To estimate the FFO / Net Debt ratio for TenneT Holding B.V. 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: $$FFO = \text{Net Income} + \text{Depreciation and Amortization} + \text{Other Non-Cash Items} + \text{Change in Working Capital (sometimes excluded or adjusted, but standard FFO often starts with Net Income + D&A)}$$ However, a more precise S&P definition for utilities/regulated entities often starts with Net Income and adds back non-cash charges. Let's look at the available data for the period 2022-01-01 to 2023-01-01 (which represents the fiscal year 2022). * **Net Income (Profit Loss):** -879,000,000 EUR * Note: S&P often uses "Net Income attributable to parent" or consolidated net income. The consolidated "Profit Loss" is -879,000,000 EUR. * **Depreciation and Amortization:** 1,233,000,000 EUR * **Other Non-Cash Adjustments:** * Share of profit/loss of associates/joint ventures (equity method): 120,000,000 EUR. This is a non-cash income included in Net Income, so it should be subtracted to get to cash flow from operations before working capital changes, or added back if we are building up from EBITDA. Let's stick to the standard FFO bridge: * FFO = Net Income + Depreciation & Amortization + Deferred Taxes + Other non-cash items. * Let's check the Cash Flow from Operations (CFO) provided: 1,196,000,000 EUR. * S&P FFO is typically close to CFO but adjusts for working capital volatility and other items. A common simplified proxy for FFO in the absence of a specific "FFO" line item is: $$FFO \approx \text{Net Income} + \text{Depreciation \& Amortization}$$ $$FFO \approx -879,000,000 + 1,233,000,000 = 354,000,000 \text{ EUR}$$ Let's refine this. S&P often adds back deferred taxes and subtracts non-cash equity income. * Deferred Tax Expense: -354,000,000 EUR (This is a benefit, meaning it increased net income but didn't provide cash, or rather, the tax expense was negative). Wait, "Income Tax Expense Continuing Operations" is -354,000,000. This implies a tax benefit. * Let's look at the "Cash Flows From Used In Operating Activities": 1,196,000,000 EUR. * S&P defines FFO as net income plus depreciation, amortization, and other non-cash items. It usually excludes changes in working capital. * Let's try to reconstruct FFO from the top down or bottom up using the provided cash flow adjustments. * Net Income: -879,000,000 * Add: Depreciation & Amortization: 1,233,000,000 * Add: Deferred Tax (non-cash): The tax expense is -354m. The cash tax paid/refund is 231m (inflow). The difference is due to deferred taxes and other adjustments. * Add: Share of losses/gains from equity method investments (non-cash): The share of profit is 120,000,000. This is included in Net Income but is non-cash. So we subtract it. * Add: Other non-cash items. The cash flow statement lists "Other Adjustments For Noncash Items": 1,347,000,000. This is a large number. Let's see what's in there. It likely includes the change in provisions, unrealized gains/losses, etc. A robust way to estimate S&P FFO when detailed breakdowns are missing is: $$FFO = \text{CFO} - \text{Change in Working Capital} + \text{Other Adjustments}$$ Or simpler: $$FFO = \text{Net Income} + \text{D\&A} + \text{Non-cash items excluding working capital}$$ Let's look at the "Cash Flows From Used In Operations Excluding EEG Working Capital": 596,000,000 EUR. And "Increase Decrease In Working Capital Excluding EEG Working Capital": 736,000,000 EUR. And "Increase Decrease In Working Capital EEG Working Capital": -1,792,000,000 EUR. S&P often normalizes working capital. For regulated utilities, "FFO" is often approximated by **EBITDA - Cash Taxes - Cash Interest - Capex?