Let’s step through the assessment systematically. --- **1. Sector and regulatory context** Terna S.p.A. is the Italian electricity transmission system operator. It is a regulated utility under the oversight of ARERA. From the methodology for regulated utilities, Terna would qualify for the **low volatility table** if: - It derives about two-thirds or more of operating cash flows from regulated operations at the low end of the utility risk spectrum - Regulatory advantage is assessed as strong - Stable credit measures and low funding costs are expected - No high-risk activities contribute significantly Italy’s regulatory framework is transparent, allows full cost recovery including capital costs, and has a track record of stability. Terna fits this low-risk profile well. --- **2. Business risk profile summary** - **Regulatory advantage**: Strong, given transparent tariff-setting, cost recovery, pre-approved investments, and insulation mechanisms. - **Scale, scope, and diversity**: Strong — monopoly grid operator for Italy, large asset base (~€16.2bn PP&E), diverse revenue drivers. - **Operating efficiency**: Strong — costs largely pass-through, strong project execution record, capitalised personnel costs visible. - **Profitability**: Above average — EBITDA margin approx. 46% (€1,333m EBIT + €725m D&A on €2,964m revenue). ROE is solid and predictable. --- **3. Financial risk profile and metrics** Key 2022 figures: - Total equity: €6,169m - Long-term borrowings: €8,417m - Short-term borrowings + current portion of LT: €2,353m - Total reported debt ≈ €10,770m - Cash: €2,155m → net debt ≈ €8,615m FFO to net debt: - FFO ≈ net income (€857.7m) + D&A (€725.7m) – gains + other non-cash ≈ €1,500m+ - FFO / net debt ≈ 17–18% (strong for low volatility table). Debt to EBITDA: - EBITDA ≈ €2,058m (operating profit + D&A) - Net debt / EBITDA ≈ 4.2x — moderate for a utility, especially under low volatility metrics. --- **4. Hybrid bonds consideration** Terna already has **€989m hybrid bonds** outstanding (recorded in equity under “Capital Instruments Bonds Hybrid Perpetual”). This represents ~16% of reported equity, but the S&P cap is 15% of **total adjusted capital** (equity + adjusted debt). Adjusted capital: - Equity: ~€6,169m - Adjusted debt (gross): ~€10,770m (with adjustments for pensions, leases etc., not materially different here) - Total adjusted capital ≈ €16,939m Existing hybrid % of adjusted capital: €989m / €16,939m ≈ 5.8% Current market conditions (2022 swap rates ~1.7–1.9%, corporate bond yields ~1.1–2.3%) suggest cost of new hybrid would be above senior debt but not prohibitive. --- **5. Needs and rationale for further issuance** - 2022 capex: €1,492m PPE + €212m intangibles = ~€1.7bn, mostly growth investments. - Operating cash flow: €2,324m, strong but largely absorbed by capex and dividends (~€596m). - FOCF after dividends is slightly negative but manageable. - Planned investments under energy transition are large, but currently funding gap is moderate. Given existing hybrid cushion, strong FFO/debt, and manageable leverage, there isn’t a pressing need to issue the maximum. However, some additional hybrid issuance could support rating headroom for the significant capex pipeline without weakening credit metrics. --- **6. Conclusion** The most appropriate recommendation is a moderate increase in hybrid usage — not the maximum, but above the current level — to maintain flexibility and absorb future investment needs without material rating pressure. This aligns best with the **7.5%** guideline (moderate refinancing/acquisition needs, rating headroom moderately constrained, issuance meaningfully improves adjusted leverage). --- 7.5%