To estimate the FFO / Net Debt ratio for Fortum Oyj for the year 2022 based on S&P methodology, we need to calculate Funds From Operations (FFO) and Net Debt. **1. Calculate Funds From Operations (FFO)** According to S&P Global Ratings methodology, FFO is generally calculated as: $$FFO = \text{Net Income} + \text{Depreciation and Amortization} + \text{Other Non-Cash Items} + \text{Deferred Taxes} - \text{Non-Cash Revenues} + \text{Changes in Working Capital (sometimes excluded or adjusted, but standard FFO often starts with Net Income and adds back D&A and Deferred Tax)}$$ A more standard simplified S&P definition for industrial/utility companies often uses: $$FFO = \text{Net Income from Continuing Operations} + \text{Depreciation and Amortization} + \text{Deferred Income Tax Expense} + \text{Other Non-Cash Items}$$ Let's extract the relevant data for the period 2022-01-01 to 2023-01-01 (Fiscal Year 2022): * **Net Income from Continuing Operations:** The report lists "Profit Loss From Continuing Operations" as **1,011,000,000 EUR**. Note: S&P often prefers using income from continuing operations to exclude volatile discontinued operations. The total "Profit Loss" is -10,290,000,000 EUR, heavily impacted by discontinued operations (-11,302,000,000 EUR). Using continuing operations is more representative of ongoing operational cash generation capability for ratio analysis unless specified otherwise. However, standard FFO definitions sometimes start with reported Net Income. Let's look at the components. * Reported Net Income (Profit Loss): -10,290,000,000 EUR. * Discontinued Operations Loss: -11,302,000,000 EUR. * Continuing Operations Income: 1,011,000,000 EUR. Given the massive loss from discontinued operations (likely divestments or restructuring charges which are non-recurring or balance sheet reclassifications), using Continuing Operations is the prudent analytical choice for a forward-looking credit metric like FFO/Net Debt. Let's stick with **Profit Loss From Continuing Operations: 1,011,000,000 EUR**. * **Depreciation and Amortization:** "Depreciation And Amortisation Expense" is **566,000,000 EUR**. * **Deferred Income Taxes:** We need the deferred tax component. * Total "Income Tax Expense Continuing Operations": -556,000,000 EUR (This is a benefit/negative expense). * To find the deferred portion, we usually look at the cash flow statement or notes. The cash flow statement shows "Income Taxes Paid Refund Classified As Operating Activities" as 167,000,000 EUR (inflow/refund). * Alternatively, we can look at the change in Deferred Tax Assets/Liabilities on the balance sheet, but that includes other comprehensive income items. * Let's look for a specific "Deferred Tax" line item. It is not explicitly broken out in the provided summary lines. However, S&P methodology adds back deferred taxes. If we assume the total tax expense is largely deferred or we lack the split, we might have to estimate. * Let's look at the Cash Flow from Operations indirect method adjustments if available. The provided text doesn't explicitly list "Deferred Tax" as an adjustment line. * However, we can approximate. Total Tax Expense is -556M. If cash tax paid was a refund of 167M, the difference is roughly the deferred portion plus changes in tax liabilities. * Let's check the change in Deferred Tax Assets (DTA) and Liabilities (DTL) from the balance sheet (excluding OCI impacts if possible, but hard to separate). * DTA 2022: 2,149M -> 2023: 933M. Decrease of 1,216M. * DTL 2022: 827M -> 2023: 152M. Decrease of 675M. * Net DTA/DTL change: The net deferred tax asset decreased significantly. A decrease in DTA is a source of cash (add back to income?) or implies previous benefits reversing. * This balance sheet movement is complex due to discontinued operations. * Let's try a simpler S&P proxy often used when detailed deferred tax data is missing: **FFO ≈ EBITDA - Cash Taxes - Cash Interest - Changes in Working Capital**? No, that's Free Operating Cash Flow. * Standard S&P FFO Definition: Net Income + Depreciation + Amortization + Deferred Taxes + Other Non-Cash Items. * Let's use **Net Income from Continuing Operations**: 1,011M. * Add **Depreciation & Amortization**: 566M. * Add **Deferred Taxes**: Since explicit deferred tax expense is not given, we can infer it. Current Tax Expense = Total Tax Expense - Deferred Tax Expense. Without the split, we might assume the tax benefit is largely non-cash (deferred) or look at the "Income Tax Expense" line. In many utility cases, a large portion is deferred. However, without the specific line, adding the full tax expense back is incorrect (that would be EBIT). We should add back *deferred* taxes. * Let's look at "Other Adjustments For Noncash Items" in the cash flow section: **153,000,000 EUR**. This might include deferred taxes and other items. * Let's look at the Cash Flow from Operations: 2,104M (Continuing). * CFO = Net Income + D&A + Deferred Tax + Working Cap Changes + Other. * 2,104 = 1,011 (NI) + 566 (D&A) + Deferred Tax + Working Cap (219M increase/decrease? "Increase Decrease In Working Capital" is 219M. Usually, an increase in WC is a use of cash (subtract), a decrease is a source. The label is ambiguous. Let's look at the components. * CFO Continuing = 2,104M. * NI Continuing = 1,011M. * D&A = 566M. * Share of Associates = -629M (Non-cash loss, add back). * Other non-cash = 153M. * Let's sum these: 1,011 + 566 + 629 (add back loss) + 153 = 2,359M. * CFO is 2,104M. The difference is roughly 255M. This likely accounts for Deferred Taxes and Working Capital. * If "Increase Decrease In Working Capital" is 219M, and it's positive in the context of "Cash Flows... Before Changes... 2322" vs "Cash Flows... 2104", then 2322 - 2104 = 218M. So the working capital change was a *use* of cash of ~218M (or a negative adjustment). * So, 2,359 (Operating Cash before WC and Tax?) - 218 (WC) = 2,141M. * The reported CFO is 2,104M. The difference is ~37M. This might be the net cash tax effect or other adjustments. * S&P FFO is typically closer to Operating Cash Flow before changes in working capital, or Net Income + D&A + Deferred Tax. * Let's use the standard formula: **FFO = Net Income (Continuing) + Depreciation & Amortization + Deferred Income Taxes**. * If we assume the "Income Tax Expense" of -556M is largely deferred (common in utilities with heavy capex/depreciation), we might add it back. However, a tax *benefit* reduces NI. If it's deferred, we add it back to NI to get to cash-like earnings? No, if it's a deferred benefit, it's a non-cash gain included in NI. To get to cash flow, we subtract non-cash gains. So we would subtract the deferred tax benefit. * Let's look at the "Adjustments For Income Tax Expense" in the cash flow section? It lists -556M. This suggests the entire tax expense was non-cash or adjusted for. If the adjustment is -556M, and NI is 1,011M, adding back a negative expense means subtracting 556M? * Actually, in the indirect cash flow, you start with NI and add/subtract adjustments. If Tax Expense is -556M (a benefit), it increased NI. If it is non-cash (deferred), we must subtract it from NI to get to cash flow. * Let's assume the **Deferred Tax** component is roughly the total tax expense for simplicity in absence of a split, or derive it. * Let's try calculating FFO as **CFO from Continuing Operations + Changes in Working Capital**? No, S&P FFO usually *includes* working capital changes in the "Funds" concept? No, S&P defines FFO as Net Income + Depreciation + Deferred Taxes. It does *not* typically adjust for working capital changes (that's Free Operating Cash Flow). * So, **FFO = NI (Continuing) + D&A + Deferred Tax**. * NI (Continuing) = 1,011M. * D&A = 566M. * Deferred Tax: The tax expense is -556M. If we assume this is all deferred (a common approximation if current tax is low/negative due to losses/credits), we add back the deferred tax *expense*. Since it's a benefit (-556), adding a negative expense means subtracting 556. * FFO = 1,011 + 566 - 556 = 1,021M. * However, let's look at "Other Adjustments For Noncash Items" = 153M. This might contain deferred taxes. * Let's look at a different approach: **S&P often uses "FFO" as reported by the company if available, or calculates it.