** No, that's Free Cash Flow. Standard S&P FFO Formula: $$FFO = \text{Net Income} + \text{Depreciation and Amortization} + \text{Deferred Income Taxes} + \text{Other Non-Cash Charges} - \text{Non-Cash Credits}$$ Let's use the provided "Profit Loss" (Net Income): -879,000,000 EUR. Add Depreciation and Amortization: 1,233,000,000 EUR. Subtotal: 354,000,000 EUR. Now, consider "Other Gains Losses": -38,000,000 EUR. This is a loss, so it reduced Net Income. It is likely non-cash or investing related. If it's non-cash, we add it back. Share of profit of associates: 120,000,000 EUR. This increased Net Income but is non-cash (equity method). We subtract it. Adjusted Subtotal: $354,000,000 + 38,000,000 - 120,000,000 = 272,000,000$ EUR. What about Deferred Taxes? The income tax expense is -354,000,000. The current tax asset/liability changes and deferred tax asset/liability changes explain the difference between tax expense and cash tax. Change in Deferred Tax Assets: $711 - 162 = 549$ million increase (use of cash/non-cash charge?). An increase in DTA is a deferred tax benefit (added to NI) but not cash. So we subtract the increase in DTA? Or rather, the tax expense includes this benefit. Change in Deferred Tax Liabilities: $12 - 7 = 5$ million increase. This is getting complex. Let's look at a simpler proxy often used for S&P FFO in financial analysis when only summary data is available: $$FFO \approx \text{Operating Cash Flow} - \text{Changes in Working Capital}$$ However, S&P includes some working capital changes in FFO for utilities if they are part of the regulatory cycle. But typically, FFO is pre-working capital. Let's try calculating FFO as: $$FFO = \text{Net Income} + \text{D\&A} + \text{Deferred Tax} + \text{Other Non-Cash}$$ From the Cash Flow Statement indirect method components: Net Income: -879,000,000 Adjustments for D&A: 1,233,000,000 Adjustments for Losses/Gains on disposal: 38,000,000 Adjustments for Undistributed profits of equity method inv: 120,000,000 (This is the share of profit, which is non-cash income, so it's added back in the sense that it's subtracted from NI? No, in the CF statement, "Adjustments For Undistributed Profits..." is usually a subtraction from NI because the profit was recognized but cash wasn't received. The value given is positive 120m in the list of "Adjustments". Usually, these lists show the absolute value or the sign as it appears in the reconciliation. If it's an adjustment *to* reconcile NI to CFO, and it's a positive number in a list of add-backs, it might be confusing. Let's look at the logic: Share of profit is 120m. It is included in NI. It is not cash. So to get to CFO, we subtract 120m. If the line item says "Adjustments For Undistributed Profits... 120,000,000", it likely means the amount to subtract is 120m. Let's look at "Other Adjustments For Noncash Items": 1,347,000,000. This is a huge add-back. What does it contain? It likely contains the deferred tax benefit, changes in provisions, etc. Let's try a different approach. S&P FFO is often very close to **CFO from Operations before Working Capital Changes**. Let's calculate **CFO before Working Capital Changes**: Start with Net Income: -879,000,000 Add D&A: 1,233,000,000 Add Loss on disposal/Other gains: 38,000,000 (Loss is added back) Subtract Share of Equity Income: -120,000,000 Add Deferred Tax Benefit? The tax expense is -354m. Let's look at the provided "Cash Flows From Used In Operations Excluding EEG Working Capital": 596,000,000 EUR. This figure represents the cash generated from operations before the specific "EEG Working Capital" adjustments. EEG (Erneuerbare-Energien-Gesetz) working capital is a regulatory mechanism in Germany. S&P often treats regulatory working capital as part of the core operating cycle for utilities, or excludes it to normalize. However, the most standard definition of FFO is: $$FFO = \text{Net Income} + \text{Depreciation} + \text{Amortization} + \text{Deferred Taxes} + \text{Other Non-Cash Items}$$ Let's estimate the "Other Non-Cash Items" from the balance sheet changes and P&L. Change in Provisions (Non-current + Current): 2022 NC Prov: 1,417 -> 1,235 (Decrease of 182) 2022 C Prov: 45 -> 77 (Increase of 32) Net Change in Provisions: -150 million. The P&L has "Adjustments For Provisions": 104,000,000. This suggests the expense was higher than the cash paid, or vice versa. Let's rely on the **Cash Flow from Operations (CFO)** and adjust for the volatile working capital components if necessary, or use the CFO directly if the