# Workflow Execution for ØRSTED A/S Credit Trend Analysis (2021-2022) ## Step 1: Identify the Relevant Industry ØRSTED A/S is a Danish renewable energy and utilities company operating across multiple jurisdictions (UK, Germany, Denmark, Poland, Netherlands, US, Taiwan). The company operates in both regulated and unregulated power generation segments, with significant renewable generation assets. Based on the company's operations and the provided methodologies, ØRSTED is best classified as an **Unregulated Power and Gas** company with some regulated utility exposure. However, given the mixed nature and the large capital-intensive infrastructure investments, elements of the **Regulated Utilities** methodology may also apply, particularly around how we view cash flow stability from long-term contracts. For this analysis, I will primarily apply the **Unregulated Power and Gas** methodology, as the majority of the company's growth strategy revolves around renewable generation assets sold under long-term PPAs and similar arrangements, rather than pure regulated distribution. --- ## Step 2: Estimate 2021 Adjusted_EBITDA **Baseline from reported data (2021):** - Profit Loss from Operating Activities Before Interest Taxes Depreciation And Amortisation Expense (EBITDA proxy): 24,296 million DKK - Depreciation Amortisation And Impairment Loss: 8,101 million DKK - Reported Operating Profit (EBIT): 16,195 million DKK **Reconstruction of EBITDA:** EBITDA = Operating Profit + D&A EBITDA = 16,195 + 8,101 = **24,296 million DKK** (matches reported figure) **Adjustments for S&P methodology:** Per the financial statements: - Gains/Losses on Disposals of Investments: -742 million DKK (loss, adds back) - Other Expense By Nature: 386 million DKK (appears to be operating nature) - Share of Profit/Loss of Associates (Core): -17 million DKK For unregulated power and gas, we normalize for significant one-time items: - Disposal losses: +742 million DKK (nonrecurring) - No material pension adjustments disclosed - No substantial lease adjustments required (lease obligations are separately disclosed) **Adjusted EBITDA (2021):** Adjusted_EBITDA = 24,296 + 742 = **25,038 million DKK** --- ## Step 3: Estimate 2021 FFO **Formula:** FFO = Adjusted_EBITDA - cash_interest_paid - cash_taxes_paid **Components:** - Adjusted_EBITDA: 25,038 million DKK - Interest Paid (Classified as Operating Activities): 3,985 million DKK - Income Taxes Paid (Classified as Operating Activities): 1,380 million DKK **FFO (2021):** FFO = 25,038 - 3,985 - 1,380 = **19,673 million DKK** --- ## Step 4: Estimate 2021 Adjusted_Debt **Components:** - Long-term Borrowings (2021-01-01): 31,502 million DKK - Short-term Borrowings (2021-01-01): 19,493 million DKK - Total Reported Debt (Dec 31, 2020): 31,502 + 19,493 = 50,995 million DKK - Lease Liabilities (Noncurrent, 2021-01-01): 6,812 million DKK - Lease Liabilities (Current, 2021-01-01): 720 million DKK - Total Leases: 7,532 million DKK - Hybrid Capital (2021-01-01): 13,232 million DKK (S&P typically includes 50% of hybrid as debt) **Debt-like items treatment:** Per S&P methodology for unregulated power: - Hybrid Capital: Include 50% = 13,232 × 0.50 = 6,616 million DKK **Cash and eligible offsets:** - Cash (2021-01-01): 5,210 million DKK **Adjusted Debt (2021-01-01, as of 2021 year-end):** Adjusted_Debt = 50,995 + 7,532 + 6,616 - 5,210 = **59,933 million DKK** *Note: Using 2021-01-01 balance sheet data as proxy for 2021 year-end since we don't have 2021 closing balances separately labeled.* --- ## Step 5: Calculate 2021 Adjusted_Debt / Adjusted_EBITDA **Ratio:** Adjusted_Debt / Adjusted_EBITDA = 59,933 / 25,038 = **2.39x** --- ## Step 6: Calculate 2021 FFO / Adjusted_Debt **Ratio:** FFO / Adjusted_Debt = 19,673 / 59,933 = **0.328** or **32.8%** --- ## Step 7: Estimate 2022 Adjusted_EBITDA **Baseline from reported data (2022):** - Profit Loss from Operating Activities Before Interest Taxes Depreciation And Amortisation Expense: 32,057 million DKK - Depreciation Amortisation And Impairment Loss: 12,283 million DKK **Reconstruction of EBITDA:** EBITDA = 32,057 million DKK (as reported) **Adjustments for S&P methodology:** - Gains/Losses on Disposals of Investments: +331 million DKK (gain, subtract) - Other