CHICAGO — Menasha, Wis., will call $6.9 million of general obligation notes issued for its now-shuttered steam utility plant next month as officials weigh an offer from WPPI Energy to purchase the utility’s distribution assets in a deal that would help the city repay $23 million of defaulted bond anticipation notes.
The steam plant debt has strained city finances and hurt Menasha’s near-term ability to access the tax-exempt market following its Sept. 1 default on the steam plant Bans. The city’s appropriation pledge backs up the revenue pledge. A group of investors filed a lawsuit over the default in an attempt to make the city stand behind its pledge.
The defaulted debt includes $12.6 million of sold in 2005 to convert Menasha Utilities’ power plant to coal-fired steam operations and $11.5 million issued in 2006 to cover the project’s growing costs. The city has another $14 million of taxable GO promissory notes issued for the plant that come due Sept. 1, 2010.
Menasha officials will discuss at a meeting on Monday the 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. The City Council and Utilities Commission gave the administration approval to negotiate terms of a deal at a meeting this past Monday and a final vote on whether to enter into the transaction is expected early next month.
Any money the city receives would go to help settle bondholder claims on the $23 million of defaulted debt and pending arbitration claims and regulatory fines.
“The terms are not final. They are subject to negotiations. We are moving in the right direction, but any deal with WPPI is still a long way off,” said city Treasurer Tom Stoffel.
Under terms of the proposal, bondholders would have to release their claim and the city would have to defease all of its utility debt. Voter approval on the April ballot would be required for the deal to go through and approval from the state Public Service Commission also is needed. Menasha would pay WPPI about $1.2 million annually to lease back the facilities, based on a 6.5% rate of return for WPPI that overall should limit to 1% the increase needed from ratepayers.
“Going forward, the offer would leave the city’s electric utility in good operating condition to continue providing the same quality services to its customers,” read a statement from Mayor Donald Merkes and utility officials on the proposal. “This structure would also allow Menasha to retain the payment in lieu of taxes currently made by Menasha Utilities to the city, where an outright sale would not. The city receives approximately $1.2 million annually as a payment in lieu of taxes from the combined utilities.”
As negotiations on the WPPI offer continue, the city is planning on Dec. 4 to call about half of its GO plant notes with funds from a 20-year, $7 million loan from the state Bureau of Public Lands trust fund that carries a 5.5 % interest rate.
Menasha is moving to retire the notes ahead of their September 2010 maturity in order to take advantage of a second trust fund loan for $6.9 million approved by the bureau earlier this month that requires the first loan be used by a December deadline. The city would call the remainder of the notes in March, Stoffel said.
The ultimate cost of retiring the utility bonds on the city’s balance sheet remains unclear. Menasha has included about $500,000 in its fiscal 2010 budget to cover the costs of shutting down the plant and paying for legal expenses. Repayment of the state trust fund loans doesn’t start until 2011, giving the city a bit of breathing room as it looks for revenues to cover the costs.
“We are currently reviewing budget projections for the next five years,” Stoffel said.
With its eye on preserving its economic base, the city decided in 2004 to convert a portion of its electric generation plant to produce industrial steam to support area paper mills 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. Given the plant’s losses and dim prospects, the city could not refinance the Bans into long-term debt as originally intended.
The steam plant’s fiscal struggles have taken a steep toll on Menasha’s credit ratings. Moody’s Investors Service in August downgraded its $29 million of GO debt to B1 with a negative outlook, four notches below investment grade.
The downward slide began this spring when Moody’s lowered the city’s GO rating to Baa2 from A3 and then dropped the rating to junk-bond status at Ba2 following the Menasha Utilities Commission’s vote to close the plant.
Moody’s speculative short-term rating of SG remains on the $24 million of defaulted debt and on the $14 million of taxable GO promissory notes that are to be retired with the state trust fund loan.
Moody’s also downgraded $5.8 million of water and electric revenue debt one notch to Baa3 with a negative outlook. The city would be required to retire those bonds under the WPPI offer.
