Deteriorating** Deteriorating