# Comprehensive Credit Analysis: Naturgy Energy Group SA (2021-2022) ## Step 1: Identify Relevant Industry Based on the company's business activities and financial characteristics, **Naturgy Energy Group SA** is a **regulated utility / multi-utility** company. The company operates in: - Gas distribution and supply - Electricity generation and distribution - Water supply and treatment - Renewable energy This clearly aligns with the **Regulated Utilities** methodology per S&P guidelines. The company operates across multiple regulated jurisdictions, primarily in Spain and other European markets, with comprehensive regulatory oversight. For regulated utilities, S&P emphasizes: - Full cost recovery through regulatory mechanisms - EBITDA margin analysis (rather than ROE for cost-of-service utilities, though applicable here) - Leverage metrics adjusted for lease obligations - FFO analysis for cash flow stability --- ## Step 2: Estimate 2021 Adjusted_EBITDA ### 2021 Data (period 2021-01-01 to 2022-01-01): From the income statement: - Revenue: €22,140M - EBITDA (reported as "Beneficio Bruto De Explotacion Ebitda"): €3,529M **Adjustments for regulated utilities:** 1. **Lease adjustments**: The company has Right-of-use Assets of €1,229M (2022-01-01), suggesting material lease obligations. S&P's regulated utility methodology requires adjustment for operating leases. - Operating lease expense impact (estimated from ROU assets): ~€50M (conservative, based on typical operating patterns) 2. **Nonrecurring items**: Examining "Other Gains Losses" and related items: - Other Gains/Losses: €133M (2021) — appears to be a gain, so we subtract - Gains on Disposals of PP&E: €5M — nonrecurring gain, subtract 3. **Pension adjustments**: Not explicitly detailed, but deferred tax assets of €2,267M suggest pension liabilities. Conservative estimate: €0M (captured in operating performance) 4. **Joint ventures**: "Share of Other Comprehensive Income of Associates" €90M — already incorporated in profit **Adjusted EBITDA (2021)**: ``` Adjusted_EBITDA (2021) = 3,529 + 50 (lease equivalent) - 133 (other gains) - 5 (asset sales) + 0 = 3,441M EUR ``` --- ## Step 3: Estimate 2021 FFO **FFO = Adjusted_EBITDA - cash_interest - cash_taxes** From the cash flow statement (2021-01-01 to 2022-01-01): - Interest Paid (Operating Activities): €488M - Income Taxes Paid (Operating Activities): €864M **FFO (2021)**: ``` FFO (2021) = 3,441 - 488 - 864 = 2,089M EUR ``` --- ## Step 4: Estimate 2021 Adjusted_Debt **Adjusted_Debt = reported_debt + leases + other_debt_like_items - eligible_cash** From the balance sheet (2022-01-01, representing end of 2021): Debt components: - Longterm Borrowings: €13,786M - Current Borrowings (portion of current liabilities): €1,493M - Noncurrent Lease Liabilities: €1,325M - Current Lease Liabilities: €196M - Total Reported Debt (gross): €13,786M + €1,493M = €15,279M Lease capitalization: - Gross lease liabilities: €1,325M + €196M = €1,521M Less eligible cash: - Cash and Cash Equivalents: €3,965M **Adjusted_Debt (2021)**: ``` Adjusted_Debt (2021) = 15,279 + 1,521 - 3,965 = 12,835M EUR ``` --- ## Step 5: Calculate 2021 Adjusted_Debt / Adjusted_EBITDA ``` Debt/EBITDA (2021) = 12,835 / 3,441 = 3.73x ``` --- ## Step 6: Calculate 2021 FFO / Adjusted_Debt ``` FFO/Debt (2021) = 2,089 / 12,835 = 0.163 (or 16.3%) ``` --- ## Step 7: Estimate 2022 Adjusted_EBITDA ### 2022 Data (period 2022-01-01 to 2023-01-01): From the income statement: - Revenue: €33,965M - EBITDA (reported): €4,954M **Adjustments for regulated utilities (2022)**: 1. **Lease adjustments**: ROU Assets at 2023-01-01 = €1,162M (down from €1,229M) - Estimated operating lease expense: ~€45M 2. **Nonrecurring items**: - Other Gains/Losses: -€111M (loss, so we ADD back) - Gains on Disposals of PP&E: €8M (nonrecurring gain, subtract) - Impairment/allowance changes: -€228M adjustment for credit losses (appears recurring, leave as-is) 3. **Pension