working capital changes are considered temporary. CFO (2022): 1,196,000,000 EUR. S&P often defines FFO for utilities as: $$FFO = \text{CFO} - \text{Change in Regulatory Working Capital (if volatile)} + \text{Dividends from Equity Method Investees (if not in CFO)}$$ The "Increase Decrease In Working Capital EEG Working Capital" is -1,792,000,000 EUR. This is a massive outflow (or reduction in liability/increase in asset). The "Increase Decrease In Working Capital Excluding EEG Working Capital" is 736,000,000 EUR. Total Change in Working Capital = $736 - 1,792 = -1,056$ million. If we back out the total working capital change from CFO, we get Cash Flow from Operations *before* working capital changes: $$CFO_{pre-WC} = CFO - \Delta WC$$ $$CFO_{pre-WC} = 1,196 - (-1,056) = 2,252 \text{ million EUR}$$ Is this FFO? FFO usually includes some working capital changes (like trade receivables/payables) but excludes others. However, a common approximation for FFO in the absence of a direct line item is **EBITDA - Cash Interest - Cash Taxes**. Let's calculate EBITDA: Revenue: 8,299,000,000 Operating Expense: 9,395,000,000 Operating Loss: -976,000,000 Add D&A: 1,233,000,000 EBITDA = $-976 + 1,233 = 257,000,000$ EUR. Wait, Operating Expense usually includes D&A. "Profit Loss From Operating Activities" is -976,000,000. If we add back D&A (1,233,000,000) to Operating Loss, we get EBITDA. $EBITDA = -976,000,000 + 1,233,000,000 = 257,000,000$ EUR. Now, calculate Cash Interest and Cash Taxes. Cash Interest Paid: 202,000,000 EUR (from Financing Activities, but interest paid is often operating or financing. S&P usually subtracts cash interest). Cash Taxes Paid/Refund: 231,000,000 EUR (Inflow, so it's a refund). $$FFO \approx EBITDA - \text{Cash Interest} + \text{Cash Tax Refund}$$ $$FFO \approx 257,000,000 - 202,000,000 + 231,000,000 = 286,000,000 \text{ EUR}$$ Let's check this against the Net Income + D&A method. Net Income: -879,000,000 D&A: 1,233,000,000 Sum: 354,000,000 Adjust for Equity Income (120m profit, non-cash): Subtract 120,000,000 -> 234,000,000 Adjust for Deferred Tax: The tax benefit was 354m. The cash tax was a refund of 231m. The difference is 123m. The deferred tax asset increased by 549m and liability by 5m. Net DTA increase 544m. This is a non-cash benefit included in NI. So we should subtract the increase in DTA? If we subtract the non-cash tax benefit (approx 544m?), the FFO drops significantly. Let's look at the S&P definition again. S&P FFO = Net Income + Depreciation + Amortization + Deferred Taxes + Other Non-Cash Items. Let's use the **CFO** as a baseline and adjust for items S&P excludes/includes. CFO = 1,196,000,000. S&P FFO is typically *lower* than CFO for companies with large working capital inflows, or *higher* if there are large non-cash charges not in CFO? No, CFO includes WC changes. FFO typically *excludes* WC changes. If we assume FFO is roughly **EBITDA - Cash Interest - Cash Taxes**: EBITDA = 257,000,000 Cash Interest = 202,000,000 Cash Tax = -231,000,000 (Refund) FFO = 257 - 202 - (-231) = 286,000,000 EUR. Let's try another common proxy: **Net Income + D&A**. NI + D&A = 354,000,000 EUR. Let's look at the "Funds From Operations" if we can derive it from the Equity reconciliation? No. Let's consider the magnitude of the debt. **2. Calculate Net Debt** Net Debt = Total Debt - Cash and Cash Equivalents. * **Total Debt:** * Long-term Borrowings: 19,006,000,000 EUR * Short-term Borrowings: 709,000,000 EUR * Current Lease Liabilities: 155,000,000 EUR * Noncurrent Lease Liabilities: 574,000,000 EUR * Other Current Financial Liabilities: 550,000,000 EUR (Are these debt? "Other Current Financial Liabilities" often includes derivatives or short-term instruments. S&P typically includes interest-bearing debt. Let's assume these are debt-like or include them to be conservative, or check if they are trade-related. Given the name "Financial Liabilities", they are likely debt. However, standard Net Debt usually focuses on Borrowings and Leases. Let's include Borrowings and Leases first.) * Other Noncurrent Financial Liabilities: 185,000,000 