I'll work through this step-by-step, analyzing A2A ENERGIA S.P.A.'s financial data and applying S&P's methodology. ## Step 1: Identify the Relevant Industry A2A ENERGIA S.P.A. is an Italian energy company. Looking at the facts: - It's a subsidiary of A2A S.p.A., owned by municipalities of Milan and Brescia - Revenue from contracts with customers: €22.9B (2022) vs €11.4B (2021) - Principal place of business: Italy - It's in the energy sector with significant revenue from energy supply Given the massive revenue increase (roughly doubling), high raw materials costs (€20.5B in 2022), and the nature of operations, this appears to be primarily an **unregulated power and gas** company (energy retailer/trader with generation). The company doesn't appear to be a fully regulated utility given the revenue volatility and exposure to commodity costs. However, looking more carefully: A2A is a major Italian multi-utility. The entity "A2A ENERGIA S.P.A." specifically is the energy supply/retail arm. Given the high revenue, high pass-through costs, and the Italian energy market context, this fits **Unregulated Power And Gas** methodology. ## Step 2: Estimate 2021 Adjusted_EBITDA From the data: - "Gross Operating Income EBITDA" 2021-01-01 - 2022-01-01: €1,428,000,000 For unregulated power and gas, I need to check for adjustments: - No lease adjustments mentioned specifically (no finance lease data apparent) - "Result From Nonrecurring Transactions" 2021: €0 (no nonrecurring items) - No pension adjustments needed (OCI pension items are separate) - No joint venture proportional EBITDA adjustment needed (equity method investments are small, €33M) Baseline formula: Adjusted_EBITDA = EBITDA + adjustment_leases + nonrecurring_losses - nonrecurring_gains ± other adjustments **2021 Adjusted_EBITDA = €1,428,000,000** ## Step 3: Estimate 2021 FFO From cash flow data: - "Cash Flows From Used In Operating Activities" 2021: €1,135,000,000 - "Interest Paid Classified As Operating Activities" 2021: €80,000,000 - "Income Taxes Paid Refund Classified As Operating Activities" 2021: €165,000,000 However, per S&P methodology for FFO: FFO = Adjusted_EBITDA - cash_interest - cash_taxes Using the cash flow statement approach (more direct for FFO): - Operating cash flow before working capital changes can be derived Actually, let me use the standard S&P approach. From the data: - EBITDA: €1,428M - Need to subtract: cash interest and cash taxes From cash flow statement: - Interest paid: €80M - Income taxes paid: €165M But wait - the operating cash flow already includes working capital. Let me use the more standard S&P FFO calculation from EBITDA: FFO = Adjusted_EBITDA - cash interest paid - cash taxes paid + other adjustments Actually, looking at S&P methodology more carefully: FFO typically starts from net income and adds back depreciation, or from operating cash flow with adjustments. Let me use: FFO = Cash Flows From Operating Activities - changes in working capital (if not already normalized) From 2021: - Cash Flows From Used In Operating Activities: €1,135M But this includes working capital changes. Let me check if there's a better approach. Looking at adjustments in cash flow: - Adjustments for decrease/increase in trade receivable: -€1,285M - Adjustments for increase/decrease in trade payable: +€1,329M - Adjustments for decrease/increase in inventories: -€56M - Other adjustments for noncash items: +€225M The "Cash Flows From Used In Operating Activities" of €1,135M already reflects these. For S&P FFO, we typically want: Net income + depreciation + deferred taxes - nonrecurring gains + other non-cash items - working capital changes (to normalize) Or more practically: FFO = Funds from operations = Net income + depreciation + amortization + other non-cash charges - gains on asset sales + deferred taxes From data 2021: - Profit Loss: €550M - Depreciation Expense: €465M - Amortisation Expense: €201M - Adjustments for losses/gains on disposal: €0 (none in 2021) - Adjustments for impairment: €19M - Adjustments for provisions: €89M - Adjustments for undistributed profits of associates: -€2M - Adjustments for income tax expense: €36M FFO = €550M + €465M + €201M + €19M + €89M - €2M + €36M = €1,358M Wait, let me verify with operating cash flow. The operating cash flow is €1,135M which includes working capital. Actually, standard S&P FFO = Operating Cash Flow - Change in Working Capital (to normalize) + after-tax interest Or: FFO = Net Income + Depreciation + Deferred Tax + Other non-cash - Working capital changes Let me use a cleaner approach. From S&P's typical calculation: FFO = EBIT + Depreciation - Cash taxes + Other non-cash adjustments - Net interest (after tax) Actually, let me use: FFO = EBITDA - Cash Interest - Cash Taxes From 2021: - EBITDA: €1,428M - Interest paid: €80M (but finance costs were €89M, finance income €17M, net financial balance -€70M) - Cash interest: need to use actual cash paid From cash flow: "Interest Paid Classified As Operating Activities": €80M - "Income Taxes Paid Refund Classified As Operating Activities": €165M But wait - taxes paid were €165M, yet income tax expense was only €36M. This suggests refunds or timing differences. For S&P FFO: Use cash taxes actually paid if available, or tax expense adjusted for timing. Let me use: FFO = Adjusted_EBITDA - Net Financial Interests (cash) - Cash Taxes From data: "Net Financial Interests" 2021: €72M (this is the cash/operating measure) Actually "Net Financial Interests" is listed as €72M for 2021. FFO = €1,428M - €72M - (tax expense adjusted, or use cash taxes) Hmm, let me look more carefully. The cash flow shows: - Interest Paid: €80M - Income Taxes Paid: €165M But tax expense was only €36M. The €165M likely includes payments for prior years or timing differences. For S&P methodology, we typically use: FFO = Funds from operations = Operating cash flow before working capital changes Let me calculate from net income: Net income: €550M + Depreciation & Amortization: €465M + €201M = €666M + Other non-cash (impairment, provisions, etc.): €19M + €89M = €108M - Gain on disposal: €0 - Undistributed profits of associates: €2M + Income tax expense: €36M - Actual cash taxes paid: need to normalize Actually, let me try: FFO = Cash Flow from Operations - Change in Working Capital Working capital changes from cash flow adjustments: - Trade receivable: -€1,285M (increase) - Trade payable: +€1,329M (increase, so source of cash) - Inventories: -€56M (increase) - Other adjustments: €225M Net working capital change: -€1,285M + €1,329M - €56M = -€12M (roughly, plus other items) Cash flow from operations €1,135M includes these working capital changes. Normalized FFO (before working capital) = €1,135M - (-€12M + other working capital effects)... This is getting complicated. Let me use a simpler S&P standard approach: **FFO = Net Income + Depreciation + Amortization + Deferred Taxes + Other Non-Cash - Nonrecurring Gains + After-tax Interest** Or from the "Cash Flows From Used In Operating Activities" and adjusting: Actually, looking at typical S&P: FFO = Operating Cash Flow + Cash Interest Paid + Cash Taxes Paid - Working Capital Changes - Nonrecurring items Let me try: FFO = €1,135M + €80M (interest paid, added back as it's financing in S&P terms) - wait, no, in operating cash flow under IFRS interest can be classified as operating. Actually for S&P, FFO typically excludes working capital fluctuations. Let me use: FFO = EBITDA - Cash Interest - Cash Taxes (paid, not accrued) + Other adjustments But we need "sustainable" FFO. Let me use the direct S&P approach from cash flows: From 2021 cash flow data, let me reconstruct "Funds From Operations": - Start with Operating Cash Flow: €1,135M - Subtract: changes in working capital (to normalize) - Trade receivables increased: source of cash use was -€1,285M in adjustments (meaning cash outflow) - Actually the adjustment is "Adjustments For Decrease Increase In Trade Account Receivable" = -€1,285M means receivables increased, reducing cash flow - Trade payables: +€1,329M means payables increased, adding to cash flow - Inventories: -€56M means inventories increased, reducing cash flow Net working capital effect in operating cash flow: these are already included in the €1,135M. To get FFO before working capital: €1,135M + €1,285M - €1,329M + €56M = €1,147M... roughly, plus other items. Hmm, let me look at this differently. The cash flow statement items: - "Other Adjustments For Noncash Items" 2021: €225M Let me try to find a cleaner path. S&P sometimes uses: FFO = Net Income + D&A + Deferred Taxes + Other non-cash - Equity earnings + Cash distributions from equity investments From 2021: - Net Income: €550M - D&A: €465M + €201M = €666M - Deferred tax: need to calculate. Tax expense was €36M, cash taxes paid €165M. So deferred tax benefit = €36M - €165M = -€129M? That doesn't seem right. Actually, looking at balance sheet: Net Deferred Tax Assets 2021: €424M, 2022: €363M. Decrease of €61M. Let me use a more standard approach. From S&P Corporate Methodology: FFO = Funds from operations = Net income from continuing operations + Depreciation and amortization + Deferred income taxes + Other non-cash items - Nonrecurring gains (after tax) + Minority interest in net income (if not already in continuing ops) From 2021: - Profit Loss From Continuing Operations: €554M - Depreciation Expense: €465M - Amortisation Expense: €201M - Adjustments For Impairment: €19M - Adjustments For Provisions: €89M - Adjustments For Undistributed Profits Of Associates: -€2M - Income Tax Expense: €36M (but we need deferred portion) Actually, I think the cleanest approach given data limitations is: **FFO = Cash Flows From Used In Operating Activities + Interest Paid (financing) - Working capital changes** But interest paid is already in operating cash flow under IFRS. Let me use S&P's typical calculation for unregulated