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Rating Action:

Moody's assigns A2 to Gulf States Gas District, Gas Supply Revenue Bonds, Series 2021A

10 Jun 2021

New York, June 10, 2021 -- Moody's Investors Service (Moody's) has assigned an A2 rating to The Gulf States Gas District (the Issuer), Gas Supply Revenue Bonds, Series 2021A (the Bonds).

The A2 rating takes into account the following factors:

(i) the credit quality of BP p.l.c. (A2 stable) as guarantor for payments due under the Prepaid Natural Gas Purchase and Sale Agreement (GPA), the Receivables Purchase Agreement (RPA) and the back-end commodity swap; and

(ii) the structure and mechanics of the transaction which provide for the payment of debt service consistent with the rating assigned to the Bonds.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING

» Upgrade of the long-term rating of BP p.l.c..

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING

» Downgrade of the long-term rating of BP p.l.c..

RATINGS RATIONALE

Bond proceeds will be used by the Issuer to prepay BP Energy Company (BP Energy) (the Gas Supplier) for the delivery of a specified quantity of natural gas to be delivered on a daily basis over an approximately 30 year period. The Issuer will sell gas acquired under the GPA to municipal utilities (the Project Participants) pursuant to Gas Supply Agreements. The Bonds are being issued at a fixed rate of interest payable semiannually.

Pursuant to the GPA between the Gas Supplier and the Issuer, the Gas Supplier agrees to deliver to the Issuer natural gas in quantities specified in the agreement. The Issuer will in turn sell daily quantities, billed on a monthly basis, of natural gas to the Project Participants pursuant to their Gas Supply Agreements. The contract price which the Project Participants pay will be based upon either an index price or fixed price per MMBtu less a specified discount. The payments to be received from the Project Participants, net of index price payments made or received by the Issuer on the commodity swap described below will be sufficient to make the fixed payments owed to Bondholders.

Should any of the Project Participants fail to make a payment for delivered gas, the trustee shall deliver a put option notice under the RPA. Upon receipt of such notice, BP Energy shall purchase such receivables. The RPA is sized to exceed the maximum consecutive two months of payments required to be made by each Project Participant (assuming an index price equal to the fixed price for the index price contracts). Therefore, risk of non-payment by any Project Participant is covered by BP p.l.c. as guarantor under the RPA.

If a Project Participant defaults in its payment, the Issuer shall (i) immediately suspend delivery of gas, and (ii) unless such default is cured no later than the 20th day of the month following the month such payment was due, terminate such Gas Supply Agreement. Upon a termination of a Gas Supply Agreement the Gas Supplier shall remarket such gas and is obligated to make a minimum payment at least equal to the fixed price or the index price less the discount as applicable.

For sales under a Gas Supply Agreement at an index price, the revenue received from gas sales to the Project Participants is variable and the payment owed to Bondholders is fixed. For these Agreements, the Issuer will enter into a commodity swap (the Commodity Swap) with Royal Bank of Canada (RBC) (the Commodity Swap Counterparty), which will result in the Issuer receiving fixed payments while paying the index price to the Commodity Swap Counterparty, on a net basis. The quantities of gas under the Gas Supply Agreements which are fixed price agreements will not be included in the Commodity Swap.

The Commodity Swap includes standard ISDA events of default and termination events.

A termination of the Commodity Swap for defaults of the Commodity Swap Counterparty, defaults of the Issuer or any other termination event will lead to an automatic termination event under the GPA and a redemption of the Bonds unless a replacement swap becomes effective as of such early termination date. If the Commodity Swap terminates and is not replaced within 120 days, the GPA will terminate, and an early termination date will be declared on the last day of the month following the date of the termination of the GPA.

The Issuer can replace the Commodity Swap Counterparty (i) at any time with written confirmation from Moody's that the rating on the Bonds will not be reduced or withdrawn or (ii) with a counterparty (a) rated at least the lower of (i) the rating of BP p.l.c. as guarantor under the GPA or (ii) the rating on the Bonds at the time or (b) who has entered into an identical commodity swap and custodial arrangement for payment consistent with the arrangements entered into by RBC.

As part of the transaction, BP Energy and the Commodity Swap Counterparty will enter into a commodity swap (the Back-End Commodity Swap) relating to the prepaid gas supply on terms matching (on an off-setting basis from the perspective of the Commodity Swap Provider) the terms of the Commodity Swap. Payment obligations of BP Energy under this swap are guaranteed by BP p.l.c..

In order to address the risk that a nonpayment by the Commodity Swap Counterparty under the Commodity Swap could lead to an insufficiency in the payment due to the Bondholders or result in an early termination event under the GPA and a redemption of the Bonds, all payments to be made by BP Energy under the Back-End Commodity Swap are deposited monthly with a custodian under a custodial agreement. If the Commodity Swap Counterparty fails to make a required payment under the Commodity Swap, the custodian is required under the terms of the custodial agreement to deliver to the Trustee the funds provided by BP Energy on the Back-End Commodity Swap, which funds will be applied by the Trustee in the same manner as payments made by the Commodity Swap Counterparty. In addition, should any termination of the Back-End Commodity Swap occur, BP Energy will continue to make payments to the custodian until the earlier of (i) termination of the GPA and (ii) replacement of both the Commodity Swap and the Back-End Commodity Swap. Therefore, the rating of the Commodity Swap Counterparty is not a factor in the long-term rating assigned to the Bonds.

Upon delivery to the Gas Supplier of a remarketing notice by a Project Participant or if there is a failure to accept gas, the Gas Supplier will remarket such gas and will pay the lower of the market price received for such gas or the index price. If gas is not remarketed at a price equal to either the fixed price or the contract price (index price less the specified discount), there may be insufficient funds to fund a net payment owed under the Commodity Swap. The Project Participants are obligated under their gas supply agreements to make up any such deficiency in payment. Should any of the Project Participants fail to pay such deficiency, the trustee shall deliver a put option notice under the RPA. Upon receipt of such notice, BP Energy shall purchase such receivables as described above.

In any failure by the Gas Supplier to deliver gas, the Gas Supplier is required to make payments to the Issuer equal to the higher of (i) the index price or fixed price specified in the Gas Supply Agreement as applicable or (ii) what the Issuer paid for replacement gas. If the failure to deliver gas is associated with an event of force majeure, Gas Supplier will make payments equal to the index price.

In the event of an early termination of the GPA at the option of either the Issuer or Gas Supplier or due to an automatic early termination event, the GPA will terminate as of the early termination date. Upon the early termination date, gas deliveries will cease and obligations of both the Issuer and the Gas Supplier will terminate. The Gas Supplier will make the termination payment in an amount set forth in the monthly schedule listed in the GPA. The termination payment will be made on the last business day of the month following the month in which such early termination event occurred. Such final payment amount, combined with amounts on

deposit in the debt service account, have been calculated to be sufficient to cover redemption of the Bonds at their amortized value plus accrued interest. Under the Indenture, the Bonds will be redeemed on the first day of the month following the termination payment date.

The principal methodology used in this rating was US Gas Prepayment Bonds Methodology published in July 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1142804. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Joann Hempel
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Florence Zeman
Associate Managing Director
Public Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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