I'll work through this step-by-step for Terna S.p.A., which is Italy's national electricity transmission system operator.

## Step 1: Identify the Relevant Industry

Terna S.p.A. is Italy's national electricity transmission grid operator. This is a **regulated utility** - specifically an electricity transmission/network business. The company operates under regulated tariffs set by the Italian Regulatory Authority for Energy, Networks and Environment (ARERA). This falls squarely under the "Regulated Utilities" methodology, specifically "Electricity National" subsector.

Key characteristics confirming this:
- Provides essential infrastructure service (electricity transmission)
- Shielded from competition (natural monopoly)
- Subject to comprehensive regulation by ARERA
- Revenue primarily from regulated transmission tariffs

## Step 2: Estimate 2021 Adjusted_EBITDA

For regulated utilities, S&P typically uses EBITDA or reconstructs it. Let me reconstruct EBITDA from the income statement data.

From the facts:
- Revenue 2021: 2,534,500,000 EUR
- Other Revenue 2021: 71,800,000 EUR
- Revenue And Operating Income 2021: 2,606,300,000 EUR (this is total revenue)
- Expense By Nature 2021: 1,405,900,000 EUR
- Profit Loss From Operating Activities 2021: 1,200,400,000 EUR

EBITDA can be reconstructed as:
- Operating Profit (Profit Loss From Operating Activities): 1,200,400,000 EUR
- Add back: Depreciation Amortisation And Impairment 2021: 654,400,000 EUR

EBITDA = 1,200,400,000 + 654,400,000 = **1,854,800,000 EUR**

Now applying S&P adjustments for regulated utilities:
- **Leases**: No lease adjustments mentioned in the data; IFRS 16 leases likely already in reported numbers
- **Nonrecurring items**: No explicit nonrecurring gains/losses identified
- **Pension adjustments**: No pension deficit or adjustments mentioned
- **Joint ventures**: Share Of Profit Loss Of Associates And Joint Ventures 2021: 300,000 EUR (positive, equity method) - this is below operating profit, so already excluded from EBITDA

For regulated utilities, S&P notes they do not adjust for regulatory accounting effects under IFRS. The methodology mentions deconsolidating securitized debt with specialized recovery provisions, but no such items are evident.

Adjusted_EBITDA_2021 = **1,854,800,000 EUR**

## Step 3: Estimate 2021 FFO

FFO = Adjusted_EBITDA - cash_interest - cash_taxes

From the cash flow statement:
- Interest Paid Classified As Operating Activities 2021: 214,600,000 EUR
- Income Taxes Paid Refund Classified As Operating Activities 2021: 317,900,000 EUR

FFO_2021 = 1,854,800,000 - 214,600,000 - 317,900,000 = **1,322,300,000 EUR**

Note: The S&P methodology for regulated utilities focuses on actual cash flow generation. The cash flow statement shows "Cash Flows From Used In Operating Activities" of 832,300,000 EUR, but this includes working capital changes. FFO is before working capital changes.

Let me verify: Cash Flows From Used In Operations Before Changes In Working Capital 2021: 1,896,300,000 EUR. This includes interest and taxes paid? Let me check:

Cash Flows From Used In Operations Before Changes In Working Capital 2021: 1,896,300,000
Less: Interest Paid: 214,600,000
Less: Taxes Paid: 317,900,000
= 1,363,800,000... this doesn't match exactly.

Actually, looking more carefully: "Cash Flows From Used In Operations Before Changes In Working Capital" likely already excludes interest and taxes, or the presentation is different. Let me recalculate:

From the adjustments to reconcile to operating cash flow:
- Cash Flows From Used In Operations Before Changes In Working Capital 2021: 1,896,300,000

This seems to be after adding back depreciation (664,800,000) and other non-cash items, but before working capital changes and before interest/taxes paid.

Actually, let me trace through:
- Profit Loss Before Tax 2021: 1,121,500,000
- Add: Depreciation etc: 664,800,000
- Add: Other adjustments (finance costs, etc.): 993,000,000 (Adjustments For Finance Income Cost)
- Less: Finance Income Cost: -16,600,000? 

Let me use the direct approach: FFO is typically Funds From Operations, calculated as:
- Net income + depreciation + deferred taxes + other non-cash items - working capital changes... no, FFO is before working capital.

