**Step 1: Identify the relevant industry** Electricité de France (EDF) is a major integrated electric utility. The provided methodologies include "Regulated Utilities," "Oil And Gas Exploration And Production," "Unregulated Power And Gas," and "Transportation Infrastructure." EDF operates primarily in the electricity sector, involving generation (nuclear, hydro, renewables, thermal), transmission, distribution, and supply. While it has unregulated activities (merchant generation, trading), a significant portion of its business (distribution, regulated nuclear generation via ARENH mechanism in France, and regulated tariffs) falls under the **Regulated Utilities** framework, or at least the hybrid nature requires assessing it against the utility standards. The prompt provides specific guidance for "Regulated Utilities" which notes that for integrated utilities, we look at regulatory advantage. Given EDF's status as a state-owned incumbent with significant regulated assets and obligations, the **Regulated Utilities** methodology is the most appropriate primary framework, although its merchant exposure introduces volatility. However, for the purpose of calculating the specific ratios requested (Adjusted EBITDA, FFO, Adjusted Debt), the baseline formulas provided in the prompt instructions are to be used, modified by industry specifics. Key Industry Specifics for Regulated Utilities from the text: - **Profitability:** Use EBITDA margin or ROE. - **Accounting:** Do not adjust GAAP earnings for regulatory accounting effects (though EDF uses IFRS). - **Volatility:** The text mentions applying low/medial volatility tables based on the proportion of regulated cash flows. EDF has significant merchant exposure, which likely pushes it toward the standard or medial volatility table, implying higher risk than a pure regulated utility. However, the calculation steps requested are standard ratio calculations. **Step 2: Estimate 2021 "Adjusted_EBITDA"** Formula: `Adjusted_EBITDA = EBITDA + adjustment_leases + nonrecurring_losses - nonrecurring_gains ± pension_adjustments ± joint_venture_proportional_EBITDA ± other_normalization_adjustments` From the data for 2021 (2021-01-01 - 2022-01-01): - "Operating Profit Before Depreciation And Amortisation" (EBITDA) = 18,005,000,000 EUR. We need to check for adjustments: - **Leases:** The data does not explicitly provide lease adjustments. In the absence of specific lease liability data or rent expense vs. depreciation splits, we assume reported EBITDA is the starting point. S&P often adds back operating lease rents if capitalized, but under IFRS 16, leases are already capitalized, so EBITDA is generally higher than pre-IFRS 16. No specific adjustment factor is given, so we assume 0 adjustment for leases in this simplified context unless "Other External Services" implies it, which it doesn't clearly. - **Non-recurring items:** The data provides "Impairment Loss Reversal..." and "Other Operating Income...". - "Impairment Loss Reversal Of Impairment Loss Recognised In Profit Or Loss" = 653,000,000 EUR. This is a gain included in EBITDA. S&P typically removes non-recurring gains. So we subtract this. - "Other Operating Income And Expenses Included In Ebe" = 4,262,000,000 EUR. This is a large positive number. We need to determine if this is recurring. For utilities, this can include regulatory adjustments or one-offs. Without specific breakdown, standard practice is to treat large "Other" items with caution. However, looking at 2022, this drops to 367M. The drop suggests 2021 might have had non-recurring benefits or 2022 had non-recurring costs. Let's look closer. EDF's 2021 results were boosted by specific items. However, without explicit "non-recurring" labels in the provided facts, we must rely on the explicit line items. The prompt asks to use the baseline formula. Usually, "Impairment reversals" are considered non-recurring. - Let's check "Profit Loss From Operating Activities" = 5,225,000,000. - EBITDA (18,005) - Depreciation (10,789) + Impairment Reversal (653) + Other Op Inc (4,262) ... wait. - The standard reconciliation is: EBITDA = Operating Profit + Depreciation + Amortization + Impairment. - The provided line "Operating Profit Before Depreciation And Amortisation" *is* EBITDA. - So, Reported EBITDA = 18,005,000,000 EUR. Adjustments: - **Non-recurring gains:** The "Impairment Loss Reversal" of 653M is a non-cash gain included in EBITDA. We should subtract it. - "Other Operating Income And Expenses Included In Ebe" of 4,262M. In EDF's context, this often includes the impact of the ARENH mechanism and other regulatory items. In 2021, this was high. In 2022, it was low (367M). This volatility suggests it might contain non-recurring or volatile regulatory components. However, S&P often views regulatory pass-throughs as part of core earnings for regulated utilities if they are predictable. But the huge swing suggests instability. Let's look at the "Profit Loss From Operating Activities" (EBIT). - EBIT 2021 = 5,225M. - EBITDA 2021 = 18,005M. - Depreciation = 10,789M. - 18,005 - 10,789 = 7,216M. This doesn't match EBIT (5,225M). The difference is roughly 2,000M. - Let's check the components: EBITDA includes "Other Operating Income" (4,262M) and "Impairment Reversal" (653M). - If we remove the Impairment Reversal (653M), Adjusted EBITDA becomes 17,352M. - What about the 4,262M? If this is recurring regulatory income, it stays. If it's non-recurring, it goes. Given the prompt's simplicity and lack of detailed notes, we will stick to the most obvious non-recurring item: Impairment Reversals. We will also consider if "Other Operating Income" is non-recurring. In 2022, it is only 367M. The drop of ~3.9B is significant. It is likely that the 2021 figure included one-off regulatory benefits or favorable market conditions not guaranteed to repeat. However, without explicit instruction to classify it as non-recurring, and given it's "Included in EBE" (Earnings Before Interest and Taxes, essentially), we might keep it or adjust. - Let's look at S&P methodology for utilities: "We do not adjust GAAP earnings... to remove the effects of regulatory accounting." This suggests we should keep regulatory items. - Therefore, we will only adjust for the explicit **Impairment Loss Reversal** which is a standard non-recurring adjustment. - **Joint Ventures:** "Share Of Profit Loss Of Associates...". This is below EBITDA usually (equity income). So no adjustment to EBITDA for JV EBITDA unless we are grossing up. S&P often uses proportional consolidation for JVs in utilities if they are core. However, the baseline formula says `± joint_venture_proportional_EBITDA`. The data gives "Share of Profit", not EBITDA. We cannot calculate JV EBITDA from the share of profit without knowing the JV's net margin/debt. We will assume the reported EBITDA includes the necessary operational view or that the JV impact is immaterial to the top-line EBITDA adjustment in this simplified exercise, or that the "Share of Profit" is excluded from EBITDA (which it is, typically). If S&P requires proportional consolidation, we would add the JV's revenue/expenses. We don't have that. We will proceed with Reported EBITDA adjusted for non-recurring items. Let's refine the Non-recurring adjustment. 2021 Impairment Reversal: 653M (Gain). Subtract. 2021 Other Operating Income: 4,262M. Let's calculate 2021 Adjusted EBITDA: Reported EBITDA: 18,005M Less: Impairment Reversal: 653M Adjusted EBITDA 2021 = 17,352M EUR. *Self-Correction/Refinement:* Is there any other adjustment? "Other External Services" is an expense. "Employee Benefits" is an expense. These are operating. What about the "Net Changes In Fair Value On Energy And Commodity Derivatives"? This is listed *below* EBITDA in many utility formats, or sometimes above. The line item "Operating Profit Before Depreciation And Amortisation" is explicitly given. We assume this is the starting EBITDA. The derivative fair value changes are often excluded from core EBITDA in utility analysis due to volatility. The data lists "Net Changes In Fair Value..." separately from EBITDA. It is likely excluded from the "Operating Profit Before D&A" line or included? Let's check the math: Revenue (84,461) - Fuel (44,299) - Other Ext (8,595) - Employee (14,494) - Tax Other (3,330) + Other Op Inc (4,262) + Impairment Rev (653) = ? 