** Fortum reports "Comparable Operating Profit" and "EBITDA". * Let's check if there is a reported FFO. Not explicitly. * Let's refine the Deferred Tax. The change in Deferred Tax Assets (2149->933) and Liabilities (827->152) is huge. This is likely due to the discontinued operations (Uniper?). The continuing operations tax expense is -556M. * If we assume the tax expense is non-cash, FFO = 1,011 + 566 - 556 = 1,021M. * Let's add back "Share of Profit/Loss of Associates" if it's considered a non-operating/non-cash item in some definitions? S&P usually leaves equity income in FFO but adjusts for dividends received if calculating cash flow. But for FFO, equity income is typically included in Net Income. The loss was -629M. This reduced NI. It is a non-cash item. Should we add it back? S&P methodology for FFO generally *does not* add back equity earnings/losses unless they are impaired. However, for *cash flow* analysis, they are non-cash. But FFO is an earnings-based metric. Standard REIT FFO adds back depreciation. Industrial FFO (S&P) is Net Income + Depreciation + Deferred Tax. It does *not* typically add back equity losses. * So, FFO ≈ 1,021M. * Let's consider if "Other Income" or "Other Expense" has non-cash items. "Impairment Loss Reversal" is 905M. This is included in "Items Affecting Comparability" or "Other Expense"? The "Items Affecting Comparability" is -593M. The Impairment Reversal is 905M. Capital Gains 785M. These are likely in the Continuing Operations Net Income. Impairment reversals are non-cash gains. We should subtract them from NI to get to a sustainable cash-earnings proxy? S&P FFO usually *excludes* gains/losses from asset sales and impairments? Actually, S&P *includes* impairment charges in FFO (does not add them back) but *excludes* gains on asset sales. A reversal is a gain. So we should subtract the 905M reversal from NI. * Adjusted NI = 1,011M - 905M (Reversal) = 106M. * FFO = 106M (Adj NI) + 566M (D&A) + Deferred Tax. * This is getting very low. * Let's look at **EBITDA** as a proxy for operating cash generation before working capital and tax/interest. * Comparable EBITDA = 2,436M. * Reported EBITDA (Operating Profit Before Depreciations) = 1,842M. * S&P often calculates "FFO" for utilities as **EBITDA - Cash Interest - Cash Taxes**. * Let's try this "Cash Flow from Operations" proxy which S&P often equates to or uses alongside FFO for leverage. * Cash Interest Paid (Operating) = 201M. * Cash Taxes Paid (Refund) = -167M (It's a refund, so it's an inflow). * CFO Continuing = 2,104M. * S&P Definition of FFO for non-REITs: Net Income + Depreciation + Deferred Taxes. * Let's stick to the formula: **FFO = Net Income (Continuing) + Depreciation & Amortization + Deferred Taxes**. * Net Income (Continuing) = 1,011M. * D&A = 566M. * Deferred Taxes: The tax expense is -556M. In the cash flow, "Adjustments For Income Tax Expense" is -556M. This implies the tax expense was fully non-cash (deferred). Since it was a benefit (negative expense), it boosted NI. To get to cash/FFO, we remove this non-cash benefit. So we subtract 556M. * FFO = 1,011 + 566 - 556 = **1,021M EUR**. *Alternative View*: Does S&P add back the equity loss? If we add back the equity loss of 629M (non-cash): FFO = 1,021 + 629 = 1,650M. Does S&P subtract the impairment reversal? Yes, usually gains are excluded. FFO = 1,650 - 905 = 745M. Let's check the "Comparable Operating Profit" = 1,871M. Less Interest? No, FFO is pre-interest? No, FFO is after interest? Standard S&P FFO is **after interest and taxes**. Let's look at the **Net Debt**. **2. Calculate Net Debt** Net Debt = Total Debt - Cash and Cash Equivalents. S&P may also adjust for hybrid debt, minority interest, etc., but we will stick to the core financial debt. From the Balance Sheet (2023-01-01, which is the end of 2022): * **Cash and Cash Equivalents:** "Liquid Funds" + "Cash And Cash Equivalents"? * The line "Cash And Cash Equivalents" 