Facing backlash from council members and the public over complaints they had been kept in the dark about Mayor-President Joel Robideaux’s year-long negotiations to privatize Lafayette Utilities System’s electric division, Bernhard Capital Partners shifted into overdrive in recent weeks, meeting with city leaders and promising to create a Fortune 500 company in Lafayette if the deal goes through.
Now the private equity firm has indicated interest in a takeover of all three LUS divisions — electric, water and sewer (excluding LUS Fiber). Those most familiar with LUS’s operations had questioned BCP’s earlier plan to extract only the electric division, arguing the electric side props up the other two in regulatory compliance and shared administrative costs; without electric, they say there would be increasing rate pressure on the remaining divisions.
A white paper report created at Robideaux’s behest in July 2017 by LUS’s consulting engineering firm, Texas-based NewGen Strategies and Solutions, found that selling the electric system alone (the study only contemplated a sale in the form of a “franchise agreement”) would not be economically feasible for Lafayette Consolidated Government. The report, obtained Tuesday by The Current via a public records request filed July 17, also notes the likelihood that utility rates would increase under such a scenario. That’s an impact of LUS’s “combined system” approach to utilities management, uniting three utilities in one public agency.
“Under a combined system approach, the electric system can support the water and wastewater systems, from time to time,” said Andrew Duhon, who retired last year after three decades with LUS, most recently as customer and support services manager. “Without the electric system, there could be profound pressure on rates in the current regulatory environment.”
During LCG’s budget review of LUS this week, interim utilities Director Jeff Stewart said EPA regulations will force a comprehensive, 10-year inspection of the city’s wastewater collection system beginning next year. The study will double the wastewater system’s contractual services budget — the fund that pays for outside contractors — to $1.3 million next year and could result in federally required capital improvements that could be costly. Meanwhile, LUS is rolling out a massive overhaul of its wastewater system in the city’s urban core, expected to take several years and cost approximately $7 million.
NewGen’s research concludes that carving off the electric system would force the water and wastewater systems to back $105 million in Fiber debt, potentially forcing significant rate hikes.
The NewGen white paper notes that LUS provides a “financial backstop” to LUS Fiber, serving as a guarantor of debt in the event Fiber has a catastrophic default. NewGen’s research concludes that carving off the electric system would force the water and wastewater systems to back $105 million in Fiber debt, potentially forcing significant rate hikes.
Potentially, managing an intact LUS would alleviate some of these concerns. However, whether BCP’s latest proposals make the deal more palatable remains to be seen, as does the question of whether it will win support from city voters. Bernhard and the administration insist they intend for the agreement to go to general election, as is widely demanded, despite the production of a legal opinion in February suggesting a public vote isn’t required by law. As it stands now, it appears that votes of both the LPUA, the City-Parish Council subcommittee that oversees LUS, and the full council are needed to put a management agreement on a ballot.
“It’s changed through the due diligence,” BCP founder Jim Bernhard, 64, said in an interview at his Downtown Baton Rouge office last week, declining to offer additional information on the decision to include water and sewer. In April, Robideaux signed a non-binding letter of intent with BCP, agreeing to give the company full access to LUS’s operations in order to conduct a comprehensive assessment. The results of that assessment, and what looks to be an imminent offer to manage LUS, are expected later this month. In the LOI, BCP offers to pay $526 million for the electric division, roughly half of that the assumption of debt.
It’s unclear how much the option of system-wide management has been discussed with LCG representatives. Robideaux said the topic has come up in one phone conversation and reiterated his openness to options on the table.
“As I’ve stated before, I’m open to the discussion of outside management and look forward to seeing the details they propose,” Robideaux said. “My process with regard to LUS management has always been one based on fiscal responsibility to the taxpayers and not on emotion.”
During the interview, Bernhard, who founded The Shaw Group in the mid-1980s with $50,000, grew it to Fortune 500 status and sold it in 2013 for $3 billion, was a bit more forthcoming with information on the headquarters the company hopes to build in Lafayette, where it has narrowed potential sites to three: Four Corners, the old Lourdes property and UL Lafayette’s Research Park. “I think we may have some options on some property right now,” Bernhard said.
The proposed headquarters, a 200,000-square-foot office building with room for expansion, would eventually house what Bernhard aims to grow into another Fortune 500 company, bringing under one roof the operations for dozens of municipal power companies (Louisiana currently has two Fortune 500 companies, New Orleans-based Entergy and Monroe-based CenturyLink). Bernhard explained that his staff has narrowed prospective power company targets across the South to 70 and is already in talks with 30 to 40 of those municipalities. Those transactions are expected to be a mix of purchases and management agreements, he said, with some requiring approvals from mayors, some city councils and others public votes.
As The Current reported last week, Lafayette is in competition with another out-of-state city for the headquarters, and BCP officials indicate that there is some urgency to the deal here. They say the company’s timeline for getting the measure on an upcoming ballot, which will include wording about the Lafayette headquarters, will be finalized later this week.
For Bernhard personally, however, Lafayette is his first choice. Though he was born in Baton Rouge, Bernhard and his family later moved to Lafayette. He graduated from Cathedral Carmel High School, and his parents still live here. “If I didn’t grow up there, it wouldn’t be Lafayette,” he said.
The number of jobs that would be created locally by this new Bernhard subsidiary, NextGen (not to be confused with LUS engineering consultant NewGen), is unknown because the company is still negotiating other deals.
Bernhard did, however, seek to assuage LUS employees’ fear for their job security, anxiety that will likely be heightened by the release of the NewGen white paper, which estimated that a sale of the electric division could result in significant workforce reductions. At a minimum, Bernhard said, current salary and benefits will remain the same for the system’s more than 500 employees. He insists job losses have “not happened in a single company I’ve been involved with.”
Bernhard sought to correct public perception (and The Current’s assumptions) that LUS is well-run.
Bernhard sought to correct public perception (and The Current’s assumptions) that LUS is well-run. He also intimated that NewGen Strategies and Solutions has come around during the due diligence period to share some of his concerns about how the utility is managed.
“I believe we have some efficiencies and know-how that they don’t have now,” Bernhard said, primarily referencing the decades of experience he and his staff gained from The Shaw Group, which he says was at one time the largest builder of power plants in the world.
Bernhard is hopeful a tax averse community like Lafayette will be open to considering other alternatives for raising money to fund vital services and improve infrastructure, and stressed that rate increases under a BCP-managed LUS will be regulated just as they are now — by the LPUA (or city council, should voters approve the split council measure in December). He said BCP will stipulate to locking in rates for three years, the only exception being an unexpected fluctuation in natural gas prices.
Bernhard also promised that the $23 million in in-lieu-of-tax payments LUS annually makes to LCG won’t go away. “We have a plan for that,” is the only comment he was willing to offer.
“We don’t want people to be upset,” Bernhard said. “It’s a good thing, not a bad thing. We’re not going to go into a community and create thousands of jobs for people who don’t want us to be there.”
Additional reporting by Christiaan Mader