To estimate S&P's adjusted leverage trend for Ørsted A/S in 2022, we need to calculate the Net Debt / EBITDA ratio for the years 2021 and 2022 and compare the change. **1. Calculate EBITDA for 2021 and 2022** The report provides "Profit Loss From Operating Activities Before Interest Taxes Depreciation And Amortisation Expense" (EBITDA). * **2022 EBITDA:** 32,057,000,000 DKK * **2021 EBITDA:** 24,296,000,000 DKK *Note: S&P often makes adjustments to EBITDA (e.g., adding back share-based compensation, restructuring costs, or normalizing for volatile items like hedge accounting). However, without specific adjustment details, we use the reported EBITDA as a proxy. The large increase in EBITDA is driven by higher revenue and other income.* **2. Calculate Net Debt for 2021 and 2022** Net Debt is typically calculated as Total Interest-Bearing Debt minus Cash and Cash Equivalents. We need to identify interest-bearing liabilities and cash. * **Interest-Bearing Debt Components:** * Long-term Borrowings * Short-term Borrowings * Lease Liabilities (Current and Non-current) - *S&P typically includes lease liabilities in debt.* * Hybrid Capital - *S&P often treats hybrid capital as equity or mezzanine, but sometimes includes a portion in debt depending on the rating methodology. For a standard leverage calculation, we might exclude it or treat it separately. However, standard Net Debt usually focuses on bank borrowings and bonds. Let's look at the borrowings first.* * Derivative Financial Liabilities - *These are usually excluded from Net Debt unless they represent funded debt, which they typically don't (they are mark-to-market values). We will exclude them.* * **Cash and Cash Equivalents:** * The report lists "Cash" and "Cash And Cash Equivalents". We will use "Cash And Cash Equivalents" as it is the standard line item for liquidity. * 2022 Cash & Cash Equivalents: 16,175,000,000 DKK (End of 2022, which is 2023-01-01 in the data labels, but represents the 2022 fiscal year end). * 2021 Cash & Cash Equivalents: 8,614,000,000 DKK (End of 2021, which is 2022-01-01 in the data labels). * **Debt Components (End of Year):** **For 2022 (Data labeled 2023-01-01):** * Long-term Borrowings: 60,451,000,000 DKK * Short-term Borrowings: 2,830,000,000 DKK * Non-current Lease Liabilities: 7,697,000,000 DKK * Current Lease Liabilities: 569,000,000 DKK * *Total Gross Debt (2022)* = 60,451 + 2,830 + 7,697 + 0.569 = 71,547,000,000 DKK * *Net Debt (2022)* = Total Gross Debt - Cash & Cash Equivalents * *Net Debt (2022)* = 71,547 - 16,175 = 55,372,000,000 DKK **For 2021 (Data labeled 2022-01-01):** * Long-term Borrowings: 31,502,000,000 DKK * Short-term Borrowings: 19,493,000,000 DKK * Non-current Lease Liabilities: 6,812,000,000 DKK * Current Lease Liabilities: 720,000,000 DKK * *Total Gross Debt (2021)* = 31,502 + 19,493 + 6,812 + 0.720 = 58,527,000,000 DKK * *Net Debt (2021)* = Total Gross Debt - Cash & Cash Equivalents * *Net Debt (2021)* = 58,527 - 8,614 = 49,913,000,000 DKK **3. Calculate Leverage Ratios (Net Debt / EBITDA)** * **2021 Leverage:** * Net Debt: 49,913 million DKK * EBITDA: 24,296 million DKK * Ratio: 49,913 / 24,296 ≈ **2.05x** * **2022 Leverage:** * Net Debt: 55,372 million DKK * EBITDA: 32,057 million DKK * Ratio: 55,372 / 32,057 ≈ **1.73x** **4. Determine the Trend** * **Change in Ratio:** 1.73x (2022) - 2.05x (2021) = **-0.32x** The leverage ratio decreased by approximately 0.32x. **5. Apply the Definition** * **Improving:** Gap < -0.3x (Lower leverage is better/improving). * **Stable:** Gap between -0.3x and +0.3x. * **Deteriorating:** Gap > +0.3x. The calculated gap is -0.32x. The prompt states: "if the gap of the ratio Net Debt / EBITDA year on year is lower than 0.3x is improving." Usually, "lower than 0.3x" in the context of a negative change (improvement) implies a reduction greater than 0.3x (i.e., more negative than -0.3x). Or, strictly speaking, the magnitude of the improvement is 0.32x. Let's re-read carefully: "Consequently if the gap of the ratio Net Debt / EBITDA year on year is lower than 0.3x is improving." This phrasing is slightly ambiguous. Does it mean the absolute difference? Or the algebraic value? Standard financial interpretation: - Leverage went from 2.05x to 1.73x. This is an improvement. - The magnitude of change is 0.32x. - The definition says: "Stable is ... gap ... is among ± 0.3x". This implies the range [-0.3, +0.3]. - "If the gap ... is lower than 0.3x is improving." This likely refers to the algebraic value being less than -0.3 (i.e., a significant drop) OR it refers to the magnitude of improvement being significant. - However, usually, "Improving" means the ratio went down significantly. "Deteriorating" means it went up significantly. - If the gap is -0.32x, it is outside the stable range of [-0.3, 0.3]. - Since the leverage decreased, the credit profile improved. - Is -0.32 considered "lower than 0.3x"? Algebraically, yes (-0.32 < 0.3). But that would make almost everything "improving" or "stable" depending on the upper bound. - Let's look at the "Stable" definition again: "gap ... is among ± 0.3x". This defines the stable band as [-0.3, +0.3]. - The change is -0.32. This is *outside* the stable band. - Since the change is negative (leverage decreased), it is an **Improving** trend. Let's double check the calculations. 2021 Net Debt: LT Borrowings: 31,502 ST Borrowings: 19,493 Leases: 6,812 + 720 = 7,532 Total Debt: 58,527 Cash: 8,614 Net Debt: 49,913 EBITDA: 24,296 Ratio: 2.054 2022 Net Debt: LT Borrowings: 60,451 ST Borrowings: 2,830 Leases: 7,697 + 569 = 8,266 Total Debt: 71,547 Cash: 16,175 Net Debt: 55,372 EBITDA: 32,057 Ratio: 1.727 Difference: 1.727 - 2.054 = -0.327 The leverage ratio improved by ~0.33x. The threshold for stability is ±0.3x. Since the improvement (0.33x) exceeds the stability threshold (0.3x), and the direction is positive (lower leverage), the trend is Improving. Improving