84,461 - 44,299 - 8,595 - 14,494 - 3,330 + 4,262 + 653 = 18,658. The reported EBITDA is 18,005. The difference is ~653. Wait, 18,658 - 18,005 = 653. It seems the "Impairment Loss Reversal" is the only difference? Or maybe "Other Operating Income" is treated differently? Actually, 84461 - 44299 - 8595 - 14494 - 3330 + 4262 + 653 = 18,658. The reported EBITDA is 18,005. Difference = 653. This implies that the "Impairment Loss Reversal" of 653 is *not* included in the 18,005? Or my summation of expenses is missing something? Let's re-read carefully. "Operating Profit Before Depreciation And Amortisation" 2021: 18,005. If I sum Revenue - Expenses + Other Income: 84,461 (Rev) - 44,299 (Fuel) - 8,595 (Other Ext) - 14,494 (Emp) - 3,330 (Tax Other) + 4,262 (Other Op Inc) + 653 (Impairment Rev) = 18,658. Why is Reported EBITDA 18,005? Maybe "Impairment Loss Reversal" is *excluded* from the "Operating Profit Before D&A" line item provided? If 18,658 - 653 = 18,005. Yes! This suggests that the line item "Operating Profit Before Depreciation And Amortisation" provided in the data **excludes** the Impairment Loss Reversal. Therefore, the Reported EBITDA (as per the label) is 18,005. To get Adjusted EBITDA, we usually start with Reported EBITDA and add back non-recurring losses or subtract non-recurring gains. If the 653M gain is *already excluded* from the 18,005 figure, then we don't need to subtract it. It's not in there. However, S&P Adjusted EBITDA usually *includes* recurring operations. Is the impairment reversal recurring? No. So we don't want it. If it's not in the 18,005, we are good. But wait, standard EBITDA definitions usually *include* impairment reversals if they are part of operating profit. The label "Operating Profit Before Depreciation And Amortisation" is synonymous with EBITDA. If the company reports it as 18,005, and the sum of components including the reversal is 18,658, then the company likely presented EBITDA *excluding* the impairment reversal, or there is another expense of 653 not listed? Let's look at 2022. Rev 143,476 - Fuel 121,010 - Other Ext 9,420 - Emp 15,236 - Tax Other 3,163 + Other Op Inc 367 + Impairment Rev 1,762 = ? 143,476 - 121,010 - 9,420 - 15,236 - 3,163 + 367 + 1,762 = -3,224. Reported EBITDA 2022 is -4,986. Difference: -3,224 - (-4,986) = 1,762. Again, the difference is exactly the Impairment Reversal amount. This confirms that the provided "Operating Profit Before Depreciation And Amortisation" line **excludes** the "Impairment Loss Reversal". Therefore, the Reported EBITDA figure (18,005 and -4,986) is already "clean" of the impairment reversals. Are there other non-recurring items? "Other Operating Income And Expenses Included In Ebe" is included in the sum. 2021: 4,262. 2022: 367. This item is volatile. However, without specific info classifying it as non-recurring, and given it's part of the core "Operating Profit" definition provided, we will treat the provided EBITDA as the base. So, **2021 Adjusted EBITDA = 18,005,000,000 EUR**. **Step 3: Estimate 2021 "FFO"** Formula: `FFO = Adjusted_EBITDA - cash_interest - cash_taxes` - **Cash Interest:** The data provides "Interest Expense" = 1,459,000,000 EUR. It also provides "Finance Income Cost" = 360,000,000 EUR. And "Net Financial Expeneses Disbursed Including Dividends Received" = 588,000,000 EUR. S&P FFO uses **cash** interest. "Interest Expense" is an accrual figure. "Net Financial Expeneses Disbursed" is a cash flow figure. The line "Net Financial Expeneses Disbursed Including Dividends Received" is 588M. This includes dividends received (cash inflow) and net financial expenses (cash outflow). To get Cash Interest Paid, we ideally need "Interest Paid". The Cash Flow statement shows: "Net Financial Expeneses Disbursed Including Dividends Received" = 588M. "Dividends Received Classified As Operating Activities" = 467M. So, Net Financial Expenses Disbursed (Cash Interest Paid - Cash Interest Received + Other Fin Costs) = 588M - 467M (if dividends are netted out? No, "Including" usually means the net figure includes the dividend receipt). Let's assume "Net Financial Expeneses Disbursed" = Cash