To estimate the S&P adjusted leverage trend, we need to calculate the Net Debt / EBITDA ratio for the years ending 2021 (for the 2021-2022 period comparison base, though the prompt asks for the trend *for* 2022, usually implying the change from the previous year to the current year, i.e., 2021 vs 2022 ratios) and 2022. However, the prompt provides data for periods "2021-01-01 - 2022-01-01" (FY2021) and "2022-01-01 - 2023-01-01" (FY2022). It also provides balance sheet data at "2022-01-01" (End of FY2021) and "2023-01-01" (End of FY2022). Standard leverage analysis compares the ratio at the end of the current fiscal year to the end of the previous fiscal year. Let's define: * **Year 2021 Ratio**: Using FY2021 EBITDA and Net Debt at 2022-01-01 (End of FY2021). * **Year 2022 Ratio**: Using FY2022 EBITDA and Net Debt at 2023-01-01 (End of FY2022). **Step 1: Calculate EBITDA for FY2021 and FY2022** EBITDA is typically calculated as Profit Before Interest, Tax, Depreciation, and Amortization. From the data: * "Profit Loss Before Financial Income And Financial Expenses Income Tax Expense And Extraordinary Contribution To The Energy Sector CESE" is effectively EBIT (Earnings Before Interest and Taxes) adjusted for CESE. Let's call this EBIT_adj. * "Depreciation Amortisation And Impairment Loss Reversal Of Impairment Loss Recognised In Profit Or Loss" is D&A. **FY2021 (2021-01-01 - 2022-01-01):** * EBIT_adj = 1,930,785,000 EUR * D&A = 1,731,755,000 EUR * EBITDA_2021 = 1,930,785,000 + 1,731,755,000 = 3,662,540,000 EUR **FY2022 (2022-01-01 - 2023-01-01):** * EBIT_adj = 2,529,993,000 EUR * D&A = 1,979,007,000 EUR * EBITDA_2022 = 2,529,993,000 + 1,979,007,000 = 4,509,000,000 EUR **Step 2: Calculate Net Debt for End of FY2021 and End of FY2022** Net Debt = Total Financial Debt - Cash and Cash Equivalents. Financial Debt includes Current Borrowings, Non-current Borrowings, and often other financial liabilities. S&P definitions often include lease liabilities and potentially other interest-bearing instruments. We will use the explicit borrowing lines and adjust for cash. **At 2022-01-01 (End of FY2021):** * Long-term Borrowings: 15,299,588,000 EUR * Current Borrowings And Current Portion Of Noncurrent Borrowings: 1,518,348,000 EUR * Other Noncurrent Financial Liabilities: 3,039,975,000 EUR (Often includes derivatives/leases, treated as debt in leverage) * Other Current Financial Liabilities: 2,781,101,000 EUR * Institutional Partnerships In North America: 2,259,741,000 EUR (These are often treated as debt-like instruments or minority interests with debt characteristics in utility leverage calcs. S&P often treats "Institutional Partnerships" in EDP's case as debt due to mandatory distributions/repurchase obligations. Let's include them to be conservative/accurate to S&P methodology for EDP). * Cash And Cash Equivalents: 3,222,409,000 EUR Total Gross Debt_2021 = 15,299,588,000 + 1,518,348,000 + 3,039,975,000 + 2,781,101,000 + 2,259,741,000 = 24,898,753,000 EUR Net Debt_2021 = 24,898,753,000 - 3,222,409,000 = 21,676,344,000 EUR *Note: Even if we exclude "Other Financial Liabilities" and "Institutional Partnerships", the trend direction is usually driven by the core borrowings vs EBITDA growth. Let's calculate a standard Net Debt first.* Standard Net Debt (Borrowings only) = (15,299,588,000 + 1,518,348,000) - 3,222,409,000 = 13,595,527,000 EUR. However, S&P Adjusted Debt for EDP typically includes the Institutional Partnerships and Lease Liabilities (embedded in Other Financial Liabilities or Right-of-Use assets, but here we have liability lines). Let's stick to the broader definition often used for utilities: Total Interest Bearing Debt. Let's use the sum of: Long-term Borrowings + Current Borrowings + Other Noncurrent Financial Liabilities + Other Current Financial Liabilities + Institutional Partnerships. Net Debt_2021 = 21,676,344,000 EUR. **At 2023-01-01 (End of FY2022):** * Long-term Borrowings: 15,782,604,000 EUR * Current Borrowings And Current Portion Of Noncurrent Borrowings: 4,239,869,000 EUR * Other Noncurrent Financial Liabilities: 5,159,496,000 EUR * Other Current Financial Liabilities: 3,600,893,000 EUR * Institutional Partnerships In North America: 2,212,162,000 EUR * Cash And Cash Equivalents: 4,900,205,000 EUR Total Gross Debt_2022 = 15,782,604,000 + 4,239,869,000 + 5,159,496,000 + 3,600,893,000 + 2,212,162,000 = 