I'll work through this step-by-step, analyzing Veolia Environnement's financial data to estimate S&P's credit trend from 2021 to 2022. ## Step 1: Identify the relevant industry Veolia Environnement is a **water and waste management utility company**. Based on the S&P methodologies provided, this falls under **"Regulated Utilities"** (specifically water utilities) with significant unregulated/commercial activities. Given the mixed nature (water utilities with concession contracts, waste management, and environmental services), I'll primarily apply the **Regulated Utilities** methodology with consideration for the **Transportation Infrastructure** aspects where concessions apply. Veolia operates under concession contracts for water and waste services, which have regulatory-like characteristics. The company also has significant "operating financial assets" (actifs financiers opérationnels) typical of concession-based infrastructure companies. ## Step 2: Estimate 2021 Adjusted_EBITDA First, let me reconstruct EBITDA for 2021: From the income statement (2021-01-01 to 2022-01-01): - Revenue: 28,508,100,000 EUR - Cost of Sales: 23,905,900,000 EUR - Gross Profit = 28,508,100,000 - 23,905,900,000 = 4,602,200,000 EUR - Selling Expense: 584,000,000 EUR - General and Administrative Expense: 2,308,600,000 EUR - Other Operating Income/Expense: -496,900,000 EUR (negative = expense) Operating Income before share of equity accounted entities: 1,212,700,000 EUR Let me verify: 4,602,200,000 - 584,000,000 - 2,308,600,000 - 496,900,000 = 1,212,700,000 ✓ **EBITDA reconstruction:** Operating Income before equity method: 1,212,700,000 + Operating Depreciation, Amortization, Provisions and Impairment: 2,117,200,000 = **EBITDA: 3,329,900,000 EUR** Now applying S&P adjustments for Regulated Utilities/Transportation Infrastructure: **Adjustments needed:** - **Lease adjustments**: For IFRS 16 leases, S&P typically adds back lease expenses or adjusts for operating leases. Looking at the data, Veolia already capitalizes leases (Right-of-use assets). The cash flow shows "Change in Current Lease Debt IFRS16" of 455,200,000 and "Repayment of New Noncurrent Lease Debt" of 123,300,000. For EBITDA, we typically add back lease depreciation or adjust to operating lease basis. However, with IFRS 16 already applied, the standard S&P adjustment is to treat leases as debt-like but keep EBITDA as reported (since lease depreciation is already in operating expenses). Let me use reported EBITDA and adjust debt later. Actually, for S&P's regulated utilities methodology: "Where substantial seasonal working capital requirements distort leverage measures, we adjust inventory and debt balances by netting the value of inventory against outstanding short-term borrowings." For EBITDA with IFRS 16: S&P typically does NOT add back lease depreciation to reported EBITDA under IFRS 16, because the lease expense is already replaced by depreciation. However, they may adjust to a "pre-IFRS 16" basis for comparability. Let me check if we need to add back the lease component. Looking more carefully at S&P methodology for utilities: they generally use reported EBITDA with adjustments for non-recurring items and pensions. **Non-recurring items:** - Gains/Losses on disposal of operating assets: -39,200,000 EUR (loss, so negative = add back for EBITDA? No, this is already below EBITDA) Wait, let me re-read: "Gains Losses On Disposal Of Operating Assets" is listed as -39,200,000 for 2021. This is typically part of operating income/above EBITDA or below? Looking at cash flow adjustments: "Gains Losses On Disposal Of Operating Assets" appears in the reconciliation from profit to cash flow, so it's typically deducted from operating income to get to cash flow. This means it's likely in operating income already. Actually, looking at the structure: "Operating Income Before Share Of Net Income Loss Of Equity Accounted Entities" is 1,212,700,000. This is EBIT before equity method. So EBITDA = this + depreciation/amortization. The "Other Operating Income Expense" of -496,900,000 likely includes various items including possibly some non-recurring. But without detailed breakdown, I'll use standard approach. For **nonrecurring losses/gains**: The "Gains Losses On Disposal Of Operating Assets" of -39,200,000 (loss) and "Plus Ou Moins Values De Cessions Dactifs Financiers" of 1,200,000 (gain) are items to consider. Actually, let me re-examine: in the cash flow reconciliation, these items are adjustments to reconcile profit to cash flow. This suggests: - Gains on disposal are deducted (negative adjustment if gain, positive if loss) - For 2021: "Gains Losses On Disposal Of Operating Assets" = -39,200,000. The negative sign in cash flow reconciliation means it's a loss that was deducted from profit, so we add it back? Or is it a gain? Looking at the sign convention: "Other Adjustments To Reconcile Profit Loss" = 116,000,000. These are typically non-cash or non-operating adjustments. Let me use a cleaner approach. For S&P purposes: **Base EBITDA** = Operating Income before equity method + D&A = 1,212,700,000 + 2,117,200,000 = **3,329,900,000** **Adjustments:** - **Pension adjustments**: "Other Comprehensive Income Before Tax Gains Losses On Remeasurements Of Defined Benefit Plans" = 68,200,000. This is an OCI item, not in EBITDA. S&P may adjust for pension service cost differences, but this is remeasurement (actuarial gains/losses). For EBITDA, we typically adjust operating pension expense to cash contribution. Without detailed pension expense breakdown, I'll note this but may not have sufficient data. - **Joint venture proportional EBITDA**: Share of net income of core equity accounted entities = 104,800,000. For EBITDA, S&P sometimes includes proportional EBITDA of JVs. But this is net income, not EBITDA. Without D&A of JVs, difficult to estimate. The equity method income is already below operating income (after "Operating Income Before Share..."). Actually, looking at the structure, the 1,212,700,000 is BEFORE equity method, and "Resultat Operationnel Apres Quote Part..." is 1,317,500,000, which includes 104,800,000 equity income. For S&P's approach to JVs: they may include proportional consolidation for significant JVs. However, this gets complex. Let me use a practical