## 1. Relevant industry

TERNA S.p.A. is Italy’s national electricity transmission grid operator. This fits the **Regulated Utilities** methodology, specifically an electricity transmission/network utility. Its activities are capital-intensive, monopoly-like, and subject to comprehensive regulation rather than normal competitive market forces.

For the quantitative trend estimate, I apply the regulated utility financial-risk approach using:
- reconstructed EBITDA,
- FFO approximated from EBITDA less cash interest and cash taxes,
- adjusted debt from reported borrowings and financial liabilities less eligible cash.

No sufficient data is provided for leases, guarantees, pension deficits, purchased power obligations, securitized debt, or detailed S&P cash haircuting. Therefore, I assume these adjustments are zero or unavailable, except for explicit hybrid treatment discussed below.

A key 2022 item is the **€989 million perpetual hybrid bond** recorded in equity. S&P often gives partial equity credit to qualifying hybrids. The prompt’s baseline formula includes “hybrid debt portion,” but does not provide the S&P equity-credit percentage. For a practical estimate, I treat the accounting-equity hybrid as not included in reported debt, and do not add a debt portion. This is conservative neither fully nor mechanically; however, even adding 50% debt credit would not change the final trend conclusion materially.

---

## 2. Estimate 2021 Adjusted EBITDA

Reported operating profit / EBIT 2021:

\[
EBIT_{2021} = €1{,}200.4m
\]

Depreciation, amortisation and impairment 2021:

\[
D\&A_{2021} = €654.4m
\]

Reconstructed EBITDA:

\[
EBITDA_{2021} = EBIT + D\&A
\]

\[
= 1{,}200.4 + 654.4 = €1{,}854.8m
\]

No lease, pension, JV proportional EBITDA, or nonrecurring adjustments are provided.

\[
Adjusted\ EBITDA_{2021} \approx €1{,}854.8m
\]

---

## 3. Estimate 2021 FFO

Baseline:

\[
FFO = Adjusted\ EBITDA - cash\ interest - cash\ taxes
\]

Cash interest paid 2021:

\[
€214.6m
\]

Cash taxes paid 2021:

\[
€317.9m
\]

\[
FFO_{2021} = 1{,}854.8 - 214.6 - 317.9
\]

\[
FFO_{2021} = €1{,}322.3m
\]

---

## 4. Estimate 2021 Adjusted Debt

Use balance sheet at 2022-01-01 as fiscal year-end 2021.

Reported debt-like borrowings and financial liabilities:

- Long-term borrowings: €8,835.0m
- Short-term borrowings: €1,947.0m
- Current portion of long-term borrowings: €1,640.0m
- Noncurrent financial liabilities: €83.7m
- Current financial liabilities: €45.8m

\[
Reported\ debt_{2021} = 8{,}835.0 + 1{,}947.0 + 1{,}640.0 + 83.7 + 45.8
\]

\[
= €12{,}551.5m
\]

Cash and cash equivalents at 2022-01-01:

\[
Cash_{2021} = €1{,}566.8m
\]

Assuming cash is eligible for netting:

\[
Adjusted\ Debt_{2021} = 12{,}551.5 - 1{,}566.8
\]

\[
Adjusted\ Debt_{2021} = €10{,}984.7m
\]

---

## 5. 2021 Adjusted Debt / Adjusted EBITDA

\[
Debt/EBITDA_{2021} = \frac{10{,}984.7}{1{,}854.8}
\]

\[
= 5.92x
\]

---

## 6. 2021 FFO / Adjusted Debt

\[
FFO/Debt_{2021} = \frac{1{,}322.3}{10{,}984.7}
\]

\[
= 0.1204
\]

So:

\[
FFO/Debt_{2021} \approx 12.0\%
\]

---

## 7. Estimate 2022 Adjusted EBITDA

Reported operating profit / EBIT 2022:

\[
EBIT_{2022} = €1{,}333.5m
\]

Depreciation, amortisation and impairment 2022:

\[
D\&A_{2022} = €725.7m
\]

Reconstructed EBITDA:

\[
EBITDA_{2022} = 1{,}333.5 + 725.7
\]

\[
EBITDA_{2022} = €2{,}059.2m
\]

No sufficient data is provided for additional S&P adjustments.

\[
Adjusted\ EBITDA_{2022} \approx €2{,}059.2m
\]

---

## 8. Estimate 2022 FFO

Cash interest paid 2022:

\[
€154.8m
\]

Cash taxes paid 2022:

\[
€380.1m
\]

\[
FFO_{2022} = 2{,}059.2 - 154.8 - 380.1
\]

\[
FFO_{2022} = €1{,}524.3m
\]

---

## 9. Estimate 2022 Adjusted Debt

Use balance sheet at 2023-01-01 as fiscal year-end 2022.

Reported debt-like borrowings and financial liabilities:

- Long-term borrowings: €8,416.7m
- Short-term borrowings: €444.1m
- Current portion of long-term borrowings: €1,909.3m
- Noncurrent financial liabilities: €247.2m
- Current financial liabilities: €44.9m

\[
Reported\ debt_{2022} = 8{,}416.7 + 444.1 + 1{,}909.3 + 247.2 + 44.9
\]

\[
= €11{,}062.2m
\]

Cash and cash equivalents at 2023-01-01:

\[
Cash_{2022} = €2{,}155.1m
\]

\[
Adjusted\ Debt_{2022} = 11{,}062.2 - 2{,}155.1
\]

\[
Adjusted\ Debt_{2022} = €8{,}907.1m
\]

Note: If a 50% debt portion of the €989.0m hybrid were added, adjusted debt would rise by about €494.5m to €9,401.6m, but the year-on-year trend would still improve.

---

## 10. 2022 Adjusted Debt / Adjusted EBITDA

\[
Debt/EBITDA_{2022} = \frac{8{,}907.1}{2{,}059.2}
\]

\[
= 4.33x
\]

---

## 11. 2022 FFO / Adjusted Debt

\[
FFO/Debt_{2022} = \frac{1{,}524.3}{8{,}907.1}
\]

\[
= 0.1711
\]

So:

\[
FFO/Debt_{2022} \approx 17.1\%
\]

---

## 12. Year-on-year credit trend classification

### Signal 1: Leverage

\[
Debt/EBITDA\ change = 4.33x - 5.92x
\]

\[
= -1.59x
\]

Threshold:
- ≤ -0.2x = Improving

Since leverage decreased by about **1.59x**, Signal 1 is:

\[
\textbf{Improving}
\]

### Signal 2: Cash-flow coverage

\[
FFO/Debt\ change = 0.1711 - 0.1204
\]

\[
= +0.0507
\]

This is an improvement of about **5.1 percentage points**.

Threshold:
- ≥ +0.03 = Improving

Therefore Signal 2 is:

\[
\textbf{Improving}
\]

### Combined result

Both leverage and FFO/debt improved materially:
- Adjusted Debt / EBITDA improved from about **5.9x to 4.3x**
- FFO / Adjusted Debt improved from about **12.0% to 17.1%**

The improvement was driven by higher EBITDA and FFO, lower net adjusted debt, higher cash balances, and lower short-term borrowings. Despite higher capex and dividends, operating cash flow was much stronger in 2022.

Therefore, the estimated S&P credit trend from 2021 to 2022 is:

<answer>Improving</answer>