utilities: FFO = Adjusted_EBITDA - Cash Interest - Cash Taxes Where Cash Interest = interest paid, Cash Taxes = taxes paid 2021: - Adjusted_EBITDA: €1,428M - Cash Interest: Let's use "Net Financial Interests" = €72M, or Interest Paid = €80M - Cash Taxes: €165M (taxes paid) FFO = €1,428M - €72M - €165M = €1,191M? Or with €80M: €1,183M But wait, "Net Financial Interests" of €72M might already be the net cash interest. Let me check: Finance Income €17M, Finance Costs €89M, so net is €72M. But cash interest paid was €80M. Actually, looking more carefully: "Net Financial Interests" 2021 is €72M. This seems to be the net financial expense. For S&P FFO, we want: FFO = EBITDA - Net Cash Interest - Cash Taxes Net Cash Interest = Interest Paid - Interest Received = €80M - ? We have "Finance Income" of €17M but that's accrual. Cash interest received unknown. Let me use: **FFO = Operating Cash Flow before working capital changes** From operating cash flow €1,135M, add back working capital changes: - Receivables increase (use of cash): €1,285M - Payables increase (source of cash): -€1,329M (wait, the adjustment is positive €1,329M when payables increase) - Inventories increase (use of cash): €56M So working capital contribution to OCF = -€1,285M + €1,329M - €56M = -€12M OCF before working capital = €1,135M - (-€12M) = €1,147M? No wait: If OCF includes these effects, and net working capital effect is -€12M (slight drag), then OCF before WC = €1,135M + €12M = €1,147M? Actually, let me check signs. The adjustments are: - "Adjustments For Decrease Increase In Trade Account Receivable" = -€1,285M: This means in cash flow calculation, we subtract €1,285M for receivable increase. So in OCF, this is a negative. - "Adjustments For Increase Decrease In Trade Account Payable" = +€1,329M: This means we add €1,329M for payable increase. Positive for OCF. - "Adjustments For Decrease Increase In Inventories" = -€56M: Negative for OCF. Net: -€1,285M + €1,329M - €56M = -€12M So OCF of €1,135M includes a -€12M working capital drag. Thus OCF before working capital = €1,135M + €12M = €1,147M. But wait, there are other working capital items too (other current assets/liabilities). Let me try yet another approach. S&P's FFO is often approximated as: FFO = Net Income + D&A + Deferred Taxes + Other Non-Cash - Gains + Minority Interest From 2021: - Profit Loss (Net Income): €550M - D&A: €465M + €201M = €666M - Impairment: €19M - Provisions: €89M - Undistributed profits of associates: -€2M (subtract as it's equity earnings not distributed) - Income tax expense: €36M (accrual, need to adjust to cash or keep) Actually, adding back tax expense then subtracting cash taxes: +€36M (expense, non-cash add back) - €165M (cash paid) = -€129M net tax effect So: €550M + €666M + €19M + €89M - €2M + €36M - €165M = €1,193M Hmm, close to my €1,191M above. Let me also add back "Net Financial Interests" of €72M (accrual) and subtract cash interest paid of €80M: +€72M - €80M = -€8M Total: €1,193M - €8M = €1,185M Or if we don't do this: €1,193M Let me check with 2022 to see consistency, and also verify against "Free Cash Flow" data. 2021 Free Cash Flow = -€460M 2022 Free Cash Flow = €118M Free Cash Flow = Operating Cash Flow - Capex - Acquisitions + Disposals 2021: €1,135M - €714M - €360M - €444M + €5M + €0M - €109M (treasury) ... doesn't match perfectly. Actually Free Cash Flow is given as: OCF - Capex - Intangibles - Acquisitions + Disposals + Dividends received 2021: €1,135M - €714M - €360M - €444M + €5M + €0M = -€378M, not -€460M. Hmm, maybe includes other items. The given FCF is -€460M for 2021. Let me just use a consistent approach and move forward. I'll use: **FFO = Cash Flows From Used In Operating Activities - Working Capital Changes + After-tax Interest adjustment** Or more practically for S&P: **FFO = Adjusted_EBITDA - Cash Interest - Cash Taxes** Using Cash Interest = €80M, Cash Taxes = €165M: FFO = €1,428M - €80M - €165M = **€1,183M for 2021** Wait, but this seems high. Let me verify with another formula. Actually, I realize I should check if "Net Financial Interests" is the right metric. Let me look at 2022: - Net Financial Interests: €90M - Interest Paid: €75M - Finance Costs: €125M - Finance Income: €35M So Net Financial Interests = Finance Costs - Finance Income (accrual) = €125M - €35M = €90M. Yes! Cash interest paid was €75M in 2022, vs €90M accrual. For 2021: Finance Costs €89M - Finance Income €17M = €72M = Net Financial Interests. Cash interest paid €80M. So cash interest can differ from accrual. For S&P FFO calculation, I'll use: **FFO = Adjusted_EBITDA - Cash Interest Paid - Cash Taxes Paid** 2021: €1,428M - €80M - €165M = **€1,183M** But wait, this assumes no other adjustments. Let me think about whether S&P would make other adjustments. For unregulated power and gas, S&P may adjust for: - Working capital normalization (but that's for ratios, not FFO calculation directly) - Nonrecurring items - Pension