Rating Action: Moody's downgrades eustream's and EPIF's ratings and maintains review for downgrade, confirms SPP-distribucia's ratingsGlobal Credit Research - 23 Mar 2022Frankfurt am Main, March 23, 2022 -- Moody's Investors Service ("Moody's") has today downgraded to Ba1 from Baa2 the ratings on the senior unsecured notes issued by eustream, a.s. (eustream) and on the backed senior unsecured notes issued by SPP Infrastructure Financing B.V. (SPP-IF) and guaranteed by eustream. At the same time, Moody's has assigned a Ba1 long-term Corporate Family Rating (CFR) and a Ba1-PD probability of default rating to eustream and concurrently has withdrawn the company's Baa2 long-term issuer rating, as per the rating agency's practice for corporates transitioning to speculative grade. All of eustream's ratings are on review for downgrade.At the same time, Moody's has confirmed the Baa2 senior unsecured debt and long-term issuer ratings of SPP-distribúcia, a.s. (SPP-d or SPP-distribucia). The outlook is negative. This rating action concludes the review for downgrade initiated on 3 March 2022.Moody's has also downgraded to Ba2 from Baa3 the ratings on the senior unsecured notes issued by EP Infrastructure, a.s. (EPIF). At the same time, Moody's has assigned a Ba1 long-term CFR and a Ba1-PD probability of default rating to EPIF and concurrently withdrawn the company's Baa3 long-term issuer rating, as per the rating agency's practice for corporates transitioning to speculative grade. All of EPIF's ratings are on review for downgrade.A full list of affected ratings is provided towards the end of this press release. RATINGS RATIONALE eustream The downgrade of eustream's ratings reflects the company's exposure to the risk of negative credit implications from the severe sanctions imposed on the Government of Russia (Ca negative) and certain Russian financial institutions by Western countries which could disrupt the receipt of payments due to eustream from its main counterparty. While the European Union (EU, Aaa stable) sanctions that have been put in place since the invasion of Ukraine (Caa2 review for downgrade) by Russia exclude energy-related payments and are not directly imposed on the major Russian gas shipper, Moody's considers that the risk that additional EU sanctions and/or countermeasures by Russia may stop the ability of the major Russian gas shipper to make payments under its contractual obligations to eustream is substantially higher than previously, given the volatile geopolitical situation.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 (Caa2 negative), 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.Russia's invasion of Ukraine, which started on 24 February 2022, has led to sovereign rating actions, and subsequently downgrades of Russian non-financial corporates, including the Russian gas shipper on 10 March. The weakening of the credit profile of the major Russian gas shipper reflects Moody's view of a significantly increased risk of default which may include trade-related obligations.Up to today, gas flows from Russia have continued uninterrupted and the Russian shipper has honoured its contractual payment obligations. Given that a part of eustream's gas transportation network serves as a link between Czech Republic (Aa3 stable) and Austria (Aa1 stable), Moody's expects that in a case of cessation of gas flows or capacity payments from Russia, or both, the company could replace part but not all of the business with the Russian shipper with alternative bookings, but these are unlikely to fully compensate the revenues coming from the major Russian gas shipper.The Ba1 ratings also factor in Moody's expectation that EPIF is willing to protect the financial profiles of eustream and SPP-d since these operating companies are a key source of its income. In a press release dated 10 March [1], EPIF and its shareholders confirmed their commitment to maintain an investment grade rating for EPIF, eustream and SPP-d, subject to other factors outside their control. Moody's believes that SPP-d has some capacity to provide support to eustream, if needed, given its current strong financial profile.Nevertheless, while an immediate stop of gas imports from Russia into Europe is currently not Moody's baseline scenario, the evolution of the current geopolitical situation is highly uncertain and could have materially adverse implications for the gas trade between Russia and the EU, hence the ratings remain on review for downgrade.The review will focus on (1) the evolution of the geopolitical situation, including decisions, if any, around further of sanctions and their impact on eustream's cash flow, liquidity and business risk profile; (2) the evolution of the EU's energy policy, in particular its plans for reducing energy dependence on Russia; as well as (3) any credit enhancing measures that may become available from shareholders to support the company's credit profile, if required.SPP-distribúciaThe confirmation of SPP-d's ratings reflects Moody's expectation that the company, which as owner and operator of the largest gas distribution network in Slovakia has no direct exposure to Russia, will remain able to preserve its current strong financial profile. Should eustream require financial support, Moody's believes that earnings from SPP-d in excess of what is required to maintain its financial profile; and those from the gas storage companies which only have moderate debt; will likely suffice to support eustream over the next 2-3 years. The rating confirmation also reflects Moody's expectation, as noted above, that EPIF is willing to protect the financial profile of SPP-d since this operating company is a material source of its income. The outlook is nevertheless negative, reflecting the risk of contagion from eustream.EP InfrastructureThe downgrade of EPIF's ratings follows that of eustream's ratings and reflects the credit linkages of EPIF with eustream. EPIF is a pure holding company and owns 49% eustream and SPP-d through a 49% stake in and management control of SPP Infrastructure a.s. (SPP-I) group that includes eustream and SPP-d, which together