BRADENTON, Fla. — The Clay Gas Utility District of Clay County, Tenn., never made a payment on its bonds over the past decade. Now the district is offering to buy them for 10 cents on the dollar in a contingent tender offer.

The offer depends on 90% of bondholders participating and a successful refunding, according to a recent notice. Even if those conditions are met the district is not obligated to purchase any bonds and the tender offer could be withdrawn before the Feb. 8 deadline for bondholders to accept it.

The rural utility district sold $3.25 million of unrated, uninsured bonds in 1998 to build a natural gas distribution system and fund capitalized interest. Only $110,000 of principal was ever paid with bond proceeds in the early years, according to a source familiar with the district.

Currently, $3.14 million is outstanding in maturities between 2001 and 2017. The bonds continue to trade at near worthless prices.

In the most recent trade Dec. 7, a customer sold $30,000 of bonds that matured in 2007 for pennies on the dollar, according to the Municipal Securities Rulemaking Board's online EMMA system. The original bonds were sold by Cumberland Securities, a division of Morgan Keegan & Co. Morgan is the dealer for the tender offer.

The firm holds about 25% of the outstanding principal, which it plans to sell in the tender offer. Morgan Keegan declined to comment for this story.

District officials plan to fund the purchase of tendered bonds with $200,000 in cash and $114,000 of proceeds from a tax-exempt, subordinate-lien refunding bond to be issued on or before the Feb. 16 settlement date.

The tender offer notice also said that the Tennessee Utility Management Review Board is attempting to force it into receivership or bankruptcy, "although the district is not currently authorized under Tennessee law to avail itself of bankruptcy protection."

The state utility board urged the district for many years to resolve its financial problems and deal with the outstanding debt, including the pursuit of bankruptcy, according to the state board's coordinator, Joyce Welborn, of the comptroller's office of state and local finance.

When the district consulted with a bankruptcy attorney about two years ago, Welborn said that's when the state utility board learned that it could not force a utility district into bankruptcy, as it has in the past.

Changes made to the federal bankruptcy code in the 1990s required states to specifically authorize Chapter 9 filings. Tennessee is one of about 20 states that do not authorize issuers to file for bankruptcy.

Welborn said the board dropped language about bankruptcy from letters to the district in early 2011.

As far as receivership is concerned, only bondholders can seek that as a remedy for defaulted bonds, according to an attorney who counsels utility districts in Tennessee.

Ray Norris, president of the gas district's board of commissioners, declined to comment.

The district in northeastern Tennessee was beset by financial problems from the start, including a project manager who went to prison for embezzling $200,000 of funds a year after the bonds were sold.

Some 600,000 customers were projected at startup, but officials have said the customer base never grew after the embezzlement was publicized. The district has not paid any principal or interest on its bonds since June 1, 2001, and currently has 220 customers.

Most of the district's revenues barely cover operating expenses, according to the tender offer notice. The district tried to sell the system without success largely because of the outstanding debt, a source knowledgeable about the situation said.

John Hall, who provides districts financial services with the Tennessee Association of Utility Districts, said the Clay natural gas district has been plagued with many problems, including an insufficient startup plan with a solid customer base and a rate structure to support debt service payments. The county is also served by electricity and less costly propane gas, which gives potential customers alternatives.

"This is a very, very economically deprived area," he said, adding that the district has "more debt than customers."

The district was required to raise rates to maintain net revenues of 1.33 times annual debt-service payments, according to bond documents.

Rates have not been raised since at least 2007 due to the distressed economy and high unemployment, a source familiar with the district said.

"If they raise rates high enough to make the covenants, they'd virtually have zero customers," Hall said.

Since the Clay gas district was formed in 1997, Tennessee has implemented laws designed to prevent a similar situation from occurring again, he added.

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