SAN FRANCISCO - What's the price of turning cow manure into natural gas? A 9% tax-free interest rate, according to a private-activity bond issue that closed recently in California.

Environmental Power Corp. announced this month that it had closed on the $62.4 million bond transaction, a private placement issued through the California Statewide Communities Development Authority and underwritten by Ziegler Capital Markets.

The proceeds will finance manure-to-natural gas facilities in Fresno and Kings counties, serving three different dairies in each county.

Environmental Power's wholly owned subsidiary, Microgy Inc. of Colorado, will install anaerobic digesters that process manure from the dairies, and "other agricultural- and food-based residuals," to produce natural gas, according to a staff report prepared by the California Debt Limit Allocation Committee, which authorized the private-activity bond allocation.

The California projects follow the template Microgy created in Texas, where it financed similar projects using $60 million in environmental facilities revenue bonds issued in 2006 through the Gulf Coast Industrial Development Authority.

"From a security standpoint, it's the same," said Don Carlson, vice chairman of Ziegler Capital Markets, underwriter for both transactions. "It's the same type of projects, engineering, technology, and so on."

The company plans to build and own anaerobic digesters, and sell the energy they produce, either as "pipeline-quality natural gas," or as propane, or by generating electricity with the gas.

Environmental Power contracted with utility Pacific Gas and Electric to take natural gas produced at its planned California facilities.

The company says it can charge a premium for its renewable natural gas because utilities such as PG&E face regulatory mandates to grow their renewable energy portfolios. The future development of carbon-credit trading and greenhouse gas offset allowances are also "a potentially lucrative revenue source," according to an investor presentation on its Web site.

In addition to the transaction that closed this month, Environmental Power expects to close another, similar $26 million bond issue, which received a separate PAB volume cap allocation.

"We expect to close sometime in mid-October," Carlson said.

The company also reported in late July that it closed on a $7 million tax-exempt bond deal, issued through the city of Grand Island, Neb., for a biogas project at the JBS Swift beef processing plant there.

This month's bond issue matures in 2038, with interest-only payments through 2013 and level debt service thereafter, according to a news release issued by the company.

It carries a 9% interest rate, compared with the 7% yield of the similarly structured Texas bonds of 2006.

"It just really reflects how credit spreads have widened in the market environment we're in," Carlson said. "The bonds were well received."

In both California and Texas, bond documents require Environmental Power to invest equity equal to at least 20% the cost of construction, according to documents the company filed with the Securities and Exchange Commission.

In its 10-Q filing for the quarter ending June 30, Environmental Power said it estimates the need to raise $18 million in the next year to fund its equity requirements for the California projects, plus more equity for its remaining Texas projects. The firm reported $13 million cash on hand.

"We will require significant additional capital over the next 12 months in order to continue to fund our planned construction program on its current schedule," the report said.

In August, the company filed a shelf registration with the SEC to issue up to $50 million in corporate debt.

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