Standard S&P FFO = Net income + depreciation + deferred taxes + other non-cash charges - capitalized interest - gain on sale + other adjustments.

Actually for utilities, S&P defines FFO as cash from operations before working capital changes, or more precisely:
FFO = EBITDA - cash interest - cash taxes (when using the simplified approach)

Let me use: FFO_2021 = 1,322,300,000 EUR (from above)

But let me cross-check with another approach:
- Profit Loss 2021: 790,800,000
- Add: Depreciation Amortisation: 654,400,000
- Add: Income Tax Expense (accrual): 317,900,000
- Less: Finance Income (accrual): -16,600,000? 
- Add: Finance Costs (accrual): 95,800,000

This gets messy with accrual vs. cash. Let me stick with the cash-based approach using actual interest and taxes paid.

Actually, re-reading S&P methodology: "Our financial analysis focuses on the economics and actual cash flow generation."

FFO_2021 = **1,322,300,000 EUR** (using cash interest and cash taxes paid)

## Step 4: Estimate 2021 Adjusted_Debt

Adjusted_Debt = reported_debt + leases + pension_deficit + guarantees + hybrid_debt_portion + other_debt_like_items - eligible_cash

From balance sheet 2022-01-01 (end of 2021):
- Longterm Borrowings: 8,835,000,000 EUR
- Shortterm Borrowings: 1,947,000,000 EUR
- Current Portion Of Longterm Borrowings: 1,640,000,000 EUR

Total reported debt = 8,835,000,000 + 1,947,000,000 + 1,640,000,000 = **12,422,000,000 EUR**

Other items:
- **Leases**: Not separately disclosed; likely included in debt or not material
- **Pension deficit**: Noncurrent Provisions For Employee Benefits: 60,800,000 EUR - this is a provision, not necessarily debt-like. S&P may treat pension deficits as debt-like.
- **Guarantees**: Not disclosed separately
- **Hybrid debt portion**: The company issued "Equity Instruments Perpetual Hybrid Bonds" in 2022 (989,000,000 EUR). In 2021, there was no hybrid bond. The 2021 equity shows no hybrid capital instrument.
- **Other debt-like items**: Noncurrent Financial Liabilities: 83,700,000; Current Financial Liabilities: 45,800,000

For regulated utilities, S&P notes: "Where substantial seasonal working capital requirements distort leverage measures, we adjust inventory and debt balances by netting the value of inventory against outstanding short-term borrowings." Not applicable here.

Also: "We deconsolidate securitized debt (and associated revenue and expense) that has been accorded specialized recovery provisions." Not evident here.

Hybrid bonds: The 989,000,000 EUR hybrid was issued in 2022, not 2021. So zero for 2021.

Pension provisions: S&P typically treats unfunded pension deficits as debt-like, but these are provisions for employee benefits, not necessarily unfunded pensions. The amount (60,800,000) is relatively small. I'll include it as debt-like.

Cash and equivalents 2022-01-01: 1,566,800,000 EUR
Current Financial Assets 2022-01-01: 980,600,000 EUR (this includes short-term investments)

Eligible cash: S&P typically uses "cash and cash equivalents" plus some short-term investments if readily convertible. Let's use Cash And Cash Equivalents: 1,566,800,000 EUR. Some methodologies include current financial assets if liquid.

Adjusted_Debt_2021 = 12,422,000,000 + 60,800,000 (pension) + 83,700,000 (noncurrent fin liab) + 45,800,000 (current fin liab) - 1,566,800,000 (cash) - 980,600,000 (current financial assets, if liquid)

= 12,422,000,000 + 190,300,000 - 2,547,400,000 = **10,064,900,000 EUR**

Let me be more conservative and include current financial assets as they appear to be liquid investments:
Adjusted_Debt_2021 = **10,064,900,000 EUR**

Or if we exclude current financial assets from eligible cash:
= 12,422,000,000 + 190,300,000 - 1,566,800,000 = **11,045,500,000 EUR**

Given S&P's typical approach, I'll include liquid financial assets as eligible cash:
Adjusted_Debt_2021 = **10,064,900,000 EUR**