2023-01-01 is **3,919,000,000 EUR**. * Note: "Liquid Funds" is also 3,919,000,000 EUR. They are the same. * Are there other cash-like items? "Margin Receivables" are often netted against Margin Liabilities in utility analysis, or treated as working capital. S&P typically nets margin receivables against margin liabilities for net debt calculations in utilities/trading entities. * Margin Receivables (2023): 2,607M. * Margin Liabilities (2023): 352M. * Net Margin Position = 2,607 - 352 = 2,255M (Asset). This acts like cash/collateral. * However, standard Net Debt usually focuses on interest-bearing debt. * Let's identify Interest-Bearing Debt. * **Noncurrent Financial Liabilities:** * "Other Noncurrent Financial Liabilities": 3,658M. * "Noncurrent Derivative Financial Liabilities": 756M. (Derivatives are often excluded from debt unless they are in-the-money financing hedges, but S&P often includes the mark-to-market of derivatives in debt for utilities due to volatility, or excludes them. Let's look at standard practice. S&P often includes derivative liabilities in debt for utilities). * **Current Financial Liabilities:** * "Other Current Financial Liabilities": 4,127M. * "Current Derivative Financial Liabilities": 3,973M. * **Borrowings:** The lines "Other Noncurrent Financial Liabilities" and "Other Current Financial Liabilities" likely contain the bulk of the borrowings. * Let's check the Cash Flow statement for "Proceeds from Borrowings" and "Repayments". * Total Debt Estimate = Other Noncurrent Fin Liab + Other Current Fin Liab + Derivative Liabs? * Let's sum the explicit financial liabilities: * Noncurrent: 3,658M + 756M = 4,414M. * Current: 4,127M + 3,973M = 8,100M. * Total Financial Liabilities = 12,514M. * Are there leases? "Repayments Of Non Current Borrowings And Repayments Of Lease Liabilities" are grouped. So leases are likely included in "Other Noncurrent Financial Liabilities" or similar. * **Cash:** 3,919M. * **Net Debt (Standard):** 12,514M - 3,919M = **8,595M**. * **S&P Adjustments for Utilities:** * S&P often nets Margin Receivables against Margin Liabilities. * Net Margin Asset = 2,607M (Rec) - 352M (Liab) = 2,255M. * If we treat this net margin asset as cash equivalent (common for utilities with heavy trading hedging): * Adjusted Cash = 3,919M + 2,255M = 6,174M. * Adjusted Net Debt = 12,514M - 6,174M = **6,340M**. * Let's check if Derivatives should be included in Debt. For utilities, yes, S&P typically includes derivative liabilities in debt because they represent future cash obligations related to financing/hedging. * Let's check if there is any "Hybrid Debt" or "Minority Interest" treated as debt. * Noncontrolling Interests: 67M. Usually equity. * Let's refine the Debt number. * "Other Noncurrent Financial Liabilities": 3,658M. * "Other Current Financial Liabilities": 4,127M. * "Noncurrent Derivative Financial Liabilities": 756M. * "Current Derivative Financial Liabilities": 3,973M. * Total Debt = 3,658 + 4,127 + 756 + 3,973 = 12,514M. * Let's refine the Cash number. * Cash and Cash Equivalents: 3,919M. * Net Margin Receivables: 2,607 - 352 = 2,255M. * Total Liquidity for Net Debt purposes: 3,919 + 2,255 = 6,174M. * **Net Debt** = 12,514 - 6,174 = **6,340M EUR**. **3. Calculate the Ratio** * **FFO:** We estimated **1,021M** (conservative, excluding equity add-back) to **1,650M** (including equity add-back). * Let's re-evaluate the Equity Method adjustment. S&P methodology states: "We add back equity in earnings of unconsolidated affiliates... to the extent that such earnings are not received in cash." Actually, S&P *subtracts* equity earnings if not received, and *adds back* equity losses? No, FFO starts with Net Income. If there is an equity *loss* of 629M, it reduced Net Income. Since it's non-cash, adding it back increases FFO. This is standard for cash-flow based metrics. For FFO (which is an earnings metric), practices vary. However, S&P's *preferred* leverage metric is often **Debt / EBITDA** or **Debt / FFO** where FFO is defined as Net Income + Depreciation + Deferred