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Rating Action:

Moody's downgrades SPP Infrastructure Financing and SPP-distribucia ratings to Baa2; stable outlook

22 May 2015

Approximately EUR1.75 billion of debt affected

London, 22 May 2015 -- Moody's Investors Service (Moody's) has today downgraded to Baa2 from Baa1 the senior unsecured ratings of notes issued by SPP Infrastructure Financing B.V. and guaranteed by eustream, a.s., and the issuer and senior unsecured ratings of SPP-distribucia, a.s..The outlook on all ratings is stable. This concludes the review process initiated on 16 April 2015.

eustream and SPP-distribucia are major subsidiaries of SPP-Infrastructure, a.s., whose ultimate owners are Energeticky a prumyslovy holding, a.s. (EPH) maintaining a 49% ownership and management control in the company, and the Government of Slovakia holding a 51% stake.

RATINGS RATIONALE

Today's rating action reflects Moody's re-assessment of the business risk profile of the SPP-Infrastructure group due to the weakening of the credit quality of eustream's counterparty portfolio and continued geopolitical risk surrounding Ukraine and Russia. Gas transmission activities are the primary source of the group's cash flows accounting for over 50% of its consolidated EBITDA. Whilst the SPP Infrastructure group as a whole benefits from diversification of its operations and the presence of fully-regulated gas distribution activities, these are not sufficient to fully offset the negative impact of the recent developments at eustream.

The downgrade of SPP-distribucia's ratings reflects the lack of regulatory ring-fencing or specific creditor protection features that would isolate the company from the wider risks of the SPP-Infrastructure group. Whilst the shareholder agreement between EPH and the Government of Slovakia provides for a maximum leverage of 2.5x on a net debt/ EBITDA basis, this is not sufficient to delink the credit quality of SPP-distribucia from the wider group at the current rating level considering that the shareholders can agree to modify the capital structure without the need to seek regulatory and/or creditors' consent.

Moody's acknowledges the recent good operational performance of the SPP-Infrastructure group owing to the better than expected cash flow generation of eustream following procurement of additional ship-or-pay contracts. However, eustream's cash flows are still reliant on the long-term contract with the Russian shipper for gas transit from east to west. In this regard tensions between Ukraine and Russia and the finite life of the gas transit contract through Ukrainian territory exposes the company to geopolitical risk, which currently weighs on Moody's assessment of eustream. While the medium term reverse flow contract for the exit capacity in the Ukrainian direction is a source of additional cash flows, it exposes eustream to relatively higher counterparty risk given the destination of the gas and weak credit quality of certain shippers. Moreover, Moody's notes that the outperformance of operational assumptions has been used by the SPP-Infrastructure group to upstream dividends to shareholders, albeit still respecting the maximum leverage target of 2.5x on a net debt/EBITDA basis.

The Baa2 rating of the notes issued by SPP Infrastructure Financing B.V. is a result of the unconditional and irrevocable guarantee provided by eustream and as such reflects the credit quality of the guarantor. The rating reflects (1) eustream's importance as a major gas transit route in Europe but also its role as an intermediate pipeline exposing it to regulatory and geopolitical risks in other transit countries; (2) the commercial nature of its "ship-or-pay" contracts, which are subject to renewal risk in the context of competition and shifts in gas flows; (3) the credit quality of its counterparty portfolio and material exposure to a single Russian shipper; (4) high profitability of contracts and low capital maintenance requirements associated with the current infrastructure; and (5) the consolidated credit quality of the SPP-Infrastructure group.

SPP-distribucia's rating reflects (1) the company's position as a de-facto monopoly gas distribution network in Slovakia; (2) a historically fairly supportive regulatory framework, which is, however, evolving and not very transparent; (3) strong cash flow generation coupled with low investment requirements; (4) moderate leverage of the company on a standalone basis; and (5) the consolidated credit quality of the SPP-Infrastructure group. In this regard Moody's notes that the company's standalone assessment is stronger but its rating is currently constrained by the overall credit quality of the SPP-Infrastructure group.

RATING OUTLOOK

The stable outlook on SPP Infrastructure Financing's and SPP-distribucia's ratings reflects Moody's view that the SPP-Infrastructure group as a whole has some flexibility to accommodate weaker operational performance and that it will maintain a financial profile commensurate with the current rating guidance.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's currently sees limited potential for a rating upgrade considering the perceived risks weighing on the business risk profile of the SPP-Infrastructure group and in the case of SPP-distribucia the lack of ring-fencing features.

Downward rating pressure could develop, if (1) there was a material increase in the business risk profile of the SPP-Infrastructure group; (2) the group's consolidated funds from operations (FFO)/debt ratio were to deteriorate to below 30% on a sustainable basis; (3) there was a further material weakening in the credit quality of eustream's counterparties; (4) the probability that the contractual arrangements may not be respected in full and / or in a timely manner by eustream's counterparties had increased; or (5) there was a change in financial policies of the ultimate shareholders.

PRINCIPAL METHODOLOGIES

The principal methodology used in rating SPP Infrastructure Financing B.V. was Natural Gas Pipelines published in November 2012.

The principal methodology used in rating SPP-distribucia, a.s. was Regulated Electric and Gas Networks published in November 2014.

Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Bratislava, eustream, a.s. is a gas transmission network operator in Slovakia. In 2014, it transported 47 bcm of gas.

Headquartered in Bratislava, SPP-distribucia, a.s. is the owner and operator of the gas distribution network in Slovakia. In 2014, SPP-distribucia reported revenues of EUR344 million.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Joanna Fic
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Andrew Blease
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades SPP Infrastructure Financing and SPP-distribucia ratings to Baa2; stable outlook
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