Okay, let’s break this down step-by-step. **Step 1: Identify the relevant industry** "REN - REDES ENERGÉTICAS NACIONAIS, SGPS, S.A." is an energy networks operator in Portugal. From the financials, the company has massive intangible assets (concessions), operates under a regulated framework with construction revenue and costs related to concession assets, and reports an Energy Sector Extraordinary Contribution. This clearly fits the **Regulated Utilities** industry methodology. It is a transmission system operator (TSO) for electricity and gas, which is at the low end of the utility risk spectrum. **Step 2: Estimate 2021 Adjusted EBITDA** The baseline formula is: Adjusted_EBITDA = EBITDA (reported or reconstructed) + adjustment_leases (if any) + nonrecurring_losses - nonrecurring_gains ± pension_adjustments ± joint_venture_proportional_EBITDA ± other_normalization_adjustments First, let's reconstruct 2021 EBITDA from the income statement. Profit/Loss from Operating Activities = Revenue and Operating Income - Operating Expense 2021: 838,353,000 - 619,490,000 = 218,863,000 EUR Add back Depreciation and Amortisation: 241,940,000 EUR Add back Impairment loss (since we subtract it later, but it's part of OpEx; wait, "Impairment Loss Reversal" is an income/expense line. 2021: 1,313,000 EUR was an expense, so it's already in OpEx. We add this back to get EBITDA). Implicitly, D&A + Impairment Loss = 241,940,000 + 1,313,000 = 243,253,000 EUR. EBITDA = Profit from Operating Activities + D&A + Impairment Loss 2021 EBITDA = 218,863,000 + 243,253,000 = 462,116,000 EUR. Now, adjustments for the Regulated Utilities methodology: - **Leases:** The methodology says "adjustment_leases (if any)". S&P typically adds back operating lease expense to EBITDA. We have "Payments Of Lease Liabilities" and "Payments Of Lease Interests" in the cash flow statement, but the income statement doesn't have an explicit "lease expense" item for operating leases. S&P usually makes an adjustment based on lease payments, but the standard formula provided to me is generic. Looking at "Payments Of Lease Liabilities Classified As Financing Activities" (2021: 2,065,000) and "Payments Of Lease Interests" (2021: 29,000), these are finance lease payments (principal + interest). Depreciation on these is in D&A, interest in finance costs. We might need to adjust if there were operating leases, but IFRS 16 has largely converted them to finance leases. We won't adjust without explicit data on operating lease payments. - **Non-recurring items:** The income statement doesn’t explicitly label "nonrecurring". We’ll assume operating income is clean. - **Joint ventures:** "Share Of Profit Loss Of Associates And Joint Ventures" is 6,431,000 EUR. Under S&P methodology, we typically deduct this from EBITDA and then add back proportional EBITDA (or handle it differently). Since we have no further detail, we will eliminate the equity income line and use the proportional debt/EBITDA later, but simpler adjustments for regulated utilities often leave it if it's a small part of operations. For a TSO, such income is ancillary. Given the lack of data to proportionally consolidate, we'll subtract equity income from EBITDA to be conservative, and treat it as an unadjusted non-cash item. We'll remove it: 462,116,000 - 6,431,000 = 455,685,000 EUR. - **Other adjustments:** None apparent. 2021 Estimated Adjusted EBITDA = **455,685,000 EUR**. **Step 3: Estimate 2021 FFO** FFO = Adjusted_EBITDA - cash_interest - cash_taxes - Cash interest: The cash flow statement has "Interest Paid Classified As Financing Activities" = 39,725,000 EUR. - Cash taxes: "Income Taxes Paid Refund Classified As Operating Activities" = 74,253,000 EUR. But we also have the "Energy Sector Extraordinary Contribution" (ESEC). In Portugal, this is an additional tax on energy assets. Is it part of cash taxes? S&P usually includes mandatory government contributions in taxes. Reported Income Tax Expense = 52,081,000 EUR + ESEC 27,041,000 = 79,122,000 total tax and contributions. Cash taxes paid were 74,253,000. This is operating cash flow. We'll use cash taxes paid = 74,253,000 EUR. FFO = 455,685,000 - 39,725,000 - 74,253,000 = **341,707,000 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: Long-term borrowings 2,390,852,000 + Current borrowings 375,221,000 = 2,766,073,000 EUR. - Leases: Are these already in borrowings? Under IFRS 16, yes. We'll assume it's all included. - Pension deficit: Noncurrent Provisions For Employee Benefits = 94,109,000 EUR. S&P often adds the full pension deficit. - Other debt-like items: Trade payables, deferred tax liabilities? Not usually. - Eligible cash: Cash and Cash Equivalents = 398,759,000 EUR. S&P typically caps surplus cash, but we'll use the full amount here. Adjusted Debt = 2,766,073,000 + 94,109,000 - 398,759,000 = **2,461,423,000 EUR**. **Step 5: 2021 Adjusted Debt / Adjusted EBITDA** 2,461,423,000 / 455,685,000 = **5.40x**. **Step 6: 2021 FFO / Adjusted Debt** 341,707,000 / 2,461,423,000 = **0.1388 (13.88%)**. --- **Step 7: Estimate 2022 Adjusted EBITDA** - Profit/Loss from Operating Activities = 824,683,000 - 584,962,000 = 239,721,000. - D&A = 249,276,000; Impairment loss (reversal) = 1,437,000 (expense). Wait, "Impairment Loss Reversal" in 2022 is 1,437,000 positive? The line says "Impairment Loss Reversal Of Impairment Loss Recognised In Profit Or Loss" 2022: 1,437,000. In the OpEx formula, it's an expense, so a positive number is a loss. We add it back. 2022 EBITDA = 239,721,000 + 249,276,000 + 1,437,000 = 490,434,000 EUR. - Subtract Share of Profit of Associates: 11,812,000 EUR. Adjusted EBITDA = 490,434,000 - 11,812,000 = **478,622,000 EUR**. **Step 8: Estimate 2022 FFO** - Cash interest: 40,545,000 EUR. - Cash taxes: 77,970,000 EUR. FFO = 478,622,000 - 40,545,000 - 77,970,000 = **360,107,000 EUR**. **Step 9: Estimate 2022 Adjusted Debt** - Reported debt: Long-term borrowings 1,695,362,000 + Current borrowings 638,944,000 = 2,334,306,000 EUR. - Pension deficit: 64,939,000 EUR. - Eligible cash: 365,292,000 EUR. (Note: there is a 1,000,000,000 EUR asset/liability related to a gas price stabilization regime. These are typically working capital items that net out perfectly; we ignore them for leverage). Adjusted Debt = 2,334,306,000 + 64,939,000 - 365,292,000 = **2,033,953,000 EUR**. **Step 10: 2022 Adjusted Debt / Adjusted EBITDA** 2,033,953,000 / 478,622,000 = **4.25x**. **Step 11: 2022 FFO / Adjusted Debt** 360,107,000 / 2,033,953,000 = **0.1770 (17.70%)**. --- **Step 12: Classify the year-on-year credit trend** - **Signal 1: Leverage (Debt/EBITDA)** Change: 4.25x - 5.40x = **-1.15x**. Threshold: ≤ -0.2x is **Improving**. - **Signal 2: Cash-flow coverage (FFO/Debt)** Change: 0.1770 - 0.1388 = **+0.0382** (i.e., +3.82 percentage points). Threshold: ≥ +0.03 is **Improving**. Both signals agree: **Improving**. Improving