University of Iowa lands $1.165 billion in utilities deal

URBANDALE - In a deal unique to Iowa, a French company and investors will pay $1.165 billion upfront to manage the University of Iowa's utility system for 50 years - speeding up a commitment to wean the power plant off coal and providing the university with millions to spend each year toward attaining its academic goals.

In a special meeting Tuesday, the Iowa Board of Regents unanimously approved the expansive agreement that will - in a comparison of size - land the university a lump-sum payment twice as big as legislators typically approve annually for general education at all three Iowa public universities combined.

Of course, the UI will not spend that money the same way - instead tapping into it to pay costs associated with the deal and using income from interest and investments to support education.

The deal with global energy provider Engie and infrastructure investment firm Meridiam in some ways mirrors a deal the larger Ohio State University modeled three years ago. Ohio State also secured payments and commitments worth $1.165 billion from an investor and Engie.

'I think Ohio State was a pioneer, and the University of Iowa is the second of its size,” said Andre Cangucu, chief business development officer at Engie North America, who noted one of his company's priorities is retaining the 120-some UI utility workers and their combined 1,600-plus years of experience.

'We count on the experience, we count on the knowledge base, and we count on all of them to come to Engie to help us to deliver the plan that we have for the partnership,” Cangucu told reporters following Tuesday's meeting in Urbandale. 'We need the people, so we're going to start tomorrow on the journey to bring the employees to change.”

The UI has been investigating a potential public-private utilities partnership for more than a year in hopes of securing another source of revenue in light of waning state support, increasing competition for a shrinking pool of prospective students and pressure to limit tuition increases.

The partnership benefits the UI by allowing it to invest the majority of that upfront sum into an endowment it could pull from annually to support strategic initiatives. It benefits Engie by affording it a steady stream of income for five decades and access to tax benefits not available to the UI.

Officials also noted benefits more broadly.

'Over the next 50 years, it's expected that the University of Iowa Energy Collaborative organization, the new organization that will provide these services, will pay $256 million in Iowa taxes that would have not been paid if this deal didn't take place,” UI President Bruce Harreld said.

Gov. Kim Reynolds, who also appeared at the meeting, praised the deal and said it could serve as a 'road map” for similar ventures - although regent leaders wouldn't commit to mandating that Iowa State University or the University of Northern Iowa consider a similar path.

'Governing boards like this one, administrators like those at our three public universities, continue to focus on innovation and finding creative opportunities to reshape how things are done in higher education,” Reynolds said. 'That means exploring new funding streams in addition to state dollars and tuition, which we all know are limited. And the reason I am with you today is to say good work.”

Public input

The governor's office announced last week she would be at the board office for an expected an announcement, and she offered her praise for the deal even before regents actually voted on it.

Although the university has been discussing and holding public informational meetings on the concept of a public-private utility partnership for months, regents only last week received bids from four finalists.

The board did not publicly release details of the agreement - including the name of the new operator and the lump sum - until the start of Tuesday's meeting.

Despite the new information, the board did not allow public comments before its vote.

A woman in the audience stood to criticize the regents for an 'unconscionable” decision to move forward without allowing the public to comment on the specifics.

Last week, state Sen. Joe Bolkcom, D-Iowa City, issued a statement criticizing - among other things - the 'breakneck speed” at which the university was moving toward the partnership.

Regent and UI officials didn't directly answer a question from The Gazette about why they didn't allow time for public input on the newly released information, but rejected any assertions they moved too quickly and too secretively.

'We'll have two regents meetings where there will be public comments - the opportunity for public comments … and anybody can sign up to talk about anything during those meetings,” board President Mike Richards said.

Harreld took issue with any contention the process hadn't been transparent and deliberative.

'That's one wave of this that I get a little bit frustrated with, quite frankly, that they somehow think that this has been too fast - it's been a year and a half,” he said. 'And secondly, that it hasn't been transparent. Stop it. It's been very transparent and will continue to be.”

How it will work

The deal will take 90 days to finalize, after which Engie will take over as the UI's utility system operator.

Although Engie must contribute half the upfront payment - to ensure it has skin in the game - it's partnering with investor Meridiam for the other half, creating a new University of Iowa Energy Collaborative Holdings LLC.

From that $1.165 billion upfront payment, the UI right away will pull $153 million to pay off its utility debt and then another $13 million to pay consultants it hired for the deal.

That leaves $999 million the university will put into an endowment, modeled to increase in value at 4 percent a year - which amounts to nearly $40 million in the first year. From the endowment, the UI plans to pull $15 million annually for campus-generated strategic initiatives, plus any utility expenses the standard campus billing process doesn't cover.

That gap exists because the UI must pay its partner a $35 million annual fixed fee in addition to utility expenses, plus costs for employees, maintenance and upgrades, fuel and other items. That gap will grow, in part, because after five years the fixed fee increases at an annual rate of 1.5 percent.

Over the deal's life span, the UI expects to pay the provider $2.4 billion in just the fixed fee - not including what it must spend on utilities, employees, facilities, fuel and other expenses.

The campus is planning to cover the fee and other expenses through its standard university billing process and with some of its endowment proceeds. For its strategic initiatives, the university plans to pull as much as $735 million from the endowment over the duration.

A three-member board will decide specifically how much to pull annually and how to allocate it. Administrators have outlined a process inviting applicants for up to five-year grants for projects supporting the UI's strategic plan.

The university has projected pulling more than $3 billion from the endowment over the contract's life for both strategic initiatives and utility expenses.

'To put that into context, the university has averaged around an 8 percent return, per year, over the past decade,” Harreld has said. 'In other words, we approach this, I believe, from a very conservative risk-tolerance perspective, in order to reduce the long-term downside risk.”

Still, he cautioned, success will require discipline.

When asked whether taxpayers or the public could be responsible for the concessionaire fee if the market turns south and the endowment fails to thrive, Harreld said, 'definitively no.”

'Whenever we're talking about low risk or lower risk - there is risk; there's not no risk,” he said when asked Tuesday for more specifics.

'And, at the end of the day, if we go through a period of 2007, ‘08, and ‘09 where we had a credit lockup … we wouldn't spend the money,” he said. 'That capital can stay in the 501c3. And so actually we've been planning on $15 million a year on average to come to the university - that would go to zero during that period.”

Partner details

Engie characterized itself as a global leader in providing energy services. It also reported a commitment to sustainability that between 2012 and 2018 compelled it to reduce emissions by 56 percent, according to its pitch to the UI.

In its proposal, Engie promised to help the UI continue to diversify its fuel sources and efficiency. It stated a goal of achieving a coal-free campus by 2023 - sooner than the UI's previously-stated 2025 goal.

While Engie dates to the 1800s, Meridiam is much younger - with a 2005 inception. Today, the Meridiam family of companies has offices in nine countries.

The new collaborative reports that nearly 22 percent of the 'committed private placement financing” for the UI deal comes from Iowa-based investors. But the names of those investors are being kept secret.

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