approach. Given data limitations, let me use: **Adjusted_EBITDA_2021 ≈ 3,329,900,000 + 104,800,000 (equity income, rough proxy for EBITDA contribution) + 39,200,000 (loss on disposal, if non-recurring) - 1,200,000 (gain on financial assets, if non-recurring)** Actually, for non-recurring items, S&P typically adjusts for material one-time gains/losses. The 39,200,000 loss on operating asset disposals and 1,200,000 gain on financial asset disposals are relatively small compared to EBITDA. Let me be more conservative and use: - Add back loss on disposal of operating assets (39,200,000) as non-recurring - Deduct gain on financial assets disposal (1,200,000) if non-recurring But wait - are these already in operating income? The operating income of 1,212,700,000 is before equity method. The disposal gains/losses could be in "Other Operating Income Expense" or separate. Looking at cash flow: "Gains Losses On Disposal Of Operating Assets" = -39,200,000 is an adjustment to reconcile profit to operating cash flow. This means it was included in profit (loss reduces profit, so adding back). This confirms it's in the income statement. For simplicity and given materiality, let me estimate: **Adjusted_EBITDA_2021 = 3,329,900,000 + 0 (leases already in) + 39,200,000 (non-recurring loss, add back) - 1,200,000 (non-recurring gain, deduct) + 0 (pension, insufficient data) + 104,800,000 (equity method, add for proportional) ≈ 3,472,700,000** Actually, I need to be more careful. The equity method income is typically NOT in EBITDA when starting from EBIT. If we start from "Operating Income Before Share Of Net Income..." then equity income is excluded. For S&P's proportional EBITDA, we'd need to add proportional EBITDA, not just equity income. Let me use a cleaner base: Start from "Resultat Operationnel Apres Quote Part..." = 1,317,500,000 which INCLUDES equity income. This is closer to EBIT. EBITDA including equity income = 1,317,500,000 + 2,117,200,000 = 3,434,700,000 Then adjust for non-recurring: +39,200,000 - 1,200,000 = 3,472,700,000 For JVs, if we want proportional EBITDA rather than equity income: we'd need to add back D&A of JVs. Without this data, using equity income as proxy is conservative (EBITDA > net income). Let me use **Adjusted_EBITDA_2021 ≈ 3,470,000,000 EUR** (rounded) Actually, let me recalculate more carefully. Looking at S&P methodology, they often use "Funds From Operations" (FFO) which starts from net income and adds back D&A. Let me recalculate EBITDA as: Revenue - Cash Operating Costs (excluding D&A). But we don't have that breakdown. Alternative: EBITDA = Operating Income + D&A = 1,212,700,000 + 2,117,200,000 = 3,329,900,000 (excluding equity method) Or with equity method: 1,317,500,000 + 2,117,200,000 = 3,434,700,000 For regulated utilities with significant JVs, S&P may use proportional consolidation. Let me check if 104,800,000 is already included in operating income. "Operating Income Before Share Of Net Income Loss Of Equity Accounted Entities" = 1,212,700,000 - clearly EXCLUDES equity income. "Resultat Operationnel Apres Quote Part..." = 1,317,500,000 = 1,212,700,000 + 104,800,000 So if we want EBIT including JVs, it's 1,317,500,000. EBITDA including JVs = 3,434,700,000. For S&P's Adjusted EBITDA, I'll use this base and make lease adjustments. Under IFRS 16, EBITDA includes lease depreciation instead of lease expense. S&P typically adjusts this by adding back lease depreciation and subtracting estimated lease expense (or keeps as is for comparability). Actually, for recent S&P methodology with IFRS 16: they generally accept reported EBITDA and treat lease liabilities as debt. So no EBITDA adjustment needed for leases. Let me finalize: **Adjusted_EBITDA_2021 = 3,434,700,000 + 39,200,000 (non-recurring loss) - 1,200,000 (non-recurring gain) = 3,472,700,000 ≈ 3,473,000,000 EUR** ## Step 3: Estimate 2021 FFO FFO = Adjusted_EBITDA - cash_interest - cash_taxes From cash flow statement: - "Net Finance Costs" = 342,600,000 (this is expense, so cash interest paid would be similar, but we have actual "Interest Paid" = 357,400,000) - "Income Taxes Paid Refund Classified As Operating Activities" = 285,600,000 Wait, FFO formula is: Adjusted_EBITDA - cash interest - cash taxes. But we also need to adjust for working capital changes? No, FFO is before working capital changes. Actually, standard S&P FFO = Net Income + D&A + deferred taxes + other non-cash items - equity income + dividends from equity investments... Or from EBITDA: FFO = EBITDA - cash interest - cash taxes (this is a simplified version) Using the formula given: FFO = Adjusted_EBITDA - cash_interest - cash_taxes Cash interest: "Interest Paid" = 357,400,000 But we also have "Interest On Operating Assets" = 76,500,000 and "Interest On Lease" = 28,200,000. Are these included in interest paid or separate? Looking at financing activities: "Interest Paid" = 357,400,000. This likely includes all interest. Cash taxes: "Income Taxes Paid Refund Classified As Operating Activities" = 285,600,000 So **FFO_2021 = 3,472,700,000 - 357,400,000 - 285,600,000 = 2,829,700,000 EUR** But wait - this seems high. Let me verify with alternative calculation from net income: Net Income = 554,900,000 + D&A and impairment (operating) = 2,117,200,000 + Financial amortization and impairment = 3,800,000 - Equity income (to exclude, add back if we want FFO attributable) = -104,800,000? + Dividends received from investments = 223,100,000 (from investing activities, but these are cash dividends) Actually, S&P FFO typically: = Net Income from continuing operations + Depreciation and amortization + Deferred income taxes + Other non-cash items - Equity income from affiliates + Cash dividends from equity investments + Other adjustments From cash flow: "Cash Flows From Used In Operations Before Changes In Working Capital" = 3,213,200,000 This is essentially EBITDA - cash interest - cash taxes + other adjustments = FFO before working capital. Actually, "Cash Flows From Used In Operations Before Changes In Working Capital" = 3,213,200,000 for 2021. This matches closely with my FFO estimate of 2,829,700,000? No, it's higher. Let me check what's in this 3,213,200,000. From reconciliation: Profit Loss = 554,900,000 + Operating D&A provisions impairment = 2,117,200,000 + Financial amortization impairment = 3,800,000 + Gains losses on disposal operating assets = -39,200,000 (negative = loss, so subtract? No, in reconciliation: if loss, we add back) Wait: "Gains Losses On Disposal Of Operating Assets" = -39,200,000. In cash flow reconciliation, gains are subtracted, losses are added. Negative means loss, so add 39,200,000. Let me recalculate: 554,900,000 + 2,117,200,000 + 3,800,000 + 39,200,000 - 1,200,000 + 74,100,000 + 30,800,000 - 124,200,000 + 342,600,000 + 345,800,000 + 116,000,000 + ... This gets complex. Let me just use the reported "Cash Flows From Used In Operations Before Changes In Working Capital" = 3,213,200,000 as a proxy for FFO-like measure, but adjust for equity income and dividends. Actually, S&P's FFO definition: "Funds from operations (FFO) is net income from continuing operations adjusted for depreciation and amortization, deferred income taxes and other non-cash items." For utilities, FFO is typically close to "Cash Flows From Used In Operations Before Changes In Working Capital" minus any items that are not recurring or not operational. Let me use **FFO_2021 = 3,213,200,000** as base, but this includes working capital? No, it's "Before Changes In Working Capital." Actually, looking more carefully: this 3,213,200,000 is already adjusted for interest and taxes (cash or accrual?). It includes "Adjustments For Income Tax Expense" of 345,800,000 (non-cash/add back) and "Net Finance Costs Adjustments" of 342,600,000 (add back non-cash or accrued interest). But "Interest Paid" and "Income Taxes Paid" are in operating cash flow after working capital changes. The "before changes in working capital" figure is before these actual cash payments? No, it's before WORKING CAPITAL changes, but after adjusting net income for non-cash items. Actually, standard cash flow presentation: Net Income + Adjustments to reconcile net income to net cash provided by operating activities = Cash flows from operating activities before changes in working capital ± Changes in working capital = Cash flows from operating activities So 3,213,200,000 is after adding back D&A, deferred taxes, etc., but BEFORE changes in working capital and BEFORE actual cash interest/tax payments? Or are those included in working capital? Looking at the detailed items: "Net Finance Costs Adjustments" = 342,600,000 - this adds back accrued finance costs. "Adjustments For Income Tax Expense" = 345,800,000 - this adds back income tax expense. So the 3,213,200,000 is essentially: Net Income + non-cash items - non-cash revenues. It does NOT yet reflect actual cash interest or cash taxes paid. Those come in the working capital section or are part of the "before working capital" as financing/tax payments? Actually, in many cash flow statements, "Cash flows from operating activities before changes in working capital" is equivalent to EBITDA - cash interest - cash taxes, or close to it. But here we see add-back of tax expense and finance costs, suggesting it's accrual-based. Then "Income Taxes Paid Refund Classified As Operating Activities" = 285,600,000 is a separate line in operating activities. And "Interest Paid" = 357,400,000 is in financing activities? No, looking again: "Interest Paid" appears in the financing section? Let me check. Looking at the cash flow data: "Interest Paid" = 357,400,000 appears near "Interest On Operating Assets" and "Interest On Lease" and "Cash Flows From Used In Financing Activities". Actually, it's listed before the financing activities total, so it might be part of operating or financing. In IFRS, interest paid can be classified as operating or financing. Looking at the structure, "Interest Paid" is listed near other items that seem to be in the operating section, but let me check the financing activities total. "Cash Flows From Used In Financing Activities Continuing Operations" = 2,294,900,000 for 2021. This includes various items. The "Interest Paid" of 357,400,000 might be in operating activities. Actually, looking at standard IFRS cash flow: interest paid is typically operating activity. So "Cash Flows From Used In Operating Activities Continuing Operations" = 3,163,800,000 likely includes interest paid and taxes paid. Let me verify: 3,213,200,000 (before WC changes) - 382,500,000 (WC change) + 146,300,000 (concession WC) - 285,600,000 (taxes paid) = 2,691,400,000? That doesn't match 3,163,800,000. Actually: 3,213,200,000 - 382,500,000 + 146,300,000 - 285,600,000 = 2,691,400,000. But reported is 3,163,800,000. Difference is 472,400,000. Hmm. Wait, I need to re-read: "Income Taxes Paid Refund Classified As Operating Activities" = 285,600,000. Is this positive or negative? In the data, it's shown as positive 285,600,000. But in cash flow, taxes paid are typically negative (use of cash). The sign convention here might be that positive = cash outflow? Or is it refund (positive = inflow)? Looking at 2022: "Income Taxes Paid Refund Classified As Operating Activities" = 557,400,000. This increased, suggesting higher payments or lower refunds. Actually, the label says "Paid Refund" - so positive could mean either. But in context, if it's an adjustment to get to operating cash flow, and 2022 profit is higher, more taxes paid makes sense. Let me assume "Income Taxes Paid" are cash outflows (negative in direct method, but here shown as positive number meaning outflow, or the data uses positive for outflows in some cases). Actually, looking at "Cash Flows From Used In Operating Activities" = 3,163,800,000 (positive = inflow). This is net cash provided by operations. The components: 3,213,200,000 (before WC) - 382,500,000 (WC change, negative = outflow) + 146,300,000 (concession WC, positive = inflow) - 285,600,000 (taxes, if paid = outflow) = ? If taxes paid are outflow: 3,213,200,000 - 382,500,000 + 146,300,000 - 285,600,000 = 2,691,400,000. But we need 3,163,800,000. Difference is +472,400,000. Alternatively, if "Income Taxes Paid Refund" of 285,600,000 means refund (inflow): 3,213,200,000 - 382,500,000 + 146,300,000 + 285,600,000 = 3,262,600,000. Still not matching. Hmm, let me look at this differently. The "Cash Flows From Used In Operating Activities Continuing Operations" = 3,163,800,000 might already include interest and taxes. The "before changes in working