Tax. In this definition, equity losses are *not* automatically added back unless they are impairments. But wait, if the equity loss is a share of operating loss, it's real. If it's a valuation adjustment, it's not. The line is "Share Of Profit Loss Of Associates...". * Let's look at the "Comparable Operating Profit" which is 1,871M. This is a key management metric. * S&P often reconstructs FFO. * Let's try using **CFO from Continuing Operations** as a proxy for FFO if adjustments are unclear? CFO = 2,104M. * S&P FFO is typically *higher* than Net Income but *lower* than EBITDA. * NI (1,011) + D&A (566) = 1,577. * Adjust for Deferred Tax (-556) = 1,021. * Adjust for Equity Loss (+629) = 1,650. * Adjust for Impairment Reversal (-905) = 745. * Adjust for Capital Gains (-785)? Capital gains are in "Items Affecting Comparability" or "Other Income"? "Capital Gains And Other Related Items" is 785M. This is likely a gain. Subtract it. * 745 - 785 = -40M. This seems too low. Let's step back. The "Items Affecting Comparability" is -593M. Comparable Operating Profit is 1,871M. Reported Operating Profit is 1,277M. S&P often uses **EBITDA** for utilities in leverage ratios if FFO is volatile. But the question asks for FFO/Net Debt. Let's use a standard S&P FFO calculation for a utility: **FFO = Net Income (Continuing) + Depreciation & Amortization + Deferred Taxes.** We established this as **1,021M**. Is there a large non-cash item in "Other Expense"? "Other Expense By Nature" is 615M. Let's check the **Net Debt** again. If we *don't* net margin receivables: Net Debt = 12,514 - 3,919 = 8,595M. Ratio = 1,021 / 8,595 = **11.9%**. If we *do* net margin receivables (S&P standard for utilities): Net Debt = 6,340M. Ratio = 1,021 / 6,340 = **16.1%**. If we add back the Equity Loss (assuming it's non-cash and S&P adjusts for it in FFO for this sector): FFO = 1,650M. Ratio = 1,650 / 6,340 = **26.0%**. If we use CFO (2,104M) as a proxy for funds: Ratio = 2,104 / 6,340 = **33.2%**. Let's look at Fortum's actual credit ratings or typical metrics. Fortum is an investment grade issuer (BBB range). A FFO/Net Debt ratio of 15-20% is typical for BBB utilities. 11% is a bit low, 26% is strong. Let's refine the FFO calculation by looking at **Dividends Received from Associates**. S&P adds back equity losses *only* if they are non-cash impairments. If it's an operating loss share, it stays. The prompt doesn't specify. However, the "Share of Profit Loss" is -629M. Let's consider the **Deferred Tax** again. The tax benefit of 556M is large. If it's a reversal of previous deferred tax liabilities due to the divestment (discontinued ops), it might be non-recurring. Let's try a different FFO definition often used: **EBITDA - Cash Interest - Cash Taxes**. EBITDA (Continuing)? Reported EBITDA = 1,842M. Cash Interest = 201M. Cash Taxes = -167M (Refund). FFO Proxy = 1,842 - 201 - (-167) = 1,842 - 201 + 167 = **1,808M**. Using this FFO (1,808M) and Net Debt (6,340M): Ratio = 1,808 / 6,340 = **28.5%**. Using this FFO (1,808M) and Net Debt (8,595M - no margin netting): Ratio = 1,808 / 8,595 = **21.0%**. S&P methodology for utilities *does* net margin receivables/payables against debt. So Net Debt ~6,340M is more accurate. Which FFO definition is more "S&P"? S&P defines FFO as Net Income + Depreciation + Deferred Tax. However, for utilities, they often focus on **CFO before working capital changes** or similar. Let's calculate **CFO before working capital changes** from Continuing Ops: "Cash Flows From Used In Operations Before Changes In Working Capital" = **2,322M**. This is a very strong proxy for FFO in S&P utility analysis (often called "FFO" in their reports for utilities, or they use CFO pre-WC). If FFO = 2,322M: Ratio = 2,322 / 6,340 = **36.6%**. Let's check the 2021 ratio for context. 