I'll execute this workflow step-by-step to assess Terna's credit trend from 2021 to 2022.

## Step 1: Identify the Relevant Industry

TERNA - Rete Elettrica Nazionale is Italy's national electricity transmission company. It operates as a regulated utility providing transmission and dispatching of electricity. Based on the company description and operations, **TERNA falls under the "Regulated Utilities" industry methodology**, specifically as an electricity transmission utility.

Key characteristics:
- National infrastructure company
- Regulated by Italian regulator
- Transmission and distribution network operator
- Essential service provider

## Step 2: Estimate 2021 Adjusted_EBITDA

**Data for 2021 (01-01-2021 to 01-01-2022):**
- Revenue: €2,534.5 million
- Operating Income (Profit from Operating Activities): €1,200.4 million
- Depreciation & Amortization: €654.4 million

**Reconstruction of EBITDA:**
EBITDA (2021) = Operating Income + D&A
EBITDA (2021) = €1,200.4M + €654.4M = €1,854.8M

**Adjustments for Regulated Utility:**
For regulated utilities, we review for:
- Non-recurring items: None material identified in the data
- Pension adjustments: Employee benefits expense gross = €401.1M, with capitalized portion of €105.8M
- The company is primarily regulated; minimal non-recurring adjustments needed

**Adjusted_EBITDA (2021) = €1,854.8 million**

(For regulated utilities with cost-of-service recovery, normalized EBITDA is generally appropriate without major adjustments to operating cash flow assumptions)

## Step 3: Estimate 2021 FFO

**Data needed:**
- Adjusted_EBITDA (2021): €1,854.8M
- Cash Interest Paid (2021): €214.6M (from statement)
- Cash Taxes Paid (2021): €317.9M (from statement)

**FFO (2021) = Adjusted_EBITDA - Cash_Interest - Cash_Taxes**
FFO (2021) = €1,854.8M - €214.6M - €317.9M = **€1,322.3 million**

## Step 4: Estimate 2021 Adjusted_Debt

**Data for 2021 (as of 01-01-2022):**
- Long-term Borrowings: €8,835.0M
- Short-term Borrowings: €1,947.0M
- Current Portion of Long-term Borrowings: €1,640.0M
- Cash and Cash Equivalents: €1,566.8M
- Noncurrent Financial Liabilities: €83.7M
- Current Financial Liabilities: €45.8M

**Calculation:**
Total Debt = LT Borrowings + ST Borrowings + Current Portion of LT Borrowings + Other Financial Liabilities
Total Debt = €8,835.0M + €1,947.0M + €1,640.0M + €83.7M + €45.8M = €12,551.5M

**Lease Adjustments:**
For regulated utilities, significant operational leases should be capitalized. However, specific lease data is not fully disclosed. For transmission network utilities with owned assets, lease burden is typically moderate. Reasonable estimate: ~5-10% of debt for normalized lease obligations = ~€0.6-1.2B. Using conservative mid-point: €0.8M

**Hybrid Debt:**
No hybrid bonds mentioned for 2021 period.

**Eligible Cash:**
Cash and equivalents: €1,566.8M

**Adjusted_Debt (2021) = €12,551.5M + €0.8M - €1,566.8M = €10,985.5 million**

(Rounding: **€10,986M**)

## Step 5: Calculate 2021 Adjusted_Debt / Adjusted_EBITDA

**Ratio (2021) = €10,986M / €1,854.8M = 5.92x**

## Step 6: Calculate 2021 FFO / Adjusted_Debt

**Ratio (2021) = €1,322.3M / €10,986M = 0.1204 or 12.04%**

---

## Step 7: Estimate 2022 Adjusted_EBITDA

**Data for 2022 (01-01-2022 to 01-01-2023):**
- Revenue: €2,898.1M
- Operating Income (Profit from Operating Activities): €1,333.5M
- Depreciation & Amortization: €725.7M

**Reconstruction of EBITDA:**
EBITDA (2022) = €1,333.5M + €725.7M = **€2,059.2 million**

**Adjustments:**
- No material non-recurring items identified
- Operating costs normalized for regulated utility
- Finance income/cost separated from operations

**Adjusted_EBITDA (2022) = €2,059.2 million**

## Step 8: Estimate 2022 FFO

**Data needed:**
- Adjusted_EBITDA (2022): €2,059.2M
- Cash Interest Paid (2022): €154.8M
- Cash Taxes Paid (2022): €380.1M

**FFO (2022) = €2,059.2M - €154.8M - €380.1M = €1,524.3 million**

## Step 9: Estimate 2022 Adjusted_Debt

**Data for 2022 (as of 01-01-2023):**
- 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
- Cash and Cash Equivalents: €2,155.1M

**Calculation:**
Total Debt = €8,416.7M + €444.1M + €1,909.3M + €247.2M + €44.9M = €11,062.2M

**Hybrid Debt Portion:**
From the equity statement, in 2022, €989M of "Capital Instruments Bonds Hybrid Perpetual" was issued. Given the nature of hybrid bonds and their treatment in S&P methodology, a portion should be included in adjusted debt. However, these are also equity-classified. For regulated utilities, hybrid bonds are typically treated as 50% debt equivalent for leverage calculation purposes: €989M × 0.5 = €494.5M

**Lease Adjustments:**
Similar to 2021, estimated at €0.8M (small relative to debt base)

**Eligible Cash:**
€2,155.1M

**Adjusted_Debt (2022) = €11,062.2M + €494.5M + €0.8M - €2,155.1M = €9,402.4 million**

## Step 10: Calculate 2022 Adjusted_Debt / Adjusted_EBITDA

**Ratio (2022) = €9,402.4M / €2,059.2M = 4.57x**

## Step 11: Calculate 2022 FFO / Adjusted_Debt

**Ratio (2022) = €1,524.3M / €9,402.4M = 0.1620 or 16.20%**

---

## Step 12: Classify the Credit Trend

**Signal 1: Leverage Change**
- 2021 Ratio: 5.92x
- 2022 Ratio: 4.57x
- Change: 4.57x - 5.92x = **-1.35x** (improvement of 1.35x turns)

This is ≤ -0.2x, so **Signal 1 = Improving**

**Signal 2: Cash-Flow Coverage Change**
- 2021 Ratio: 0.1204
- 2022 Ratio: 0.1620
- Change: 0.1620 - 0.1204 = **+0.0416** (improvement of 4.16 percentage points)

This is ≥ +0.03, so **Signal 2 = Improving**

**Conclusion:**

Both signals strongly agree and point to **Improving** credit metrics:

1. **Leverage improved significantly** (5.92x → 4.57x), driven by:
   - Higher EBITDA (+€204.4M or +11.0%)
   - Lower adjusted debt despite issuance of hybrid bonds
   - Strong revenue growth (+14.4% YoY)
   - Better operating leverage

2. **FFO/Debt coverage improved materially** (12.04% → 16.20%), driven by:
   - Higher FFO generation (+€202M or +15.3%)
   - Lower cash interest paid (€154.8M vs €214.6M)
   - Stronger operational cash generation
   - Better debt service capacity

**Context:** 
TERNA is a regulated Italian transmission utility with stable revenue streams. The improvements reflect:
- Revenue growth from higher transmission volumes and tariffs
- Controlled operating costs
- Deleveraging through debt repayment
- Better cash conversion despite higher depreciation
- Hybrid bond issuance diluting traditional leverage metrics but improving flexibility

Both metrics show material improvement beyond the stability thresholds, with leverage improvement of 1.35x being particularly significant (well above the -0.2x threshold).

<answer>Improving</answer>