Louisiana private-equity group eyes partnerships with N.C. muny utilities

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A Louisiana-based private equity group wants to create partnerships with municipal-owned utilities in North Carolina in which it would take operating control and help manage and improve electric, water, and wastewater systems in return for sizable upfront payments.

Completing such agreements is months, if not years, away from happening, but it comes amid the national push by Congress and the Biden Administration to spend hundreds of billions of dollars to improve U.S. infrastructure. A 2017 state study suggested North Carolina cities and counties will need to spend as much as $26 billion over the next 20 years to pay for improved water and wastewater needs. That is likely to require hefty increases in taxes or user fees, prompting some cities to seek other ways of raising money.

Bernhard Capital Partners has been talking with mayors and other city officials in dozens of N.C. cities over the last year about the plans, according to Jeff Jenkins, who joined Jim Bernhard to co-found the investment firm in 2013. Bernhard is former CEO of Shaw Group, a utility construction and engineering company acquired by Chicago Bridge & Iron for $3 billion in 2013.

The basic thrust of Bernhard’s plan is that cities would receive significant upfront capital by negotiating “concession agreements” under multi-decade contracts. Existing employees would be guaranteed jobs at existing pay with Bernhard while ownership of the physical assets stays with the city. These deals follow the public-to-private transition examples of cable and broadband service, toll roads and universities that are outsourcing their electricity operations, Jenkins says.

Baton Rouge, La.-based Bernhard raised $750 million in 2016 and $1.2 billion in 2019 to make investments in industrial, energy and infrastructure businesses. Investors include the United Auto Workers pension fund and endowments at Harvard and the University of Michigan. It has made more than 30 investments in companies that employ more than 18,000 employees. But it’s struggled to crack the municipal utility market, where it expects an annual return in the 8% to 11% range, much less than the targets of many private equity investments.

Bernhard is showing particular interest in Fayetteville, the state’s sixth-largest city with about 210,000 residents. It’s the only municipal utility in the state that owns and operates its own electric generation plant, according to its website, while its Public Works Commission also provides water and wastewater services. Fayetteville Mayor Mitch Colvin says he’s impressed with the potential for a partnership with Bernhard, but declined to discuss specific details and says no decisions have been made.

“They would provide us with upfront capital that would enable us to take care of some needs without adding to the tax burden on our citizens,” he says. “It could be a pretty creative way to get capital into our community.”

Fayetteville has “lots of needs that far exceeds our revenue,” the mayor adds. He cites neighborhoods that were annexed as many as 15 years ago but remain without sewer and water connections.

But private investment in municipal utilities faces stiff opposition from many local officials who doubt that private operators can provide more efficient, lower-cost service, particularly given the need to produce a profit. Giving up control over a key city asset is also a difficult decision.

Many N.C. municipal utilities are members of Raleigh-based ElectriCities, a not-for-profit quasi-governmental group that buys and sells electricity in 92 communities in the Carolinas and Virginia. ElectriCities CEO Roy Jones hasn’t met with Bernhard officials, who are talking directly to elected officials and local public works managers.

The Raleigh News & Observer reported Saturday that New Bern officials turned down a $70 million upfront payment from Bernhard to manage the city’s utilities, while officials in Kinston are mulling a $92 million offer for a 30-year contract. The newspaper also said that Greenville, Shelby and Wilson weren’t interested in a transactions. Those cities are all members of ElectriCities.

ElectriCities shared a skeptical view of private investment in municipal utilities at its February board meeting, according to a document that the group shared with Business North Carolina.

In a statement, ElectriCities spokeswoman Elizabeth Kadlick said, “the essence of public power, best captured in our motto `A Focus on People, Not Profit’ is that the value from the utility stays in the community. A private-equity model, funded by investors who expect a return, would necessarily turn that philosophy on its head.”

Bernhard officials think public-private partnerships will spread in the U.S. municipal utility market over the next few years out of financial necessity and because of efficiencies stemming from industry consolidation. While the southeast U.S. has 2,800 regulated utilities,  France has 10, Jenkins notes. He said he has no doubt that a public-private operator can significantly reduce rates charged by many N.C. municipal utilities.

Jenkins noted that the infrastructure plan being debated at Congress includes incentives for communities that have private partners for major initiatives. Promoters say involving the private sector can help reduce potential tax increases.

Bernhard officials don’t think legislative action is needed to pave the way for these agreements, but they hired Raleigh lobbyists Richard Sullivan and Doug Miskew to explain their plans to state and local leaders. ElectriCities’s Raleigh lobbyists include Johnny Tillett and Michelle Frazier, in addition to its in-house team, according to filings with the N.C. Secretary of State.

The Local Government Commission, which is part of the State Treasurer’s Office, would need to review agreements between the cities and Bernhard.

Gene McLaurin, chairman of the Economic Development Partnership of North Carolina, says it’s unclear if such agreements can benefit towns but agrees that private investment may be needed to pay for improved infrastructure. “Each community has to assess whether it makes sense and you have to have trust, accountability and some real transparency in these relationships.” During his 15 years as mayor of Rockingham, the city outsourced commercial trash collection to a private operator, but later took the business back in-house.

Bernhard in Janaury named Luke Kissam IV as a partner. He’s the former CEO of Charlotte-based Albemarle Corp., a publicly traded company that is among the world’s largest lithium producers. He stepped down because of health issues in April 2020.

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