Terna outlook upgraded to positive by Moody’s Ratings

Investing.com -- Moody’s Ratings has shifted its outlook for Terna (BIT:TRN) - Rete Elettrica Nazionale S.p.A. (Terna) from stable to positive. The rating agency also confirmed Terna’s Baa2 long-term issuer rating, baa2 Baseline Credit Assessment (BCA), Baa2 senior unsecured ratings, and the provisional (P)Baa2 rating for Terna’s EUR12 billion senior unsecured EMTN programme. Terna’s P-2 short-term issuer and Commercial Paper ratings and (P)P-2 other short-term rating were also affirmed, along with the Ba1 ratings of Terna’s subordinated debt, also known as "hybrid".

The positive outlook reflects Terna’s robust financial profile, demonstrated by an average funds from operations (FFO) to net debt ratio of 15.0% over the past five years (2020-24). Moody’s expects that Terna will be able to maintain credit metrics in line with a Baa1 rating throughout 2025-28.

Terna’s gross capital expenditures (capex) of EUR 17.7 billion, as detailed in its 2024-28 business plan update, will likely lead to a significant rise in adjusted net debt and weaker credit metrics compared to recent years. However, nearly all the planned investments will contribute to growth in Terna’s regulatory asset base, and subsequently, earnings and cash flows. Terna’s management is committed to maintaining a robust financial structure and safeguarding credit ratings, and may strengthen the balance sheet amid increased investments, potentially through hybrid issuance. As a result, Moody’s anticipates FFO/net debt in the low double digits and retained cash flow (RCF)/net debt ratio in the mid-to-high single digits, both in percentage terms, on average over 2025-28.

The change in outlook also considers the improved fiscal outlook and anticipated enhancement in Italy’s economic resilience, highlighted by the positive outlook on the Government’s Baa3 rating. This is relevant in the context of Terna’s ties with the sovereign, as most of its earnings are generated in Italy.

The affirmation of Terna’s rating acknowledges its monopoly ownership and operation of the electricity transmission network in Italy, its crucial role in executing the country’s energy strategy, the low business risk of its electricity transmission activities, supported by a transparent and supportive regulatory framework, its limited exposure to volume fluctuations, and the usually timely cost recovery mechanisms in the Italian tariff-setting framework, which support revenue predictability and stability.

These positives are balanced by the country risk associated with Italy where Terna’s operations are concentrated, the relatively high proportion of cash flow paid out as dividends, which acts as a constraint on the company’s retained cash flow (RCF), and Terna’s sizeable and increased capital spending programme, which will bring higher leverage without mitigating action.

Terna falls within the scope of Moody’s Government-related Issuers methodology, because the Government of Italy has indirect control. Based on Moody’s expectation of a moderate support probability by the Government in case of financial distress, and very high default dependence with the Government, the Baa2 senior unsecured ratings of Terna do not include any uplift from the company’s BCA of baa2. Terna’s BCA is already higher than the Baa3 rating of its supporter.

Any upgrade of Terna’s ratings would depend on an upgrade of the Italian sovereign rating. Upward rating pressure would also require continuing sound liquidity and Terna likely maintaining financial metrics in line with a Baa1 credit profile with FFO/Net debt of at least 11% and RCF/Net debt of at least 7%.

Terna’s ratings could be downgraded following a downgrade of the Italian sovereign rating due to its links with the sovereign’s credit profile. Downward pressure on the rating could also result from a structural deterioration in Terna’s own credit profile, illustrated, for example, by a weakening of funds from operations (FFO)/net debt below 8% or RCF/net debt below 5%, growing exposure to unregulated businesses, which would be detrimental to Terna’s currently low business risk profile, or unexpected adverse regulatory developments damaging the company’s business risk profile, evidence of political interference or adverse fiscal measures.

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