Louisiana firm offers big money to manage NC public utilities. Is it headed your way?
A private-equity management company has been quietly reaching out to communities across North Carolina offering tens of millions of dollars to manage their utilities for as long as 30 years.
Bernhard Capital Partners and a local subsidiary formed in August 2019, North Carolina Municipal Utility Services, have pitched “concession agreements” to more than 10 cities over the past two years. The company’s leaders would not identify those cities, but records obtained by The News & Observer and interviews with municipal officials show pitches made to Fayetteville, Greenville, Kinston, New Bern, Shelby and Wilson. Four of those localities said they have turned Bernhard down, and company officials say no city so far has accepted.
But what Bernhard is proposing in each case is somewhat of a mystery. The company required some community leaders to sign nondisclosure agreements and would not disclose key details in an interview.
Tony Sears, the city manager for Kinston, confirmed the companies have made a pitch there, but he said he couldn’t say much about it because of the nondisclosure agreement. He called what they are proposing a “paradigm shift.”
“Anytime there is an opportunity to increase the level of service, the quality of service, while maintaining or lowering cost to citizens, that’s something we always want to give a positive look at,” Sears said.
After consulting with attorneys, Sears produced documents from Bernhard that show it offering $92 million to Kinston to “operate, maintain and improve the cities (sic) electric, water and wastewater utilities systems” for 30 years depending on a review of utility finances and usage.
Bernhard’s preliminary proposal to New Bern offered $70 million upfront to manage its utilities for 30 years, documents show. New Bern City Manager Mark Stephens provided few additional details.
The company suggested to both communities that they could use the upfront money to give each residential customer a $1,000 rebate in the first year, or the communities could receive a smaller upfront payment in exchange for “sustainable” reductions in the rates customers pay of roughly 7% depending on revenue and usage forecasts.
Bernhard began talking with New Bern officials in early 2020, Stephens said.
“Moving forward with their proposal was not in the best interest of our City and utility at this time,” he said in an email message the The News & Observer. Officials with the cities of Greenville (its utilities commission said it had no contact with Bernhard), Shelby and Wilson said they, too, were not interested.
Fayetteville evaluates Bernhard’s proposal
Fayetteville’s utilities are run by a public works commission that is separate from city government. James West, the commission’s attorney, provided records showing Bernhard officials had made a preliminary offer, but key details such as how much the company might pay were redacted. He declined to say why other than citing the nondisclosure agreement.
Those records show that Fayetteville Mayor Mitch Colvin wrote a letter, dated March 16, inquiring about the commission’s evaluation of the proposal from Bernhard. It said the city council had “authorized the engagement of a consultant/valuation firm to review and advise City Council as to the fairness of any definitive proposal from Bernhard.”
Colvin’s letter also referred to a “letter of intent” that Bernhard sent to the commission on Dec. 7, and a subsequent letter on March 7. Bernhard provided the March 7 letter to Colvin and other city officials. After the N&O brought up the correspondence, the commission provided a letter from Bernhard dated March 9. It says Bernhard would be willing to place a corporate headquarters in Fayetteville as part of the deal, plus the potential of additional corporate headquarters from Bernhard’s portfolio of companies.
The N&O requested records from Fayetteville city officials, but they said in a response on March 19 that there were no public records regarding Bernhard or N.C. Municipal Utility Services.
“The record you asked for does not exist,” the city responded through NextRequest, its public records portal. “We have inquired regarding the two companies and no one has heard of them. We do not have the records that you have asked for.”
(The city reopened the records request on Thursday.)
In addition to the Colvin letter, the public works commission records show Bernhard representatives met with city and commission officials in June 2019. The commission and the City Council heard a presentation from Bernhard in a joint closed session on Dec. 1, 2020.
The commission, in a Dec. 16 letter, said it was not interested in pursuing Bernhard’s proposal, saying it was “premature and not able to pass prudency standards for utility governance in decision making.”
Colvin confirmed in an interview that he has been made aware of Bernhard’s proposal and is seeking the commission’s report that evaluated the proposal. He said he didn’t think he could share details of Bernhard’s proposal because of the nondisclosure agreement.
He’s not ready to give up on making a deal with Bernhard.
“It was a significant amount in that particular proposal that could help meet a lot of needs in the community,” Colvin said.
Bernhard’s pitch
Bernhard representatives said in an interview that concession agreements are common in European countries and Australia, and what Bernhard is proposing isn’t much different from the concession agreements some public universities have struck with private entities to run some of their operations, including utilities.
Bernhard is betting that it will get back what it pays plus an agreed-upon rate of return for its investors in the range of 8% to 11%, said Jeff Jenkins, a company co-founder, in an interview. He said there is a “critical need” for infrastructure improvements and expansions in the Southeast, and the concession agreements his company is pitching could provide the money to take care of them.
“We offer upfront capital to partner with a community that has a municipal utility so they can take some of those proceeds and invest in infrastructure in their communities where they don’t want to raise taxes or increase their indebtedness,” he said.
They are targeting smaller communities that aren’t seeing the explosive growth of Charlotte and the Triangle, but want to offer the kinds of amenities that could help them compete economically, Jenkins said. The economic downturn caused by the pandemic, and President Joe Biden’s proposed plan for $2.3 trillion in infrastructure spending also could interest communities in striking agreements, he said.
As part of a concession agreement, the company agrees to keep all employees, who would remain with the municipality and continue to receive the same pay and benefits, Jenkins said. The municipality would also continue to set rates and decide upon capital improvements. Bernhard would pay down debt incurred for those improvements but only for the length of the agreement. The municipality would have to assume any remaining debt. There would be no requirement for the municipalities to buy back management of their utilities at the end or pay a separation fee, Jenkins said.
