## Analysis of Terna S.p.A. for Hybrid Bond Issuance Suitability

### 1. Business Profile

**Sector:** Terna is Italy's national electricity transmission system operator (TSO), operating as a regulated utility with a natural monopoly in electricity transmission. This is squarely in the "Regulated Utilities" sector as described in the S&P methodology.

**Regulatory Framework:** As Italy's TSO, Terna operates under the oversight of ARERA (the Italian energy regulator). The regulatory framework for Italian electricity transmission is well-established, transparent, and provides for cost recovery including a return on the regulated asset base (RAB). This is a strong/adequate to strong regulatory environment.

**Revenue Stability:** Revenue is predominantly regulated, with significant related-party revenue (from the Italian energy system). Revenue grew from €2,534.5M to €2,898.1M (14.3% increase), demonstrating stable, predictable growth consistent with a regulated utility.

**Ownership:** The ultimate parent is Cassa Depositi e Prestiti S.p.A. (CDP), Italy's state-owned investment bank, via CDP Reti S.p.A. This government backing provides additional stability and credibility.

### 2. Financial Profile

**Profitability:**
- EBITDA (approximated as Operating Profit + D&A): €1,333.5M + €725.7M = ~€2,059.2M (2022)
- EBITDA margin: ~69.5% (extremely high, consistent with a transmission-only utility)
- Net income: €857.7M (2022), up from €790.8M (2021)
- ROE: €857M / ((€6,142M + €4,682M)/2) ≈ 15.8%

**Leverage:**
- Total debt: Long-term borrowings €8,416.7M + Short-term borrowings €444.1M + Current portion of LT borrowings €1,909.3M = ~€10,770.1M
- Total equity: €6,169.1M
- Debt/Equity: ~1.75x
- Net debt: €10,770.1M - €2,155.1M (cash) - €255.3M (current financial assets) = ~€8,359.7M
- Net debt/EBITDA: ~4.1x

This leverage profile is consistent with a BBB-area investment grade rating, typical for regulated utilities with large capital programs.

**Cash Flow:**
- Operating cash flow: €2,323.7M (2022), a massive improvement from €832.3M (2021)
- Capex (PP&E + intangibles): €1,492.3M + €212.4M = €1,704.7M
- Free cash flow: ~€619M before dividends
- Dividends paid: €595.8M

The company has significant ongoing capex needs, which is typical for a TSO supporting the energy transition.

**FFO/Debt estimate:** 
- FFO ≈ Operating cash flow + interest paid + taxes paid - interest received - working capital changes
- Rough FFO: ~€2,059.2M - €121.8M (finance costs) - €355.4M (tax) ≈ €1,582M
- FFO/Debt: ~1,582/10,770 ≈ 14.7% — this is consistent with a BBB rating under the low/medial volatility tables for regulated utilities.

### 3. Existing Hybrid Bond Issuance

**Critical Finding:** The data explicitly shows that Terna issued €989M in perpetual hybrid bonds during FY2022. This is reflected in:
- "Equity Instruments Perpetual Hybrid Bonds" of €989M in the equity movement table
- "Capital Instruments Bonds Hybrid Perpetual" balance of €989M at year-end
- "Coupon Payable To Holders Of Hybrid Bonds" of €21.1M
- "Movement In The Reserve For Equity Instruments" of €989M in cash flow from financing

This demonstrates that Terna has already successfully accessed the hybrid bond market, confirming its suitability and market credibility.

### 4. Assessment Against Criteria

**Strongly Suitable indicators (all met):**
- ✅ Regulated utility with highly visible, predictable cash flows
- ✅ Investment grade profile in the BBB area (leverage metrics consistent with BBB)
- ✅ Hybrid issuance materially improves adjusted leverage and rating headroom (€989M hybrid treated as equity)
- ✅ Strong capex funding rationale (€1.7B annual capex for energy transition infrastructure)
- ✅ High credibility of financial policy — already issued hybrids successfully
- ✅ State-backed ownership (CDP) enhances market access
- ✅ Natural monopoly TSO — the strongest type of regulated utility from a credit perspective
- ✅ Existing hybrid bonds that may need refinancing at future call dates

**Against Not Suitable:**
- The company is not A-rated or better (leverage too high for that)
- The company is not distressed or sub-investment grade
- Clear use of proceeds (funding large capex program)
- Strong investor appetite demonstrated by actual issuance

### 5. Market Conditions

The swap curve rose significantly in 2022, and credit spreads widened, but Terna still successfully issued €989M in hybrids during 2022, demonstrating strong market access even in challenging conditions. The sub-senior delta of ~20bps for non-financial IG corporates is manageable.

### Conclusion

Terna S.p.A. is the textbook example of a hybrid bond issuer: a regulated monopoly utility with stable, predictable cash flows, BBB-area credit metrics, large ongoing capital requirements for the energy transition, state-backed ownership, and a proven track record of hybrid issuance. The hybrid bonds provide meaningful equity credit that supports the company's credit rating while funding its substantial transmission investment program.

<answer>Strongly Suitable</answer>