capital" of 3,213,200,000 minus some WC changes = 3,163,800,000? Difference is 49,400,000. Actually: 3,213,200,000 - 49,400,000 = 3,163,800,000. What is 49,400,000? It's close to the sum of some items. Looking at the detailed operating cash flow: - Change In Operating Working Capital Requirements: -382,500,000 - Change In Concession Working Capital Requirements: +146,300,000 - Income Taxes Paid Refund: ? If taxes paid are NOT in the "before WC" figure, then: 3,213,200,000 - 382,500,000 + 146,300,000 - 285,600,000 (taxes paid) = 2,691,400,000 ≠ 3,163,800,000 Alternatively, if taxes are already reflected in "before WC" (i.e., it's actually "before working capital but after cash taxes and interest"), then the "Income Taxes Paid Refund" line is explaining a component. I think the most standard interpretation is: "Cash Flows From Used In Operations Before Changes In Working Capital" = 3,213,200,000 is after cash interest and cash taxes, before working capital changes. Then: 3,213,200,000 - 382,500,000 (WC change) + 146,300,000 (concession WC change) = 2,977,000,000? But reported is 3,163,800,000. Actually, maybe the concession WC is already included in operating WC? Or maybe the signs are different. Let me try: 3,213,200,000 + 382,500,000 + 146,300,000 = 3,742,000,000? No. Given the complexity, let me use a simpler approach for FFO: From S&P's standard formula: FFO = Adjusted_EBITDA - cash_interest - cash_taxes Cash interest: We need actual cash interest paid. "Interest Paid" = 357,400,000. But we also have "Net Finance Costs" = 342,600,000 (accrual). The difference might be capitalized interest or changes in accrued interest. Cash taxes: "Income Taxes Paid Refund Classified As Operating Activities" = 285,600,000. I'll interpret this as taxes paid (outflow). So **FFO_2021 = 3,472,700,000 - 357,400,000 - 285,600,000 = 2,829,700,000 EUR** But let me cross-check with "Cash Flows From Used In Operations Before Changes In Working Capital" = 3,213,200,000. This should be close to FFO. My estimate is lower by 383,500,000. The difference could be: - My EBITDA might be too low (missing some items) - Or the 3,213,200,000 includes items not in FFO Actually, looking at the reconciliation to 3,213,200,000: it starts from Profit Loss 554,900,000 and adds back 2,117,200,000 D&A and other items. This 3,213,200,000 is essentially Net Income + major non-cash items, which is close to FFO but before working capital and before some cash adjustments. If we compare: 3,213,200,000 vs my FFO of 2,829,700,000, the difference is 383,500,000. This could be explained by: - My cash interest (357,400,000) vs add-back of finance costs (342,600,000) - difference 14,800,000 - My cash taxes (285,600,000) vs add-back of tax expense (345,800,000) - difference 60,200,000 - Total difference in these two: ~75,000,000 Still not explaining 383,500,000. Let me recalculate EBITDA. Actually, I think the issue is that "Cash Flows From Used In Operations Before Changes In Working Capital" of 3,213,200,000 is NOT FFO. It's a subtotal that may include or exclude certain items. Let me use **FFO_2021 = 3,213,200,000 - 104,800,000 (equity income, to exclude) + 223,100,000 (dividends received, if not already in) - other non-FFO items**... this gets too complex. For practical purposes, let me use the formula as specified: **FFO = Adjusted_EBITDA - cash_interest - cash_taxes** With Adjusted_EBITDA = 3,473,000,000, cash interest = 357,400,000, cash taxes = 285,600,000: **FFO_2021 = 2,829,700,000 ≈ 2,830,000,000 EUR** Actually, let me reconsider. The S&P formula says "cash_taxes" not "taxes paid from cash flow statement." Cash taxes typically means income tax expense adjusted for deferred taxes, or actual cash outflow for taxes. Given ambiguity, let me also compute using alternative: FFO ≈ "Cash Flows From Used In Operations Before Changes In Working Capital" minus cash interest if not already deducted, or plus cash interest if added back. Actually, I think "Cash Flows From Used In Operations Before Changes In Working Capital" of 3,213,200,000 might already be AFTER cash interest and taxes, or it might be accrual-based with add-backs. Let me try yet another approach: S&P FFO for utilities is often approximated as: Net Income + D&A + Deferred Taxes - Equity Earnings + Dividends from Equity Investments + Other non-cash items From data: - Net Income: 554,900,000 - Operating D&A: 2,117,200,000 - Financial amortization: 3,800,000 - Deferred tax: ? Not directly available, but "Deferred Tax Assets" changed from prior year. 2022 start was 1,059,200,000, but we don't have 2021 start. - Equity Earnings: 104,800,000 (to subtract, as we want FFO attributable to company, not equity investees) - Dividends from equity investments: 223,100,000 (from investing activities, but these are cash inflows) Actually, for FFO, S&P typically includes dividends received from equity investments as part of FFO (unlike EBITDA). So: 554,900,000 + 2,117,200,000 + 3,800,000 - 104,800,000 + 223,100,000 + ... = 2,794,200,000 plus other items. This is close to my 2,829,700,000 estimate. The difference of ~35,500,000 could be deferred taxes and other items. Let me use **FFO_2021 = 2,830,000,000 EUR** as reasonable estimate. ## Step 4: Estimate 2021 Adjusted_Debt Adjusted_Debt = reported_debt + leases + pension_deficit + guarantees + hybrid_debt_portion + other_debt_like_items - eligible_cash **Reported debt:** From balance sheet 2022-01-01 (start of 2022 = end of 2021): - Noncurrent Financial Liabilities Excluding Concession Liabilities: 10,462,500,000 - Noncurrent Lease Liabilities: 1,298,100,000 - Noncurrent Concession Liabilities: 1,588,400,000 - Current Financial Liabilities Excluding Concession Liabilities: 8,624,300,000 - Current Lease Liabilities: 410,600,000 - Current Concession Liabilities: 169,400,000 - Bank Overdrafts And Other Cash Position Items: 241,900,000 Total reported debt = 10,462,500,000 + 1,298,100,000 + 1,588,400,000 + 8,624,300,000 + 410,600,000 + 169,400,000 + 241,900,000 = 22,795,200,000 But wait - for S&P purposes, what is "reported_debt"? Typically interest-bearing debt. Let me identify: - Noncurrent Financial Liabilities Excluding Concession Liabilities: 10,462,500,000 (debt) - Current Financial Liabilities Excluding Concession Liabilities: 8,624,300,000 (debt) - Bank Overdrafts: 241,900,000 (debt) Concession liabilities: These might be treated differently. For regulated utilities/concessions, S&P may or may not include concession liabilities as debt-like. Looking at transportation infrastructure methodology: "For unregulated power and gas companies that enter into long-term power purchase agreements (PPAs), we make adjustments... as we do for regulated utilities." For concessions, the liabilities might be operating in nature (payables for concession fees) or debt-like. Given Veolia's water/waste concessions, these are likely debt-like obligations. Lease liabilities: Under IFRS 16, these are already in debt. S&P typically includes them as debt. So base debt = 10,462,500,000 + 8,624,300,000 + 241,900,000 + 1,298,100,000 + 410,600,000 + 1,588,400,000 + 169,400,000 = 22,795,200,000 **Leases**: Already included in the above (1,298,100,000 + 410,600,000 = 1,708,700,000). For S&P, if we want to treat operating leases as debt-like under pre-IFRS 16, but they're already capitalized. So no additional adjustment needed unless we're adjusting EBITDA too. Actually, for S&P's Adjusted_Debt with IFRS 16: they typically include lease liabilities as reported. So no add-back needed. **Pension deficit**: We have "Other Comprehensive Income Before Tax Gains Losses On Remeasurements Of Defined Benefit Plans" = 68,200,000 (gain), but this is OCI, not balance sheet. Without pension liability data, I'll assume small or use deferred tax/pension related items. Looking at balance sheet: No explicit pension liability. "Noncurrent Provisions" = 1,876,600,000 might include pension and other items. Without breakdown, difficult to estimate pension deficit. **Hybrid debt**: "Titres Super Subordonnes ADuree Indeterminee" = 2,460,700,000. These are deeply subordinated securities (hybrid equity/debt). S&P typically treats 50% or 100% as equity or debt depending on features. For "super subordinated" with indefinite duration, these are typically treated as 50% debt or 100% equity by S&P (depending on coupon deferral features). Given the name "super subordinated" and "indeterminate duration," these are likely hybrid equity instruments. S&P typically counts 50% as debt for hybrids without mandatory coupon deferral, or 0% if strong equity-like features. Looking at cash flows: "Coupons On Deeply Subordinated Securities" = 23,900,000 paid. This suggests coupons are discretionary or non-cumulative? Actually, they're being paid, so maybe cumulative. For conservatism, I'll count 50% as debt: 2,460,700,000 × 50% = 1,230,350,000 **Other debt-like items**: - "Actifs Financiers Operationnels Non Courants" / "Actifs Financiers Operationnels Courants": These are operating financial assets, not liabilities. - Derivatives: "Noncurrent Derivative Financial Liabilities" = 68,800,000, "Current Derivative Financial Liabilities" = 261,500,000. These are already in debt? Or separate? If interest rate/commodity hedges, might be debt-like. Actually, derivative liabilities are typically not "debt" but fair value of derivatives. For credit analysis, we might include negative mark-to-market. **Guarantees**: No specific data. **Eligible cash**: "Cash And Cash Equivalents" = 10,518,700,000 "Bank Overdrafts And Other Cash Position Items" = 241,900,000 (negative cash?) Net cash = 10,518,700,000 - 241,900,000 = 10,276,800,000? Or is bank overdraft already deducted? Actually, "Cash And Cash Equivalents If Different From Statement Of Financial Position" = 10,276,800,000 (2022-01-01). This might be net of overdrafts. Looking at 2022-01-01: Cash = 10,518,700,000, Overdrafts = 241,900,000. Net = 10,276,800,000 which matches the "If Different" line! So eligible cash = 10,276,800,000 (or 10,518,700,000 gross, with overdrafts as debt). For S&P, eligible cash is typically cash and liquid investments minus restricted cash. Assuming no restricted cash: eligible cash = 10,276,800,000. **Putting together Adjusted_Debt_2021:** = 22,795,200,000 (reported debt including leases and concessions) + 0 (leases already in) + 0 (pension, unknown) + 0 (guarantees, unknown) + 1,230,350,000 (hybrid 50%) + 0 (other) - 10,276,800,000 (eligible cash) = 13,748,750,000 ≈ 13,749,000,000 EUR Wait, this seems low for a utility. Let me reconsider if concession liabilities should be included. For water utilities with concessions, the concession liabilities are typically debt-like (payments due to grantor). However, they might be operating in nature. Let me check if they should be included. In many European utility/concession models, concession liabilities are financial debt. I'll keep them. But actually, looking at S&P's regulated utilities methodology: "We deconsolidate securitized debt (and associated revenue and expense) that has been accorded specialized recovery provisions." Not directly relevant. For concessions, S&P transportation infrastructure methodology mentions concession liabilities. Let me assume they're debt-like. However, let me reconsider: "Noncurrent Concession Liabilities" and "Current Concession Liabilities" - these are likely payables to government for concession rights, similar to debt. Yes, include. Revised: Keep 22,795,200,000 as debt basis. But wait - is "Noncurrent Financial Liabilities Excluding Concession Liabilities" already excluding concessions? Yes. So my addition is correct. Actually, I need to double-check: are "Noncurrent Financial Liabilities Excluding Concession Liabilities" and "Current Financial Liabilities Excluding Concession Liabilities" the main debt items, and then I add concession liabilities separately? Yes. Total debt = 10,462,500,000 + 8,624,300,000 + 241,900,000 + 1,298,100,000 + 410,600,000 + 1,588,400,000 + 169,400,000 = 22,795,200,000 Hmm, but this includes lease liabilities (1,298,100,000 + 410,600,000 = 1,708,700,000) and concession liabilities (1,588,400,000 + 169,400,000 = 1,757,800,000). For S&P, should leases be added back to debt if already in IFRS 16? No, they're already in reported debt. Should concessions be treated as debt? For operating concessions, yes typically. Let me also check if there are other debt-like items: - "Other Noncurrent Financial Assets" = 431,200,000 - this is asset, not liability - "Other Current Financial Assets" = 1,521,000,000 - asset What about operating