I'll work through this step-by-step for EDP, S.A.

## Step 1: Identify the relevant industry

EDP (Energias de Portugal) is involved in "generation, transmission, distribution and supply of electricity and supply of gas." EDP is a diversified utility with both regulated (networks/distribution) and unregulated (renewable generation, merchant power) activities. Given EDP's mix, the company spans both **Regulated Utilities** and **Unregulated Power and Gas** methodologies. EDP has significant regulated operations (distribution networks in Portugal, Brazil, Spain) and significant unregulated operations (EDPR renewables, generation). I'll apply a blended utility approach.

## Step 2: Estimate 2021 Adjusted EBITDA

From the income statement for 2021 (fiscal year ending 2022-01-01):

**Reconstructing EBITDA:**
- "Profit Loss Before Provisions Amortisation And Impairment Financial Income And Financial Expenses Income Tax Expense And Extraordinary Contribution To The Energy Sector CESE" = 3,723,050,000 EUR

This is essentially EBITDA before provisions. This line item represents revenue minus cost of energy, minus opex, plus JV income — before D&A, provisions, financial items, and tax.

So reported EBITDA ≈ 3,723,050,000 EUR

**S&P Adjustments:**

1. **Lease adjustments:** Right-of-use assets at 2022-01-01 = 1,007,029,000 EUR. S&P adds back the depreciation of ROU assets and treats lease payments as debt service. The lease depreciation is embedded in the D&A figure. I'll estimate lease-related depreciation. Lease liabilities are part of financing activities: "Payments Of Lease Liabilities" 2021 = 98,772,000 EUR. S&P adjustment adds operating lease rents back to EBITDA (since IFRS 16 already capitalizes them, EBITDA already includes this benefit). Under IFRS 16, EBITDA is already adjusted. No further adjustment needed for EBITDA under IFRS 16 reporting.

2. **Joint ventures:** The JV income of 108,106,000 EUR is already included in the EBITDA line. S&P may prefer proportional consolidation, but with limited data, I'll keep as reported.

3. **Nonrecurring items:** No major nonrecurring items identified.

4. **Pension adjustments:** Pension deficit at 2022-01-01 = 940,266,000 (non-current employee benefits). S&P typically adds service cost and subtracts total pension expense, but with limited breakdown, I'll make a minor adjustment.

**2021 Adjusted EBITDA ≈ 3,723,050,000 EUR**

Adding back lease payments for S&P purposes (since under IFRS 16, lease depreciation and interest are below EBITDA, S&P treats operating leases by adding back the full rental — but IFRS 16 already capitalizes, so EBITDA is already higher). For S&P's adjusted EBITDA under IFRS 16, the EBITDA figure already includes the lease benefit.

**2021 Adjusted EBITDA ≈ 3,723 million EUR**

## Step 3: Estimate 2021 FFO

FFO = Adjusted EBITDA - cash interest - cash taxes

**Cash interest 2021:**
- Finance costs = 875,816,000
- Finance income = 364,883,000
- Net finance costs = 510,933,000
- From cash flow: "Interest And Similar Costs Of Financial Debt Including Hedge Derivatives" = 481,329,000
- Add: Interest on NCI loans = 18,244,000
- Cash interest paid ≈ 481,329 + 18,244 = 499,573,000
- Less interest received (from investing): 22,996,000
- Net cash interest ≈ 499,573 - 22,996 = 476,577,000

For S&P, we also add lease interest (embedded in lease payments). Lease payments = 98,772,000. Approximate lease interest ≈ 30,000,000 (roughly 3% on ~1B lease liabilities).

Adjusted cash interest ≈ 476,577 + 30,000 = 506,577,000

**Cash taxes 2021:**
- "Income Tax And CESE" from cash flow = 89,845,000 (outflow)
- CESE = 53,314,000
- Total cash taxes ≈ 89,845 + 53,314 = 143,159,000

Wait, looking at the cash flow statement, "Income Tax And CESE" = -89,845,000 appears to already include CESE. Let me reconsider. The negative sign indicates cash outflow. Cash taxes = 89,845,000.

Actually, looking more carefully: the CESE is shown separately in the P&L but the cash flow "Income Tax And CESE" line likely includes both. Cash taxes ≈ 89,845,000 EUR.

**2021 FFO = 3,723,050 - 506,577 - 89,845 = 3,126,628,000 EUR**

But let me cross-check with operating cash flow: OCF = 2,019,909,000. This is after working capital changes and other items. FFO should be before working capital changes.

From cash flow: Cash flows from operations (before other items) = 2,595,519,000 + Other inflows/outflows = -575,610,000 → OCF = 2,019,909,000.

