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BP Inks $1B, 10-Year Gas Sale with Eastern Munis

BP Energy Co. said that it sold 170 Bcf of gas to Public Energy Authority of Kentucky Inc. (PEAK) under a 10-year, $1 billion prepaid contract. PEAK, which financed the prepayment with the proceeds of revenue bonds underwritten by Banc of America Securities LLC, will use the gas to serve the baseload requirements of its municipal members and customers in Kentucky, Tennessee and Missouri.

"In a volatile market, many customers are concerned about natural gas supply," said Troy Black, managing director of structured products for BP Energy. "This type of transaction is particularly suited to municipalities because they can use tax-exempt bonds to help reduce long-term gas supply costs.

"In the case of PEAK, we worked very closely to achieve a deal that aligned with PEAK's 10-year supply plan across various pipelines," Black said. "This contract will secure delivery of specified daily quantities of natural gas at an advantaged price over the life of the agreement."

In 2003, the Internal Revenue Service issued regulations permitting the use of tax-exempt bonds to finance gas prepayments for municipal gas systems, and Congress enacted safe harbors for gas prepayments as a part of the Energy Policy Act of 2005. Prepaid contracts work best for municipal joint action agencies such as PEAK that need to secure long-term gas supplies to help meet their members' baseload gas requirements.

Since 2003 BP said it has executed four prepaid contracts totaling more than $2 billion with an aggregate volume of more than 400 Bcf. The PEAK contract is the largest of the four and is worth $1.03 billion. Banc of America Securities LLC participated in all four deals in the role of underwriter, BP said.

"Such large, long-term contracts have the ability to secure natural gas supplies at a competitive price because of the lower cost of the tax exempt debt over conventional financing," said Steve Provenzano, BP's head of structured financial products.

PEAK President Gerald Ballinger said concerns about supply reliability and price volatility played a role in the company's decision to sign a 10-year supply agreement. "With the disruptions in gas supply experienced in the wake of last year's hurricanes and the current high natural gas price environment, this supply is a critical element in the overall gas portfolio of the municipalities we serve," he said. "We believe the prepay with BP has resulted in a desirable balance of long-term reliability and economically priced gas supplies for our members and participants and, ultimately, the retail customers they serve."

PEAK is a municipal joint action agency organized by the Cities of Carrollton and Henderson, KY.

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