adjustments 2021 had no nonrecurring items. Pension: OCI pension was -€38M before tax, -€27M after tax. This is already in equity, not in EBITDA. I think **€1,183M** is a reasonable 2021 FFO estimate, but let me also consider using the more comprehensive approach. Actually, let me cross-check: FFO / Debt should be reasonable for a utility. Let me proceed and also calculate 2022, then check consistency. ## Step 4: Estimate 2021 Adjusted_Debt From balance sheet 2022-01-01 (which is 2021 year-end): - Other Noncurrent Financial Liabilities: €4,322M - Other Current Financial Liabilities: €746M - Total reported debt = €4,322M + €746M = €5,068M Need to add: - Leases: Not separately stated, may be included in financial liabilities or other liabilities - Pension deficit: "Noncurrent Provisions For Employee Benefits" = €294M. This is a pension/employee benefit obligation. Need to check if it's a deficit. - Guarantees: Not stated - Hybrid debt: Not apparent - Other debt-like items: Need to assess For unregulated power and gas, S&P also considers: - PPAs as debt-like (but this is an energy supply company, not generator with long PPAs) Looking at other liabilities: - Trade And Other Current Payables: €2,894M (not debt) - Other Current Nonfinancial Liabilities: €4,487M (need to check) - Other Noncurrent Liabilities: €129M For working capital adjustments in unregulated power and gas: S&P may adjust for seasonal working capital by netting inventory against short-term borrowings. But we don't have clear seasonal breakdown. Also: "Other Noncurrent Financial Assets" €64M, "Other Current Financial Assets" €9M - these might be netted if liquid. Cash and equivalents 2021: €964M (2022-01-01) or €1,012M (2021-01-01). The 2022-01-01 figure of €964M is year-end 2021. Eligible cash: Typically 75% of cash if not restricted, or less if needed for operations. For utilities, often subtract most cash. Let me use standard approach: - Reported debt: €5,068M - Add pension deficit: Need to assess if underfunded. "Noncurrent Provisions For Employee Benefits" €294M. This is likely IAS 19 provision, could be net position. Without plan assets data, hard to say. But given "Net Deferred Tax Assets" exists, and IAS19 reserves in equity, let me check. Actually, looking at equity: "IAS19Reserves" 2021-01-01 to 2022-01-01: -€27M. This is OCI reserve for pensions, negative meaning liability. The provision of €294M is likely the gross liability. If plan assets exist, net could be different. Without more data, I'll include as debt-like. - Leases: Looking at "Payments Of Lease Liabilities Classified As Financing Activities" 2021: €2M. This suggests leases exist but are small. Adjusted Debt = €5,068M + €294M (pension) + small leases - eligible cash Eligible cash: Typically 75% of cash for utilities, or could be 0 if fully needed. Let's use 75% of €964M = €723M eligible. But wait - for unregulated power and gas with high working capital needs, S&P may allow less cash offset. Let me use conservative: 75% of cash is eligible. Eligible cash = 0.75 × €964M = €723M Adjusted Debt = €5,068M + €294M - €723M = **€4,639M** Hmm, but let me check if there are other debt-like items. "Other Current Nonfinancial Liabilities" €4,487M seems high - could include energy derivative margin calls or other trading liabilities. But these are typically not debt. Actually, looking at 2022: Other Current Nonfinancial Liabilities dropped to €3,006M while trade payables jumped to €5,524M. This suggests 2021 had different working capital structure, possibly due to energy price hedging or margin requirements. For a more conservative approach, let me also consider if any of this should be treated as debt-like. In energy trading, derivative liabilities can be debt-like. But without specific data, I'll proceed with standard treatment. Let me recalculate with different cash treatment: If 0% cash eligible (all needed for operations): €5,068M + €294M = €5,362M If 100% cash eligible: €5,068M + €294M - €964M = €4,398M I'll use **75% eligible: €4,639M** as my base case, but let me also note alternatives. Actually, re-reading S&P methodology for unregulated power and gas: "For unregulated power and gas companies that enter into long-term power purchase agreements (PPAs), we make adjustments to account for those obligations." This company is primarily energy supply/retail, not generation with PPAs. So standard approach. Let me also check 2021-01-01 vs 2022-01-01. The equity at 2021-01-01 was €4,116M, and 2022-01-01 was €4,303M. Hmm, I want to be more careful. Let me use year-end 2021 (2022-01-01) figures for 2021 calculations. **2021 Adjusted_Debt = €5,068M + €294M - €723M = €4,639M** Or if we don't subtract cash (more conservative for trading companies): €5,362M Let me use a range and decide. Given energy crisis in 2021-2022 with high working capital needs, S&P likely allows less cash offset. Let me use **50% eligible: €5,068M + €294M - €482M = €4,880M** I'll go with **€4,880M** as reasonable estimate, or about **€4,600M-€5,000M** range. ## Step 5: Calculate 2021 Adjusted_Debt / Adjusted_EBITDA Using €4,880M / €1,428M = **3.42x** Or with €4,639M: 3.25x Or with €5,362M: 3.75x Range: **3.3x - 3.8x** ## Step 6: Calculate 2021 FFO / Adjusted_Debt Using €1,183M / €4,880M = **24.2%** or 0.242 Or with €4,639M: 25.5% Or with €5,362M: 22.1% Range: **22% - 26%** ## Step 7: Estimate 2022 Adjusted_EBITDA From data: - "Gross Operating Income EBITDA" 2022-01-01 - 2023-01-01: €1,505M Nonrecurring items: "Result From Nonrecurring Transactions" 2022: €157M (positive, gain) For S&P: subtract nonrecurring gains from EBITDA to get sustainable level. Adjusted_EBITDA = €1,505M - €157M (nonrecurring gain) = **€1,348M** Wait, is this correct? Let me check. The €157M is "Result From Nonrecurring Transactions" - positive means gain. S&P wants to normalize by removing nonrecurring gains. So **2022 Adjusted_EBITDA = €1,505M - €157M = €1,348M** Alternatively, if some portion is truly nonrecurring. Let me verify if this is included in EBITDA or below. Looking at income statement structure: - EBITDA is "Gross Operating Income EBITDA" - Then "Depreciation Amortization Provisions And Writedowns" - Then "Profit Loss From Operating Activities" - Then "Result From Nonrecurring Transactions" So "Result From Nonrecurring Transactions" is AFTER operating profit, not in EBITDA. This means EBITDA of €1,505M already excludes the €157M nonrecurring. Wait, let me re-read: The items are listed in order: - EBITDA: €1,505M - D&A etc: €818M - Profit from operating activities: €687M - Result from nonrecurring: €157M - Finance income: €35M - Finance costs: €125M - etc. So "Result From Nonrecurring Transactions" is added to operating profit to get some subtotal before financial items. Actually, looking at the structure: After "Profit Loss From Operating Activities" (€687M), we add "Result From Nonrecurring Transactions" (€157M) to get... what? Let's check: €687M + €157M = €844M, then +€35M - €125M + €2M = €756M = Profit Before Tax. Yes! So the €157M nonrecurring is already excluded from "Profit Loss From Operating Activities" but is part of pre-tax profit. And EBITDA of €1,505M is before this. Is the €157M included in EBITDA? No, because EBITDA is "Gross Operating Income" before D&A. The nonrecurring is after operating profit. Wait, but "Gross Operating Income EBITDA" might include some nonrecurring items at gross level. Let me check if €157M is part of revenue or operating expense. Actually, "Result From Nonrecurring Transactions" is typically separate from normal operations. If it's not in EBITDA, then no adjustment needed. But let me verify by checking if EBITDA includes it. Looking at 2021: EBITDA €1,428M, then D&A €768M, operating profit €660M, nonrecurring €0. So €1,428M - €768M = €660M. Yes, matches. 2022: €1,505M - €818M = €687M operating profit. Then +€157M nonrecurring = €844M. Then financial = €844M + €35M - €125M + €2M = €756M. But "Profit Loss Before Tax" is €756M. Yes, matches! So EBITDA of €1,505M does NOT include the €157M nonrecurring gain. Therefore, **2022 Adjusted_EBITDA = €1,505M** (no adjustment needed for nonrecurring since it's below EBITDA line). But wait - S&P might want to include nonrecurring items if they're part of sustainable operations. However, "nonrecurring" suggests one-time. Since it's not in EBITDA anyway, no adjustment. Hmm, but let me think again. Is there any nonrecurring in EBITDA? Looking at revenue: €23,166M vs €11,549M prior year. The revenue doubled! This is due to energy price spikes in 2022. Is this sustainable? For S&P, they might normalize for extraordinary commodity price effects. But standard practice is to use reported EBITDA unless there's clear one-time item. Actually, looking more carefully: "Other Revenue" €220M in 2022 vs €197M in 2021. "Revenue From Contracts With Customers" €22,946M vs €11,352M. The massive revenue increase is pass-through of energy costs. EBITDA margin fell from 12.4% to 6.5% (€1,505M/€23,166M). This is typical for energy retailers - revenue up but margins compressed. For S&P, they'd likely use reported EBITDA but assess sustainability. Let me proceed with **2022 Adjusted_EBITDA = €1,505M** or possibly adjust for nonrecurring if needed. Actually, re-reading the formula: "Adjusted_EBITDA = EBITDA (reported or reconstructed) + adjustment_leases (if any) + nonrecurring_losses - nonrecurring_gains ± pension_adjustments ± joint_venture_proportional_EBITDA ± other_normalization_adjustments" Since the €157M is below EBITDA, it's not in EBITDA. So no adjustment via this formula. But if we want "sustainable" EBITDA, we might consider whether to add back any nonrecurring losses or subtract gains that are embedded. Actually, I need to check: is €157M truly nonrecurring or is it part of normal operations misclassified? Without more detail, I'll use **€1,505M** but note that if we adjust for the nonrecurring gain (even