**Step 1: Identify the relevant industry**

TERNA S.P.A. is the Italian electricity transmission grid operator. As the national transmission system operator (TSO) for electricity, it operates as a regulated monopoly. The provided S&P methodology for **Regulated Utilities** applies directly.

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**Step 2: Estimate 2021 Adjusted EBITDA**

Per the Regulated Utilities methodology, no special formula override is given—use the corporate baseline.  
Reconstructed EBITDA 2021:
- Revenue and Operating Income: €2,606.3M
- Expense by Nature: €1,405.9M  
But note that "Expense by Nature" already includes depreciation (€654.4M). EBITDA = Operating Profit + Depreciation.
- Profit from Operating Activities: €1,200.4M
- Depreciation: €654.4M  
EBITDA = 1,200.4 + 654.4 = **€1,854.8M**

Adjustments: no details on leases, non-recurring items, pensions, or JV EBITDA are material enough from the data. Using the reported figures directly, no further normalization is obvious.

**Adjusted EBITDA 2021 = €1,854.8M**

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**Step 3: Estimate 2021 FFO**

Baseline: FFO = Adjusted EBITDA − Cash Interest − Cash Taxes

- Cash Interest: Finance Costs were €95.8M. Interest received was €54.3M (cash flow line) but that goes into operating flows. Cash interest paid (operating CF) = €214.6M. The difference with P&L finance costs (€95.8M) may include capitalized interest and other items. S&P typically uses cash interest paid (€214.6M) as proxy for total interest cost in FFO.
- Cash Taxes: Income taxes paid = €317.9M.

FFO = 1,854.8 − 214.6 − 317.9 = **€1,322.3M**

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**Step 4: Estimate 2021 Adjusted Debt**

Baseline: Adjusted Debt = (reported debt + leases + pension deficit + hybrid portion + other) − eligible cash

Reported debt:
- Long-term borrowings: €8,835.0M
- Current portion of long-term: €1,640.0M
- Short-term borrowings: €1,947.0M  
Total reported debt: €12,422.0M

Pension deficit: Noncurrent provisions for employee benefits: €60.8M (taken as deficit proxy, no surplus data).

Hybrids: None reported in 2021 (perpetual hybrid bonds were issued in 2022, €989M).

Cash and cash equivalents: €1,566.8M. S&P typically allows deduction of surplus cash; we assume all cash eligible.

Adjusted Debt = 12,422.0 + 60.8 − 1,566.8 = **€10,916.0M**

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**Step 5: 2021 Adjusted Debt / Adjusted EBITDA**

10,916.0 / 1,854.8 = **5.89x**

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**Step 6: 2021 FFO / Adjusted Debt**

1,322.3 / 10,916.0 = **0.1211** (12.11%)

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**Step 7: Estimate 2022 Adjusted EBITDA**

- Profit from Operating Activities: €1,333.5M
- Depreciation: €725.7M  
EBITDA = 1,333.5 + 725.7 = **€2,059.2M**

No adjustments evident from data.

**Adjusted EBITDA 2022 = €2,059.2M**

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**Step 8: Estimate 2022 FFO**

- Cash Interest paid: €154.8M
- Income taxes paid: €380.1M

FFO = 2,059.2 − 154.8 − 380.1 = **€1,524.3M**

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**Step 9: Estimate 2022 Adjusted Debt**

Reported debt:
- Long-term borrowings: €8,416.7M
- Current portion long-term: €1,909.3M
- Short-term borrowings: €444.1M  
Total reported debt: €10,770.1M

Hybrid bonds (50% equity credit typical for S&P): €989.0M → add 50% = €494.5M to debt.

Pension deficit: €48.4M.

Cash: €2,155.1M.

Adjusted Debt = 10,770.1 + 494.5 + 48.4 − 2,155.1 = **€9,157.9M**

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**Step 10: 2022 Adjusted Debt / Adjusted EBITDA**

9,157.9 / 2,059.2 = **4.45x**

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**Step 11: 2022 FFO / Adjusted Debt**

1,524.3 / 9,157.9 = **0.1664** (16.64%)

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**Step 12: Classify year-on-year credit trend**

**Signal 1 (Leverage change):**  
2022: 4.45x  
2021: 5.89x  
Change = −1.44x → well below −0.2x → **Improving**

**Signal 2 (FFO/Debt change):**  
2022: 0.1664  
2021: 0.1211  
Change = +0.0453 → above +0.03 → **Improving**

Both signals agree: **Improving**.

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<answer>Improving</answer>