Jenkins and Jim Bernhard formed the company in 2013 out of the sale of Bernhard’s former company, The Shaw Group, which specializes in utility operations and has a presence in Charlotte. Jenkins was the former chief operating officer of a Shaw Group subsidiary.
Jim Bernhard is well known in Democratic circles. He’s a former chairman of the Louisiana Democratic Party and at one point some of the state’s top politicians unsuccessfully advocated for him to be energy secretary under President Barack Obama, the Advocate of Baton Rouge reported. Campaign finance reports show he and Jenkins made maximum $5,400 contributions to Gov. Roy Cooper, a Democrat, last year.
Jeff Yuknis, a Bernhard director who is leading the efforts to recruit municipalities in North Carolina, made three contributions totaling $6,200 in the last election. The N.C. Senate Majority Fund supporting Republican candidates received $2,500. State Sen. Kirk deViere, a Fayetteville Democrat, received a $1,000 contribution and Cooper picked up a $2,700 contribution.
Jenkins said he and his colleagues have a history of supporting candidates from both major parties who support economic growth. He noted that Jim Bernhard has a second home in Banner Elk, southwest of Boone.
Jenkins confirmed that among those his team sought advice from is Dan Gerlach, a former president of the Golden LEAF Foundation, which disburses tobacco-settlement money to rural North Carolina communities. Gerlach suggested municipalities that might be interested in a proposal. Yuknis said Gerlach was not paid.
Gerlach, who was also a former top aide to then-Gov. Mike Easley, a Democrat, became a lobbyist after he resigned as interim chancellor at East Carolina University. The News & Observer was not able to reach him for this story.
Bernhard Capital is based in Baton Rouge, Louisiana. Its investors include pension funds. Jenkins said the company had raised more than $3 billion, and its portfolio includes construction companies, engineering firms and energy consultants.
He said it has struck concession agreements with 20 hospitals, but it has yet to win over a municipality.
Those who advise public utilities take a dim view of the company’s proposal.
Concerns about agreements
Ursula Schryver, a vice president with the American Public Power Association, said the information she’s received from members suggests the short-term cash might not outweigh the potential long-term cost. The company has reached out to power agencies across the Southeast, but so far she said none of the association’s members have signed up.
“Obviously they are in business to make money,” she said. “That is what their goal is and so they are going to have to find ways to do that. Whether it’s raising rates or cutting expenses, there’s going to have to be a way they can make money. And it’s hard for me to imagine that there would not be a lump sum payment [to the company] to take back the system at the end.”
In Lafayette, Louisiana, where the company proposed taking over the city’s electric, water and wastewater utilities, the Daily Advertiser newspaper reported that Bernhard would have paid $140 million and taken over $184 million in debt on the utility’s books while cutting residential customers’ electric rates by 10% the first three years. That would have saved the average customer about $130 a year, the newspaper reported.
The effort died after Terry Huval, the city’s former longtime utilities director, told council members that Bernhard had made four offers to hire him to run the subsidiary that would have managed the utilities. Such offers appeared to counter Bernhard’s claims there was room for improvement in the utilities’ operations, the newspaper reported.
Huval, in his remarks to the council, called the proposal a “scheme by a large company to try to get money out of the city of Lafayette. It was never going to be good for the city of Lafayette,” the newspaper reported.
Bernhard and several other companies also lost out on a bid to take over the utilities for Jacksonville, Florida. That city also decided to keep them public, and a subsequent Jacksonville City Council investigative report found that the mayor and his staff may have violated sunshine laws in pushing for privatization, the Jacksonville Daily Record reported.
Fayetteville and Greenville’s public works commissions, Kinston, New Bern, Shelby and Wilson are members of ElectriCities, a government-created nonprofit that buys and sells power for more than 50 public utilities across the state. ElectriCities officials have heard about Bernhard through their members, and are also troubled by the secrecy.
“A lot of our members who would normally be telling us details have been asked to sign nondisclosure agreements, so they can’t,” said Drew Elliot, ElectriCities’ government affairs manager.
Elizabeth Kadick, a spokeswoman for ElectriCities, said the nonprofit is also concerned about the kind of impact concession agreements might have on communities.
“It is unclear what effect any arrangement with a private equity firm would have on ElectriCities as a joint action agency or as a trade association,” she said in an emailed statement. “However, 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.”
State approval
ElectriCities officials and the State Treasurer’s Office say such agreements would have to be approved by the Local Government Commission. The commission, which is within the treasurer’s office, reviews local government actions that involve significant borrowing to help them avoid bad deals that could engulf them in debt.
Jenkins said the company agrees the commission has the right to review and approve. The company has hired two lobbyists to represent it before state officials, but he said it is not seeking legislation to remove the commission’s oversight.
He said the nondisclosure agreements allow Bernhard to make a preliminary, nonpublic proposal, while the company can examine a utility’s books to develop a formal proposal that works for the company and municipality.
That proposal would be public record, he said.
“The whole point is to be very transparent once you have enough information,” he said.
Brooks Fuller, the director of the North Carolina Open Government Coalition and Sunshine Center at Elon University, said businesses dealing with governmental agencies can protect commercially valuable trade secrets and financial information. That could include preliminary proposals such as those Bernhard made to North Carolina municipalities.
Such concession agreements would have to be voted on in public under the state’s Open Meetings Law, he said.
So far, Jenkins said, the company has reached out to more than 100 municipalities in the Southeast and several have expressed serious interest in a concession agreement. But he is not identifying them.
This story was originally published April 10, 2021 at 6:00 AM.