receivables/payables netting? S&P mentions for utilities: "we adjust inventory and debt balances by netting the value of inventory against outstanding short-term borrowings" for seasonal working capital. Not obviously applicable here. **Hybrid treatment**: Let me reconsider. "Titres Super Subordonnes ADuree Indeterminee" with coupons paid. These are "deeply subordinated securities with indefinite duration." S&P's typical treatment: If coupon is discretionary and non-cumulative, 0% debt (100% equity). If cumulative or mandatory, up to 50% debt. Given coupons are being paid and there's a line "Coupons On Deeply Subordinated Securities," this suggests they're expected payments. But are they discretionary? For French "titres super subordonnés," these are typically deeply subordinated perpetual bonds. S&P usually treats them as 50% equity, 50% debt, or 100% equity if sufficiently equity-like. Given the "indeterminate duration" and "super subordinated" features, I'll use **50% equity treatment = 50% debt**: 1,230,350,000. Actually, looking at equity section: "Deeply Subordinated Securities Member Member" = 2,460,700,000. This is in equity! So these are classified as equity in the balance sheet, not debt. If they're in equity, then for S&P Adjusted_Debt, we need to decide if to reclassify portion to debt. S&P does this for hybrid instruments. Given they're in equity but deeply subordinated, S&P likely treats 50% as debt-like: add 1,230,350,000 to debt. **Final Adjusted_Debt_2021:** = 22,795,200,000 + 1,230,350,000 - 10,276,800,000 = **13,748,750,000 EUR** Let me round to **13,749,000,000 EUR** or about **13.75 billion EUR** ## Step 5: Calculate 2021 Adjusted_Debt / Adjusted_EBITDA = 13,748,750,000 / 3,472,700,000 = **3.96x** ## Step 6: Calculate 2021 FFO / Adjusted_Debt = 2,829,700,000 / 13,748,750,000 = **0.206 or 20.6%** ## Step 7: Estimate 2022 Adjusted_EBITDA Revenue (2022): 42,885,300,000 Cost of Sales: 35,739,800,000 Gross Profit = 7,145,500,000 Operating Income before equity method: 2,206,300,000 Verify: 7,145,500,000 - 954,200,000 - 3,215,800,000 - 769,200,000 = 2,206,300,000 ✓ EBITDA = 2,206,300,000 + 3,178,600,000 (Operating D&A) = 5,384,900,000 With equity method: 2,333,300,000 + 3,178,600,000 = 5,511,900,000 Non-recurring adjustments: - Gains Losses On Disposal Of Operating Assets: -299,000,000 (loss, add back) - Plus Ou Moins Values De Cessions Dactifs Financiers: -370,000,000 (loss, add back? Or is this financial?) Wait, -370,000,000 is negative, meaning loss. This is significant. For 2022, "Gains Losses On Disposal Of Operating Assets" = -299,000,000 (loss, so add back to EBITDA if non-recurring) "Plus Ou Moins Values De Cessions Dactifs Financiers" = -370,000,000 (loss on financial asset disposals) Are these non-recurring? The operating asset disposal loss of 299,000,000 is likely non-recurring. The financial asset disposal loss of 370,000,000 - is this operating or financing? Given it's "financial assets," likely investing/financing. For EBITDA, we typically adjust for non-recurring operating items. The 299,000,000 is likely in operating income or below it. Since it's in the cash flow reconciliation, it's an adjustment from profit to cash flow, so it affected profit. Add back 299,000,000 for non-recurring operating loss. The 370,000,000 financial asset loss might be below operating income (in financing or exceptional). Adjusted_EBITDA_2022 = 5,511,900,000 + 299,000,000 = 5,810,900,000 Wait, I need to check if 299,000,000 is already in operating income. "Operating Income Before Share Of Net Income Loss Of Equity Accounted Entities" = 2,206,300,000. This is before equity method but after other operating items. The disposal loss could be in "Other Operating Income Expense" of -769,200,000 or separate. Given the cash flow reconciliation includes it, it was in net income. Whether in operating income depends on classification. I'll assume it's in operating income or just below, and add back for non-recurring. **Adjusted_EBITDA_2022 ≈ 5,810,900,000 EUR** Actually, let me also consider: is there a need to adjust for the Suez acquisition? 2022 results include a full year of Suez (acquired early 2022). This is not non-recurring, just larger scale. Also, "Other Adjustments To Reconcile Profit Loss" = 282,300,000 in 2022 vs 116,000,000 in 2021. This might include integration costs or other items. Without detail, I'll leave as is. Let me use **Adjusted_EBITDA_2022 = 5,811,000,000 EUR** ## Step 8: Estimate 2022 FFO FFO = Adjusted_EBITDA - cash_interest - cash_taxes Cash interest: "Interest Paid" = 637,700,000 Cash taxes: "Income Taxes Paid Refund Classified As Operating Activities" = 557,400,000 FFO_2022 = 5,810,900,000 - 637,700,000 - 557,400,000 = 4,615,800,000 Cross-check with "Cash Flows From Used In Operations Before Changes In Working Capital" = 4,804,300,000. My FFO is lower by 188,500,000. This could be due to my EBITDA estimate or treatment of certain items. Alternative using reported subtotal: If "Cash Flows From Used In Operations Before Changes In Working Capital" = 4,804,300,000 is closer to FFO, then maybe use that? But the formula specifies FFO = Adjusted_EBITDA - cash_interest - cash_taxes. Let me stick with formula. Actually, let me recalculate: maybe cash interest should be "Net Finance Costs" of 632,700,000 (accrual) rather than 637,700,000 paid? Or the difference is small. Using 632,700,000: FFO = 5,810,900,000 - 632,700,000 - 557,400,000 = 4,620,800,000 Or using 4,804,300,000 - adjustments for equity income etc. For consistency with 2021 approach, let me use: **FFO_2022 = 4,616,000,000 EUR** (using cash interest paid) Actually, to be more consistent with my 2021 methodology where I used 3,213,200,000 vs my calculated 2,829,700,000, there's a difference. Let me see if I should use the reported "before WC" figure. For 2021: reported before WC = 3,213,200,000, my FFO = 2,829,700,000, difference = 383,500,000 For 2022: reported before WC = 4,804,300,000, if same difference: 4,804,300,000 - 383,500,000 = 4,420,800,000 Hmm, but the difference might not be constant. Let me think about what causes the difference. The "before WC" figure includes: Net Income + D&A + other non-cash items - equity income + dividends? Actually no, looking at reconciliation items, it includes various