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Rating Action:

Moody's assigns A3 to Southeast Alabama Gas Supply District Gas Supply Revenue Bonds (Project No. 2), Series 2018

17 May 2018

New York, May 17, 2018 -- Moody's Investors Service has assigned an A3 rating to Southeast Alabama Gas Supply District (the Issuer) Gas Supply Revenue Bonds (Project No. 2), Series 2018A, 2018B and 2018C (the Bonds).

The A3 rating takes into account the following factors:

(i) the credit quality of Morgan Stanley (A3 stable) as guarantor for payments due under the Prepaid Natural Gas Sales Agreement (GPA) (including the Receivables Purchase Exhibit (RPE)), the back-end commodity swap and the interest rate swaps for Series 2018B and 2018C.

(ii) the credit quality of the provider of the investment agreement provided for the debt service account (such provider will initially be rated by Moody's at least as high as the rating on the Bonds, will be identified at closing); and

(iii) 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

» Upgrade of the long-term rating of Morgan Stanley's senior unsecured obligations.

» Upgrade of the long-term rating of the investment agreement provider.

Factors that Could Lead to a Downgrade

» Downgrade of the long-term rating of Morgan Stanley's senior unsecured obligations.

» Downgrade of the long-term rating of the investment agreement provider.

RATINGS RATIONALE

Bond proceeds will be used by the Issuer to prepay Morgan Stanley Capital Group (MSCG) (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 in three initial long-term rate periods (i) at a fixed rate of interest payable semiannually for Series 2018A, (ii) LIBOR index rate (or any successor or substitute for such reported rate) payable monthly for Series 2018B and (iii) SIFMA index rate payable monthly for Series 2018C. The initial long-term rate periods for each Series is scheduled to end on May 31, 2025 and the Bonds are subject to mandatory tender on the business day following such rate period (June 1, 2025). Following the initial long-term rate periods the Bonds may be converted to the daily, weekly, CP or index rate modes.

During the long-term rate period, a failed remarketing occurs if (i) on the last day of the second calendar month preceding the mandatory purchase date, the Issuer has not entered into a bond purchase agreement, firm remarketing agreement or similar agreement for such Bonds, or (ii) if such agreement is entered into but the purchase price of the Bonds is not delivered into the trust estate by the fifth day preceding such mandatory purchase date. A failed remarketing results in an automatic termination of the GPA and a mandatory redemption of the Bonds would occur on the mandatory purchase date (June 1, 2025). In the case of a failed remarketing, MSCG will make the termination payment on the last business day of the then current long-term interest rate period. Such final payment, combined with amounts on deposit in the debt service account (including investment earnings on such account), have been calculated to be sufficient to cover redemption of the Bonds at their amortized value plus accrued interest.

Moody's rating terminates on the mandatory tender/ redemption date at the end of the initial long-term rate periods as MSCG has the option to terminate the Morgan Stanley guaranty of the GPA (including the RPE) and the interest rate swap on that date.

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 delivered natural gas to the Project Participants pursuant to Gas Supply Agreements. The Contract Price which the Project Participants pay will be based upon an index price per MMBtu (the Index Price), less a specified discount. Payments for gas delivered will be due on the 22nd of each month. The payments to be received from the Project Participants, net of payments made or received by the Issuer on the commodity swap described below, combined with interest earned on the debt service account, will be sufficient to make the fixed payments owed to Bondholders for Series 2018A and owed under the interest rate swaps for Series 2018B and 2018C.

Should any of the Project Participants fail to make a payment for delivered gas, the trustee shall deliver a put option notice under the RPE. Upon receipt of such notice, MSCG shall purchase such receivables. The RPE 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. Therefore, risk of non-payment by any Project Participant is covered by Morgan Stanley as guarantor under the RPE.

If a Project Participant defaults in its payment, the trustee will notify; (i) the Issuer and instruct them to immediately suspend delivery of gas and (ii) the Gas Supplier with a notice to begin remarketing gas on a monthly basis. A monthly remarketing of gas under this scenario obligates the Gas Supplier to make a minimum payment at least equal to the Index Price less the discount.

Since the revenue received from gas sales to the Project Participants is variable and the payment owed to Bondholders is fixed, the Issuer will enter into a commodity swap (the Commodity Swap) with BP Energy Company (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 fixed payments received by the Issuer will be swapped with MSCG under the interest rate swap provided for Series 2018B and 2018C. Under the interest rate swap the Issuer will receive payments sufficient to pay the index rate on the Series 2018B and 2018C bonds, on a net basis. MSCG's payments under the interest rate swap are also guaranteed by Morgan Stanley.

Payments under the Commodity Swap will be made on a monthly basis. The Project Participants are required to pay by the 22nd of each month for gas delivered during the previous month. Payments to or from the Commodity Swap Counterparty are due on the 25th of each month.

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 Morgan Stanley 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 BP Energy Company.

As part of the transaction, MSCG 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 MSCG under this swap are guaranteed by Morgan Stanley.

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 MSCG 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 MSCG 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, MSCG 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.

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 Index 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.

In any failure by the Gas Supplier to deliver gas, including failure to deliver gas associated with an event of force majeure, the Gas Supplier is required to make payments to the Issuer equal to the higher of the Index Price or what the Issuer paid for replacement gas.

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 (including investment earnings on such 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 these ratings was Gas Prepayment Bonds published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

Chandra Ghosal
Vice President - Senior Analyst
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.
© 2018 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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