EUR. Standard S&P Net Debt includes: - Short-term and Long-term Borrowings - Lease Liabilities (Capitalized leases) - Less: Cash and Cash Equivalents Let's sum the interest-bearing debt: Long-term Borrowings: 19,006,000,000 Short-term Borrowings: 709,000,000 Noncurrent Lease Liabilities: 574,000,000 Current Lease Liabilities: 155,000,000 Total Debt (Borrowings + Leases) = $19,006 + 709 + 574 + 155 = 20,444$ million EUR. Should we include "Other Financial Liabilities"? Other Current Financial Liabilities: 550,000,000 Other Noncurrent Financial Liabilities: 185,000,000 Total Other Financial: 735,000,000. If we include these, Total Debt = $20,444 + 735 = 21,179$ million EUR. Cash and Cash Equivalents: 6,547,000,000 EUR. **Net Debt Scenario A (Borrowings + Leases only):** Net Debt = $20,444 - 6,547 = 13,897$ million EUR. **Net Debt Scenario B (All Financial Liabilities):** Net Debt = $21,179 - 6,547 = 14,632$ million EUR. S&P methodology typically includes all interest-bearing debt. "Other Financial Liabilities" are often interest-bearing. Let's assume Scenario B is more accurate for "Net Debt" in a broad sense, or stick to the explicit "Borrowings" and "Leases" if "Other" is ambiguous. However, looking at the size, 550m is significant. Let's look at the previous year. 2021: ST Borrow 1,339, LT Borrow 12,366, Lease Curr 169, Lease NC 235, Other Curr Fin 281, Other NC Fin 183. Let's calculate Net Debt for 2022 (end of year, which is 2023-01-01 in the data). Total Debt = $19,006 + 709 + 574 + 155 + 550 + 185 = 21,179$ million. Cash = 6,547 million. Net Debt = $21,179 - 6,547 = 14,632$ million EUR. **3. Calculate the Ratio** Using FFO estimate of ~286 million (EBITDA - Cash Int + Cash Tax) or ~354 million (NI + D&A). Let's refine FFO. S&P FFO for utilities often adds back deferred taxes. Net Income: -879 D&A: 1,233 Deferred Tax: The tax expense is -354. The current tax refund is 231. The deferred tax component is the difference. Actually, the tax expense is composed of current and deferred. Tax Expense = Current Tax Expense + Deferred Tax Expense. -354 = Current + Deferred. Cash Tax Paid/Refund is related to Current Tax. Refund of 231 implies Current Tax Benefit of roughly 231 (adjusted for working capital in tax payable). Change in Current Tax Assets/Liabilities: Current Tax Assets: 158 (2022) vs 143 (2021). Increase of 15. Current Tax Liabilities: 26 (2022) vs 6 (2021). Increase of 20. Net Current Tax Asset/Liability position: 2021: Asset 143 - Liab 6 = Net Asset 137. 2022: Asset 158 - Liab 26 = Net Asset 132. Change in Net Current Tax Asset = 132 - 137 = -5 (Decrease in asset, which is a source of cash/benefit). So Current Tax Benefit approx = Cash Refund 231 + Change in Net Asset (-5)? No. Cash Flow = Tax Expense - Change in Tax Payables/Receivables. This is getting too granular. Let's use the **CFO** adjusted for the large EEG working capital swing, as S&P often normalizes regulatory working capital. CFO = 1,196 million. EEG Working Capital Change = -1,792 million. If we add back the EEG WC change (assuming it's a temporary regulatory timing difference that S&P might normalize by adding back the outflow to get to a "normalized" operating cash flow), the normalized CFO would be $1,196 + 1,792 = 2,988$ million. However, FFO is *before* working capital changes. The "Cash Flows From Used In Operations Excluding EEG Working Capital" is 596 million. The "Increase Decrease In Working Capital Excluding EEG Working Capital" is 736 million. So, Cash Flow from Operations before *any* working capital changes (excluding EEG) would be $596 + 736 = 1,332$ million? Wait. CFO (Total) = 1,196. CFO (Excl EEG WC) = 596. This implies the EEG WC contribution to CFO is $1,196 - 596 = 600$ million? But the WC change for EEG is -1,792. There are other items. Let's look at the structure: CFO = Net Income + D&A + Other Non-Cash + WC Changes. We established NI + D&A = 354. Other Non-Cash (Equity, Gains, etc.) approx -120 + 38 = -82. Subtotal = 272. WC Changes Total = -1,056. $272 - 1,056 = -784$. This does not match CFO of 1,196. The difference is the "Other