adjustments. For cleaner comparison, let me use the formula as specified: FFO = Adj EBITDA - cash interest - cash taxes. **FFO_2022 = 5,810,900,000 - 637,700,000 - 557,400,000 = 4,615,800,000 ≈ 4,616,000,000 EUR** Or if I use the 2021 pattern where my FFO was lower than "before WC" by including equity income adjustments, let me try: From "before WC" 4,804,300,000, subtract equity income 127,000,000? No, equity income is already in net income which starts the reconciliation. Actually, looking more carefully at 2021 reconciliation to 3,213,200,000: - Starts from Profit Loss: 554,900,000 - Adds back: Operating D&A (2,117,200,000), Financial amortization (3,800,000), Gains losses on disposal (-39,200,000, i.e., loss so add 39,200,000), etc. - Includes: Share of net income of JVs (74,100,000) - this is subtracted? Or added? Wait, "Share Of Net Income Loss Of Joint Ventures" = 74,100,000. In cash flow reconciliation, this is likely SUBTRACTED because it's equity income not cash. But the data shows positive 74,100,000. If it's an add-back in the list, that doesn't make sense. Let me look at signs more carefully. In 2022: - "Share Of Net Income Loss Of Joint Ventures" = 56,500,000 - "Adjustments For Undistributed Profits Of Associates" = 70,500,000 These seem to be adjustments. "Adjustments For Undistributed Profits Of Associates" suggests adding back undistributed profits (i.e., equity income not received as dividends). So "Share Of Net Income" might be subtracted, and "Adjustments For Undistributed Profits" might be the add-back? Actually, I think "Share Of Net Income Loss Of Joint Ventures" in the reconciliation is the amount to subtract (negative adjustment if income), and "Adjustments For Undistributed Profits Of Associates" adds back the undistributed portion. This is getting too detailed. Let me use the simple formula and accept some approximation. **FFO_2022 = 4,616,000,000 EUR** ## Step 9: Estimate 2022 Adjusted_Debt Balance sheet 2023-01-01 (end of 2022): - Noncurrent Financial Liabilities Excluding Concession Liabilities: 19,692,100,000 - Noncurrent Lease Liabilities: 1,656,200,000 - Noncurrent Concession Liabilities: 1,680,500,000 - Current Financial Liabilities Excluding Concession Liabilities: 6,521,400,000 - Current Lease Liabilities: 496,500,000 - Current Concession Liabilities: 243,200,000 - Bank Overdrafts And Other Cash Position Items: 213,600,000 Total reported debt = 19,692,100,000 + 1,656,200,000 + 1,680,500,000 + 6,521,400,000 + 496,500,000 + 243,200,000 + 213,600,000 = 30,503,500,000 Hybrid debt: "Titres Super Subordonnes ADuree Indeterminee" = 3,496,300,000 50% as debt = 1,748,150,000 Eligible cash: "Cash And Cash Equivalents If Different From Statement Of Financial Position" = 8,798,600,000 (2023-01-01) Or gross cash 9,012,200,000 - overdrafts 213,600,000 = 8,798,600,000. Matches! Adjusted_Debt_2022 = 30,503,500,000 + 1,748,150,000 - 8,798,600,000 = **23,453,050,000 ≈ 23,453,000,000 EUR** ## Step 10: Calculate 2022 Adjusted_Debt / Adjusted_EBITDA = 23,453,050,000 / 5,810,900,000 = **4.04x** ## Step 11: Calculate 2022 FFO / Adjusted_Debt = 4,615,800,000 / 23,453,050,000 = **0.197 or 19.7%** ## Step 12: Classify year-on-year credit trend **Signal 1: Leverage (Adjusted_Debt / Adjusted_EBITDA)** - 2021: 3.96x - 2022: 4.04x - Change: 4.04 - 3.96 = **+0.08x** Threshold: ≤ -0.2x: Improving; between -0.2x and +0.2x: Stable; ≥ +0.2x: Deteriorating +0.08x is between -0.2x and +0.2x → **Stable** **Signal 2: Cash-flow coverage (FFO / Adjusted_Debt)** - 2021: 0.206 or 20.6% - 2022: 0.197 or 19.7% - Change: 0.197 - 0.206 = **-0.009 or -0.9 percentage points** In decimal: -0.009 Threshold: ≥ +0.03: Improving; between -0.03 and +0.03: Stable; ≤ -0.03: Deteriorating -0.009 is between -0.03 and +0.03 → **Stable** **Both signals are Stable.** However, let me reconsider my calculations for potential errors, as the result seems very stable despite a major acquisition. **Reality check:** Veolia acquired Suez in 2022, roughly doubling its size. Revenue went from 28.5B to 42.9B (+50%). Assets grew significantly. Debt also grew. The leverage ratio going from 3.96x to 4.04x seems reasonable (slight increase due to acquisition funding). FFO coverage declining slightly from 20.6% to 19.7% also seems plausible. But let me verify my 2021 Adjusted_Debt. I used end-2021/start-2022 balance sheet. Let me recheck: 2022-01-01 (end 2021): - Noncurrent Financial Liabilities Excluding Concession: 10,462,500,000 - Noncurrent Lease Liabilities: 1,298,100,000 - Noncurrent Concession Liabilities: 1,588,400,000 - Current Financial Liabilities Excluding Concession: 8,624,300,000 - Current Lease Liabilities: 410,600,000 - Current Concession Liabilities: 169,400,000 - Bank Overdrafts: 241,900,000 Total: 22,795,200,000. Plus hybrid 50% (1,230,350,000) = 24,025,550,000. Minus cash 10,276,800,000 = 13,748,750,000. ✓ 2023-01-01 (end 2022): Total debt items: 30,503,500,000. Plus hybrid 50% (1,748,150,000) = 32,251,650,000. Minus cash 8,798,600,000 = 23,453,050,000. ✓ The increase in Adjusted_Debt from 13.7B to 23.5B (+71%) is faster than EBITDA growth from 3.47B to 5.81B (+67%). Hence leverage slightly up. FFO growth from 2.83B to 4.62B (+63%) is slower than debt growth (+71%), hence coverage down. Both changes are relatively small in ratio terms, leading to Stable classification. But wait - I want to double-check my EBITDA calculations. For 2022, is my base correct? Operating Income before equity method: 2,206,300,000 + Operating D&A: 3,178,600,000 = EBITDA: 5,384,900,000 With equity method: 2,333,300,000 + 3,178,600,000 = 5,511,900,000 Plus non-recurring loss on disposal: 299,000,000 = 5,810,900,000 Is the 299,000,000 non-recurring? Looking at 2021, it was 39,200,000. The increase is significant. This could include Suez integration costs or restructuring. For S&P, integration costs are sometimes treated as non-recurring. If I DON'T add back the 299,000,000: EBITDA = 5,511,900,000 Adjusted_EBITDA_2022 = 5,511,900,000 (no add-back) Then leverage = 23,453,050,000 / 5,511,900,000 = 4.26x Change from 3.96x to 4.26x = +0.30x → Deteriorating And FFO = 5,511,900,000 - 637,700,000 - 557,400,000 = 4,316,800,000 FFO/Debt = 4,316,800,000 / 23,453,050,000 = 0.184 or 18.4% Change from 20.6% to 18.4% = -0.022 → Stable This would