adjustments**: €0M (estimated same as prior year) **Adjusted EBITDA (2022)**: ``` Adjusted_EBITDA (2022) = 4,954 + 45 (lease) + 111 (losses add back) - 8 (disposal gains) = 5,102M EUR ``` --- ## Step 8: Estimate 2022 FFO From the cash flow statement (2022-01-01 to 2023-01-01): - Interest Paid (Operating Activities): €520M - Income Taxes Paid (Operating Activities): €762M **FFO (2022)**: ``` FFO (2022) = 5,102 - 520 - 762 = 3,820M EUR ``` --- ## Step 9: Estimate 2022 Adjusted_Debt From the balance sheet (2023-01-01, representing end of 2022): Debt components: - Longterm Borrowings: €12,689M - Current Borrowings: €2,110M - Noncurrent Lease Liabilities: €1,309M - Current Lease Liabilities: €177M - Total Reported Debt (gross): €12,689M + €2,110M = €14,799M Lease capitalization: - Gross lease liabilities: €1,309M + €177M = €1,486M Less eligible cash: - Cash and Cash Equivalents: €3,985M **Adjusted_Debt (2022)**: ``` Adjusted_Debt (2022) = 14,799 + 1,486 - 3,985 = 12,300M EUR ``` --- ## Step 10: Calculate 2022 Adjusted_Debt / Adjusted_EBITDA ``` Debt/EBITDA (2022) = 12,300 / 5,102 = 2.41x ``` --- ## Step 11: Calculate 2022 FFO / Adjusted_Debt ``` FFO/Debt (2022) = 3,820 / 12,300 = 0.310 (or 31.0%) ``` --- ## Step 12: Classify Credit Trend (2021 to 2022) ### Summary of Ratios: | Metric | 2021 | 2022 | Change | |--------|------|------|--------| | Debt/EBITDA | 3.73x | 2.41x | -1.32x | | FFO/Debt | 16.3% | 31.0% | +14.7pp (+0.147) | ### Signal 1: Leverage Change **Change in Debt/EBITDA = 2.41x - 3.73x = -1.32x** Threshold evaluation: - ≤ -0.2x: Improving ✓ - This change is **-1.32x**, which is well below -0.2x **Signal 1: IMPROVING** (leverage reduced significantly) ### Signal 2: Cash Flow Coverage Change **Change in FFO/Debt = 0.310 - 0.163 = +0.147 (or +14.7 percentage points)** Threshold evaluation: - ≥ +0.03: Improving ✓ - This change is **+0.147**, which is well above +0.03 **Signal 2: IMPROVING** (cash flow coverage nearly doubled) ### Analysis of Drivers: **Why did credit metrics improve so dramatically?** 1. **Revenue Growth**: Revenue increased 53% from €22,140M to €33,965M, reflecting: - Energy price increases (particularly natural gas and electricity in 2022) - Regulatory pass-through mechanisms in place - Operating leverage in regulated utilities 2. **EBITDA Growth**: Adjusted EBITDA increased 48% from €3,441M to €5,102M: - EBITDA margin improved slightly (15.5% to 15.0%), relatively stable given cost inflation - This suggests the company successfully recovered commodity cost increases through tariffs 3. **Debt Reduction**: Gross debt decreased from €15,279M to €14,799M: - Company reduced long-term borrowings by €1,097M - Despite increased current portion of debt (€617M increase), net debt fell - This reflects disciplined deleveraging despite higher interest costs 4. **Cash Generation**: FFO increased 83% from €2,089M to €3,820M: - Operating cash flow surged to €4,242M (from €1,001M) - Interest paid only increased 6% (from €488M to €520M) - Taxes paid decreased 12% (from €864M to €762M) 5. **Working Capital**: Inventories increased significantly (€878M to €1,828M), likely due to forward buying of energy at volatile prices. Trade payables also increased, helping cash conversion. ### Context: Regulated Utility Assessment For regulated utilities, S&P emphasizes: - **Regulatory advantage**: Naturgy operates under regulated frameworks across Spain and Europe, with ability to recover costs through tariff mechanisms. The 2022 energy crisis validated this, as tariffs adjusted upward to reflect input costs. - **Business strategy**: The company effectively managed the tariff-setting process, passing through commodity cost increases to customers. - **Financial stability**: The improvement in leverage (1.32x reduction) and cash flow coverage demonstrates enhanced financial stability. Both signals are unambiguously aligned and strong, indicating substantial credit improvement. --- Improving