Fitch Upgrades Spectra Energy Capital to 'BBB'; Outlook Stable.

CHICAGO -- Fitch has upgraded the ratings of Spectra Energy Capital, LLC (NYSE: SE) (Spectra Capital) and Texas Eastern Transmission, LP (Texas Eastern). The upgrade resolves the Rating Watch Positive where the ratings were placed in April 2006. The ratings are upgraded as follows:

Spectra Energy Capital, LLC

--Issuer Default Rating (IDR) to 'BBB' from 'BBB-';

--Senior unsecured debt to 'BBB' from 'BBB-';

--Commercial paper to 'F2' from 'F3'.

Texas Eastern Transmission, LP

--IDR to 'BBB+' from 'BBB';

--Senior unsecured debt to 'BBB+' from 'BBB'.

The Ratings Outlook for both entities is Stable.

On Jan. 2, 2007 Spectra Energy Corp (Spectra Energy) began trading on the NYSE under the ticker 'SE' as the spin-off of Duke Energy Corp.'s (NYSE: DUK) (Duke Energy) former natural gas businesses. Spectra Energy is the parent holding company of all of Duke Energy's natural gas transmission, storage, distribution, gathering and processing businesses, which were historically held under the Duke Capital LLC subsidiary (Duke Capital). As part of the spin-off, Duke Capital has been renamed Spectra Energy Capital (Spectra Capital) and is a wholly owned subsidiary of Spectra Energy. Spectra Capital maintains all of the holding company debt previously at Duke Capital and holds all of the operating companies under Spectra Energy.

Fitch's rating action recognizes the size, quality and diversity of the company's integrated natural gas businesses, strong industry fundamentals and a credit profile that is in-line with the 'BBB' rating. Spectra Capital's asset base represents one of the largest natural gas midstream businesses in North America that serves primarily high demand markets. The company's assets are also strategically located to capitalize on the significant investment and growth in production from most major North American natural gas basins.

The resulting demand for midstream assets also continues to drive Spectra Capital's significant growth strategy across each of its business segments. Operating results should see steady improvement over the next few years as the company's growth investments continue to come on stream. Fitch notes that despite the pull nature of some of the company's investments, the risk of speculative building does not appear to be an issue as evidenced by the company's recent cancellation of the Mid-Continent Crossing Pipeline project.

The company's ratings are also supported by the high percentage of relatively stable and predictable cash flows from the regulated nature of its transmission and distribution businesses. The company's US transmission assets, which include Texas Eastern and other FERC-regulated pipelines and storage assets serving the Northeast and Southeast markets, have a very strong stand-alone credit quality including modest credit metrics. Spectra Capital's gas distribution business consists primarily of the Union Gas Limited (Union Gas) subsidiary in central Canada. Despite Union Gas's weaker credit metrics relative to its US peer group, the stand-alone credit quality of the subsidiary is viewed as strong due to the more supportive regulatory environment in Canada and the lower volatility of Union Gas's earnings.

Spectra Capital's remaining Canadian assets include the transmission and midstream assets in Western Canada under Westcoast Energy Inc. and Spectra Capital's 77.53% interest in the Canadian leg of the Maritime & Northeast Pipeline. The credit quality of these assets are also characterized by the predictable nature of the cash flows from the regulated pipelines as well as the light handed regulation of Westcoast's gathering and processing assets with exposure to commodity prices from the Empress natural gas liquids system.

However, the majority of Spectra Capital's commodity price exposure comes from its 50% interest in DCP Midstream, LLC (DCP Midstream formerly named Duke Energy Field Services, LLC [DEFS]), Fitch IDR of 'BBB' with a Stable Rating Outlook). DCP Midstream's ratings and Stable Outlook reflect the company's conservative capital structure and generally strong current and projected credit measures; significant scale and scope of operations and geographic diversity of assets; supportive corporate sponsors in Spectra Capital and ConocoPhillips; and a highly discretionary capital spending program. Of note is that DCP Midstream has reduced its commodity price exposure by renegotiating and converting a portion of its highly volatile keep-whole contracts, which are exposed to fractionation spreads, to percent of proceeds or minimum fee arrangements. However, DCP Midstream's commodity exposure is currently unhedged and, therefore, the quantity of distributions upstreamed to Spectra Capital is difficult to predict.

While the spin-off of Spectra Capital was expected to be largely credit neutral, the reduction of business risk associated with the transfer of Crescent Resources (real estate) and Duke Energy International (primarily international power generation and power and gas marketing) has enhanced the consolidated credit profile of Spectra Capital. The company also realized a modest reduction in debt due to the asset transfers as consolidated debt of Spectra Capital pro-forma for the spin-off at Sept. 30, 2006 was estimated at $8.9 billion including approximately $3.0 billion at the holding company level. This compares with $10.3 billion of consolidated debt at year-end 2005.

Credit concerns primarily revolve around the anticipated increase in leverage during Spectra Capital's ongoing growth phase as the company has outlined at least $3.0 billion in growth capital over the next three years. While the creation of a master limited partnership (MLP) in the next several months will likely provide additional access to equity capital, shortfalls in financing Spectra Capital's capital plans are expected to be primarily met through the issuance of additional debt. As a result of the financing plans and the weaker metrics of the Canadian operations, Spectra Capital's consolidated credit metrics will likely be significantly weaker than those of the company's U.S. peer group during this period.

With the spin-off from Duke Energy Corp., the service of the approximately $3.0 billion of debt at the Spectra Capital holding company level is now reliant solely on the upstream distributions of its subsidiary companies and access to capital markets. Spectra Energy also targets a 60% dividend payout ratio with a target debt to capitalization ratio of 55% to 60%. As a result, additional pressure may be placed to upstream distributions to support the debt and equity burden, particularly during the company's ongoing growth phase. Hence, the structural subordination of the debt at Spectra Capital to the debt at its operating companies remains.

In addition to the factors driving the upgrade of Spectra's ratings, Texas Eastern's upgrade and Stable Outlook reflect the strength of the company's credit profile and the low level of business risk associated with the FERC-regulated operations. On a stand alone basis, the pipeline system has a strong credit profile reflective of an 'A' rated entity with moderate debt levels, and solid, consistent earnings and cash flow. As a subsidiary of Spectra Capital, however, the ratings of Texas Eastern remain linked to that of its parent. Texas Eastern will also continue to be functionally operated as a single integrated business unit within Spectra Capital. Texas Eastern and other U.S. operating companies will also remain reliant on the parent company's pooled credit facilities at Spectra Capital for any short term liquidity needs.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.