**Step 1: Identify the relevant industry for "IBERDROLA SA"** Iberdrola is a major global energy company with significant operations in regulated electricity distribution and transmission, as well as unregulated renewable generation and retail supply. The provided methodologies include "Regulated Utilities," "Unregulated Power And Gas," and others. Given Iberdrola's large base of regulated network assets (distribution and transmission) which typically provide the stable cash flow foundation for its credit profile, and the fact that S&P often assesses such integrated utilities under the Regulated Utilities methodology (or a blend where the regulated portion drives the baseline stability), we will apply the **Regulated Utilities** methodology. Specifically, we look for guidance on adjustments. The Regulated Utilities section notes that for integrated electric utilities, purchased power contracts might need adjustment, but primarily focuses on regulatory advantage. It does not prescribe specific complex EBITDA adjustments like the E&P sector. We will use the standard baseline formulas provided, noting that "EBITDA" is explicitly reported in the facts as "Beneficio Bruto De Explotacion Ebitda". **Step 2: Estimate the 2021 "Adjusted_EBITDA"** From the facts: * "Beneficio Bruto De Explotacion Ebitda" for 2021 (period 2021-01-01 - 2022-01-01): **12,006,000,000 EUR**. The Regulated Utilities methodology does not mandate specific add-backs for leases or pensions in the EBITDA calculation itself (leases are usually handled in Debt/FFO or already in EBITDA depending on IFRS 16, but S&P often adds back lease interest to FFO or treats lease liabilities as debt). The baseline formula is: `Adjusted_EBITDA = EBITDA + adjustment_leases + nonrecurring_losses - nonrecurring_gains ...` Looking at the data, there are no explicit "nonrecurring" items identified in the summary facts that require adjustment without further notes. We will assume the reported EBITDA is a reasonable proxy for Adjusted EBITDA for this estimation, as is common when detailed non-recurring breakdowns are not provided in the summary facts. IFRS 16 EBITDA usually includes lease depreciation and interest is below EBITDA. S&P typically adds back lease interest to FFO, not EBITDA, or treats the lease liability as debt. We will use the reported EBITDA. * **2021 Adjusted_EBITDA = 12,006 million EUR** **Step 3: Estimate the 2021 "FFO"** Formula: `FFO = Adjusted_EBITDA - cash_interest - cash_taxes` We need Cash Interest and Cash Taxes for 2021. * **Cash Taxes:** The facts provide "Income Taxes Paid Classified As Operating Activities" for 2021: **832,000,000 EUR**. * **Cash Interest:** The facts provide "Finance Costs" (accrual) of 2,268 million. However, FFO requires *cash* interest. The Cash Flow statement provides: * "Interest Paid Classified As Investing Activities": 145,000,000 EUR (This is likely capitalized interest or specific to investing). * "Intereses Pagados Excluidos Intereses Capitalizados De Deudas Con Entidades De Credito...": 741,000,000 EUR. * "Intereses Pagados Excluidos Intereses Capitalizados De Pasivos Financieros Por Arrendamiento": 49,000,000 EUR. * "Intereses Pagados De Obligaciones Perpetuas Subordinadas": 94,000,000 EUR. * Total Cash Interest Paid ≈ 741 + 49 + 94 + 145 (if not excluded already, but "Excluidos Intereses Capitalizados" suggests the 741 is the main operating interest paid). Let's sum the explicit interest outflows classified in financing/operating: * Interest on debt: 741 million * Interest on leases: 49 million * Interest on perpetuities: 94 million * Interest paid (investing): 145 million (Often capitalized interest is paid but classified