Meridiam, ENGIE take $1.2bn PPP to court, alleging ‘breaches in obligations’

The consortium is citing the University of Iowa’s refusal to make certain payments and rescind approval for others for the PPP which closed in March 2020.

Meridiam and consortium partners ENGIE and Hannon Armstrong have filed a lawsuit in a district court in Iowa, alleging breaches of contract against the University of Iowa – its counterparty in a $1.2 billion public-private partnership.

The consortium – known as the University of Iowa Energy Collaborative – signed the 50-year PPP in March 2020 in what was billed at the time as one of the first such deals with a university for its utility system. The deal would see UIEC responsible for operating, maintaining and upgrading the university’s utility system and infrastructure, including a decarbonisation programme that would see coal usage disappear by 1 January 2025, if not before.

UIEC paid $1.165 billion upfront for the contract and the lawsuit states that the university used $153 million of the proceeds to pay off its existing utility system bonds, $13 million to pay consulting fees and $999 million reserved for its endowment. Under the terms of the agreement, the consortium would be paid an annual fee of $35 million, rising by 1.5 percent per year from 2025.

However, in the lawsuit, UIEC alleges that the university is refusing to make payments that are due and owing, has refused approvals for repairs to the utility system and is refusing to file claims for casualty insurance coverage. UIEC also claims that the university is demanding payment for “unplanned” utility outages, although UIEC insists that the university’s representatives were present in meetings and discussions planning for such events.

“The University of Iowa and our P3 partners, ENGIE North America, Meridiam and Hannon Armstrong, have a disagreement regarding some of the terms and conditions of the 50-year P3 utilities partnership agreement. The university has been working with its utilities partner to resolve these differences,” a spokesperson for the university said in a statement to Infrastructure Investor.

“We are disappointed that our utilities partner has a different interpretation of the contract and felt the need to file a lawsuit against the university. We are eager for the court to provide us with a clear definition of the contract for both parties to adhere to. We will continue to work with our P3 partners to ensure that the utility needs of our campus will be met today and for the next 47 years.”

A spokesperson for UIEC stated: “We do not comment on commercial agreements and/or ongoing litigation. UIEC values our relationship and partnership with the University of Iowa and is committed to continuing to help them achieve their sustainability goals and transition to cleaner sources of reliable energy.”

In the lawsuit, UIEC stated that it “remains fully committed to helping the university meet its sustainability goals and bring its utility system into the 21st century”.

P3 was like ‘writing the US constitution’

As part of the agreement, the University of Iowa had to demonstrate it had “substantial business experience” and was fully acquainted with the PPP agreement, according to the lawsuit. In fact, the lawsuit alleges that the contract’s provisions were so detailed and carefully negotiated that the university’s president likened it to “writing the US constitution”.

While UIEC acknowledged that such high-value transactions are complex and detailed, the provisions governing the dispute are “straightforward”, it said. The dispute began after fiscal year 2021, when the parties were calculating the utility fee owed to UIEC. The university – “with its billion dollars now in hand – began searching for ways to reduce its payment obligations to UIEC and chip away at UIEC’s contractual rights”, the lawsuit alleges.

This includes a “capped O&M” cost, which includes a $1.5 million annual operator fee UIEC had paid an ENGIE subsidiary to manage the operations and maintenance of the utility works. UIEC, which says it should be reimbursed for this, negotiated this contract “in line with market standards”, it argues, and which it says the university knew about when accepting its offer. The University of Iowa is allegedly refusing to pay this.

“Notwithstanding the university’s willful blindness, the concession agreement is clear: If UIEC has to make a payment to the operator in exchange for the operator’s operation of the utility system, then that payment is included within the Capped O&M Costs and is therefore a component part of the calculation of the utility fee. The university’s refusal to include this cost in the utility fee is thus a direct breach of the concession agreement,” UIEC alleges in the lawsuit.

There is also a dispute around the pay of two senior UIEC executives, with UIEC claiming their salaries, expenses and benefits should come under the capped costs, with the university allegedly refusing to include these in the utility fee.

The PPP came under scrutiny in December by the Iowa state auditor, which released an investigation into how the UIEC PPP was procured and criticised the lack of transparency involved in the matter.

“While the legislature has delegated the authority to issue debt to the board of Regents, it seems inappropriate for a government department or agency to take on the largest financial obligation ever held by Iowa taxpayers at the governor’s general suggestion and without a vote from the legislature,” the report said. “Such practices lead to a lack of accountability and transparency.”

The University of Iowa had not responded to a request for comment about the auditor’s report.