## Step 5: Calculate 2021 Adjusted_Debt / Adjusted_EBITDA

= 10,064,900,000 / 1,854,800,000 = **5.43x**

## Step 6: Calculate 2021 FFO / Adjusted_Debt

= 1,322,300,000 / 10,064,900,000 = **0.131** or **13.1%**

## Step 7: Estimate 2022 Adjusted_EBITDA

Revenue 2022: 2,898,100,000 EUR
Other Revenue 2022: 66,400,000 EUR
Revenue And Operating Income 2022: 2,964,500,000 EUR

Profit Loss From Operating Activities 2022: 1,333,500,000 EUR
Depreciation Amortisation And Impairment 2022: 725,700,000 EUR

EBITDA = 1,333,500,000 + 725,700,000 = **2,059,200,000 EUR**

Adjusted_EBITDA_2022 = **2,059,200,000 EUR**

## Step 8: Estimate 2022 FFO

Interest Paid Classified As Operating Activities 2022: 154,800,000 EUR
Income Taxes Paid Refund Classified As Operating Activities 2022: 380,100,000 EUR

FFO_2022 = 2,059,200,000 - 154,800,000 - 380,100,000 = **1,524,300,000 EUR**

## Step 9: Estimate 2022 Adjusted_Debt

From balance sheet 2023-01-01 (end of 2022):
- Longterm Borrowings: 8,416,700,000 EUR
- Shortterm Borrowings: 444,100,000 EUR
- Current Portion Of Longterm Borrowings: 1,909,300,000 EUR

Total reported debt = 8,416,700,000 + 444,100,000 + 1,909,300,000 = **10,770,100,000 EUR**

Other items:
- Pension provisions: Noncurrent Provisions For Employee Benefits: 48,400,000 EUR
- Noncurrent Financial Liabilities: 247,200,000 EUR
- Current Financial Liabilities: 44,900,000 EUR
- Hybrid bonds: 989,000,000 EUR (Equity Instruments Perpetual Hybrid Bonds - these are in equity but S&P treats portion as debt)

For hybrid bonds: S&P typically treats 50% of hybrid equity as debt-like for investment grade, or the full amount if it's more debt-like. The methodology mentions "hybrid_debt_portion" - for a perpetual hybrid bond, typically 50% is treated as debt.

Hybrid debt portion = 989,000,000 × 50% = 494,500,000 EUR

Cash and equivalents 2023-01-01: 2,155,100,000 EUR
Current Financial Assets 2023-01-01: 255,300,000 EUR

Adjusted_Debt_2022 = 10,770,100,000 + 48,400,000 + 247,200,000 + 44,900,000 + 494,500,000 - 2,155,100,000 - 255,300,000
= 10,770,100,000 + 835,000,000 - 2,410,400,000 = **9,194,700,000 EUR**

## Step 10: Calculate 2022 Adjusted_Debt / Adjusted_EBITDA

= 9,194,700,000 / 2,059,200,000 = **4.47x**

## Step 11: Calculate 2022 FFO / Adjusted_Debt

= 1,524,300,000 / 9,194,700,000 = **0.166** or **16.6%**

## Step 12: Classify Year-on-Year Credit Trend

**Signal 1: Leverage (Adjusted_Debt / Adjusted_EBITDA)**
- 2021: 5.43x
- 2022: 4.47x
- Change: 4.47 - 5.43 = **-0.96x**

Threshold: ≤ -0.2x is Improving
-0.96x < -0.2x, so **Improving**

**Signal 2: Cash-flow coverage (FFO / Adjusted_Debt)**
- 2021: 0.131
- 2022: 0.166
- Change: 0.166 - 0.131 = **+0.035**

Threshold: ≥ +0.03 is Improving
+0.035 > +0.03, so **Improving**

**Combining signals:**
Both signals indicate **Improving**.

Let me verify the magnitude: leverage improved by 0.96x, which is nearly 5x the threshold for improvement. Cash flow coverage improved by 3.5 percentage points, just above the 3 percentage point threshold. Both are clearly in the improving direction.

The improvement is driven by:
1. Strong EBITDA growth (+11% from revenue increase and operating leverage)
2. Significant debt reduction (total borrowings down from 12.4bn to 10.8bn)
3. Higher cash balances (up from 1.6bn to 2.2bn)
4. Hybrid bond issuance added to equity but only half counted as debt

This is consistent with Terna's regulated utility profile where revenue growth and disciplined capital management improve credit metrics.

<answer>Improving</answer>