contribute around 60% of its EBITDA on a proportional basis. The company also has access to the cash flows of some district heating companies in the Czech Republic, whose cogeneration plants have been benefitting from high power prices, as well as to the earnings of some gas storage companies, which are partly located within SPP-I and stand to benefit from the EU's greater focus on strategic gas storage. The Slovak government indirectly owns 51% of SPP-I, which supports Moody's view that the government has a strong incentive to protect the operating companies within SPP-I.EPIF's Ba1 CFR reflects Moody's assessment of the consolidated credit quality of the EPIF group's operating subsidiaries, which incorporates the weaker credit profile of eustream, together with the additional debt of EUR2.35 billion at the holding company, albeit partly offset by Moody's expectation of potential support coming from EPIF's majority owner Energetický a prumyslový holding, a.s. (EPH) in a situation of financial distress. EPIF, which holds 70% of proportionate group debt, is reliant on dividend income from its subsidiaries, which, in addition to SPP-I and the heating and gas storage subsidiaries, also include a 49% share in the second-largest power distribution and supply company in Slovakia, Stredoslovenska Energetika group (SSE).Moody's believes that EPIF will be able to service its debt over the next two years without a meaningful contribution from eustream and SPP-d, given that only interest payments will be due before the next debt maturity of a EUR750 million bond in April 2024. The Ba2 senior unsecured rating of EPIF's outstanding senior bonds is nevertheless one notch below EPIF's CFR, reflecting (1) the structural subordination of noteholders to the claims of other EPIF group creditors as well as (2) Moody's view that in the current situation there is a focus on the protection of the credit profiles of eustream and SPP-d.EPIF's ratings remain on review for downgrade, reflecting the review of eustream's ratings. The review will focus on (1) the evolution and potential effect of sanctions and changes in EU energy policies on EPIF's consolidated credit quality; (2) the company's ability and willingness to upstream funds from the operating companies to the holding company; as well as (3) any credit enhancing measures that may become available from shareholders to support the company's credit profile, if required.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSeustreamGiven the review for downgrade, an upgrade of eustream's and SPP-IF's ratings in the near term is unlikely. The ratings could be confirmed if eustream continues to receive due capacity payments under the long-term transit contracts and uses these to protect its financial profile; or, in case the capacity payments were to be materially reduced, revenues from other bookings could be achieved that support the current credit profile; or if the company obtains adequate support from its owners to offset any further deterioration of its 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.SPP-distribúciaGiven the negative outlook, an upgrade of SPP-d's current ratings is unlikely. The ratings could be affirmed with a stable outlook if the credit profile of eustream were to stabilize and there was adequate visibility that any potential financial support needs from eustream would not materially affect SPP-d's financial profile.SPP-d's ratings could be downgraded if cash requirements from eustream were to lead to a materially weaker financial profile.EP InfrastructureGiven the review for downgrade, an upgrade of EPIF's ratings is unlikely. The ratings could be confirmed if eustream's ratings were confirmed; or if the company obtains adequate support from its owners to offset any further deterioration of its credit profile.EPIF's ratings could be downgraded if eustream's or SPP-d's ratings were downgraded; if dividend flows from subsidiaries were unlikely to be sufficient to cover the company's operating and interest expenses; or if there was an increased likelihood that the company could face difficulties to refinance the next bond maturity.LIST OF AFFECTED RATINGSIssuer: EP Infrastructure, a.s.Assignments:....Probability of Default Rating, Assigned Ba1-PD, Placed On Review for Downgrade....LT Corporate Family Rating, Assigned Ba1, Placed On Review for DowngradeDowngrades:....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba2 from Baa3; Placed On Review for further Possible DowngradeWithdrawals:....LT Issuer Rating, Withdrawn, previously rated Baa3, previously Placed On Review for DowngradeIssuer: SPP-distribúcia, a.s.Confirmations:....LT Issuer Rating, Confirmed at Baa2....Senior Unsecured Regular Bond/Debenture, Confirmed at Baa2Outlook Actions:....Outlook, Changed To Negative From Rating Under ReviewIssuer: eustream, a.s.Assignments:....Probability of Default Rating, Assigned Ba1-PD, Placed On Review for Downgrade....LT Corporate Family Rating, Assigned Ba1, Placed On Review for DowngradeDowngrades:....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba1 from Baa2; Placed On Review for further Possible DowngradeWithdrawals:....LT Issuer Rating, Withdrawn, previously rated Baa2, previously Placed On Review for DowngradeIssuer: SPP Infrastructure Financing B.V.Downgrades:....Backed Senior Unsecured Regular Bond/Debenture, Downgraded to Ba1 from Baa2; Placed On Review for further Possible Downgrade 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-distribúcia, a.s. is the monopoly provider of regulated gas distribution services in Slovakia. In the financial year 2020/21 the company reported EUR443 million of revenues and an EBIT of EUR178 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-distribúcia, 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. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS [1] EPIF press release 10-Mar-2022 (https://www.epinfrastructure.cz/en/tiskove-zpravy/epif-and-its-shareholders-restate-commitment-to-investment-grade-credit-rating/) Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. 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