DBRS Confirms Texas Eastern Transmission, LP at BBB (high)

DBRS has today confirmed the long-term debt rating of Texas Eastern Transmission, LP (TETLP or the Partnership) at BBB (high) with a Stable trend. TETLP is an integral part of Spectra Energy Capital, LLC’s (Spectra Capital) natural gas pipeline network, supported by production in the Gulf Coast region and strong demand in the U.S. Northeast, and competitive tolls. Demand is seasonal, with throughput peaking in the winter months. 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 operations and cash management functions at the parent company. In addition, the Partnership 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 the large capex program outlined by Spectra Capital, which has significant growth projects totalling about $1.3 billion during 2009, 2010 and beyond (about 50% of its $2.6 billion total for that time frame) to expand its U.S. Transmission segment, which is focused on the U.S. Northeast natural gas market. As a result, Spectra Capital will likely generate negative free cash flows on a consolidated basis. While recognizing that TETLP’s credit profile is closely linked to Spectra Capital, DBRS expects the Partnership’s credit metrics to remain relatively strong.

(2) The Partnership is supported by firm contracts, mostly with local distribution utilities, with an average remaining term of four years. The average remaining contract life has stabilized as several long-term shippers have converted to evergreen contracts that are renewable on an annual basis.

(3) TETLP has a strong balance sheet, interest coverage ratios and free cash flow.

These metrics are expected to remain favourable relative to those of its peers, although free cash flow before dividends will likely be negative in 2010 due to higher capex related to medium-term expansions. (a) The Northern Bridge project, which will expand the existing pipeline system from Clarington, Ohio (also the endpoint of Kinder Morgan Energy Partners, L.P.’s (KMP) 51%-owned Rockies Express Pipeline), to its market area at Oakford/Delmont, Pennsylvania is currently under construction. Northern Bridge is projected to cost approximately $45 million and transport up to 150 million cubic feet per day (mmcf/d). The Partnership has already signed transportation agreements with shippers, and Northern Bridge is expected to begin operations in Q4 2009. (b) (i) The TEMAX project will transport approximately 395 mmcf/d of Rockies gas from Clarington, Ohio to Station 195 on Transcontinental Gas Pipeline Corporation (Transco). ConocoPhillips has executed a precedent agreement to deliver the gas. (ii) The TIME III Project will add approximately 60 mmcf/d of gas transportation capacity within Pennsylvania, from Oakford/Delmont to Station 195 on Transco. PPL Energy Plus LLC and CenterPoint Energy Services Inc. have signed precedent agreements totalling 55 mmcf/d. TEMAX and TIME III are projected to cost a total of $700 million, with anticipated in-service dates in November 2010. This will necessitate funding either from Spectra Capital or third-party sources. The Partnership faces some refinancing risk, with $300 million of outstanding debt (26% of total debt) due in Q4 2010, although this should be manageable given TETLP’s strong credit profile and market acceptance.

(4) TETLP faces significant competition for supply and end-user markets. (a) The Partnership competes for supply with a number of pipelines including Transco, ANR Pipeline Company, Natural Gas Pipeline Company of America and KMP’s KM Louisiana Pipeline, placed in service in July 2009. (b) TETLP also competes for end-user markets with several pipelines, including Transco, Consolidated Natural Gas Company, Iroquois Gas Transmission, and Maritimes & Northeast Pipeline LLC. KMP’s Rockies Express - East Pipeline project, expected to be fully in service in November 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 evergreen contracts approach their renewal dates.

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

The applicable methodology is Rating Utilities (Electric, Pipelines & Gas Distribution), which can be found on our website under Methodologies.

This is a Corporate rating.