Rating Action: Moody's reviews eustream's, SPP-distribucia's and EP Infrastructure's ratings for downgradeGlobal Credit Research - 03 Mar 2022Frankfurt am Main, March 03, 2022 -- Moody's Investors Service ("Moody's") has today placed on review for downgrade the Baa3 senior unsecured debt and long-term issuer ratings of EP Infrastructure, a.s. (EPIF), the Baa2 senior unsecured debt and long-term issuer ratings of eustream, a.s. (eustream) and SPP-distribucia a.s. (SPP-d), as well as the Baa2 backed senior unsecured debt rating of the notes issued by SPP Infrastructure Financing B.V. (SPP-IF) and guaranteed by eustream. The outlooks have been changed to ratings under review from stable for all issuers.RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe review for downgrade of eustream's ratings is triggered by the company's exposure to the heightened geopolitical risk for gas transit from Russia (B3 review for downgrade) to Europe via Ukraine (B3 review for downgrade), resulting from Russia's military assault of Ukraine which started on 24 February 2022. The review for downgrade of SPP-d's and EPIF's ratings reflects the credit linkages of these companies with eustream.eustream, the owner and operator of the gas transmission system in Slovakia (A2 stable), is generating around 95% of its revenues from transporting gas that is primarily sourced from Russia to Central and Southern Europe under long-term gas transit contracts. The Russian company Gazprom Export LLC, a 100% subsidiary of Gazprom, PJSC (Baa2 review for downgrade), has the monopoly on pipeline gas exports from Russia. The company's transit contracts are on a ship-or-pay basis, meaning that eustream receives most income from capacity payments and independent of actual gas flows. The contract portfolio is highly concentrated in the major Russian gas shipper.The placement of eustream's ratings on review for downgrade reflects the company's exposure to (1) the risk, stemming from the military conflict, of physical damage to the pipelines in Ukraine that ship gas to Slovakia; (2) the weakening of the credit profile of the major Russian gas shipper; and (3) the risk of negative credit implications for eustream from the additional and more severe sanctions imposed on the Government of Russia and certain Russian financial institutions by Western countries. For example, financial sector sanctions could disrupt cross-border payments associated with Russia's gas exports.The review of SPP-d's ratings follows that of eustream. While the company as owner and operator of the largest gas distribution network in Slovakia has no direct exposure to Russia, it is a member of a cash pooling arrangement of the SPP Infrastructure a.s. (SPP-I) group that includes eustream. Given that there is no ring-fencing in place which would insulate SPP-d's credit risk profile from that of SPP-I group, Moody's views SPP-d's credit quality as linked to SPP-I group entities and therefore exposed to the risk of contagion from eustream.The review of EPIF's ratings follows that of eustream and SPP-d. EPIF is a pure holding company and the ultimate parent of both eustream and SPP-d as EPIF owns 49% in these entities through a 49% stake in and management control of SPP-I. The Slovak government indirectly owns 51% of SPP-I. EPIF's debt is serviced by dividend income from its subsidiaries, thus exposing it to the evolution of the credit profiles of eustream and SPP-d. On a proportionate, consolidated basis, as per financial year 2021, EPIF estimated the share of EBITDA generated by eustream at 34%, with another 38% coming from SPP-d and the power distribution business, 17% from the gas storage segment and around 12% from the heating infrastructure operations.The reviews will focus on (1) the evolution and potential effect of sanctions on eustream's, SPP-d's and EPIF's cash flows and liquidity, as well as (2) the likelihood of potential shareholder support to the companies in the event of financial distress.eustreamGiven the review for downgrade, an upgrade of eustream's and SPP-IF's current ratings is remote. The ratings could be confirmed with a negative outlook if eustream continues to receive due capacity payments under the long-term transit contracts; and if there is a high likelihood that such payments will not be impeded by sanctions in the foreseeable future; or if the company obtains adequate support from its owners to offset any deterioration of its current credit profile.eustream's ratings could be downgraded if capacity payments to the company were to be discontinued or materially delayed, for example due to sanctions, resulting in material pressure on its liquidity and financial profile; if the wider SPP Infrastructure group's ratio of funds from operations (FFO) to debt were to deteriorate below 25% on a sustained basis; or if there was a significant deterioration in eustream's customer portfolio risk profile without offsetting support from owners.SPP-distribuciaGiven the review for downgrade, an upgrade of SPP-d's current ratings is remote. The ratings could be confirmed with a negative outlook if eustream's ratings were to be confirmed with a negative outlook; and if the company and the SPP Infrastructure group maintained a financial profile commensurate with the current rating, taking into account potential cash requirements from eustream.SPP-d's ratings could be downgraded if eustream's ratings were to be downgraded, unless there was tangible evidence that the shareholders would take measures to maintain the current Baa2 ratings, such as sufficient ring-fencing, that would insulate the credit quality of SPP-d from that of eustream.EP InfrastructureGiven the review for downgrade, an upgrade of EPIF's current ratings is remote. The ratings could be confirmed with a negative outlook if eustream's and SPP-d's ratings were confirmed and EPIF maintains its ratios aligned with the guidance for the current rating (see below); or in case the company's financial profile were to deteriorate, EPIF's owners take adequate measures to offset such deterioration to maintain the current credit profile.EPIF's ratings could be downgraded if eustream's and SPP-d's ratings were downgraded; or if the company's financial were to deteriorate such that proportional net debt/EBITDA exceeded 4.5x, or funds from operations (FFO)/net debt on a fully consolidated basis were to drop significantly below 20% on a sustained basis. The principal methodology used in rating EP Infrastructure, a.s. and SPP-distribucia, a.s. was Regulated Electric and Gas Networks published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1059225. The principal methodology used in rating eustream, a.s. and SPP Infrastructure Financing B.V. was Natural Gas Pipelines published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113727. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies. eustream a.s., is the owner and operator of the natural gas transmission and transit pipeline that runs through Slovakia. In the financial year 2020/21 the company reported EUR622 million of revenues and EBITDA of EUR544 million.SPP-distribucia a.s. is the monopoly provider of regulated gas distribution services in Slovakia. In the first six months of financial year 2020/21 the company reported EUR228 million of revenues and an EBIT of EUR95 million.EP Infrastructure, a.s. is a Czech holding company with shareholdings in core Slovak gas and electricity infrastructure, including (1) eustream a.s.; (2) SPP-distribucia, a.s.; and (3) Stredoslovenska Energetika group. The group also holds stakes in regional gas storage entities SPP Storage, NAFTA, NAFTA Speicher and Pozagas, as well as a number of district heating infrastructure providers in the Czech Republic. EP Infrastructure, a.s. is ultimately owned 69% by Energetický a prumyslový holding, a.s. and 31% by a number of specialist investment funds managed by Macquarie Infrastructure and Real Assets.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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