CHICAGO — Menasha, Wis., expects to close Wednesday on the sale of its electric utility assets to WPPI Energy in an $18 million sale-leaseback transaction to provide the bulk of funds needed to cover the city’s proposed settlement with holders of $23 million of defaulted steam plant notes.
The city defaulted on the steam plant anticipation notes, which carried an appropriation pledge, in September 2009. Menasha would pay holders $17.5 million under a proposed cash settlement to be funded with the asset sale proceeds, advancing the city’s efforts to put the steam-plant saga behind it and to rebuild its credit.
The notes include $12 million sold in 2005 to convert Menasha Utilities’ power plant to coal-fired steam operations and $11 million issued in 2006 to cover the project’s growing costs. The plant was shuttered in the fall of 2009. The sale of the city’s electrical generation assets does not include the steam plant.
A group of the noteholders — led by American Bank, Lafayette Life Insurance Co., and Mercy Ridge Inc. — filed a federal complaint after the default. They alleged that Menasha and its utilities division misrepresented the coal-fired plant’s business prospects and the true costs of converting it to steam operations.
The city and a majority of the noteholders reached a tentative settlement in February. and Menasha’s Common Council last month approved a written settlement. Court approval is still pending. The city will fund the settlement with proceeds of the asset sale, a city contribution, and an undisclosed sum provided by RBC Capital Markets, the underwriter of the notes.
“Proceeds of the asset sale will go into an escrow account where they will be held until a final non-appealable order settling the federal lawsuit is entered by the court,” said city attorney Pamela Captain. Bondholders also will be given the opportunity to object to the settlement.
The city will make payments to WPPI to lease back the electric utility assets over the next 20 years. At the end of the term, the assets revert back to city ownership. Rates will increase by about 4% under the deal.
City officials had warned that without the sale-leaseback deal, a steep property tax increase would have been needed to repay the notes.
To close the WPPI deal, Captain said the city utility needs to complete a defeasement of its outstanding electric revenue bonds and to refinance its water revenue debt, which together total more than $4 million. The Wisconsin Bureau of Public Lands trust fund was expected Tuesday to approve a $3.5 million loan to help the city complete the transactions.
Menasha voters last April signed off on the sale of the city’s electric utility assets to WPPI, a regional wholesale supplier of power to 51 members, including Menasha. WPPI will use cash on hand to finance the deal. Moody’s Investors Service rates the supplier’s $422.7 million of debt A1.
The default strained Menasha’s finances, led to its loss of an investment-grade general obligation rating, and hurt its near-term ability to access the tax-exempt market.
Moody’s in 2009 downgraded the city’s $29 million of GOs to B1 with a negative outlook, four notches below investment grade.
Menasha decided in 2004 to convert a portion of its electric generation plant to produce industrial steam to support area paper mills. But the coal-fired plant — burdened with growing construction costs, unfavorable regulatory rulings, and pricing disputes — failed to generate sufficient revenue to cover both operations and debt service.
The conversion was originally supposed to cost just $13 million, but the price rose to $41 million. Given the plant’s losses and dim prospects, the city could not refinance the notes into long-term debt as originally intended.
Menasha sold another $14 million of taxable GO promissory notes for the plant, but it’s retiring them with two loans from the trust fund. The state trust fund offers a more affordable financing mechanism, given the city’s junk-bond status.
