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Announcement:

Moody's comments on Spectra Energy's Bobcat Gas Storage Purchase

15 Jul 2010

New York, July 15, 2010 -- Moody's Investors Service commented that Spectra Energy Corp's credit profile (its guaranteed finance vehicle Spectra Energy Capital, LLC rated Baa2 senior unsecured) and stable outlook are unaffected by the announcement that the company will acquire the Bobcat Gas Storage assets and development project for $540 million from Haddington Energy Partners III LP and GE Energy Financial Services.

Although the acquisition is of some size and increases Spectra's total capital budget for 2010 by about a third from $1.6 billion, Bobcat is small relative to Spectra, with its $24 billion of assets, $2.6 billion of EBITDA in the last twelve months ended March 2010, and multiple funding vehicles, which Moody's believes gives Spectra adequate financial resources to absorb this transaction. Spectra is well equipped to take on the risks of developing and operating high-deliverability gas storage facilities. The company currently owns almost 300 billion cubic feet (Bcf) of storage capacity, including its Egan and Moss Bluff storage facilities nearby Bobcat that were also initially developed by Haddington. Bobcat is strategically valuable to Spectra as the facility is located not far from the Henry Hub gas trading hub and owns pipeline interconnects to two pipelines that Egan and Moss Bluff lack -- Transco and Gulf South.

The transaction is subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act and is estimated to close before year-end. Spectra Energy Corp will acquire the assets and hold them under its Spectra Energy Transmission unit. The company plans to bridge finance with borrowings under Spectra Energy Capital's $1.5 billion revolver, which currently has ample availability to accommodate it.

The Bobcat assets are currently housed in Port Barre Investments, LLC (d/b/a Bobcat Gas Storage), which has B2 ratings for its Corporate Family Rating and senior secured Term Loans A and B. These obligations will be repaid at the closing of the acquisition, and Spectra will assume the assets only.

Spectra's ratings and stable outlook are based on the company permanently financing this transaction so as to maintain its financial profile. The company has not yet determined its financing plan, but it has reiterated that it does not plan to issue common stock in the foreseeable near future.

The Bobcat Gas Storage facility has now in operation two salt-dome caverns totaling 18 Bcf in working gas storage capacity. In addition to the $540 million purchase price, Spectra plans to invest an additional $400 to $450 million to finish the third cavern currently in development as well as two other caverns by end of 2015, raising Bobcat's capacity to 46 Bcf.

Moody's notes that the transaction is based on Spectra's expectation for all five caverns and is fully valued from the perspective of projected first year EBITDA. In terms of financial performance, the transaction will be a minor credit-negative in the near to medium term, because of the debt that Spectra will incur in advance of the cash flow from the caverns yet to be completed.

Moody's notes that Bobcat is a greenfield project that has only reached full commercial operations in its second cavern last fall. Bobcat just turned profitable on a reported EBITDA basis in 2009. EBITDA should increase over the next few years with the completion of cavern 3 in 2012, cavern 4 in 2014, and cavern 5 in 2015.

However, the degree of cash flow increase is made difficult to forecast by Bobcat's lack of operating record and the increasingly competitive gas storage market on the Gulf Coast. Other new gas storage facilities have been built or are being developed. Although its storage rates are regulated by the Federal Energy Regulatory Commission, Bobcat operates under market-based rates and are exposed to more short-term market conditions than are typical of interstate gas pipelines. Storage revenues are mostly founded on reservation fees for firm storage services, but there is a significant minority of less predictable revenues from optimizing the storage assets, such as interruptible, wheeling, and park and loan services. The current capacity is about 85% contracted today. Storage contracts are usually less than five years, with many that are monthly, and they are held by a diverse customer mix comprised mostly of producers and marketers.

In its development of the remaining caverns, Spectra will be exposed to the risk of cost overruns and delays. Under Bobcat's ownership, the first two caverns experienced cost overruns that resulted in actual costs being about 40% higher than the estimate when Bobcat was initially rated in 2007.

Headquartered in Houston, Texas, Spectra Energy Corp engages primarily in natural gas transmission and distribution.

Also headquartered in Houston, Port Barre Investments, LLC is a private special purpose entity owned 50% by GE Energy Financial Services and 50% by Port Barre Holdings, LLC, which in turn is 99% owned by Haddington Energy Partners III LP and 1% by Bobcat management.

New York
Mihoko Manabe
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
A.J. Sabatelle
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's comments on Spectra Energy's Bobcat Gas Storage Purchase
No Related Data.
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