here. If it's capitalized, it's not an expense in P&L but is a cash outflow. S&P FFO usually starts with EBITDA and subtracts cash interest. Capitalized interest is a cash outflow. We should include all cash interest paid). * Total Cash Interest ≈ 741 + 49 + 94 + 145 = **1,029 million EUR**. Let's verify against accrual. Finance Costs were 2,268 million. The difference is large. This might be due to non-cash items (amortization of discounts, derivatives) or capitalization. However, S&P FFO definition is `Adjusted EBITDA - Cash Interest - Cash Taxes`. Let's use the sum of cash interest payments found in the Cash Flow from Financing/Investing sections: * Interest paid on debt (financing): 741 million * Interest paid on leases (financing): 49 million * Interest paid on perpetuities (financing): 94 million * Interest paid (investing): 145 million * Total Cash Interest = 741 + 49 + 94 + 145 = **1,029 million EUR**. * **2021 FFO** = 12,006 - 1,029 - 832 = **10,145 million EUR**. **Step 4: Estimate the 2021 "Adjusted_Debt"** Formula: `Adjusted_Debt = reported_debt + leases + pension_deficit + guarantees + hybrid_debt_portion + other_debt_like_items - eligible_cash` We need the debt components for 2021 (Balance Sheet dates 2022-01-01 represent the end of 2021). * **Reported Debt:** * Noncurrent Financial Liabilities: 37,175 million * Current Financial Liabilities: 21,297 million * Total Reported Debt = 37,175 + 21,297 = **58,472 million EUR**. * **Leases:** * Noncurrent Lease Liabilities: 2,253 million * Current Lease Liabilities: 158 million * Total Leases = 2,253 + 158 = **2,411 million EUR**. * *Note:* Under IFRS 16, lease liabilities are often already included in "Financial Liabilities" depending on the company's presentation. Looking at the breakdown, "Noncurrent Financial Liabilities" includes "Noncurrent Lease Liabilities" as a sub-item? The facts list "Noncurrent Financial Liabilities" (37,175) and then list sub-items like "Deudas..." (31,179), "Instrumentos..." (525), "Noncurrent Derivative..." (1,673), "Noncurrent Lease Liabilities" (2,253), "Other..." (1,545). Sum of sub-items: 31,179 + 525 + 1,673 + 2,253 + 1,545 = 37,175. Yes, leases are **included** in the reported Financial Liabilities. Therefore, we should **not** add them again. We just use the Reported Debt figure which includes leases. * **Hybrid Debt:** * "Instrumentos De Capital Con Caracteristicas De Pasivo Financiero" (Equity instruments with characteristics of financial liability). These are classified as liabilities in the balance sheet provided (under Financial Liabilities). So they are already in Reported Debt. * However, S&P often treats "Perpetual Subordinated Bonds" or similar hybrids as 50% equity / 50% debt or fully debt depending on terms. The facts show "Emision De Obligaciones Perpetuas Subordinadas" in equity changes? No, in 2021 there was an issuance of 2,740 million in "Emision De Obligaciones Perpetuas Subordinadas" which appears in the Equity statement under Noncontrolling Interests or similar? Actually, looking at the Equity roll-forward, "Emision De Obligaciones Perpetuas Subordinadas" increased Noncontrolling Interests by 2,750 million? No, it says "Noncontrolling Interests Member" 2,750. Wait, "Emision De Obligaciones Perpetuas Subordinadas" is often treated as equity for accounting if it meets criteria, but debt for S&P. * Let's check the Balance Sheet classification. The item "Instrumentos De Capital Con Caracteristicas De Pasivo Financiero" is in Liabilities. The Perpetuals issued in 2021 (2,740m) seem to be classified in Equity (specifically affecting Noncontrolling Interests or a separate equity component, as seen in the Equity roll-forward: "Emision De Obligaciones Perpetuas Subordinadas" -> Noncontrolling Interests Member 2,750? Or perhaps "Otras Reservas"?). * Actually, usually Iberdrola's perpetuals are classified as equity in IFRS but treated as debt by S&P. * In the 2021 Equity roll-forward, we see `Emision De Obligaciones Perpetuas Subordinadas` adding 2,740 million to Equity (specifically attributed to Noncontrolling Interests Member 2,750? No, the line item `Emision De Obligaciones Perpetuas Subordinadas` has a value of 2,740 in the total column, and the breakdown shows it hitting `Noncontrolling Interests Member`? That seems odd for parent-issued perpetuities. Let's look closer. `Emision De Obligaciones Perpetuas Subordinadas` row: Total 2,740. `Noncontrolling Interests Member` 2,750. `Retained Earnings` -10. This suggests the perpetuals might be issued by subsidiaries with NCI? Or the classification is complex. * Regardless, if they are in Equity, S&P adds them to Debt. If they are in Liabilities, they are already in Debt. * In the 2022 Balance Sheet (end of 2021), we do not see a specific line for Perpetuals in Liabilities other than "Instrumentos De Capital Con Caracteristicas De Pasivo Financiero" (525m noncurrent + 100m current = 625m). The 2,740m issued in 2021 is likely part of the Equity block. * S&P Adjustment: Add Perpetuals to Debt. * Amount of Perpetuals: The equity roll-forward shows an issuance of 2,740 million in 2021. The balance of "Instrumentos De Capital..." in liabilities is only ~625m. The rest is likely in Equity. We should add the equity-classified perpetuals to Adjusted Debt. * Let's estimate the total Perpetuals outstanding. In 2021, issuance was 2,740. In 2022, issuance was 0. Redemption? "Pagos De Instrumentos De Capital Con Caracteristicas De Pasivo Financiero" was 110m in 2021. * It is difficult to pinpoint the exact equity-classified perpetual balance from the summary facts alone without a specific "Perpetual Bonds" line in Equity. However, a common adjustment for Iberdrola is to treat these as debt. Let's assume the "Instrumentos De Capital Con Caracteristicas De Pasivo Financiero" in liabilities are the ones treated as debt-like, and any in equity are added. * Given the ambiguity and the magnitude, let's look at the "Noncontrolling Interests" increase. It increased from 11,802 to 15,647. A large part is NCI in subsidiaries. * To be conservative and consistent with S&P treatment of hybrids: We will add the face value of hybrids not in debt. * Let's assume the "Instrumentos De Capital Con Caracteristicas De Pasivo Financiero" (625m) are already in debt. Are there others in equity? The line "Emision De Obligaciones Perpetuas Subordinadas" in the equity statement suggests there are perpetuals in equity. The amount issued in 2021 was 2,740m. If we assume these are still outstanding, we should add ~2,740m to debt. * Let's check 2022 issuance: 0. * So, Adjusted Debt 2021 = Reported Debt (58,472) + Equity-classified Perpetuals (~2,740). * Total Debt before cash = 61,212 million. * **Pension Deficit:** * "Noncurrent Provisions For Employee Benefits": 1,592 million. * S&P typically nets pension assets against liabilities. We don't have pension assets explicitly. We will add the provision as a debt-like item or assume it's neutral if funded. Without asset info, we might add it, but often provisions are not fully added to debt unless underfunded. Let's assume the provision is the net deficit or ignore if small relative to debt. 1.5bn is significant. Let's add it to be conservative, or check if "Provisions" are considered debt. S&P usually adds underfunded pension liabilities. Let's assume the provision represents the net liability. Add 1,592 million. * **Eligible Cash:** * "Cash And Cash Equivalents": 4,033 million. * S&P deducts unrestricted cash. * Eligible Cash = 4,033 million. * **2021 Adjusted_Debt** = 58,472 (Reported Debt) + 2,740 (Perpetuals in Equity) + 1,592 (Pension Prov) - 4,033 (Cash) = **58,771 million EUR**. *(Self-Correction: The "Instrumentos De Capital..." in liabilities might be the perpetuals. If the 2,740m issuance went to Equity, it's not in the 58,472. So adding it is correct.)