I'll work through this step-by-step, analyzing NATURGY ENERGY GROUP SA's financial data to estimate S&P's credit trend from 2021 to 2022. ## Step 1: Identify Relevant Industry NATURGY is a Spanish energy company with operations in gas and electricity. Based on the description, it operates in multiple segments including regulated utilities (gas/electricity distribution) and unregulated activities (generation, supply, trading). Given its mixed business model, I'll primarily apply the **Unregulated Power And Gas** methodology, with consideration of regulated utility elements. The company has significant regulated infrastructure (gas/electricity networks) but also substantial unregulated activities. For financial metrics, I'll use the standard formulas with appropriate adjustments. ## Step 2: Estimate 2021 Adjusted_EBITDA From the data: - "Beneficio Bruto De Explotacion Ebitda" 2021-01-01 - 2022-01-01: 3,529,000,000 EUR (this is 2021 EBITDA) I need to check for adjustments per S&P guidelines. For unregulated power and gas: - Leases: Right-of-use assets exist, so I need to add back lease expenses if they were deducted - The EBITDA figure reported appears to be pre-lease adjustment based on typical Spanish reporting Looking at the data structure, "Beneficio Bruto De Explotacion Ebitda" is the reported EBITDA. For S&P purposes, I need to consider if lease adjustments are needed. Under IFRS 16, leases are capitalized, so EBITDA typically includes lease depreciation instead of lease expense. The S&P methodology adds back lease expenses to get a "debt-like" view. However, looking more carefully at the data: the EBITDA is already reported. For IFRS 16 companies, S&P typically adds the lease depreciation/amortization back to EBITDA (or uses EBITDAR concept). But with IFRS 16, the reported EBITDA usually excludes lease expenses as they're now depreciation. Let me check: Rightofuse Assets 2022-01-01: 1,229,000,000 EUR. This indicates IFRS 16 is applied. For S&P, Adjusted EBITDA typically = Reported EBITDA + lease depreciation (to approximate pre-IFRS 16 EBITDA, or EBITDAR). However, the exact treatment varies. Actually, re-reading the methodology: for regulated utilities, they mention netting inventory against short-term borrowings for seasonal working capital. For unregulated power and gas, they mention PPAs as debt-like. Given complexity, let me use reported EBITDA as base and make standard adjustments: - Reported EBITDA 2021: 3,529,000,000 EUR For lease adjustments under IFRS 16: S&P typically adds back the lease depreciation to approximate operating lease expense. Looking at amortization: "Amortizacion YPerdidas Por Deterioro De Activos" includes intangible amortization and likely lease amortization. Given data limitations, I'll use reported EBITDA with minimal adjustments: - No obvious nonrecurring items to adjust from the P&L - No pension adjustments visible - Joint ventures: "Share Of Other Comprehensive Income" but not profit share separately **Adjusted_EBITDA 2021 ≈ 3,529,000,000 EUR** Let me add back lease-related amounts. Looking at finance costs: 598,000,000 EUR includes lease interest. The lease liabilities total: 1,325,000,000 (noncurrent) + 196,000,000 (current) = 1,521,000,000 at start 2022. Actually, for a cleaner approach, I'll use standard S&P treatment where Adjusted EBITDA for IFRS 16 companies adds back lease depreciation. Estimated lease depreciation ≈ 200-250M based on 5-year lease life. But this is imprecise. Let me use reported EBITDA and note that for leverage calculations, debt includes leases, so the ratios should be roughly consistent. **Adjusted_EBITDA 2021 = 3,529,000,000 EUR** ## Step 3: Estimate 2021 FFO FFO = Adjusted_EBITDA - cash_interest - cash_taxes From cash flow statement: - "Interest Paid Classified As Operating Activities" 2021-01-01 - 2022-01-01: 488,000,000 EUR - "Income Taxes Paid Classified As Operating Activities" 2021-01-01 - 2022-01-01: 864,000,000 EUR FFO 2021 = 3,529,000,000 - 488,000,000 - 864,000,000 = **2,177,000,000 EUR** Wait - let me verify with reported cash flow from operations: "Cash Flows From Used In Operating Activities" 2021: 1,001,000,000 EUR. This is much lower. The difference likely includes working capital changes and other items. S&P FFO is typically calculated as: FFO = Funds from operations = Net income + depreciation + deferred taxes + other non-cash items - working capital changes (sometimes excluded) Actually, standard S&P FFO = EBITDA - cash interest - cash taxes ± working capital adjustments? No, the formula given is FFO = Adjusted_EBITDA - cash_interest - cash_taxes. But this gives 2,177M vs reported operating cash flow of 1,001M. The difference is about 1,176M, which roughly equals "Increase Decrease In Working Capital" (-1,117M) plus "Other Inflows Outflows Of Cash Classified As Operating Activities" (-1,199M) plus adjustments. Actually, looking at S&P methodology more carefully: FFO is typically defined as: FFO = Net income from continuing operations + depreciation + amortization + deferred income taxes + other non-cash items Or equivalently: FFO = EBIT + depreciation - cash taxes But the problem specifies: FFO = Adjusted_EBITDA - cash_interest - cash_taxes Let me follow the specified formula: FFO 2021 = 3,529,000,000 - 488,000,000 - 864,000,000 = **2,177,000,000 EUR** However, this seems high relative to operating cash flow. Let me reconsider - the specified formula might be simplified. Actually, looking at typical S&P calculations, they sometimes use: FFO = Funds from operations = operating cash flow before working capital changes Let me calculate alternatively: Net income 2021: 1,556,000,000 + Depreciation/amortization: 1,462,000,000 + Other non-cash (increase/decrease in allowance): -99,000,000 (negative, so subtract) + Other adjustments: see "Adjustments For Reconcile Profit Loss" = 1,520,000,000 Actually, "Adjustments For Reconcile Profit Loss" 2021 = 1,520,000,000 which includes depreciation 1,462,000,000 and other items 58,000,000. Let me try: FFO = Net income + depreciation + deferred taxes + other non-cash items = 1,556,000,000 + 1,462,000,000 + ? From P&L: "Income Tax Expense Continuing Operations" = 358,000,000 (book tax) Cash taxes paid = 864,000,000 So deferred tax change = 358,000,000 - 864,000,000 = -506,000,000 (use of deferred taxes) FFO (standard) = 1,556,000,000 + 1,462,000,000 - 506,000,000 + other items ≈ 2,512,000,000 This is closer to my EBITDA-based calculation. The difference with operating cash flow is working capital and other items. I'll stick with the specified formula: **FFO 2021 = 2,177,000,000 EUR** But let me also check if we need to subtract dividends received, interest received from operating cash flow. The formula says FFO = Adjusted_EBITDA - cash_interest - cash_taxes, so I follow this. Actually, re-reading: the cash interest paid is 488M, but finance costs are 598M. The difference may be lease interest (capitalized) or accrued vs paid. Let me use actual cash interest paid: **FFO 2021 = 3,529,000,000 - 488,000,000 - 864,000,000 = 2,177,000,000 EUR** ## 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 2021 (end of 2021 = start of 2022): - "Noncurrent Financial Liabilities" 2022-01-01: 15,114,000,000 EUR - "Current Financial Liabilities" 2022-01-01: 1,698,000,000 EUR - Total reported debt = 16,812,000,000 EUR Breakdown: - Longterm Borrowings: 13,786,000,000 - Noncurrent Lease Liabilities: 1,325,000,000 - Other Noncurrent Financial Liabilities: 3,000,000 - Current Borrowings And Current Portion Of Noncurrent Borrowings: 1,493,000,000 - Current Lease Liabilities: 196,000,000 - Other Current Financial Liabilities: 9,000,000 Leases: Already included in financial liabilities under IFRS 16. S&P typically includes lease liabilities in debt. So total debt already includes leases. Pension deficit: Not explicitly stated. "Noncurrent Provisions" = 1,146,000,000 may include pensions, but unclear. Guarantees: Not visible in data. Hybrid debt: Not visible. Other debt-like items: "Pasivo Derivados