30,995,024,000 EUR Net Debt_2022 = 30,995,024,000 - 4,900,205,000 = 26,094,819,000 EUR **Step 3: Calculate Leverage Ratios** **Leverage 2021 (based on FY2021 data):** Ratio_2021 = Net Debt_2021 / EBITDA_2021 Ratio_2021 = 21,676,344,000 / 3,662,540,000 ≈ 5.92x **Leverage 2022 (based on FY2022 data):** Ratio_2022 = Net Debt_2022 / EBITDA_2022 Ratio_2022 = 26,094,819,000 / 4,509,000,000 ≈ 5.79x **Step 4: Determine Trend** Gap = Ratio_2022 - Ratio_2021 Gap = 5.79 - 5.92 = -0.13x The definition states: * Stable: gap is among ± 0.3x (i.e., between -0.3x and +0.3x). * Improving: gap is lower than -0.3x? Wait, the prompt says "if the gap ... is lower than 0.3x is improving". This phrasing is slightly ambiguous. Usually, "Improving" leverage means the ratio decreases significantly. "Deteriorating" means it increases significantly. * Prompt: "Consequently if the gap of the ratio Net Debt / EBITDA year on year is lower than 0.3x is improving. If higher is Deteriorating." * This likely contains a typo or simplification. Standard interpretation: * If the ratio *decreases* by more than 0.3x (Gap < -0.3), it's Improving. * If the ratio *increases* by more than 0.3x (Gap > 0.3), it's Deteriorating. * If the change is within [-0.3, 0.3], it's Stable. * Let's re-read carefully: "if the gap ... is lower than 0.3x is improving". This literally means any gap < 0.3 is improving. That would include -0.1, 0, 0.2. But then what is Stable? "The definition of Stable is : the gap ... is among ± 0.3x". This implies Stable is [-0.3, 0.3]. * There is a contradiction in the prompt's text: "Stable is ... among ± 0.3x" vs "if gap ... is lower than 0.3x is improving". * Usually, these prompts imply: * Deteriorating: Gap > 0.3x * Improving: Gap < -0.3x * Stable: -0.3x <= Gap <= 0.3x * Let's assume the standard financial logic where "Improving" means a significant reduction in leverage. * My calculated Gap is -0.13x. * -0.13x is within the range [-0.3x, 0.3x]. * Therefore, the trend is **Stable**. Let's double check with a narrower debt definition just in case "Other Financial Liabilities" are excluded. Narrow Debt 2021 = (15,299,588 + 1,518,348) - 3,222,409 = 13,595,527 Narrow Leverage 2021 = 13,595,527 / 3,662,540 = 3.71x Narrow Debt 2022 = (15,782,604 + 4,239,869) - 4,900,205 = 15,122,268 Narrow Leverage 2022 = 15,122,268 / 4,509,000 = 3.35x Gap = 3.35 - 3.71 = -0.36x. If the gap is -0.36x, this is "lower than -0.3x". Under the standard interpretation (Improving if < -0.3), this would be Improving. However, S&P Global Ratings' methodology for EDP specifically includes "Institutional Partnerships" as debt-equivalent because they function like perpetual debt with mandatory distributions. They also typically include lease liabilities. The "Other Financial Liabilities" line items in EDP's balance sheet largely consist of derivative financial instruments and lease liabilities. S&P usually adds back lease liabilities to debt. Let's look at the magnitude of "Other Financial Liabilities". 2021: 3,039 + 2,781 = 5,820 M. 2022: 5,159 + 3,600 = 8,759 M. This is a significant increase. Institutional Partnerships: ~2,200 M. If we use the S&P-adjusted debt which is closer to the "Gross Debt" calculated earlier (including partnerships and financial liabilities), the leverage is around 5.8x - 5.9x. The change was -0.13x. This falls squarely in the "Stable" bucket (-0.3 to +0.3). If we used the narrow definition, it would be "Improving". Which definition does "S&P's adjusted leverage" use? S&P defines Adjusted Debt as reported debt plus capital leases, underfunded pension liabilities, and other adjustments. For EDP, the Institutional Partnerships are a key adjustment. The "Other Financial Liabilities" often contain derivatives which might be netted or grossed depending on hedge accounting, but lease liabilities are definitely added. Given the explicit line item "Institutional Partnerships In North America" on the liability side, and its known treatment as debt-like by rating agencies for EDP, including it is correct. The "Other Financial Liabilities" likely contains lease liabilities (Right of Use assets are ~1.3B, so liabilities are similar). So the broader debt figure is the more accurate proxy for S&P Adjusted Debt. Calculation with Broad Debt: 2021 Leverage: ~5.92x 2022 Leverage: ~5.79x Difference: -0.13x Since -0.13x is between -0.3x and 0.3x, the trend is Stable. Stable