Interest Paid - Cash Interest Received + Other Fin Cash Flows. If Dividends Received (467M) is included in the 588M net outflow, then the underlying financial expense outflow is higher? Actually, usually "Net Financial Expenses Disbursed" is an outflow. If it *includes* dividends received (an inflow), then: Outflow (Interest) - Inflow (Divs) = Net Disbursed. Interest Paid - 467 = 588? -> Interest Paid = 1,055? Or is 588 the net result? Let's look at the Income Statement interest: 1,459M expense. Cash interest is often close to expense. Let's use the explicit "Interest Expense" as a proxy for cash interest if cash data is ambiguous, OR use the Cash Flow "Net Financial Expeneses Disbursed" adjusted for dividends. S&P prefers cash taxes and cash interest. Let's estimate Cash Interest ≈ Interest Expense = 1,459M. (Conservative, as cash interest might be lower if capitalizing, or higher if paying down arrears). Alternatively, look at "Finance Income Cost" 360M (Income). This is net. Let's stick to the standard approximation: Cash Interest ≈ Interest Expense. Cash Interest = 1,459,000,000 EUR. - **Cash Taxes:** The data provides "Income Taxes Paid Refund" = 2,276,000,000 EUR. This is a positive number in the cash flow context? "Income Taxes Paid Refund" 2021: 2,276M. In 2022, it is 1,282M. Usually, "Paid" is an outflow. If the number is positive in the provided list, does it represent an outflow or inflow? Looking at "Cash Flows From Used In Operating Activities": 2021: 12,648M. Components: Net Cash Flow From Ops Before Fin/Tax: 15,512M. Less Net Fin Exp Disbursed: 588M. Less/Plus Tax? 15,512 - 588 - Tax = 12,648? 15,512 - 588 - 2,276 = 12,648. Yes. So "Income Taxes Paid Refund" of 2,276M is a **cash outflow** (taxes paid). So, Cash Taxes = 2,276,000,000 EUR. - **FFO Calculation 2021:** FFO = 18,005M - 1,459M - 2,276M FFO = 14,270,000,000 EUR. **Step 4: Estimate 2021 "Adjusted_Debt"** Formula: `Adjusted_Debt = (reported_debt + leases + pension_deficit + guarantees + hybrid_debt_portion + other_debt_like_items) - eligible_cash` - **Reported Debt:** We need to sum interest-bearing debt. From Balance Sheet 2022-01-01 (End of 2021): "Other Noncurrent Financial Liabilities" = 56,543M. "Other Current Financial Liabilities" = 45,014M. Total Financial Liabilities = 56,543 + 45,014 = 101,557M. Are there other debt items? "Special French Public Electricity Distribution Concession Liabilities" = 48,853M. These are often treated as debt-like or provisions. In utility analysis, concession liabilities can be debt-like. However, standard "Adjusted Debt" usually focuses on financial debt. S&P often treats concession liabilities as debt if they are mandatory and fixed. Let's include them as "other debt-like items" or check if they are provisions. They are listed separately from Provisions. "Provisions Related To Nuclear..." = 62,067M. These are provisions, not debt. "Noncurrent Provisions" = 89,225M. Standard S&P Adjusted Debt for Utilities: Includes: Short-term and Long-term financial debt. May include: Capitalized leases (already in financial liabilities under IFRS 16). May include: Pension deficit (if underfunded). Let's check Pension Deficit. "Noncurrent Provisions For Employee Benefits" = 21,716M. This is a provision, not necessarily a funded plan deficit. If it's a defined benefit obligation, the deficit is the difference between obligation and assets. We don't have asset data. We will assume the provision represents the net liability or that we don't have enough info to adjust further. We will stick to Financial Liabilities. Hybrid Debt: "Issued Capital" includes perpetuals? "Payments On Perpetual Subordinated Bonds" are mentioned in equity changes. Perpetual subordinated bonds are often treated as 50% debt / 50% equity or 100% debt depending on terms. The data shows "Proceeds From Issue Of Subordinated Liabilities And Convertible Instruments" in financing cash flow. In the Balance Sheet, "Equity" is 61,989M. "Noncontrolling Interests" 11,778M. "Equity Attributable To Owners" 50,211M. Let's look for "Perpetual Subordinated Bonds" in liabilities. They might be in "Other Noncurrent Financial Liabilities". Without a