give Stable + Deteriorating (if we don't add back) or conflicting signals. Let me check S&P's typical treatment of disposal losses. "Gains Losses On Disposal Of Operating Assets" - if this is part of normal operations (e.g., asset recycling), S&P might not add back. If it's one-time restructuring, they might. For a major acquisition year, 299,000,000 could include: - Suez integration costs - Synergy realization costs - Non-core asset disposals (required by regulators for merger approval) These are likely somewhat non-recurring. But S&P is often conservative and doesn't add back integration costs. Let me check if there's another non-recurring item: "Other Operating Income Expense" = -769,200,000 in 2022 vs -496,900,000 in 2021. The increase of 272,300,000 might include integration costs. Actually, looking more carefully: the "Gains Losses On Disposal Of Operating Assets" is specifically asset disposal losses. For utilities, periodic asset sales are normal. But 299,000,000 is large. Let me also consider: is this related to the Suez acquisition? Veolia had to divest some assets to get regulatory approval. These divestment losses could be non-recurring. Given the materiality and likely one-time nature (regulatory divestitures), I'll keep the add-back but note uncertainty. **Alternative check**: What if I use "Cash Flows From Used In Operations Before Changes In Working Capital" as proxy for FFO? 2021: 3,213,200,000 / 13,748,750,000 = 23.4% 2022: 4,804,300,000 / 23,453,050,000 = 20.5% Change: -2.9 pp or -0.029 → close to Deteriorating threshold (-0.03) Hmm, this is interesting. If I had used this approach, Signal 2 would be Deteriorating. But the formula specified FFO = Adj EBITDA - cash interest - cash taxes, so I should stick with my calculation. Let me recheck my 2021 FFO. Using "before WC" 3,213,200,000 as FFO proxy: FFO/Debt = 3,213,200,000 / 13,748,750,000 = 23.4% (vs my 20.6%) For 2022: 4,804,300,000 / 23,453,050,000 = 20.5% Change: 23.4% to 20.5% = -2.9 pp or -0.029. Very close to -0.03 threshold. Given my formula-based FFO gave -0.009, and the "before WC" gave -0.029, there's a meaningful difference. Which is more correct per S&P? The formula FFO = Adj EBITDA - cash interest - cash taxes is specified. Let me recheck if my cash interest and taxes are correct. For 2021: "Interest Paid" = 357,400,000. But "Net Finance Costs" = 342,600,000. Difference = 14,800,000. Could be capitalized interest or accrual difference. "Interest On Operating Assets" = 76,500,000 and "Interest On Lease" = 28,200,000. These sum to 104,700,000. Are these part of the 357,400,000 or separate? If "Interest Paid" = 357,400,000 includes all interest, then my calculation is correct. But if "Interest On Operating Assets" and "Interest On Lease" are additional, total cash interest might be higher. Actually, looking at the cash flow structure, "Interest Paid" likely includes interest on debt. "Interest On Operating Assets" and "Interest On Lease" might be specific components or might be received, not paid. The label "Interest On Operating Assets" suggests income from operating financial assets, not expense. So positive = inflow. "Interest On Lease" = 28,200,000 - this could be lease interest expense, part of IFRS 16. So total interest-related: paid 357,400,000 + lease interest 28,200,000 - operating asset interest 76,500,000 = 309,100,000 net? No, "Interest Paid" should be the main outflow. I think my interpretation of "Interest Paid" = 357,400,000 as the main cash interest is correct. For taxes: "Income Taxes Paid Refund" = 285,600,000. If this is "paid" net of refunds, it's cash outflow. Correct. So my FFO calculations seem correct per formula. Given both signals are Stable with my calculations, the answer is Stable. But let me do one more sensitivity: if I use slightly different numbers that are reasonable, could I get a different answer? Suppose 2021 leverage was 3.8x and 2022 is 4.2x (change +0.4x) → Deteriorating Or 2021 FFO/Debt was 22% and 2022 is 18% (change -0.04) → Deteriorating Are my estimates biased? Let me check if EBITDA should be higher. For 2022: Revenue 42,885,300,000 - Cost of Sales 35,739,800,000 = 7,145,500,000 gross profit. Less: Selling 954,200,000, G&A 3,215,800,000, Other Operating -769,200,000 (expense) = 7,145,500,000 - 954,200,000 - 3,215,800,000 - 769,200,000 = 2,206,300,000. Matches reported. EBITDA = 2,206,300,000 + 3,178,600,000 = 5,384,900,000 (excluding equity method) Or 5,511,900,000 (including equity method) Add non-recurring disposal loss 299,000,000 = 5,810,900,000. Is 299,000,000 really non-recurring? Looking at 2021, it was 39,200,000. The 2022 amount is 7.6x larger. This is likely due to Suez-related divestitures. I think add-back is reasonable. But what if I also add back the financial asset loss of 370,000,000? No, that's likely below operating income, in financing activities. Actually, let me check: "Plus Ou Moins Values De Cessions Dactifs Financiers" = -370,000,000. This is "gains/losses on disposal of financial assets." In cash flow reconciliation, this adjusts profit to cash flow. If it's in the reconciliation starting from net income, it was in net income. Is it operating or financial? Given "financial assets," it's likely in financial result, not operating. So I should NOT add back to EBITDA. Final check: What about "Other Adjustments To Reconcile Profit Loss" = 282,300,000 in 2022 vs 116,000,000 in 2021? This increase of 166,300,000 might include non-recurring items. Without detail, I can't adjust. Given all this analysis, my final numbers are: | Metric | 2021 | 2022 | Change | |--------|------|------|--------| | Adj EBITDA | 3,473M | 5,811M | +67% | | FFO | 2,830M | 4,616M | +63% | | Adj Debt | 13,749M | 23,453M | +71% | | Leverage (D/EBITDA) | 3.96x | 4.04x | +0.08x → Stable | | Coverage (FFO/Debt) | 20.6% | 19.7% | -0.009 → Stable | Both signals are **Stable**. However, I want to flag that my FFO calculation uses the specified formula. If S&P's "before working capital" figure is closer to their actual FFO definition, the coverage change would be -0.029, very close to the Deteriorating threshold. But per the explicit formula given, it's Stable. Given the conservative bias instruction for conflicting signals, and both signals agreeing on Stable, the answer is: Stable