Moody's Investors Service has assigned a Baa1 rating to the EUR 500mn 7-year bond of Slovakia's gas transmission system operator Eustream, a unit of the country’s dominant gas utility Slovensky Plynarensky Priemysel (SPP). The bonds, which carry a coupon of 3.75% and mature in 2020, are issued by SPP Infrastructure Financing B.V. and unconditionally and irrevocably guaranteed by Eustream.
Moody’s noted that the rating reflects Eustream's strategic importance as a major gas transit route in Europe, the high profitability of the company's transit activities, the low risk of Eustream's domestic transmission activities, and the low capital maintenance requirements associated with the current infrastructure. On the negative side, the rating reflects the renewal risk of ship-or-pay contracts given rising competition and a shift in traditional gas flows in Europe, Eustream's material concentration in terms of its exposure to a single shipper (Russia’s Gazprom), the expected increase in the company's leverage, and the overall credit quality of SPP group. Moody's lowered last month SPP’s rating to Baa1 from A2 on expectations that the group's leverage will increase as shareholders seek to maximise the dividends they receive.
With a total capacity of 90 billion cubic metres of its pipeline network, Eustream is the largest transit carrier of Russian natural gas into western and southern Europe. It derives the majority of its transmission revenues from long-term ship-or-pay contracts, which provide good visibility on the company's future cash flow generation, as capacity payments under existing long-term contracts are linked to inflation, whereas new contracts, including those for domestic transmission, are subject to regulatory approvals.
Moody’s has assigned a negative outlook on the ratings due to uncertainty regarding a proposed restructuring of the SPP group and its impact on the group's corporate and debt structure. The Slovak government has been exploring the opportunity to acquire 100% of the parent gas company by end-2013 in a bid to gain full control over gas prices for households. In that case, Czech energy group Energeticky a Prumyslovy Holding (EPH), which bought in January a 49% stake in SPP from Germany's E.ON Ruhrgas and France's GDF Suez for EUR 2.6bn, would keep a 49% stake and a managerial control over SPP's two independent gas distribution units, Eustream and SPP Distribucia, which make up the bulk of its business.
Moody's noted that given the current negative outlook, an upgrade is unlikely at this stage, while a downgrade could come in case of a deterioration of the credit quality of SPP or Gazprom, or if Eustream fails to secure new contracts over the medium to long term, which would lead to very high contract concentration.
Eustream transported 56 billion cubic metres of gas through 2,260 km of pipelines in 2012. The company awaits a certification process as an independent transmission operator following the transfer of the transmission assets from SPP in February 2013.
Fitch assigned last week an A- rating on Eustream's bond.
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