specific breakdown, we will use Total Financial Liabilities as Reported Debt. Reported Debt = 101,557M. **Concession Liabilities:** S&P methodology for Regulated Utilities: "We deconsolidate securitized debt...". It doesn't explicitly say to add concession liabilities to debt, but they are obligations. However, "Special French Public Electricity Distribution Concession Liabilities" are often regulatory balances. We will exclude them from "Adjusted Debt" in the strict financial sense unless they are interest-bearing borrowings. They are likely non-interest bearing regulatory obligations. We will stick to Financial Liabilities. **Eligible Cash:** "Cash And Cash Equivalents" = 9,919M. S&P deducts unrestricted cash. **Adjusted Debt 2021:** Debt = 101,557M. Less Cash = 9,919M. Adjusted Debt = 91,638,000,000 EUR. **Step 5: Calculate 2021 "Adjusted_Debt / Adjusted_EBITDA"** Ratio = 91,638 / 18,005 = **5.09x** **Step 6: Calculate 2021 "FFO / Adjusted_Debt"** Ratio = 14,270 / 91,638 = **0.1557** (or 15.57%) --- **Step 7: Estimate 2022 "Adjusted_EBITDA"** From Step 2 logic: Reported EBITDA 2022 = -4,986,000,000 EUR. This figure excludes the Impairment Reversal of 1,762M. So, no adjustment needed for impairment as it's already excluded. Are there other non-recurring items? "Other Operating Income" = 367M. Included. So, **2022 Adjusted EBITDA = -4,986,000,000 EUR**. *Note:* The negative EBITDA is driven by the massive increase in "Expense Fuel Energy And Transmission Charges" (121B vs 44B) which was not fully passed through to Revenue (143B vs 84B). Revenue increased by ~59B, Costs increased by ~77B. This reflects the energy crisis and regulated price caps in France (ARENH, Tariff Shield) where EDF absorbed costs. This is a structural/regulatory hit, not necessarily "non-recurring" in the sense of a one-off accounting error, but a severe market/regulatory mismatch. For S&P, this weakness is real. **Step 8: Estimate 2022 "FFO"** Formula: `FFO = Adjusted_EBITDA - cash_interest - cash_taxes` - **Cash Interest:** "Interest Expense" 2022 = 1,730,000,000 EUR. We use this as proxy for Cash Interest. - **Cash Taxes:** "Income Taxes Paid Refund" 2022 = 1,282,000,000 EUR. Check consistency: Net Cash Flow Ops Before Fin/Tax: -5,140M. Net Fin Exp Disbursed: 1,003M. Tax: 1,282M. CFO = -5,140 - 1,003 - 1,282 = -7,425M. Matches "Cash Flows From Used In Operating Activities" (-7,425M). So Cash Tax Outflow = 1,282M. - **FFO Calculation 2022:** FFO = -4,986M - 1,730M - 1,282M FFO = -7,998,000,000 EUR. **Step 9: Estimate 2022 "Adjusted_Debt"** - **Reported Debt:** End of 2022 (2023-01-01 Balance Sheet): "Other Noncurrent Financial Liabilities" = 71,058M. "Other Current Financial Liabilities" = 71,844M. Total Financial Liabilities = 71,058 + 71,844 = 142,902M. *Observation:* Debt increased significantly. - **Eligible Cash:** "Cash And Cash Equivalents" = 10,948M. - **Adjusted Debt 2022:** Debt = 142,902M. Less Cash = 10,948M. Adjusted Debt = 131,954,000,000 EUR. **Step 10: Calculate 2022 "Adjusted_Debt / Adjusted_EBITDA"** Ratio = 131,954 / -4,986. The EBITDA is negative. The ratio is **negative** (or undefined/negative leverage). Mathematically: -26.46x. In credit analysis, a negative EBITDA makes the leverage ratio meaningless or extremely deteriorated. We treat this as a massive deterioration. **Step 11: Calculate 2022 "FFO / Adjusted_Debt"** Ratio = -7,998 / 131,954 = **-0.0606** (or -6.06%). --- **Step 12: Classify the credit trend** **Signal 1: Leverage (Adjusted Debt / Adjusted EBITDA)** 2021: 5.09x 2022: -26.46x (Negative) Change: The ratio moved from positive 5.09x to negative. This is a massive increase in leverage (deterioration). Even if we consider the magnitude, going from 5x to negative is a clear **Deteriorating** signal. Change > +0.2x. **Signal 2: Cash-flow coverage (FFO / Adjusted Debt)** 2021: 0.1557 (15.57%) 2022: -0.0606 (-6.06%) Change: -0.0606 - 0.1557 = -0.2163. The change is -0.2163. Threshold for Deteriorating is ≤ -0.03. -0.2163 is much less than -0.03. This is a clear **Deteriorating** signal. **Combination:** Both signals are Deteriorating. **Conclusion:** The credit trend is Deteriorating. Deteriorating