The "Cash Flows From Used In Operations" = 2,595,519,000 already includes working capital changes and taxes. Let me reconstruct:

Net income = 1,104,646
+ D&A = 1,731,755
+ Provisions = 60,510
- JV income = -108,106
+ Net finance costs = 510,933
+ Disposal gains = 0
+ WC changes (receivables) = -1,267,111
+ WC changes (payables) = 785,560
+ WC personnel = -170,055
+ WC regulatory = 906,892
+ Other adjustments = -1,184,866
- Taxes paid = -89,845
= Cash from operations = 2,595,519 (before "Other inflows/outflows")

Wait, this already deducts taxes. Let me reconstruct FFO differently.

FFO ≈ Cash from operations + working capital changes back + non-recurring cash items

Working capital changes in 2021:
- Receivables: -1,267,111
- Payables: 785,560
- Personnel WC: -170,055
- Regulatory WC: 906,892
- Total WC: 255,286

"Other Adjustments" = -1,184,866 (this likely includes non-cash items netted back)
"Other inflows/outflows" = -575,610

FFO from cash flow perspective:
= OCF + WC changes reversal (but need to be careful about what S&P includes)

Let me try a simpler approach:

FFO = Adjusted EBITDA - cash interest (gross) - cash taxes - lease principal repayment (for S&P under IFRS 16, S&P treats the full lease payment as an operating cost in FFO)

Actually, under S&P methodology with IFRS 16:
- EBITDA already excludes lease costs (since they're capitalized)
- S&P adds the lease depreciation back to get to their EBITDA equivalent
- But for FFO, S&P deducts the full lease payment

So: FFO = Adjusted EBITDA - cash interest on debt - cash taxes - lease payments
= 3,723,050 - 476,577 - 89,845 - 98,772
= 3,057,856,000 EUR

**2021 FFO ≈ 3,058 million EUR**

## Step 4: Estimate 2021 Adjusted Debt

**Reported debt at 2022-01-01:**
- Long-term borrowings = 15,299,588,000
- Current borrowings = 1,518,348,000
- Total reported debt = 16,817,936,000

**S&P Adjustments:**

1. **Leases (IFRS 16 already on balance sheet):** ROU liabilities are already part of the balance sheet. S&P would include lease liabilities. These aren't shown separately but implied by ROU assets of 1,007,029,000. Lease liabilities ≈ 1,007,029,000 (approximately).

Actually, under IFRS 16, lease liabilities are likely already included in "Other Noncurrent/Current Financial Liabilities" or borrowings. Let me check if they're separate. The lease payments in financing activities = 98,772,000 suggests lease liabilities are tracked separately. Since IFRS 16 capitalizes leases, S&P would include them. They may already be in borrowings or in "Other Financial Liabilities." I'll assume lease liabilities (~1,007M) are embedded in Other Financial Liabilities.

So if lease liabilities are already in "Other Financial Liabilities," I should not double count. Let me assume they are separate from borrowings.

2. **Pension deficit:** Non-current employee benefits = 940,266,000 + current = 179,534,000 = 1,119,800,000. Not all is pension — includes other benefits. Estimate pension component ≈ 60-70% = ~750,000,000.

3. **Institutional Partnerships in North America:** = 2,259,741,000. These are tax equity partnerships — S&P may treat some portion as debt-like. These are significant. I'll include them as debt-like items.

4. **Eligible cash deduction:** S&P typically allows deduction of a portion of cash. Cash = 3,222,409,000. For utilities, S&P may allow partial deduction. Conservatively, deduct ~50% or operating cash needs. Let's deduct minimal cash — maybe 20% as accessible. Actually, S&P typically nets excess cash. For EDP's size, minimum operating cash might be ~500M. Surplus cash = 3,222,409 - 500,000 = 2,722,409,000. But S&P is often conservative. Let's deduct ~1,000,000,000 in surplus cash.

Let me be more systematic:

**2021 Adjusted Debt:**
- Reported financial debt: 16,817,936,000
- Lease liabilities (if not in borrowings, ~1,007M — but likely in Other Financial Liabilities): Let's include ~1,007,000,000 (assume separate)
- Pension/employee benefit obligation (net): ~750,000,000
- Institutional partnerships: 2,259,741,000
- Other debt-like: Other non-current financial liabilities = 3,039,975,000 and Other current financial liabilities = 2,781,101,000. These include derivatives, lease liabilities, etc. Not all are debt. Let me not include these as they're mostly derivatives/hedging.
- Less surplus cash: ~(1,500,000,000) (being moderate)

Actually, I'm overcomplicating this. Let me focus on the key items S&P would adjust:

Core debt = 16,817,936,000 (borrowings)
+ Lease liabilities ≈ 1,007,000,000 (if not already in borrowings)
+ Pension deficit ≈ 750,000,000
+ Institutional partnerships (tax equity, debt-like) ≈ 2,259,741,000
- Surplus cash ≈ (1,500,000,000)

But I realize the lease liabilities under IFRS 16 might already be included in the borrowings line. Looking at the balance sheet more carefully:

The company reports "Longterm Borrowings" and "Current Borrowings" separately from "Other Financial Liabilities." Lease liabilities could be in either. Given the separate reporting of lease payments in financing, I'll assume lease liabilities are NOT in borrowings but in Other Financial Liabilities.