Adjustments For Noncash Items" of 1,347 million. So, $272 + 1,347 - 1,056 = 563$. Still not 1,196. There is a discrepancy. Let's look at "Dividends Received Classified As Operating Activities": 92 million. And "Income Taxes Paid Refund": 231 million. These are often separated in the direct method or adjusted in indirect. Let's try a simpler S&P proxy: **EBITDA / Net Debt** is often used, but the question asks for **FFO / Net Debt**. For regulated utilities, S&P often considers **FFO** to be roughly **EBITDA - Maintenance Capex**? No. Let's go with the most standard accounting definition of FFO: **FFO = Net Income + Depreciation + Amortization** FFO = -879,000,000 + 1,233,000,000 = **354,000,000 EUR**. Net Debt = **14,632,000,000 EUR** (Including all financial liabilities). Ratio = $354 / 14,632 \approx 0.024$. If we use only Borrowings + Leases for Net Debt: Net Debt = 13,897,000,000 EUR. Ratio = $354 / 13,897 \approx 0.025$. If we use the EBITDA-based FFO proxy (286m): Ratio = $286 / 14,632 \approx 0.019$. Let's check if there is a larger FFO component. Sometimes "Other Comprehensive Income" items are added back? No. Is it possible FFO is higher? Look at "Cash Flows From Used In Operations Excluding EEG Working Capital": 596,000,000. If we consider this the "Core Operating Cash Flow", and S&P FFO is close to this, then FFO ~ 596m. Ratio = $596 / 14,632 \approx 0.041$. Let's look at the "Net Financing" and "Equity" changes. The company had a loss. S&P ratings for TenneT are typically in the A range. A ratio of 0.02-0.04 is very low. Usually, utilities have FFO/Net Debt in the 10-20% range (0.10-0.20). Why is it so low? Because of the huge loss (-879m) driven by "Operating Expense" (9,395m) vs Revenue (8,299m). The operating loss is nearly 1 billion. This was a bad year for TenneT due to energy costs/regulatory issues. So a low ratio is expected. Let's refine the Net Debt. S&P Net Debt usually deducts Cash. Does it deduct "Other Financial Assets"? "Other Noncurrent Financial Assets": 44,000,000. "Cash And Cash Equivalents": 6,547,000,000. Total Liquid Assets = ~6.6 billion. Let's refine FFO. Is it possible "Depreciation and Amortisation" is the only add-back? FFO = 354 million. Let's try one more calculation. S&P Global Ratings often calculates FFO as: Net Income + Depreciation + Amortization + Deferred Taxes + Other Non-Cash Items. Deferred Taxes: The tax benefit was 354m. The cash tax was a refund of 231m. The deferred tax asset increased by 549m. This is a non-cash benefit. So we subtract the increase in DTA from NI? NI includes the benefit. Cash flow doesn't. So FFO (cash basis) should exclude the non-cash benefit. NI (-879) includes Tax Benefit (+354). If we remove the tax effect entirely and use Cash Tax: NI before Tax = -1,233. Cash Tax = +231 (Refund). Net Income adjusted for Cash Tax = -1,233 - 231 = -1,464? No. Profit Before Tax = -1,233. Less Cash Tax Paid (negative for refund) = -1,233 - (-231) = -1,002. Add D&A = 1,233. FFO = -1,002 + 1,233 = 231 million. This is close to the 286m and 354m estimates. Let's average the reasonable FFO estimates: ~300 million. Net Debt: ~14,600 million. Ratio: $300 / 14,600 \approx 0.02$. Given the precision required, and the standard definition: FFO = Net Income + D&A = 354,000,000. Net Debt = Total Financial Liabilities - Cash. Total Financial Liabilities = Borrowings (ST+LT) + Leases (ST+LT) + Other Financial (ST+LT). = $709 + 19,006 + 155 + 574 + 550 + 185 = 21,179$ million. Cash = 6,547 million. Net Debt = 14,632 million. Ratio = $354 / 14,632 = 0.02419$. Rounding to two decimal places: 0.02. Rounding to three decimal places: 0.024. Let's check if "Hybrid Capital" is treated as debt. S&P often treats Hybrid Capital as 50% debt and 50% equity, or fully equity if it's strong. TenneT's hybrids are likely treated as equity or mezzanine. If treated as debt, Net Debt increases by 2,125 million. Net Debt = $14,632 + 2,125 = 16,757$. Ratio = $354 / 16,757 = 0.021$. The difference is small. I will provide the ratio based on the standard FFO (NI+D&A) and Net Debt (Financial Liabilities - Cash). 0.024