Comerciales No Corriente" (noncurrent commercial derivatives liability) = 730,000,000 - this could be debt-like if negative fair value. Also "Deferred Income Including Contract Liabilities" = 889,000,000 - not typically debt-like. For S&P, derivatives liabilities can be debt-like if they represent economic obligations. Eligible cash: "Cash And Cash Equivalents" 2022-01-01 = 3,965,000,000 EUR. But S&P typically uses "available cash" excluding restricted cash. All cash may not be eligible. Standard S&P practice: subtract 75% of cash or use "surplus cash" definition. For simplicity, I'll use reported cash as eligible (conservative for debt, but actually S&P is often more nuanced). Actually, looking at S&P methodology for utilities: they may adjust seasonal working capital by netting inventory against short-term borrowings. Inventories 2022-01-01 = 878,000,000, current borrowings = 1,493,000,000. Not a clear seasonal pattern. Let me calculate base Adjusted_Debt: Reported debt = 16,812,000,000 + Noncurrent commercial derivatives liability (debt-like portion) = 730,000,000 (conservative, full amount) - Eligible cash = let's use 3,965,000,000 (but S&P typically doesn't fully subtract) Actually, for more standard approach, S&P uses "gross debt" including leases, less "readily available cash" which is typically cash minus minimum operating cash (often 0 for large utilities, or some portion). Let me use: Adjusted_Debt = 16,812,000,000 + 730,000,000 - 0 = 17,542,000,000 (no cash subtraction for conservatism, or with full cash subtraction) With full cash subtraction: 17,542,000,000 - 3,965,000,000 = 13,577,000,000 Hmm, this is a big range. Let me check S&P typical treatment: they usually subtract "available cash" which is cash and liquid investments minus any restricted portion. For large utilities, they often assume most cash is available. Let me use a middle ground: subtract 75% of cash as "available" = 2,974M, or use full cash. Actually, re-reading the problem: it says "eligible_cash". I'll use full cash as eligible for now, but note this is optimistic. **Adjusted_Debt 2021 (gross, no cash sub) = 16,812,000,000 + 730,000,000 = 17,542,000,000 EUR** **Adjusted_Debt 2021 (with cash sub) = 17,542,000,000 - 3,965,000,000 = 13,577,000,000 EUR** Let me also consider if we should include other noncurrent liabilities. "Other Noncurrent Nonfinancial Liabilities" = 1,118,000,000 - may include some debt-like items. For cleaner approach, let me use standard "gross debt" as total financial liabilities: **Adjusted_Debt 2021 = 16,812,000,000 EUR (reported debt) + 730,000,000 (derivatives) - 3,965,000,000 (cash) = 13,577,000,000 EUR** Or more conservatively without derivatives: **13,577,000,000 - 730,000,000 = 12,847,000,000** if derivatives not deemed debt-like. I'll use: **Adjusted_Debt 2021 = 16,812,000,000 - 3,965,000,000 = 12,847,000,000 EUR** (using reported debt minus cash, adding derivatives later if needed) Actually, let me be more precise. S&P includes operating lease liabilities in debt. Under IFRS 16, these are already in financial liabilities. So: Gross debt = 15,114,000,000 + 1,698,000,000 = 16,812,000,000 For Adjusted Debt, I'll subtract cash: **Adjusted_Debt 2021 = 16,812,000,000 - 3,965,000,000 = 12,847,000,000 EUR** Wait - I need to check if derivatives should be included. "Pasivo Derivados Comerciales No Corriente" = 730M and "Pasivo Derivados Comerciales Corriente" = 2,704M. These are commercial derivatives, likely hedging instruments. S&P may or may not include these depending on whether they're true economic liabilities or just mark-to-market. For conservative approach, I'll exclude derivatives from debt (they're often zero-sum in economic terms). **Adjusted_Debt 2021 = 12,847,000,000 EUR** ## Step 5: Calculate 2021 Adjusted_Debt / Adjusted_EBITDA = 12,847,000,000 / 3,529,000,000 = **3.64x** ## Step 6: Calculate 2021 FFO / Adjusted_Debt = 2,177,000,000 / 12,847,000,000 = **0.169 or 16.9%** ## Step 7: Estimate 2022 Adjusted_EBITDA "Beneficio Bruto De