Expense By Nature: 4,963 million DKK (significant, appears to be operating but with some one-time components) - Share of Profit/Loss of Associates (Core): +114 million DKK (gain, subtract) Conservative approach for unregulated power companies: Normalize for significant derivative and hedging impacts: - Other Expense includes significant hedge losses. Per the detailed statement, we see: - Gains/Losses on Cash Flow Hedges Before Tax: -23,521 million DKK (reported in other comprehensive income, not P&L) - These represent fair value movements on derivative financial instruments Per S&P's treatment for unregulated power, we should consider whether the "Other Expense" is operating or financial in nature. Given the scale and the context of commodity/interest rate hedging: **Conservative normalization:** Exclude approximately 70% of Other Expense as related to mark-to-market derivative movements (nonrecurring): - Normalization adjustment: 4,963 × 0.50 = ~2,481 million DKK (conservative) **Adjusted EBITDA (2022):** Adjusted_EBITDA = 32,057 + 331 + 2,481 = **34,869 million DKK** Alternatively, if we take a more normalized view (excluding half of other expenses): Adjusted_EBITDA = 32,057 + 2,481 = **34,538 million DKK** Using the more conservative: **34,869 million DKK** --- ## Step 8: Estimate 2022 FFO **Formula:** FFO = Adjusted_EBITDA - cash_interest_paid - cash_taxes_paid **Components:** - Adjusted_EBITDA: 34,869 million DKK - Interest Paid (Classified as Operating Activities): 8,548 million DKK - Income Taxes Paid (Classified as Operating Activities): 1,263 million DKK **FFO (2022):** FFO = 34,869 - 8,548 - 1,263 = **25,058 million DKK** --- ## Step 9: Estimate 2022 Adjusted_Debt **Components (as of 2022-12-31):** - Long-term Borrowings (2023-01-01, year-end 2022): 60,451 million DKK - Short-term Borrowings (2023-01-01, year-end 2022): 2,830 million DKK - Total Reported Debt: 63,281 million DKK - Lease Liabilities (Noncurrent): 7,697 million DKK - Lease Liabilities (Current): 569 million DKK - Total Leases: 8,266 million DKK - Hybrid Capital (2023-01-01): 19,793 million DKK - Hybrid Capital treatment (50%): 19,793 × 0.50 = 9,897 million DKK **Cash and eligible offsets:** - Cash (2023-01-01): 16,178 million DKK **Adjusted Debt (2022, year-end):** Adjusted_Debt = 63,281 + 8,266 + 9,897 - 16,178 = **65,266 million DKK** --- ## Step 10: Calculate 2022 Adjusted_Debt / Adjusted_EBITDA **Ratio:** Adjusted_Debt / Adjusted_EBITDA = 65,266 / 34,869 = **1.87x** --- ## Step 11: Calculate 2022 FFO / Adjusted_Debt **Ratio:** FFO / Adjusted_Debt = 25,058 / 65,266 = **0.384** or **38.4%** --- ## Step 12: Classify the Credit Trend **Summary of Key Metrics:** | Metric | 2021 | 2022 | Change | |--------|------|------|--------| | Adjusted_EBITDA (DKK m) | 25,038 | 34,869 | +39.3% | | FFO (DKK m) | 19,673 | 25,058 | +27.4% | | Adjusted_Debt (DKK m) | 59,933 | 65,266 | +8.9% | | Debt/EBITDA (x) | 2.39x | 1.87x | -0.52x | | FFO/Debt | 0.328 | 0.384 | +0.056 | **Signal 1: Leverage Change** - 2021: 2.39x - 2022: 1.87x - Change: 1.87 - 2.39 = **-0.52x** **Assessment:** -0.52x ≤ -0.2x → **Improving** **Signal 2: Cash-flow Coverage Change** - 2021: 0.328 - 2022: 0.384 - Change: 0.384 - 0.328 = **+0.056** (5.6 percentage points) **Assessment:** +0.056 ≥ +0.03 → **Improving** **Conclusion:** Both signals agree decisively: **IMPROVING** - **Leverage improved significantly**, declining 0.52x (more than double the 0.2x threshold), reflecting ØRSTED's successful deleveraging despite absolute debt growth being modest relative to EBITDA growth. - **Cash-flow coverage improved notably**, with FFO/Debt increasing by 5.6 percentage points, well above the 3 percentage point threshold, indicating stronger ability to service debt. The company achieved these improvements through: 1. Strong EBITDA growth of 39.3%, driven by higher revenues (70.4% increase) from renewable energy sales and favorable market conditions 2. Disciplined debt management, with absolute debt growing only 8.9% despite significant capex investments (evidenced by construction in progress and PP&E growth) 3. Enhanced operational cash generation despite elevated interest costs (up 114% year-over-year due to higher debt levels and interest rate environment) Improving