RPT-Fitch maintains eustream on rating watch evolvin

Mon Dec 2, 2013 8:51am EST

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Dec 2 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings is maintaining Slovakia-based eustream, a.s.'s Long-term Issuer Default Rating of 'A-' and SPP Infrastructure Financing B.V.'s senior unsecured notes, guaranteed by eustream - also rated 'A-' - on Rating Watch Evolving (RWE).

eustream's IDR is constrained by that of its immediate parent, Slovensky Plynarensky Priemysel a.s.'s (SPP, A-/Rating Watch Negative (RWN)) due to their strong financial links. This is despite eustream's status as Slovakia's independent transmission operator (ITO) and owner of the natural gas transmission network. SPP's ratings currently reflect its consolidated profile including gas transmission, distribution, storage and supply as well as the dividend policy agreed by its owners.

Fitch views eustream's unconstrained credit profile as commensurate with a 'A' rating. This is supported by its strong business profile as the national transmission system operator (TSO), its long-term ship-or-pay transmission contracts, and expected strong credit metrics, assuming the proceeds of its EUR750m 3.75% notes are used for dividend during the forecast period.

The RWE is predicated on the yet to be determined restructuring of SPP group, the resulting rating of SPP and the strengths of SPP's links with eustream. The ratings of eustream may be upgraded or downgraded by one notch, or affirmed following SPP's restructuring. Fitch will resolve the RWE once the outcome of the discussions on the restructuring is known.

KEY RATING DRIVERS

Evolving ITO Ring Fencing

Slovakia adopted EU's third gas directive (2009/73/EC) through its Act on Energy on 1 September 2012, and opted for an ITO (rather than full ownership separation or an independent system operator) status for SPP/eustream on 28 November 2012. eustream obtained its ITO certification in November 2013. However, we believe that eustream's current financial links with SPP (capital structure management, including cash pooling) and the untested ITO status currently constrain its rating to that of SPP.

SPP Group Restructuring

Should SPP's stake in eustream decrease to 51% and assuming tight shareholder agreement and regulatory ring-fencing around eustream weaken its links with SPP, we may upgrade eustream to its unconstrained level. Fitch believes that the Slovak government and the other major shareholder Energeticky a Prumyslovy Holding, a.s. (EPH) aim to agree SPP's restructuring by end-2013 and we anticipate resolving the RWE then.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- eustream's ratings could be upgraded to its standalone level, should the restructuring weaken eustream's links with SPP

- eustream's unconstrained credit profile may improve should funds from operations (FFO) adjusted net leverage fall to below 1.5x (from 2.2x currently forecasted for 2013-2016) on a sustained basis based on the current business risk profile

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- eustream's ratings could be downgraded by one notch should the current group structure and links with SPP remain unchanged and if SPP's consolidated financial profile deteriorates due to an aggressive dividend policy. However, we may not downgrade eustream if we downgrade SPP only to reflect the structural subordination of the latter's creditors (should SPP decide to raise debt)

- eustream's unconstrained credit profile would likely be downgraded should FFO adjusted net leverage increase to above 3.0x on a sustained basis based on the current business risk profile

DEBT STRUCTURE AND LIQUIDITY

Fitch's forecast metrics take into account that eustream will use the proceeds of the long-term EUR750m 3.75% notes for dividend payment. The dividend policy is expected to remain aggressive with all excess cash flows to be distributed. However, despite dividend targets set in absolute (rather than profit-based) terms for the consolidated SPP group over the next five years (EUR3.6bn in total), the shareholders' agreement also stipulates a maximum leverage level (defined as net debt to EBITDA for SPP and subsidiaries at 2.5x) that could potentially limit the dividend payout.

eustream plans to maintain a cash liquidity buffer of EUR30m which is adequate considering its cash-generative nature and no short-term debt. Approximately 90% of revenues are in EUR (with the rest in USD), limiting eustream's exposure to FX risk.

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