though it's below EBITDA), we might want to normalize pre-EBITDA items. Wait - I need to re-think. The formula says "+ nonrecurring_losses - nonrecurring_gains". This suggests we adjust EBITDA for nonrecurring items, implying some nonrecurring items might be in EBITDA. But if €157M is not in EBITDA, no adjustment. However, looking at the income statement, "Result From Nonrecurring Transactions" could include items like asset sales, restructuring, etc. that might affect EBITDA if they're operating in nature. Let me check: In 2021, this was €0. In 2022, €157M. The cash flow shows "Disposal Of Fixed Assets And Shareholdings" 2022: €413M, 2021: €5M. And "Adjustments For Losses Gains On Disposal Of Noncurrent Assets" 2022: -€191M (negative adjustment, meaning gain). So the €157M "Result From Nonrecurring Transactions" likely includes the €191M gain on disposal (or similar). This is definitely nonrecurring. But is this gain in EBITDA? Looking at cash flow, the adjustment is in operating cash flow section, suggesting it affected net income but not operating cash flow. The gain would reduce operating profit but be added back in cash flow. Actually, gains on disposal are typically NOT in EBITDA (they're below operating profit or in financing). So EBITDA is clean. **2022 Adjusted_EBITDA = €1,505M** ## Step 8: Estimate 2022 FFO Using same approach: FFO = Adjusted_EBITDA - Cash Interest - Cash Taxes 2022: - Adjusted_EBITDA: €1,505M - Interest Paid: €75M - Income Taxes Paid: €201M FFO = €1,505M - €75M - €201M = **€1,229M** Or using Net Financial Interests €90M: €1,505M - €90M - €201M = €1,214M Let me also cross-check with comprehensive approach: Net Income €448M + D&A €491M + €233M = €724M + Impairment €10M + Provisions €92M - Undistributed profits €2M + Tax expense €344M - Cash taxes €201M (so add back €344M expense, subtract €201M paid = +€143M net? No, standard is add expense then subtract cash) Actually: Net Income €448M + D&A €724M + Impairment €10M + Provisions €92M - Equity €2M + Tax expense €344M - Cash taxes €201M = €1,415M? That seems high. Hmm, let me be careful. The standard S&P FFO from net income: = Net Income + Depreciation & Amortization + Deferred Income Taxes + Other non-cash expenses - Gains on asset sales (after tax) + Minority interest = €448M + €724M + (€344M expense - €201M paid = deferred tax increase? Or just use expense) + €10M + €92M - €2M - ? Actually, deferred tax: If tax expense €344M, cash taxes €201M, then deferred tax expense is €143M. Add this back. FFO = €448M + €724M + €143M + €10M + €92M - €2M - gain on disposal (after tax) Gain on disposal: €191M pre-tax, after tax maybe €140M? = €448M + €724M + €143M + €10M + €92M - €2M - €140M = €1,275M This is higher than €1,229M. The difference might be working capital or other items. Actually, I realize the €191M gain adjustment in cash flow is added back to net income (negative adjustment = gain, so subtract from net income to get cash). In FFO, we want to exclude gains. Let me use the simpler EBITDA-based approach for consistency: **FFO = €1,229M** (using €75M cash interest) or **€1,214M** (using €90M net financial interests). I'll use **€1,229M** with cash interest paid. Wait, but "Net Financial Interests" might be more appropriate as it's the net cash financial outflow. Let me check: 2022 had €35M finance income (accrual) and €125M finance costs (accrual). Cash interest paid was €75M. The €90M "Net Financial Interests" seems to be a specific metric. I'll use **€1,214M** as conservative (using €90M) or **€1,229M** (using €75M cash paid). Let me use **€1,229M**. ## Step 9: Estimate 2022 Adjusted_Debt 2023-01-01 (2022 year-end): - Other Noncurrent Financial Liabilities: €5,867M - Other Current Financial Liabilities: €1,022M - Total reported debt: €6,889M Add pension: "Noncurrent Provisions For Employee Benefits" €248M Eligible cash: €2,584M. Using 50%: €1,292M Adjusted Debt = €6,889M + €248M - €1,292M = **€5,845M** Or with 75% cash: €6,889M + €248M - €1,938M = €5,199M Or with 0% cash: €7,137M Using 50%: **€5,845M** ## Step 10: Calculate 2022 Adjusted_Debt / Adjusted_EBITDA €5,845M / €1,505M = **3.88x** Or with 75% cash: €5,199M / €1,505M = 3.45x Or with 0% cash: €7,137M / €1,505M = 4.74x Using base case: **3.88x** ## Step 11: Calculate 2022 FFO / Adjusted_Debt €1,229M / €5,845M = **21.0%** or 0.210 Or with 75% cash: €1,229M / €5,199M = 23.6% Or with 0% cash: €1,229M / €7,137M = 17.2% Base case: **21.0%** ## Step 12: Classify Year-on-Year Credit Trend Let me summarize with consistent assumptions. I need to be careful about methodology consistency. Let me recalculate with more careful attention to S&P methodology specifics for unregulated power and gas. ### Recalculation with Consistent Approach For unregulated power and gas, S&P specifically mentions: - "For unregulated power and gas companies that enter into long-term power purchase agreements (PPAs), we make adjustments to account for those obligations" - Working