CHICAGO-- The Nebraska Public Gas Agency last month used a tax-exempt bond issue to set the price of natural gas for its customers in a deal that some market participants say may be the first of its kind.

Proceeds from the agency's $7.33 million bond issue refunded $1.32 million of the agency's outstanding debt, retired a $5 million bank loan, and financed the cost of issuance and the creation of a debt service reserve fund.

The issue was structured as serial bonds with maturities ranging from 1995 to 2005. The coupon rates ranged from 4.25% to 6.25%.

Lee Start, controller and manager of financial services for the agency, said that both the $5 million bank loan and $1.32 million of outstanding debt financed purchases of natural gas.

With the help of deal underwriters Dain Bosworth Inc. and Piper Jaffray Inc., the agency structured the bond issue's interest rates, duration, and cost of issuance to set the price of a portion of the natural gas charged to municipal customers over 11 years.

Because the agency owns a substantial amount of natural gas, it has control over the pricing of the gas to cover debt service on the bonds, according to Start. The agency set the price of 4.3 billion British thermal units of natural gas that it owns to equal debt service payments on the bonds between 1995 and 2005, Starr said.

For example, in fiscal 1995, which ends on March 31, the agency will pay $1.18 million of debt service on the bonds. That would he equal to charging customers $1.56 per 1 million of Btus on 753 million of Btus projected for use in that year.

"It seems to me this is the first time that a financing was invented and put together based on owning the gas and fixing the cost" of the gas, Starr said.

Dan Aschenbach, a vice president and manager of the public power ratings group at Moody's Investors Service. agreed. "This is the first one" relating to natural gas supplies, Aschenbach said. He added that a Georgia authority has issued bonds to acquire natural gas, but did not fix the price for its customers.

Moody's rates the Nebraska issue Baal.

Some analysts said that they have not seen the official statement for the agency's bond issue, but that the concept of using tax-exempt bonding to set the price of natural gas sounded unique.

The nonprofit Nebraska agency was formed in 1991 when four municipalities banded together to buy surplus natural gas from another agency, the Municipal Energy Agency of Nebraska. The agency contracts with 15 municipalities: 10 from Nebraska, three from Iowa, one from Colorado, and one from Wisconsin.

The Municipal Energy Agency, whose primary mission is to provide local governments with an adequate supply of electricity, had unused supplies of natural gas that were intended to be converted into electricity during the summer months when demand is high.

Starr said that the formation of the Nebraska Public Gas Agency gave its member communities the opportunity to own natural gas and set their own rates for the resource. "If towns want to save money, this is a way to fix costs and participate in rate making," Start said.

W. Don Nelson, a first vice president and manager of Dain Bosworth, said the agency has outgrown its reliance on the surplus gas provided by its sister agency, the Municipal Energy Agency of Nebraska.

"The tail is now bigger than the dog," Nelson said, noting that the agency is continuing to add new customers.

The agency is discussing the possibility of providing natural gas to eight additional municipalities, according to the official statement for the bond issue.

Nelson said that in the next three to four months, the Nebraska Public Gas Agency expects to issue between $15 million and $30 million of bonds to acquire more natural gas. In a credit comment, Moody's said that the expected future financings "pose uncertainty to credit quality with respect to cost competitiveness."

"If they don't buy [the natural gas] at a good price," Aschenbach said, "it could present some credit quality problems."

Aschenbach said the deregulation of the natural gas industry in 1992 has enabled local governments to seek out ways to lower their gas costs. He said the formation of agencies like Nebraska Public Gas could grow as natural gas becomes a "more preferable" fuel.

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