UI secures $225 million through P3

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A public-private partnership that outsources the operation of the University of Idaho's steam plant and utility system will enable the school to enhance some of its programs even as it wrestles with the pandemic-induced hit to revenues all universities are facing.

UI, a public land-grant university located in Moscow, Idaho, expects to close in December on the 50-year, $225 million lease agreement in which a developer consortium will maintain and operate the steam plant and utility system that provides electricity to the campus.

The P3 agreement was approved on Nov. 2 by the Idaho State Board of Education.

“The P3 agreement will allow the university to better invest in the student and research endeavors that have been part of our land-grant mission for more than 130 years,” said Scott Green, the university’s president.

The private operator, Sacryr Plenary Utility Partners Idaho LLC, will incur bank debt and issue a taxable private placement note through Wells Fargo in order to provide the university with the $225 million upfront payment.

The university will issue no bonds, nor incur debt from the transaction, said Randy Campbell, a Wells Fargo managing director.

Ben Tucker, the University of Idaho’s chilled water plant supervisor, opens the wood chip-fueled boiler at the steam plant in Moscow, Idaho.

The public-private agreement is one of several steps the university has taken to improve its financial situation.

When Green was named the university’s president in July 2019, the school was wrestling with a $40 million operating loss, that it has been able to convert into a $90,000 surplus through belt-tightening across departments, he said. None of the money from the P3 will be used to close a budget gap, he said.

In addition to support for programs, the transaction creates a concessionaire-paid maintenance plan for the steam plant and utility system that will free up state funding for other projects, he said.

The agreement enables the university to invest in student and research endeavors that are part of the university's 130-year mission, said Scott Green, the university’s president.

“President Green has really given this a lot of thought,” Campbell said. “His team has really mapped out what the educational and financial returns are from it.

Universities have contemplated P3s for fiber-optic assets or for parking garages, but UI concluded while the steam plant and utility system was important, it was not a core asset, Campbell said.

The university isn’t currently contemplating other public-private partnerships for university assets, Green said, nor does it plan to issue debt anytime soon.

The private consortium led by Sacryr and Plenary, both global infrastructure companies, was named the winning bidder of three finalists last week. The University of Idaho launched a request for qualifications process in November 2019 that garnered 12 responses.

“They are worldwide quality managers and have a long track record,” Green said. “They have never exited one of these long-term deals, which was important to us. They also brought in McKinstry, out of Seattle, as the operator. We have used them to help improve our utility assets in the past.”

The university expects to use $187 million of that $225 million to create an endowment with its foundation, which is expected to generate $6 million annually to invest in research, scholarships and distance learning programs, Green said. It will also use $30 million to defease debt it used to install a micro turbine and will place some of the money in reserve for any capital projects related to the utility, he said.

The money will enable the university to fund some of the energy research projects it conducts jointly with Idaho National Laboratories, Green said. It’s not uncommon for research labs to invest alongside universities in faculty and research, and INL is no exception, he added.

INL, one of the U.S. Department of Energy’s complex of national laboratories, and the country’s leading center for nuclear energy research and development, is located in southern Idaho. The main campus of UI is in northern Idaho, but it has a satellite campus in Idaho Falls, nearer to INL’s facilities in the desert between Idaho Falls and Arco.

“INL has been investing in cyber security around utility assets, and the new generation of nuclear generation, NUSCALE reactors,” Green said. “We are working alongside INL on those projects.”

The university will initially pay a fixed fee of $7.6 million annually to the private operator for utility and maintenance costs, Campbell said, slightly more than what the university currently pays in utility costs.

“The university receives an upfront fee, in the form of a lease payment, then the concessionaire has the responsibility to operate at the same cost and standard, if not better than what the university has been doing,” he added.

The operating savings construct used on the deal hasn’t been used by other universities that have structured public-private partnerships, Campbell said.

The agreement includes incentives for the concessionaire to evaluate how energy is being used throughout the campus with an eye to installing such things as energy-efficient lighting systems to achieve savings for both the private operator and the university.

“It compels the university to save money on utility use and the concessionaire to operate efficiently,” Campbell said.

Green really put a lot of thought into this transaction, said Randy Campbell, a Wells Fargo manager.

The Wells Fargo team expects that aspect of the transaction to appeal to other universities contemplating public-private partnerships.

The university’s total outstanding debt was $168.24 million as of June 30, 2019, according to an April 24 S&P Global report. The university has no swaps or bullets, and no direct purchase or private placement debt, S&P analysts wrote.

Wells Fargo priced $44 million in general revenue and refunding bonds in February for the university. PFM was financial advisor and Hawley Troxell Ennis & Hawley LLP was bond and disclosure counsel. The proceeds refunded outstanding bonds and financed a portion of the cost of the Idaho Central Credit Union Arena that is expected to open next year.

S&P Global Ratings lowered its long-term rating on the university to A from A-plus ahead of the deal and gave it a stable outlook. Moody’s Investors Service also downgraded the university’s long-term rating to A1 from Aa3 on Feb. 10 and gave it a negative outlook.

“The downgrade reflects our view of the university’s trend of negative and pressured operating margins, and trend of declining available resources over the last few years,” S&P analysts wrote. “Additionally, the downgrade reflects UI’s weakening market position relative to that of in-state peers.”

S&P also described UI’s enterprise profile as strong, characterized by its long-standing position as a flagship in the state, offset by a trend of full-time equivalent enrollment declines and weakening matriculation rates. It also assessed the university’s financial profile as strong, characterized by ongoing state support and a relatively low debt burden.

S&P’s stable outlook reflects an expectation that while the university will likely continue to face operation pressures as a result of COVID-19, it will manage through those pressures given its commitment to budgetary management.

The university had moved all of its classes online March 23, but is now offering classes both online and in-person after instituting COVID-based safety protocols, Green said.

“We took $7 million in losses on the campus when we closed, from housing and other auxiliary services, as well as the expenses of dealing with COVID,” Green said. “The university received $7 million from Congress’ CARES ACT, $3 million of which went to offset those losses.”

The university decided to reopen the campus in the fall after spending the summer instituting safety measures, he said.

“We tested every single student with our own lab before they were allowed in the classroom, and set up an isolation facility to care for any students who were sick,” Green said.

The university is teaching 30% of its classes online, and the rest are hybrid or totally live, he said.

Green said he expects to see ratings improvement from the P3 deal and steps the university has taken to strengthen its bottom line.

“I think balancing the budget will go a long way,” he said. “We have done a lot of things to improve our balance sheet including changes to how we structure our $30 million OPEB liability, which will reduce it to $5 million.”

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