capital adjustments for seasonal requirements A2A Energia appears to be mainly a retail/supply company with trading activities. The massive revenue increase (doubling) suggests significant energy trading/merchant activity. For cash treatment: In energy trading with high working capital needs, S&P is typically more conservative on cash eligibility. Let me use **50% cash eligibility** consistently. Also, for debt: should I include other liabilities? "Other Current Nonfinancial Liabilities" dropped from €4,487M to €3,006M while trade payables jumped from €2,894M to €5,524M. This suggests a reclassification or change in business model. These are likely energy supply liabilities (payables to energy exchanges, grid operators, etc.), not debt-like. Let me stick with financial liabilities as debt core. **2021 Recalculation:** - Debt: €4,322M + €746M = €5,068M - Pension: €294M - Cash 50%: €482M - Adjusted Debt: €5,068M + €294M - €482M = **€4,880M** **2022 Recalculation:** - Debt: €5,867M + €1,022M = €6,889M - Pension: €248M - Cash 50%: €1,292M - Adjusted Debt: €6,889M + €248M - €1,292M = **€5,845M** **2021 Adjusted_EBITDA:** €1,428M (no nonrecurring adjustments needed) **2022 Adjusted_EBITDA:** €1,505M. But wait - should I adjust for nonrecurring even if below EBITDA? The formula says "+ nonrecurring_losses - nonrecurring_gains". Since €157M gain is not in EBITDA, no direct adjustment. However, if we think about sustainable EBITDA, the gain might relate to operations. Actually, looking more carefully: The €157M "Result From Nonrecurring Transactions" - is this truly below EBITDA? Let me re-examine the income statement structure. In standard Italian/IFRS format: - Revenue - Operating expenses - = EBITDA - D&A - = EBIT (Operating profit) - +/- Nonrecurring - Financial income/costs - = Profit before tax So yes, nonrecurring is after operating profit, hence after EBITDA. **2021 FFO:** Using FFO = Operating Cash Flow before working capital changes Or: FFO = Adjusted_EBITDA - Cash Interest - Cash Taxes + other From cash flow statement 2021: - Operating cash flow: €1,135M - This includes: interest paid €80M (operating), taxes paid €165M, dividends paid €263M, working capital changes, etc. Actually, dividends paid are financing, not operating. Wait, "Dividends Paid Classified As Operating Activities" - this is unusual, might be IFRS classification. For S&P FFO, we want sustainable funds from operations. Let me use: FFO = Cash Flow From Operations + Interest Paid (if classified as operating, reclassify to financing) - Working capital changes - Nonrecurring items Or more standard: FFO = Net Income + D&A + Deferred Taxes + Other non-cash - Gains + Minority Interest 2021: - Net Income: €550M - D&A: €666M - Deferred tax: Tax expense €36M - cash taxes €165M = -€129M (deferred tax benefit). Actually, if cash taxes > expense, we have a deferred tax asset usage or prior year adjustment. Add back the expense €36M, then subtract cash €165M? No, standard is add expense back to get pre-tax, then subtract cash taxes. Let me try: Start with pre-tax operating profit before nonrecurring: €660M operating + €0 nonrecurring = €660M. Add finance costs €89M, subtract finance income €17M = €732M pre-tax approx. Hmm, not matching €590M given. Actually: Profit Before Tax 2021: €590M. Tax €36M. Net €554M continuing + (-€4M) discontinued = €550M total. FFO = €550M + €666M + €36M (tax expense, non-cash add) - €165M (cash taxes, use not accrual) + €19M + €89M - €2M - €0 (no gains) = €550M + €666M + €36M - €165M + €19M + €89M - €2M = €1,193M Then subtract cash interest vs accrual: We added back nothing for interest. Net financial expense was €72M accrual, cash was €80M paid. If we use accrual: FFO = €1,193M - €72M (net financial expense, already in net income) = wait, this is already included. Actually, FFO should be after interest. So €1,193M includes the interest expense already deducted. But we want pre-interest for debt coverage? No, FFO is post-interest. Hmm, I'm confusing myself. Let me use standard S&P definition: FFO = Net Income + Depreciation and amortization + Deferred income taxes + Other non-cash items - Nonrecurring gains (after tax) + Minority interest = €550M + €666M + (deferred tax) + €108M (impairment + provisions) - €0 + €46M minority? Actually minority interest: "Profit Loss Attributable To Noncontrolling Interests" is -€46M (negative, meaning loss to minority). So add back? Or is it already in net income? "Profit Loss" total €550M = Attributable to owners €504M + Minority -€46M. So minority loss means more profit to parent. Net income €550M is total. For FFO, we add minority interest in net income (positive if minority has profits, reducing parent's share). Here minority has loss, so we might subtract or do nothing. Standard: FFO = Net Income available to common + Minority Interest + D&A + Deferred Tax + Other non-cash - Preferred dividends - Gains Net Income available to common: €504M? Or €550M total? S&P typically uses total net income before minority and preferred. Or adds minority interest back. Let me use: €550M (total net income) + €666M + €36M + €108M - €0 = €1,360M? Then subtract cash vs accrual adjustments. This is getting too complex. Let me use a simpler validated approach. From S&P's typical utility calculation: FFO = EBITDA - Cash Interest - Cash Taxes 2021: €1,428M - €80M - €165M = €1,183M 2022: €1,505M - €75M - €201M = €1,229M This is clean and consistent. Let me verify with cash flow. 2021 operating cash flow €1,135M includes interest €80M and taxes €165M and working capital and other items. If we add back working capital drag of roughly €12M and other adjustments, we get close to €1,183M. Actually, let me try: OCF €1,135M + interest paid €80M (reclassify to financing) + taxes paid €165M (reclassify? no, stay) - working capital changes + other = ? For FFO, S&P typically uses: OCF - Changes in Working Capital - Nonrecurring items - After-tax interest (if interest was operating) - Cash taxes (if taxes were operating) Actually standard S&P: FFO = Funds from operations = Cash generated from operations before working capital changes - Cash interest - Cash taxes Or: FFO = EBIT + D&A - Cash Interest - Cash Taxes (approximate) 2021: EBIT = €660M (operating profit) + €0 nonrecurring = €660M. Add D&A €768M = €1,428M EBITDA. Subtract cash interest €80M, cash taxes €165M = €1,183M. Yes! 2022: EBIT = €687M + €157M nonrecurring = €844M? No wait, operating profit is €687M, nonrecurring is separate. If nonrecurring is gain, it's in pre-tax profit. Actually for 2022: Operating profit €687M. This includes normal operations. The €157M is extra. So "sustainable" EBIT might be €687M or €844M depending on view. For EBITDA-based FFO: €1,505M - €75M - €201M = €1,229M. This uses reported EBITDA. But if we want sustainable: The €157M gain is not in EBITDA, so no issue. **Final 2021 FFO: €1,183M** **Final 2022 FFO: €1,229M** Wait, FFO increased? Let me check: €1,229M / €1,183M = 3.9% increase. But debt increased more. ### Final Ratio Calculations **2021:** - Adjusted_EBITDA: €1,428M - FFO: €1,183M - Adjusted_Debt: €4,880M - Adjusted_Debt / Adjusted_EBITDA: 3.42x - FFO / Adjusted_Debt: 24.2% **2022:** - Adjusted_EBITDA: €1,505M - FFO: €1,229M - Adjusted_Debt: €5,845M - Adjusted_Debt / Adjusted_EBITDA: 3.88x - FFO / Adjusted_Debt: 21.0% ### Signal 1: Leverage Change 2022 ratio: 3.88x 2021 ratio: 3.42x Change: +0.46x Threshold: ≥ +0.2x is Deteriorating **Signal 1: Deteriorating** (+0.46x > +0.2x) ### Signal 2: Cash-Flow Coverage Change 2022 ratio: 0.210 (21.0%) 2021 ratio: 0.242 (24.2%) Change: -0.032 (or -3.2 percentage points) Threshold: ≤ -0.03 is Deteriorating **Signal 2: Deteriorating** (-0.032 < -0.03) ### Combining Signals Both signals agree: **Deteriorating** Let me double-check my calculations, especially the FFO change magnitude. -0.032 is just barely below the -0.03 threshold. If I used slightly different assumptions: If 2022 FFO = €1,214M (using €90M net financial interests): FFO/Debt = €1,214M / €5,845M = 20.8%, change = -0.034, still Deteriorating. If 2021 FFO was higher due to different calculation: Say €1,193M / €4,880M = 24.4%, then change to 21.0% = -0.034, still Deteriorating. If cash eligibility is 75%: 2021 Debt: €5,068M + €294M - €723M = €4,639M, ratio 3.25x 2022 Debt: €6,889M + €248M - €1,938M = €5,199M, ratio 3.45x Change: +0.20x, which is at threshold for Deteriorating (≥ +0.2x) FFO/Debt 2021: €1,183M / €4,639M = 25.5% FFO/Debt 2022: €1,229M / €5,199M = 23.6% Change: -0.019, which is Stable (between -0.03 and +0.03) With 75% cash: Signal 1: Deteriorating (barely), Signal 2: Stable. Then we'd need to reason about which is more material. But with 50% cash: Both Deteriorating. Given the energy crisis context and A2A's business, 50% cash eligibility seems more appropriate for a trading-heavy energy company with high working capital needs. The 2022 cash balance of €2,584M is very high (vs €964M in 2021), likely due to margin requirements and timing, not all available for debt repayment. Let me also check if debt increased due to working capital needs: - Trade receivables: €3,291M to €4,680M (+€1,389M) - Trade payables: €2,894M to €5,524M (+€2,630M) - Inventories: €204M to €536M (+€332M) Net working capital: Receivables + Inventory - Payables = €1,601M in 2021, -€308M in 2022? Let me calculate: 2021: €3,291M + €204M - €2,894M = €601M 2022: €4,680M + €536M - €5,524M = -€308M Actually working capital improved (more payables relative to receivables). But debt still increased significantly (€5,068M to €6,889M gross financial debt, +36%). The debt increase is real and concerning from credit perspective. FFO coverage declined despite higher EBITDA because interest and taxes increased. Given both signals point to Deteriorating with reasonable assumptions, and the conservative bias toward the more negative signal if there's any conflict, I conclude: Deteriorating