Explotacion Ebitda" 2022-01-01 - 2023-01-01: 4,954,000,000 EUR **Adjusted_EBITDA 2022 = 4,954,000,000 EUR** ## Step 8: Estimate 2022 FFO FFO 2022 = 4,954,000,000 - 520,000,000 (interest paid) - 762,000,000 (taxes paid) = **3,672,000,000 EUR** ## Step 9: Estimate 2022 Adjusted_Debt End of 2022 (start 2023): - Noncurrent Financial Liabilities: 13,999,000,000 - Current Financial Liabilities: 2,302,000,000 - Total reported debt = 16,301,000,000 Cash: 3,985,000,000 **Adjusted_Debt 2022 = 16,301,000,000 - 3,985,000,000 = 12,316,000,000 EUR** ## Step 10: Calculate 2022 Adjusted_Debt / Adjusted_EBITDA = 12,316,000,000 / 4,954,000,000 = **2.49x** ## Step 11: Calculate 2022 FFO / Adjusted_Debt = 3,672,000,000 / 12,316,000,000 = **0.298 or 29.8%** ## Step 12: Classify Credit Trend **Signal 1: Leverage (Adjusted_Debt / Adjusted_EBITDA)** - 2021: 3.64x - 2022: 2.49x - Change: 2.49 - 3.64 = **-1.15x** This is ≤ -0.2x, so **Improving** **Signal 2: Cash-flow coverage (FFO / Adjusted_Debt)** - 2021: 0.169 (16.9%) - 2022: 0.298 (29.8%) - Change: 0.298 - 0.169 = **+0.129** This is ≥ +0.03, so **Improving** Both signals agree: **Improving** Let me verify my calculations and consider if any adjustments are needed. ### Verification and Sensitivity Analysis Key drivers of improvement: - EBITDA increased significantly: 3,529M to 4,954M (+40%) - Debt decreased slightly: 16,812M to 16,301M (-3% gross, or -4% net of cash) - FFO improved dramatically due to higher EBITDA and slightly lower cash taxes Revenue increased from 22,140M to 33,965M (+53%), driven by higher energy prices. However, raw materials also increased from 16,529M to 27,194M, so margin expansion was modest (EBITDA margin went from ~16% to ~14.6% actually slightly down, but absolute EBITDA up due to scale). The leverage improvement is driven by EBITDA growth outpacing debt reduction. The FFO coverage improvement is even more dramatic. ### Alternative Calculation Check What if I didn't subtract cash from debt? (S&P sometimes uses gross debt for certain metrics) Adjusted_Debt (gross) 2021 = 16,812,000,000 Adjusted_Debt (gross) 2022 = 16,301,000,000 Leverage 2021 = 16,812/3,529 = 4.76x Leverage 2022 = 16,301/4,954 = 3.29x Change = -1.47x → Improving FFO/Debt 2021 = 2,177/16,812 = 0.129 (12.9%) FFO/Debt 2022 = 3,672/16,301 = 0.225 (22.5%) Change = +0.096 → Improving Same conclusion. What if I include derivatives as debt-like? Adjusted_Debt 2021 = 16,812 + 730 - 3,965 = 13,577 (noncurrent deriv) or +2,704 (current deriv too) If all derivatives debt-like: 16,812 + 3,434 - 3,965 = 16,281 Leverage 2021 = 16,281/3,529 = 4.61x 2022 derivatives: noncurrent 1,664 + current 1,624 = 3,288 Adjusted_Debt 2022 = 16,301 + 3,288 - 3,985 = 15,604 Leverage 2022 = 15,604/4,954 = 3.15x Change = -1.46x → Still Improving FFO/Debt 2021 = 2,177/16,281 = 0.134 FFO/Debt 2022 = 3,672/15,604 = 0.235 Change = +0.101 → Still Improving All scenarios lead to **Improving**. ### Final Check on FFO Calculation The problem specifies FFO = Adjusted_EBITDA - cash_interest - cash_taxes. Let me verify this is appropriate. For 2021: 3,529 - 488 - 864 = 2,177 For 2022: 4,954 - 520 - 762 = 3,672 This seems reasonable. The large increase in FFO is driven by EBITDA growth. One consideration: should we use "taxes paid" or "tax expense"? The formula says cash_taxes, so taxes paid is correct. Also, should interest be "finance costs" or "interest paid"? The formula says cash_interest, so interest paid is correct. ### Conclusion Both signals clearly indicate **Improving**: - Leverage improved by -1.15x (much better than -0.2x threshold) - FFO coverage improved by +0.129 (much better than +0.03 threshold) The magnitude of improvement is substantial and consistent across both metrics. The company's credit profile strengthened significantly from 2021 to 2022, driven by strong EBITDA growth in a high energy price environment, combined with modest debt reduction and effective working capital management (operating cash flow improved from 1,001M to 4,242M). Improving