CHICAGO — The Menasha Common Council and city utilities commission this week advanced plans that could resolve the Wisconsin city’s debt troubles and a bondholder lawsuit stemming from its now-shuttered steam plant by selling the facility to WPPI Energy. 

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 $23 million of plant bond anticipation notes. 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.

WPPI — a regional wholesale supplier of power to 51 members, including Menasha — stepped forward recently with an offer to purchase the utility’s distribution assets for $18.2 million. The city would then lease back the assets 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.

Under terms of the preliminary agreement approved by the council, 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. Approval from the Wisconsin Public Service Commission and State Department of Revenue also is needed.

Menasha would pay WPPI about $1.2 million annually to lease back the facilities. As part of the city’s workout plan to repay bondholders, utility rates would be raised by 1.7%. The city and WPPI filed applications this week with state regulators seeking approval of the transaction and the rate increase.

“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,” Mayor Donald Merkes and utility officials said in a statement on the proposal.

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 are due Sept. 1, 2010.

The city earlier this month called nearly $7 million of those GO 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 remainder of the promissory notes ahead of their September 2010 maturity in order to take advantage of a second state 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.

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 the costs of both operations and debt. Given the plant’s dim prospects the city could not issue long-term debt to replace the notes.

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.

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