CHICAGO — Menasha will seek voter approval in an April 6 referendum to sell its electric utility assets in a deal that would help the Wisconsin city resolve a bondholder lawsuit stemming from its default on $23 million of bond anticipation notes issued for a now-shuttered steam plant.

The referendum asks voters: “Shall the city of Menasha sell its electric utility assets to WPPI Energy at the price and upon the terms approved by the Public Service Commission of Wisconsin?”

A public meeting is set for March 29 to discuss details of the proposed asset sale to WPPI Energy, a regional wholesale supplier of power to 51 members, including Menasha.

Under terms of the proposed deal, WPPI would purchase the utility’s distribution assets for $18.2 million. The city would then lease the assets back in a 20-year deal. Any money it receives would go to help settle bondholder claims on the $23 million of defaulted debt and pending arbitration claims and regulatory fines.

WPPI would use cash on hand to complete the purchase. Moody’s Investors Service recently affirmed the WPPI’s A1 rating on $422.7 million of debt ahead of the looming sale-leaseback transaction, which involves the city utility’s other electrical generation assets and not the steam plant.

Menasha defaulted last September on $23 million of steam revenue bond anticipation notes that carried the city’s appropriation pledge.

The debt has strained city finances, led to its loss of an investment-grade general obligation rating, and hurt its near-term ability to access the tax-exempt market. The debt also is the subject of pending litigation.

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 steam plant’s business prospects and the true costs of converting it to steam operations.

The WPPI sale was approved by the Wisconsin Public Service Commission on Feb. 12, but voter approval is needed for any sale to proceed. The next hurdle, if voters approve, is the resolution of all pending claims involving the plant.

That means bondholders must sign off on the deal. Mediation is expected. It remains unclear whether the city will put additional funds in the pot of money available to negotiate a settlement.

The city must also resolve outstanding arbitration and regulatory issues with the Sierra Club, the U.S. Environmental Protection Agency and the Wisconsin Department of Natural Resources.

Menasha officials are hoping voters will be swayed to endorse the sale as the most economical alternative. On its Web site, the city estimates an average $4 per month impact on electric rates paid by consumers if the deal is approved. If not, and the city is forced to repay bondholders, it could result in a dramatic rise in property taxes.

If levied in a single year, homeowners would face an increase in their bill of $3,170 to repay the defaulted debt.

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, which could provide power to area paper mills interested in purchasing steam from a central plant that used coal as its primary fuel in an effort to save money.

However, the plant was burdened with growing construction costs, unfavorable regulatory rulings and pricing disputes, and failed to generate sufficient revenue to cover the costs of both operations and debt. The plant was closed last October.

Menasha has another $14 million of taxable GO promissory notes issued for the plant, but the city is retiring them with two loans form the Wisconsin Bureau of Public Lands trust fund.

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