DBRS Confirms the Senior Unsecured Notes of Texas Eastern Transmission, LP at BBB (high) with a Stable Trend

DBRS has today confirmed the Senior Unsecured Notes rating of Texas Eastern Transmission, LP (TETLP or the Company) at BBB (high) with a Stable trend. The confirmation reflects TETLP’s strong operational and financial metrics, which are expected to remain stable over the medium term. TETLP is an integral part of the natural gas pipeline network of Spectra Energy Capital, LLC (Spectra Capital). TETLP is supported by production in the Gulf Coast region and continued demand in the U.S. Northeast market. The rating also reflects the following factors:

(1) TETLP’s rating is limited by the BBB (high) rating of Spectra Capital due to the integration of cash management functions at the parent company. In addition, TETLP advances all excess cash flow to Spectra Capital after meeting its own capital expenditure, debt repayment and operating needs. This policy is expected to continue given that Spectra Capital’s significant expansion capex program (projected to be approximately $3 billion from 2007 to 2009, including about $625 million spent through September 30, 2007) is likely to result in negative free cash flows at Spectra Capital on a consolidated basis. While recognizing that TETLP’s credit profile is closely linked to that of Spectra Capital, DBRS expects the Company’s credit measures to remain strong. The improvement in Spectra Capital’s credit profile in recent years has reduced the risk that it would enhance its own resources at TETLP’s expense.

(2) TETLP is supported by long-term contracts (mostly with local distribution utilities) with an average remaining term of approximately 4.5 years (which is declining over time), resulting in earnings stability.

(3) The Company has competitive tolls from the Gulf Coast to the key U.S. Northeast market.

(4) TETLP has a strong balance sheet, interest coverage ratios and free cash flow generation. These measures are expected to remain favourable relative to its peers, although free cash flow could be reduced by higher capex related to potential medium-term expansions. Recently, the Company proposed two projects to meet growing natural gas demand in the U.S. Northeast: (a) The Northern Bridge project would expand the existing pipeline system from Clarington, Ohio (also the endpoint of Kinder Morgan Energy Partners, L.P.’s (KMP) Rockies Express Pipeline), to its market area at Oakford/Delmont, Pennsylvania. Northern Bridge would cost between $100 million and $150 million and transport up to 500 million cubic feet per day (MMcf/d) of natural gas. If constructed (subject to shipper commitments), Northern Bridge is expected to begin operations in late 2009. (b) The proposed Time 3 project would expand Texas Eastern’s capacity from Oakford to the U.S. Northeast through additional compression and looping. Time 3 would cost approximately $300 million, with an anticipated in-service date in late 2010.

(5) TETLP faces significant competition for supply and end-user markets. (a) The Company competes for supply with a number of pipelines, including Transcontinental Gas Pipe Line Corporation (Transco), ANR Pipeline Company (ANR) and Natural Gas Pipeline Company of America (NGPL). In addition, KMP’s KM Louisiana Pipeline project, expected to be in service in 2009, would compete with TETLP in the Gulf Coast region. (b) TETLP also competes for end-user markets with several pipelines, including Transco, Consolidated Natural Gas Company (CNG), Iroquois Gas Transmission System, L.P. (Iroquois) and Maritimes & Northeast Pipeline, LLC (M&NP). In addition, KMP’s Rockies Express Pipeline project, expected to be fully in service in 2009, will compete with TETLP in the U.S. Midwest. (c) Growing pipeline industry competition could negatively affect earnings in some of the markets served by TETLP. Its tariffs will have to remain competitive in order to ensure that its volumes remain high and an adequate rate of return can be achieved as its long-term contracts approach maturity.

(6) TETLP, which sources much of its natural gas from the Gulf Coast region of Texas and Louisiana, will need to access additional sources along the pipeline to maintain throughput levels over the long term given high production decline rates and limited gas production growth potential in this mature basin. The risk of declining production may be partially mitigated if deepwater Gulf of Mexico (GOM) gas production grows significantly and liquefied natural gas (LNG) deliveries become a reality over time.

Note:
All figures are in U.S. dollars unless otherwise noted.