Alright — let’s step through this systematically.

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## **Step 1 — Identify relevant industry**
Naturgy Energy Group SA is a gas and electricity utility with both regulated networks and unregulated generation/supply activities. The S&P methodology that fits best from the provided material is **Regulated Utilities**, supplemented by elements applicable to unregulated power and gas where required.

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## **Step 2 — Estimate 2021 Adjusted EBITDA**

**Reported EBITDA (2021):**  
`Beneficio Bruto De Explotacion Ebitda` = EUR 3,529 million.

**Adjustments:**
- Leases: In 2021, leases are already included in EBITDA per IFRS 16. We need to check the reported figure; there is `Right-of-use Assets` and `Noncurrent Lease Liabilities`, but IFRS 16 EBITDA already adds back lease depreciation and separates interest. S&P typically adds back operating lease expense in pre-IFRS 16, but under IFRS 16, S&P uses the reported EBITDA for utilities as is, removing finance lease interest from FFO.
- Nonrecurring items: None clearly identified as nonrecurring in provided data.
- Pensions: No pension adjustments identified.
- JV proportional EBITDA: Not separately disclosed; assume minimal.
- Government grants: EUR 49 million already included in EBITDA.

**Adjusted EBITDA 2021 = EUR 3,529 million.**

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## **Step 3 — Estimate 2021 FFO**

**FFO = Adjusted EBITDA − cash interest − cash taxes**

Cash interest:  
`Interest Paid Classified As Operating Activities` = EUR 488 million.

Cash taxes:  
`Income Taxes Paid Classified As Operating Activities` = EUR 864 million.

FFO = 3,529 − 488 − 864 = **EUR 2,177 million**.

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## **Step 4 — Estimate 2021 Adjusted Debt**

**Reported debt components (2021 year-end, i.e., 2022-01-01):**
- Long-term borrowings: 13,786 million
- Current borrowings: 1,493 million
- Lease liabilities (noncurrent + current): 1,325 + 196 = 1,521 million
- Other financial liabilities (noncurrent + current): 3 + 9 = 12 million

**Total reported debt + leases:**  
= 13,786 + 1,493 + 1,521 + 12 = EUR 16,812 million.

**Pension deficit:** Not identified separately.

**Hybrids/guarantees:** Not itemized.

**Eligible cash:** Cash and cash equivalents = EUR 3,965 million (S&P typically caps surplus cash; assume full amount for now).

**Adjusted Debt = 16,812 − 3,965 = EUR 12,847 million.**

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## **Step 5 — 2021 Debt / EBITDA**

12,847 ÷ 3,529 = **3.64x**.

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## **Step 6 — 2021 FFO / Debt**

2,177 ÷ 12,847 = **0.169** (16.9%).

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## **Step 7 — Estimate 2022 Adjusted EBITDA**

Reported EBITDA 2022: EUR 4,954 million.  
No apparent nonrecurring items.  
**Adjusted EBITDA 2022 = EUR 4,954 million.**

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## **Step 8 — Estimate 2022 FFO**

Cash interest: EUR 520 million.  
Cash taxes: EUR 762 million.

FFO = 4,954 − 520 − 762 = **EUR 3,672 million**.

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## **Step 9 — Estimate 2022 Adjusted Debt**

**Debt components (2022 year-end, i.e., 2023-01-01):**
- Long-term borrowings: 12,689 million
- Current borrowings: 2,110 million
- Lease liabilities (noncurrent + current): 1,309 + 177 = 1,486 million
- Other financial liabilities: 1 + 15 = 16 million

Total = 12,689 + 2,110 + 1,486 + 16 = EUR 16,301 million.

Cash: EUR 3,985 million.  
Adjusted Debt = 16,301 − 3,985 = **EUR 12,316 million**.

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## **Step 10 — 2022 Debt / EBITDA**

12,316 ÷ 4,954 = **2.49x**.

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## **Step 11 — 2022 FFO / Debt**

3,672 ÷ 12,316 = **0.298** (29.8%).

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## **Step 12 — Trend Classification**

**Signal 1 (Leverage):**  
2.49x − 3.64x = −1.15x → **Improving**.

**Signal 2 (FFO/Debt):**  
0.298 − 0.169 = +0.129 → **Improving**.

Both signals agree.

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<answer>Improving</answer>