* **Step 5: Calculate 2021 "Adjusted_Debt / Adjusted_EBITDA"** * Ratio = 58,771 / 12,006 = **4.89x** **Step 6: Calculate 2021 "FFO / Adjusted_Debt"** * Ratio = 10,145 / 58,771 = **17.26%** (or 0.1726) --- **Step 7: Estimate the 2022 "Adjusted_EBITDA"** From the facts: * "Beneficio Bruto De Explotacion Ebitda" for 2022 (period 2022-01-01 - 2023-01-01): **13,228,000,000 EUR**. * **2022 Adjusted_EBITDA = 13,228 million EUR**. **Step 8: Estimate the 2022 "FFO"** Formula: `FFO = Adjusted_EBITDA - cash_interest - cash_taxes` * **Cash Taxes:** "Income Taxes Paid Classified As Operating Activities" for 2022: **1,055,000,000 EUR**. * **Cash Interest:** * "Intereses Pagados Excluidos Intereses Capitalizados De Deudas...": 1,495 million. * "Intereses Pagados Excluidos Intereses Capitalizados De Pasivos Financieros Por Arrendamiento": 61 million. * "Intereses Pagados De Obligaciones Perpetuas Subordinadas": 169 million. * "Interest Paid Classified As Investing Activities": 189 million. * Total Cash Interest = 1,495 + 61 + 169 + 189 = **1,914 million EUR**. * **2022 FFO** = 13,228 - 1,914 - 1,055 = **10,259 million EUR**. **Step 9: Estimate the 2022 "Adjusted_Debt"** Balance Sheet dates 2023-01-01 represent the end of 2022. * **Reported Debt:** * Noncurrent Financial Liabilities: 44,216 million * Current Financial Liabilities: 25,079 million * Total Reported Debt = 44,216 + 25,079 = **69,295 million EUR**. * (Check inclusion of leases: Noncurrent Lease Liab 2,287 + Current Lease Liab 151 = 2,438. Sub-items of Noncurrent Fin Liab sum to 44,216. So leases are included.) * **Hybrid Debt (Perpetuals):** * Issuance in 2022 was 0. * "Instrumentos De Capital Con Caracteristicas De Pasivo Financiero" in Liabilities: 576 (Noncurrent) + 87 (Current) = 663 million. * Are there perpetuals in Equity? The 2021 issuance of 2,740m is likely still there. We assume the equity-classified perpetuals remain outstanding. Add **2,740 million**. * **Pension Deficit:** * "Noncurrent Provisions For Employee Benefits": 1,226 million. * Add **1,226 million**. * **Eligible Cash:** * "Cash And Cash Equivalents": 4,608 million. * Deduct **4,608 million**. * **2022 Adjusted_Debt** = 69,295 (Reported) + 2,740 (Perpetuals) + 1,226 (Pension) - 4,608 (Cash) = **68,653 million EUR**. **Step 10: Calculate 2022 "Adjusted_Debt / Adjusted_EBITDA"** * Ratio = 68,653 / 13,228 = **5.19x** **Step 11: Calculate 2022 "FFO / Adjusted_Debt"** * Ratio = 10,259 / 68,653 = **14.94%** (or 0.1494) --- **Step 12: Classify the credit trend** **Signal 1: Leverage (Adjusted_Debt / Adjusted_EBITDA)** * 2021: 4.89x * 2022: 5.19x * Change = 5.19 - 4.89 = **+0.30x** * Threshold: ≥ +0.2x is **Deteriorating**. **Signal 2: Cash-flow coverage (FFO / Adjusted_Debt)** * 2021: 17.26% (0.1726) * 2022: 14.94% (0.1494) * Change = 0.1494 - 0.1726 = **-0.0232** * Threshold: ≤ -0.03 is Deteriorating. Between -0.03 and +0.03 is Stable. * The change is -0.0232, which is within the range (-0.03, +0.03). Thus, **Stable**. **Combining Signals:** * Signal 1: Deteriorating * Signal 2: Stable * Rule: "If one is Stable and the other is Improving or Deteriorating, return the non-Stable category." * Therefore, the trend is **Deteriorating**. Deteriorating