The University of Iowa will hand over operations of its utility system to private operators for the next 50 years in a deal that allows the flagship school to establish a $1 billion endowment.
To cover all the costs and produce $15 million annually for its strategic plan, the deal must produce a total of $3 billion over the 50-year term.
The Iowa Board of Regents Tuesday approved the 50-year public-private utility concession partnership and created the UI Strategic Initiatives Fund, a not-for-profit organization that will manage the $995 million endowment. The board also signed off on the defeasement of $153 million of existing university utility bonds.
Final closing is expected within the next 60 days as the private group finalizes its financing.
State aid is down and the university’s U.S. News & World Report’s rankings are down to 34th place among peer institutions from 24th a decade ago.
“In order to implement” our strategic plan “we need new resources” beyond conventional ones like tuition and state support, university president Bruce Harreld told the board. “This is what this new partnership will provide.”
Gov. Kim Reynolds tasked the school last year with exploring new revenue ideas and in February the regents announced their intention to explore a utility concession. Reynolds praised the board Tuesday for the deal, calling it “the kind of innovative thinking we need.” The university currently receives about $220 million a year from the state, about $58 million less than it received a decade ago.
Similar concessions — which can carry fiscal risks — for utilities or other assets have been struck or are under consideration around the higher education sector, as schools grapple with a landscape that includes rising competition and pressures to control tuition costs amid stagnant or declining state financial support.
Legislative critics in Iowa have cited the risks of relying on investment earnings and say it’s a poor alternative to adequate state funding of public universities.
Under the concession agreement with the consortium that is a joint venture of ENGIE North America and Meridiam, the university retains ownership. The firms’ University of Iowa Collaborative venture will operate the utility system for 50 years. It provides steam for heating and air conditioning, 25% of electricity, and water services.
Wells Fargo Securities was strategic advisor to the university.
The university will pay the companies a fixed concession fee to operate the system that is set at $35 million annually for the first five years with 1.5% increases in future years. The total payment for the concession fee, an operating and maintenance charge and capital will reach $60 million in 2022. The company will benefit from various tax benefits associated with operation of the asset.
The companies will pay the university $1.165 billion upfront. After deductions for the $153 million bond payoff and $13 million in advisory expenses, the university expects to have $999 million remaining for a new endowment. The university will continue to cover employee salaries, fuel costs and other capital expenses.
The consortium will move the system to a carbon free footprint by 2023, two years ahead of the university’s own goal.
The 32,000-student Big Ten school is counting on the endowment’s earnings generate at least $15 million in excess revenues for strategic plan initiatives.
“Anyone in the campus community will be able to submit a proposal for a one- to five-year grant that supports the university’s strategic plan,” a
Board members and finance officials acknowledged the risk of that assumption but believe estimates are conservative enough to reach the goal.
“There are risks in anything we do” and a risk to doing nothing, said Rod Lehnertz, senior vice president for finance and operations. “Our assessment has been conservative” with an annualized 4% rate of return needed to cover anticipated costs and generate the $15 million strategic plan contribution compared to the average 8% seen on current university investments over the last decade.
The finance team looked for independent analysis and internally turned to its academic staff with financial expertise for analysis, Lehnertz said.
The concession is similar to the deal Ohio State University struck in 2017 with a $1 billion lease of its utility system to ENGIE and Axium Infrastructure, who makeup Ohio State Energy Partners.
University of Iowa documents on the lease note that
The model could work for others although each school has its own unique set of factors to consider, said Randy Campbell, a managing director at Wells Fargo Securities. “I think a number of universities will look at it in even greater detail. For some it works as they grapple with cuts in state appropriations” and this form of capital can be flexible in how it’s employed, Campbell said.
The ENGIE-Meridiam partnership was chosen after a competitive selection process. Fourteen groups responded to an initial request for qualifications and then four participated in the request for proposals bidding process. The chosen group was the top bidder on the size of an upfront payment.
ENGIE is an operator that provides financing, design, construction management, energy procurement, utility, and operations and maintenance services to more than higher education and healthcare facilities and Meridiam is a developer, equity investor, and long-term partner specializing in the development, financing, and management of sustainable P3 infrastructure.
The University of Iowa is not currently considering any other P3 asset concessions, according to university documents.
