# S&P-Adjusted Debt-to-EBITDA Ratio Analysis for ELECTRICITE DE FRANCE (2022) ## Step 1: Identify the Relevant Industry ELECTRICITE DE FRANCE is primarily a **regulated utility company** operating in the electricity generation, transmission, and distribution sectors. The methodology document explicitly covers "Regulated Utilities" with detailed guidance on how to assess and adjust financial metrics. Key characteristics confirming regulated utility classification: - Operates essential electricity infrastructure in France - Subject to comprehensive regulation by regulatory bodies - Primary business includes generation, transmission, and distribution of electricity - Operates under French public electricity distribution concessions **Applicable Industry Methodology: Regulated Utilities** --- ## Step 2: Estimate Adjusted_Debt ### Starting Point: Reported Debt From the balance sheet as of December 31, 2022: **Noncurrent Financial Liabilities:** - Other Noncurrent Financial Liabilities: €71,058 million **Current Financial Liabilities:** - Other Current Financial Liabilities: €71,844 million **Total Reported Debt = €71,058M + €71,844M = €142,902 million** ### Adjustments Required (per S&P Regulated Utilities methodology): **1. Operating Lease Adjustments:** The S&P methodology notes that utilities may have significant lease obligations. While not explicitly detailed in the provided data, the data shows: - Special French Public Electricity Distribution Concession Liabilities (Noncurrent): €49,459M (2022) - Special French Public Electricity Distribution Concession Liabilities relate to concession operations These concession liabilities represent obligations similar to debt-like arrangements and should be included in adjusted debt. **2. Pension Obligations:** - Noncurrent Provisions for Employee Benefits: €21,716 million (2022) The S&P methodology requires adjusting for pension deficits. The presence of substantial employee benefit provisions suggests unfunded pension liabilities that should be added to debt. **3. Provisions Assessment:** - Noncurrent Provisions Related to Nuclear: €62,067 million (2022) These represent significant decommissioning and nuclear back-end obligations. Per S&P guidance on utilities, these long-term obligations should be treated as debt-like items. - Other Noncurrent Provisions: €5,442 million (2022) **4. Cash and Eligible Adjustments:** - Cash and Cash Equivalents: €9,919 million (2022) Per S&P methodology, we deduct eligible cash from gross adjusted debt. ### Adjusted_Debt Calculation: ``` Adjusted_Debt = Reported Debt + Concession Liabilities + Pension Provisions + Nuclear Decommissioning Provisions - Cash Adjusted_Debt = €142,902M + €49,459M + €21,716M + €62,067M - €9,919M Adjusted_Debt = €142,902M + €133,242M - €9,919M Adjusted_Debt = €266,225 million ``` --- ## Step 3: Estimate Adjusted_EBITDA ### Starting Point: Reconstruct EBITDA from Income Statement For 2022 fiscal year (2022-01-01 to 2023-01-01): **Operating Profit Before Depreciation and Amortisation (EBITDA):** - Reported: €(4,986) million (negative, indicating operational stress) However, given the unusual nature of 2022 (energy crisis in Europe), we need to reconstruct and assess normalization adjustments per S&P guidance. ### Line-by-line reconstruction to verify EBITDA: ``` Revenue: €143,476M - Fuel, Energy, Transmission Charges: (€121,010M) - Other External Services: (€9,420M) - Employee Benefits: (€15,236M) - Other Taxes: (€3,163M) + Other Operating Income (included in EBIT): €367M = Operating Profit Before D&A (EBITDA): (€4,986M) ``` This confirms the reported EBITDA of €(4,986)M. ### Adjustment for Non-Recurring Items (per S&P methodology): The S&P regulated utilities guidance requires normalizing for non-recurring items: **1. Impairment and Reversal of Impairment:** - Impairment Loss Reversal: €1,762 million (2022) - This is a non-cash item and likely reflects fair value adjustments **2. Fair Value Changes in Energy Derivatives (Excluded from Operating):** - Net Changes in Fair Value on Energy Derivatives: €(849) million (2022) - These are trading/hedging activities, non-operational in nature **3. Other Income and Expenses Excluded from EBIT:** - Other Income and Expenses Excluded from EBIT: €687 million (2022) **Normalized EBITDA Calculation:** Per S&P methodology for utilities, we should: - Add back impairment reversals that are non-cash - Remove fair value volatility from derivatives (non-operational) - Consider whether the 2022 results are representative or distorted by energy crisis ``` Operating EBITDA (reported): (€4,986M) + Impairment Reversal (non-cash): €1,762M - Fair Value Changes in Derivatives (non-op): €849M + Other Non-Recurring Income/Expenses: €687M = Adjusted EBITDA (preliminary): (€1,688M) ``` ### Further Assessment - Energy Crisis Normalization: The 2022 results are severely distorted by the European energy crisis. The fuel and energy transmission charges (€121.0B) represent approximately 84% of revenue (€143.5B), which is extraordinarily high compared to historical norms. This was due to: - Exceptional energy market conditions - Government-mandated price controls in France - Hedging losses on forward contracts However, per S&P guidance, we should use actual reported figures unless there are documented regulatory accounting adjustments or sustainable cost structure changes. The crisis was real and affected actual cash flows. **For prudent analysis, using the reconstructed EBITDA:** ``` Adjusted_EBITDA = (€4,986)M + €1,762M + €849M + €687M Adjusted_EBITDA = (€1,688M) ``` Alternatively, given the severity of the distortion and applying discretion per S&P's guidance on one-time shocks to utilities, we might note that depreciation and amortization (€11,079M) provides a baseline for asset earnings power. However, the instructions require us to use the baseline formula. **Using the most direct calculation:** ``` Adjusted_EBITDA = Reported EBITDA + Non-recurring adjustments Adjusted_EBITDA = (€4,986M) + €1,762M + €849M + €687M Adjusted_EBITDA = (€1,688M) ``` --- ## Step 4: Calculate Adjusted_Debt / Adjusted_EBITDA ``` Adjusted_Debt / Adjusted_EBITDA = €266,225M / (€1,688M) Adjusted_Debt / Adjusted_EBITDA = -157.68x ``` The ratio is negative because Adjusted_EBITDA is negative (the company had negative operating earnings before depreciation in 2022 due to the energy crisis). ### Verification and Interpretation: The negative ratio reflects: 1. **Adjusted_Debt of €266.2B** - substantial, but reasonable for a major integrated utility with large infrastructure and nuclear decommissioning obligations 2. **Adjusted_EBITDA of -€1.7B** - negative due to exceptional 2022 energy market conditions where regulated prices did not fully cover costs incurred This represents a credit stress situation for 2022, which is historically accurate given EDF's severe financial difficulties during the European energy crisis. **Final Calculation:** - Adjusted_Debt: €266,225 million - Adjusted_EBITDA: (€1,688) million - Ratio: 266,225 / (-1,688) = **-157.68** -157.68