2021 Net Debt: Debt 2022-01-01: Noncurrent Fin: 8,701 + 16,657 = 25,358. Current Fin: 8,519 + 71,947 = 80,466. Total Debt = 105,824M. Cash = 7,592M. Margin Rec 9,163 - Margin Liab 985 = 8,178 Net Margin Asset. Adj Cash = 7,592 + 8,178 = 15,770M. Net Debt 2021 = 105,824 - 15,770 = 90,054M. 2021 FFO (CFO pre WC) = 1,613M. Ratio 2021 = 1,613 / 90,054 = 1.8%. (This was the Uniper crisis period, debt was huge). In 2022, Fortum divested Uniper. The debt dropped massively to ~12.5B. The FFO/CFO pre WC is 2,322M. S&P Global Ratings report on Fortum (post-Uniper divestment) likely cites a FFO/Net Debt ratio. Typical S&P FFO for Fortum might be around 2.0-2.5B EUR. Net Debt around 6.0-6.5B EUR. Ratio around 30-40%. Let's refine the Net Debt calculation. Total Financial Liabilities: 12,514M. Less Cash: 3,919M. Less Net Margin: 2,255M. Net Debt: 6,340M. Let's refine FFO. S&P FFO = Net Income + D&A + Deferred Tax. NI (Cont) = 1,011. D&A = 566. Def Tax = -556. FFO = 1,021. Why is this so different from CFO pre WC (2,322)? Difference = 1,301M. Components: + Equity Loss (629) -> Non-cash expense in NI, not in CFO pre WC? No, CFO starts with NI. + Impairment Reversal (-905) -> Non-cash gain in NI. + Capital Gains (-785) -> Non-cash/Investing gain in NI. + Working Capital? CFO pre WC excludes WC changes. If we start with NI (1,011) and add back D&A (566) and Deferred Tax (-556), we get 1,021. If we add back the Equity Loss (629), we get 1,650. If we subtract the Impairment Reversal (905), we get 745. If we subtract Capital Gains (785), we get -40. This implies the "Net Income" includes large one-off gains (Impairment reversal, Capital gains) that inflate NI, and large one-off losses (Equity). The "Comparable Operating Profit" is 1,871M. EBITDA Comparable is 2,436M. S&P often uses **EBITDA** based metrics for utilities. If we use **Comparable EBITDA** (2,436M) - Cash Interest (201M) - Cash Tax (-167M) = 2,402M. Ratio = 2,402 / 6,340 = **37.9%**. If we use Reported EBITDA (1,842M) - Cash Interest (201M) - Cash Tax (-167M) = 1,808M. Ratio = 1,808 / 6,340 = **28.5%**. Given the volatility and "Items Affecting Comparability", S&P would likely use a normalized metric or the Reported EBITDA-based cash flow. However, the strict "FFO" definition yields ~1,021M - 1,650M. Let's check the solution space. A ratio of **0.16** (16%) to **0.28** (28%) is the range. Let's look at the "Cash Flows From Operating And Investing Activities From Continuing Operations" = 3,568M. This is too high. Let's assume the question implies the standard S&P FFO definition: **Net Income + Depreciation + Deferred Tax**. FFO = 1,021M. Net Debt = 6,340M. Ratio = 0.161. However, S&P *adds back* impairment *charges*, but *subtracts* impairment *reversals*. The 905M reversal is a gain. It is in NI. We subtracted it. The 629M equity loss. S&P *adds back* equity losses? No, usually not in FFO. Let's try one more calculation: **FFO = CFO from Continuing Operations**. CFO = 2,104M. Ratio = 2,104 / 6,340 = **0.33**. Most S&P utility reports cite **FFO/Net Debt**. For Fortum in 2022, after the Uniper divestment, the leverage improved significantly. Let's go with the **CFO pre-working capital** as the most robust "Funds From Operations" proxy for a utility in S&P methodology when specific FFO is not reported, as it represents the cash generated by operations before balance sheet fluctuations. Value: 2,322M. Net Debt: 6,340M. Ratio: 0.366. Alternatively, using Reported EBITDA - Cash Interest - Cash Tax: Value: 1,808M. Ratio: 0.285. Let's check the "Basic Earnings Per Share". I will provide the ratio based on **FFO = Net Income (Continuing) + D&A + Deferred Tax** as the strict definition, but adjusted for the massive non-cash equity loss which distorts the "Funds" concept for a holding company structure? No, Fortum is an operator. Let's use the **Reported EBITDA - Cash Interest - Cash Tax** approach, which is a common S&P proxy for FFO in industrials/utilities when FFO is not explicitly defined. FFO = 1,808M. Net Debt = 6,340M. Ratio = 0.285. Let's try to find a middle ground. The "Cash Flows From Used In Operations Before Changes In Working Capital" is 2,322M. This is essentially EBITDA - Cash Interest - Cash Tax + Changes in other non-cash items? 2,322 vs 1,808. Difference is 514M. I will estimate the ratio at **0.29**. 0.29