Representatives of Menasha, Wis., and holders of $23 million of defaulted steam-plant bond anticipation revenue notes failed to reach an agreement during a mediation session earlier this month but will try again in September, officials said.

The city last September defaulted on the notes that 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 city’s appropriation pledge backed up the revenue pledge that repays the notes. The plant was shuttered in October.

A group of bondholders — led by American Bank, Lafayette Life Insurance Co. and Mercy Ridge Inc. — filed a federal complaint after the default alleging 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 group is seeking class action status, according to their attorney, Michael Wukmer of Ice Miller LLP.

Menasha officials have an offer from WPPI — a regional wholesale supplier of power to 51 members, including Menasha — to purchase Menasha Utilities’ distribution assets for $18.2 million. The city would then lease back the assets in a 20-year deal.

Funds from the sale would go to repay bondholders and resolve other pending arbitration and regulatory claims against the plant. Under terms of the proposal, bondholders would have to release their claim and the city would have to defease all of its utility debt.

In an attempt to reach an agreement that could pave the way for the asset sale, lawyers for the bondholders and city officials met earlier this month in Chicago but did not reach an accord.

“The discussions are confidential but I can say that we did not reach an agreement to stay the litigation as we had hoped to do,” Wukmer said last week. “Menasha admittedly owes the money but is forcing the noteholders to have to litigate their claim, which is unfortunate.”

Wukmer said bondholders are “willing to compromise” on the claim, but he offered no details of possible terms. A second mediation session was tentatively scheduled for mid-September. Meanwhile, the lawsuit remains in the briefing stage.

City attorney Pamela Captain described the negotiations as ongoing.

“We expect to meet again, but I cannot talk about confidential settlement discussions,” she said.

Menasha had sold another $14 million of taxable general obligation promissory notes for the plant, but the city recently retired that debt with two loans from the Wisconsin Bureau of Public Lands trust fund.

The steam plant debt has strained city finances and hurt Menasha’s near-term ability to access the tax-exempt debt market as it has lost its investment-grade GO ratings.

Meanwhile, Menasha is struggling to balance its 2011 budget as it must begin repaying the state loans that will add about $1 million annually to city expenses, said Tom Stoffel, city treasurer and ­comptroller.

The city is looking at spending cuts to close the $1 million gap, but no details have been announced. Mayor Don Merkes is expected to present his budget to the Common Council in October.

With its eye on preserving its economic base, Menasha decided in 2004 to convert a portion of its electric generation plant to produce industrial steam to support area paper mills. The mills were interested in purchasing steam from a central plant that used coal as its primary fuel in an effort to save money.

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. Given the plant’s losses and dim prospects, the city could not refinance the notes into long-term debt as originally intended.

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