**2021 Adjusted Debt ≈ 16,818 + 1,007 + 750 + 2,260 - 1,500 = 19,335 million EUR**

Hmm, let me reconsider. The institutional partnerships might be partially equity-like (tax equity investors). S&P's treatment could be mixed. Let me include about 50% as debt = ~1,130M.

**2021 Adjusted Debt ≈ 16,818 + 1,007 + 750 + 1,130 - 1,500 = 18,205 million EUR**

Let me simplify and use a more standard approach. S&P for EDP would likely focus on:
- Gross financial debt (borrowings): 16,818M
- Operating lease adjustments (already capitalized under IFRS 16): included in Other Financial Liabilities
- Pension: ~750M
- Hybrids: EDP has hybrid bonds — a portion might be treated as debt. Without specifics, I'll skip.
- Surplus cash: -(1,500M)
- Tax equity partnerships: These are complex. S&P may treat them partially as debt.

For simplicity, let me estimate:
**2021 Adjusted Debt ≈ 19,000 million EUR**

## Step 5: 2021 Adjusted Debt / Adjusted EBITDA

= 19,000 / 3,723 = **5.10x**

## Step 6: 2021 FFO / Adjusted Debt

= 3,058 / 19,000 = **16.1%**

## Step 7: Estimate 2022 Adjusted EBITDA

From the income statement for 2022 (fiscal year ending 2023-01-01):

EBITDA = "Profit Loss Before Provisions Amortisation And Impairment..." = 4,523,539,000 EUR

**2022 Adjusted EBITDA ≈ 4,524 million EUR**

## Step 8: Estimate 2022 FFO

Cash interest 2022:
- "Interest And Similar Costs Of Financial Debt Including Hedge Derivatives" = 716,454,000
- Interest on NCI loans = 12,885,000
- Interest on related party loans = 111,000
- Less interest received = 101,841,000
- Net cash interest = 716,454 + 12,885 + 111 - 101,841 = 627,609,000

Adding lease interest (~35,000): 627,609 + 35,000 = 662,609,000

Cash taxes 2022:
"Income Tax And CESE" = 258,849,000

Lease payments = 133,696,000

**2022 FFO = 4,524,000 - 662,609 - 258,849 - 133,696 = 3,468,846,000 EUR**

**2022 FFO ≈ 3,469 million EUR**

## Step 9: Estimate 2022 Adjusted Debt

At 2023-01-01:
- Long-term borrowings = 15,782,604,000
- Current borrowings = 4,239,869,000
- Total reported debt = 20,022,473,000

Adjustments:
- Lease liabilities ≈ 1,320,270,000 (using ROU as proxy)
- Pension deficit ≈ ~650,000,000 (644,299 non-current + 126,767 current, roughly 60-70% pension)
- Institutional partnerships = 2,212,162,000, include ~50% = 1,106,000,000
- Surplus cash: Cash = 4,900,205,000. Deduct ~2,000,000,000 surplus

**2022 Adjusted Debt ≈ 20,022 + 1,320 + 650 + 1,106 - 2,000 = 21,098 million EUR**

For consistency with 2021 approach:
**2022 Adjusted Debt ≈ 21,100 million EUR**

## Step 10: 2022 Adjusted Debt / Adjusted EBITDA

= 21,100 / 4,524 = **4.67x**

## Step 11: 2022 FFO / Adjusted Debt

= 3,469 / 21,100 = **16.4%**

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

**Signal 1: Leverage (Adjusted Debt / Adjusted EBITDA)**
- 2021: 5.10x
- 2022: 4.67x
- Change: 4.67 - 5.10 = **-0.43x**
- Threshold: ≤ -0.2x → **Improving**

**Signal 2: Cash-flow coverage (FFO / Adjusted Debt)**
- 2021: 16.1%
- 2022: 16.4%
- Change: 0.164 - 0.161 = **+0.003**
- Threshold: between -0.03 and +0.03 → **Stable**

**Combining signals:**
- Signal 1: Improving
- Signal 2: Stable
- Rule: One Stable, one Improving → return the non-Stable category → **Improving**

The leverage improvement is significant (-0.43x, more than double the threshold), driven by strong EBITDA growth (~22%) outpacing debt growth (~11%). FFO/debt remained roughly stable due to higher interest costs offsetting EBITDA growth.

<answer>Improving</answer>