CHICAGO — The Ohio State University expects to drum up considerable cash by finding a private partner to take over its large campus energy system, as it seeks to offset waning traditional revenue sources.
The proposal — which would be the latest first-of-its-kind financing for OSU — calls for the university to lease its energy system for 50 years to a concessionaire in exchange for what officials hope will be a "substantial" upfront payment. The private team would take on the cost of operating and upgrading the system, as well as procuring energy and achieving energy saving goals.
OSU is one of the largest electricity users in Ohio. The private partner would benefit from the university's independent rate-setting authority.
It's the latest in a series of pioneering deals undertaken by the Buckeye State's flagship university. OSU privatized its parking system in 2012, raising $483 million that it has used largely for academic purposes.
"We believe this opportunity is significantly larger than that one," said Michael Papadakis, OSU's vice president and treasurer.
The university marked another first for a public university in 2011 when it sold century bonds.
The university has gained a reputation for finding alternative financing sources, said provost and executive vice president Joseph Steinmetz.
"When I go to meetings and engage with other provosts, there's always a discussion that comes up about these kinds of alternative funds and sources of revenues, and I'm always called on to talk about it," said Steinmetz. "We're regarded as an innovator in these deals."
The university, rated double-A by all three major ratings agencies, has hired Barclays Capital Inc. as financial advisor for the energy deal. Jones Day and Ice Miller LLP are joint legal counsel and Burns & McDonnell is technical advisor. It hopes to select a final team by the end of 2015.
"No one has done anything quite this comprehensive," Papadakis said. "We are known for being at the forefront of these sorts of deals and ways to look at alternative means to pay for higher education."
The university issued a
The university's Columbus campus is the third-largest in terms of enrollment for any university or college in the U.S. It has 571 buildings on the 1,904-acre campus, which includes a golf course and airport. The Ohio State University Health System is one of the largest health science campuses in the country and a major revenue source. In the RFQ, the finance team touted the health system as a "driver of energy use, with planned expansions increasing future demand."
The 50-year concession and lease of the university's entire utility system would include electric, steam, gas, heating, cooling and production and distribution assets serving the main Columbus campus.
The private partner would also supply the campus with energy and operate and maintain the university's electricity and natural gas supply contracts.
Papadakis said the university wants to transfer all risk of operating the utility system and the cost of the energy-efficiency upgrades to the private company. The RFQ also proposes a so-called affinity relationship between the school and the private team, which could range from research collaboration to "integrated co-branded energy marketing opportunities."
School officials held a meeting in Columbus in early March and have another planned in New York on March 25 to present the deal and answer questions. Interest was strong, with 48 teams attending the first meeting and between 35 and 50 expected in New York, according to Papadakis.
"What we've seen very anecdotally is there are lots of funds with dollars to put to work, and interest rates are relatively low historically, so that's attractive from a valuation viewpoint," he said. "Lots of groups view universities as stable places to partner with over time, as someone who's going to be around in 30 to 50 years."
Officials won't put a number on how much they think the utility system is worth other than being, in Papadakis' words, a "very large opportunity," bigger than the parking system.
The university highlights the utility system's growing rate of consumption between 2004 and 2014 and expectations of future growth rates. Like the health system, new facilities being built on campus are expected to drive more energy consumption, according to the RFQ.
The RFQ outlines a series of possible rate structures, a key component of the deal where the private team will likely see the bulk of its profits. The document also invites the private firms to propose their own rate structures or mix of structures over the life of the 50-year lease.
"As a university we're not regulated by the Ohio Utility Commission, so there's no mandated way to set rates," said Papadakis. "That gives us a blank page with rates."
Various proposals include an investment-model rate structure, where the return on equity would be set within a certain range with additional revenue earned through "adders and performance initiatives," such as level of service or energy savings measures. Other models are a fixed-rate structure, where there's a fixed service charge subject to period increases over the term of the lease; as well as cost-of-service structure or a hybrid structure.
Upgrading the system into a more efficient model to boost sustainability is one of the main reasons that the university is considering the privatization, according to Steinmetz. The university estimates it would cost $250 million or more to upgrade the utilities to meet various energy efficiency goals, he said.
"We don't have that kind of cash sitting around," Steinmetz said. "So the idea is to see if we can get the company to come in and help us."
Officials expect to use the proceeds to offset falling state aid and reliance on tuition, he added.
"The main reason for looking at alternative sources of funding is the traditional sources of revenue have been student tuition and state subsidies, and both of those I would describe at best at being flat and we anticipate that as well moving into the future," said Steinmetz.
State aid dropped to $438 million in 2015 from $502.6 million in 2010, according to recent bond documents. State capital improvement appropriations fell to an expected $99.2 million in 2016 from $178 million in 2006.
Steinmetz added that the administration does not think there are many more assets it can privatize after the energy system is done.
"I don't know how many opportunities you have around campus; it has to be worked out fiscally," he said. "We don't have any other assets we're thinking of doing anything with at this time."
Like the parking privatization, the proposed energy deal has its critics, including members of the faculty, which was vocal in its opposition to the parking deal.
OSU Professor and director of the public history program Steven Conn wrote a March 20
"Yes sir, we are open for business! And by 'open for business' I mean: Make us an offer for something and we'll sell it to you like a pair of pants at a department store closeout," he wrote.
After RFQs come in, the Ohio State finance team will then select and notify qualified proposers, who will be required to sign a confidentiality agreement.
The university will give the proposers the term sheet, financial model and other documents, and the private teams will submit an indicative proposal, which includes tentative valuation. OSU will then select a short list, which will submit a final technical and financial proposal. Officials hope to choose a final team by the end of the year.
