I'll work through this step-by-step.

## Step 1: Identify the relevant industry

Terna S.p.A. is Italy's electricity transmission system operator (TSO). This is a **Regulated Utility** - specifically an electricity transmission network operator. The methodology for Regulated Utilities applies.

## Step 2: Estimate 2021 Adjusted EBITDA

For 2021 (fiscal year 2021-01-01 to 2022-01-01):

**EBITDA** = Operating Profit + D&A = 1,200,400,000 + 654,400,000 = **1,854,800,000 EUR**

S&P adjustments for regulated utilities:
- **Lease adjustments**: Operating leases would be capitalized. The data shows some right-of-use assets likely embedded in PP&E. From the cash flow statement, I don't see explicit lease data, but the financial liabilities line items may include lease liabilities. Without explicit lease data, I'll note that some adjustment may be embedded.
- **Pension adjustments**: Noncurrent provisions for employee benefits (2022-01-01) = 60,800,000 EUR. S&P typically adds back pension service costs and adjusts for actual contributions vs. expense.
- **Share of JV profit**: -300,000 (minor, included in operating profit area)

For simplicity and based on available data:
**2021 Adjusted EBITDA ≈ 1,855,000,000 EUR** (approximately 1,855M)

## Step 3: Estimate 2021 FFO

FFO = Adjusted EBITDA - cash interest - cash taxes

- Cash interest paid (2021): 214,600,000 EUR
- Cash interest received (2021): 54,300,000 EUR
- Net cash interest = 214,600,000 - 54,300,000 = 160,300,000 EUR
- Cash taxes (2021): 317,900,000 EUR

**2021 FFO = 1,855,000,000 - 160,300,000 - 317,900,000 = 1,376,800,000 EUR**

## Step 4: Estimate 2021 Adjusted Debt

As of 2022-01-01 (end of FY2021):
- Long-term borrowings: 8,835,000,000
- Short-term borrowings: 1,947,000,000
- Current portion of LT borrowings: 1,640,000,000
- Total reported debt = 8,835,000,000 + 1,947,000,000 + 1,640,000,000 = **12,422,000,000**

S&P adjustments:
- **Lease liabilities**: Noncurrent financial liabilities (83,700,000) + Current financial liabilities (45,800,000) = 129,500,000 (likely includes lease liabilities)
- **Pension deficit**: 60,800,000
- **Surplus cash**: S&P typically allows some cash netting for regulated utilities but conservatively. Cash = 1,566,800,000. For a regulated utility, S&P might not net much cash. I'll assume minimal cash netting (maybe excess cash above operating needs). Conservative approach: net ~50% of cash = ~783,000,000.

Actually, for regulated utilities, S&P is often conservative on cash netting. Let me use a more conservative approach and net only a portion. Given Terna's large cash balance was partly related to working capital timing, I'll net approximately 500,000,000.

**2021 Adjusted Debt ≈ 12,422,000,000 + 129,500,000 + 60,800,000 - 500,000,000 = 12,112,300,000 EUR**

Approximately **12,112M EUR**

## Step 5: 2021 Adjusted Debt / Adjusted EBITDA

= 12,112 / 1,855 = **6.53x**

## Step 6: 2021 FFO / Adjusted Debt

= 1,377 / 12,112 = **11.4%** (0.114)

## Step 7: Estimate 2022 Adjusted EBITDA

For 2022 (fiscal year 2022-01-01 to 2023-01-01):

**EBITDA** = Operating Profit + D&A = 1,333,500,000 + 725,700,000 = **2,059,200,000 EUR**

**2022 Adjusted EBITDA ≈ 2,059,000,000 EUR**

## Step 8: Estimate 2022 FFO

- Cash interest paid (2022): 154,800,000
- Cash interest received (2022): 64,200,000
- Net cash interest = 154,800,000 - 64,200,000 = 90,600,000
- Cash taxes (2022): 380,100,000

**2022 FFO = 2,059,000,000 - 90,600,000 - 380,100,000 = 1,588,300,000 EUR**

## Step 9: Estimate 2022 Adjusted Debt

As of 2023-01-01:
- Long-term borrowings: 8,416,700,000
- Short-term borrowings: 444,100,000
- Current portion of LT borrowings: 1,909,300,000
- Total reported debt = 8,416,700,000 + 444,100,000 + 1,909,300,000 = **10,770,100,000**

Note: Terna issued a hybrid bond (989,000,000 EUR) in 2022 classified as equity. S&P typically treats hybrids as 50% debt / 50% equity for intermediate equity content.

S&P adjustments:
- **Hybrid bond**: 50% of 989,000,000 = 494,500,000 as debt
- **Lease liabilities**: Noncurrent financial liabilities (247,200,000) + Current financial liabilities (44,900,000) = 292,100,000
- **Pension deficit**: 48,400,000
- **Cash netting**: Cash = 2,155,100,000. Conservatively net ~500,000,000.

**2022 Adjusted Debt ≈ 10,770,100,000 + 494,500,000 + 292,100,000 + 48,400,000 - 500,000,000 = 11,105,100,000 EUR**

Approximately **11,105M EUR**

## Step 10: 2022 Adjusted Debt / Adjusted EBITDA

= 11,105 / 2,059 = **5.39x**

## Step 11: 2022 FFO / Adjusted Debt

= 1,588 / 11,105 = **14.3%** (0.143)

## Step 12: Classify the year-on-year credit trend

**Signal 1: Leverage change**
= 5.39x - 6.53x = **-1.14x**
This is ≤ -0.2x → **Improving**

**Signal 2: Cash-flow coverage change**
= 0.143 - 0.114 = **+0.029**
This is between -0.03 and +0.03 → **Stable** (just barely under +0.03)

**Combining signals**: One is Improving, one is Stable → Return the non-Stable category → **Improving**

The leverage improvement is very significant (-1.14x, far exceeding the -0.2x threshold), driven by both higher EBITDA and lower total debt. FFO coverage also improved meaningfully, just barely missing the threshold.

<answer>Improving</answer>