# STEP 1: IDENTIFY THE RELEVANT INDUSTRY Iberdrola SA is a major Spanish energy company that operates in: - Electricity generation (hydro, thermal, renewables) - Distribution and transmission networks (regulated) - Retail supply operations This company is **primarily a regulated utility** with additional unregulated renewable generation. The S&P methodology for **Regulated Utilities** is the most appropriate framework. --- # STEP 2: ESTIMATE 2021 ADJUSTED_EBITDA From the annual report, for the fiscal year 2021-01-01 to 2022-01-01 (reported as "2021"): **EBITDA reconstruction:** - Profit Loss Before Tax: 6,301M EUR - Add: Finance Costs: 2,268M EUR - Less: Finance Income: (1,265M EUR) - Add: Depreciation Amortisation And Impairment: 4,294M EUR - Add: Other Gains Losses: (995M EUR) → shown as negative, so add back the negative value = subtract 995M Calculating: - EBITDA = 6,301 + 2,268 - 1,265 + 4,294 - 995 = 10,603M EUR However, S&P notes that "Beneficio Bruto De Explotacion Ebitda" (Gross Operating Profit EBITDA) is reported directly: - 2021 EBITDA = 12,006M EUR (reported) **Adjustments for Regulated Utilities:** - Lease adjustments: Right-of-use assets indicate operating leases - Noncurrent lease liabilities (2021): 2,253M EUR - Current lease liabilities (2021): 158M EUR - Total operating lease obligations: 2,411M EUR - Annualized lease expense approximation: ~150-160M EUR (using typical lease capitalization) **Adjusted_EBITDA 2021 = 12,006M EUR + 150M EUR = 12,156M EUR** (For regulated utilities, minimal other adjustments needed as pass-through mechanisms typically exist) --- # STEP 3: ESTIMATE 2021 FFO **FFO = Adjusted_EBITDA - cash_interest - cash_taxes** From the cash flow statement for 2021-01-01 to 2022-01-01: - Interest Paid Classified As Investing Activities: 145M EUR - Interest Paid (bonds/debt): 741M EUR - Interest Paid (leases): 49M EUR - **Total Cash Interest = 145 + 741 + 49 = 935M EUR** - Income Taxes Paid: 832M EUR **FFO 2021 = 12,156M EUR - 935M EUR - 832M EUR = 10,389M EUR** --- # STEP 4: ESTIMATE 2021 ADJUSTED_DEBT **Components of Adjusted Debt:** From balance sheet as of 2021-01-01: - Noncurrent Financial Liabilities (debt): 37,175M EUR - Debt with credit entities and bonds: 31,179M EUR - Derivative liabilities: 1,673M EUR - Lease liabilities: 2,253M EUR - Other: 1,545M EUR + 525M EUR = 2,070M EUR - Current Financial Liabilities (debt): 21,297M EUR - Debt with credit entities and bonds: 9,984M EUR - Derivative liabilities: 2,111M EUR - Other: 2,980M EUR + 100M EUR + 158M EUR = 3,238M EUR **Total Reported Debt = 37,175 + 21,297 = 58,472M EUR** **Adjustments:** - Operating lease liability capitalization (already in debt): 2,253 + 158 = 2,411M EUR (already included) - Pension obligations: Noncurrent: 1,592M EUR; Current: 27M EUR = 1,619M EUR (unfunded obligations) - Hybrid instruments (perpetual subordinated bonds): included in debt as 525 + 100 = 625M EUR - Per S&P methodology: typically 50% included as debt, 50% as equity - Hybrid adjustment: 625M EUR × 0.5 = 312.5M EUR additional debt treatment **Less: Cash and Cash Equivalents = 4,033M EUR** **Adjusted_Debt 2021 = 58,472 + 1,619 + 312.5 - 4,033 = 56,370.5M EUR ≈ 56,371M EUR** --- # STEP 5: CALCULATE 2021 ADJUSTED_DEBT / ADJUSTED_EBITDA RATIO **Ratio 2021 = 56,371M / 12,156M = 4.64x** --- # STEP 6: CALCULATE 2021 FFO / ADJUSTED_DEBT RATIO **Ratio 2021 = 10,389M / 56,371M = 0.184 or 18.4%** --- # STEP 7: ESTIMATE 2022 ADJUSTED_EBITDA From the annual report, for the fiscal year 2022-01-01 to 2023-01-01 (reported as "2022"): **EBITDA reconstruction:** - Profit Loss Before Tax: 6,292M EUR - Add: Finance Costs: 3,042M EUR - Less: Finance Income: (1,204M EUR) - Add: Depreciation Amortisation And Impairment: 4,774M EUR - Subtract: Other Gains Losses: (911M EUR) Reported EBITDA (Beneficio Bruto De Explotacion Ebitda): 13,228M EUR **Adjustments for Regulated Utilities:** - Lease adjustments: - Noncurrent lease liabilities (2022): 2,287M EUR - Current lease liabilities (2022): 151M EUR - Annualized lease expense: ~160M EUR **Adjusted_EBITDA 2022 = 13,228M EUR + 160M EUR = 13,388M EUR** --- # STEP 8: ESTIMATE 2022 FFO **FFO = Adjusted_EBITDA - cash_interest - cash_taxes** From the cash flow statement for 2022-01-01 to 2023-01-01: - Interest Paid (investing activities): 189M EUR - Interest Paid (bonds/debt): 1,495M EUR - Interest Paid (subordinated perpetuals): 169M EUR - Interest Paid (leases): 61M EUR - **Total Cash Interest = 189 + 1,495 + 169 + 61 = 1,914M EUR** - Income Taxes Paid: 1,055M EUR **FFO 2022 = 13,388M EUR - 1,914M EUR - 1,055M EUR = 10,419M EUR** --- # STEP 9: ESTIMATE 2022 ADJUSTED_DEBT **Components of Adjusted Debt:** From balance sheet as of 2023-01-01: - Noncurrent Financial Liabilities (debt): 44,216M EUR - Debt with credit entities and bonds: 36,129M EUR - Derivative liabilities: 3,690M EUR - Lease liabilities: 2,287M EUR - Other: 1,534M EUR + 576M EUR = 2,110M EUR - Current Financial Liabilities (debt): 25,079M EUR - Debt with credit entities and bonds: 10,458M EUR - Derivative liabilities: 3,398M EUR - Other: 5,058M EUR + 87M EUR + 151M EUR = 5,296M EUR **Total Reported Debt = 44,216 + 25,079 = 69,295M EUR** **Adjustments:** - Operating lease liability capitalization: 2,287 + 151 = 2,438M EUR (already included) - Pension obligations: Noncurrent: 1,226M EUR; Current: 42M EUR = 1,268M EUR - Hybrid instruments: 576 + 87 = 663M EUR - Hybrid adjustment: 663M EUR × 0.5 = 331.5M EUR **Less: Cash and Cash Equivalents = 4,608M EUR** **Adjusted_Debt 2022 = 69,295 + 1,268 + 331.5 - 4,608 = 66,286.5M EUR ≈ 66,287M EUR** --- # STEP 10: CALCULATE 2022 ADJUSTED_DEBT / ADJUSTED_EBITDA RATIO **Ratio 2022 = 66,287M / 13,388M = 4.95x** --- # STEP 11: CALCULATE 2022 FFO / ADJUSTED_DEBT RATIO **Ratio 2022 = 10,419M / 66,287M = 0.157 or 15.7%** --- # STEP 12: CLASSIFY CREDIT TREND **Signal 1: Leverage Change (Adjusted_Debt / Adjusted_EBITDA)** - 2021: 4.64x - 2022: 4.95x - Change: 4.95x - 4.64x = +0.31x Since +0.31x ≥ +0.2x → **DETERIORATING** **Signal 2: Cash-Flow Coverage Change (FFO / Adjusted_Debt)** - 2021: 0.184 - 2022: 0.157 - Change: 0.157 - 0.184 = -0.027 Since -0.027 is between -0.03 and +0.03 (exclusive) → **STABLE** (Note: -0.027 is very close to the -0.03 threshold, indicating material weakness but technically within the stable band) **Resolution of Conflict:** The two signals show one Deteriorating (leverage) and one Stable (coverage). Per the methodology: "If one is Stable and the other is Improving or Deteriorating, return the non-Stable category." **Analysis:** - Leverage deterioration: +0.31x is a meaningful increase (beyond the 0.2x threshold), indicating increased financial risk - Coverage change: -0.027 is minimal and nearly at the stability threshold, reflecting minor cash flow coverage erosion - Context: Iberdrola's debt increased significantly (from 56.4B to 66.3B EUR, +€9.9B or +17.6%) while EBITDA growth was modest (+2.0%) The leverage deterioration is the more material signal, driven by substantial debt accumulation (likely for capital investments in renewables and infrastructure), while EBITDA growth did not keep pace. The slight coverage decline further supports deterioration. **Conclusion: DETERIORATING** Deteriorating