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Private equity wants to buy Entergy’s gas assets. Should regulators let it happen? [1]

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Date: 2024-06-25  

In November, Drew Marsh, chairman and CEO of Entergy Corporation, announced to shareholders that, after 100 years, the power company would cease to distribute natural gas.

“We have significant capital needs to meet our customers’ growing demand for reliable, resilient and clean energy,” Marsh said. “To that end, we are pursuing opportunities to source that capital at a lower cost.”

One of those sources of capital? A $484 million deal with Baton Rouge-based private equity firm Bernhard Capital to buy Entergy’s gas utilities in Louisiana, which distribute natural gas to over 200,000 households and businesses in New Orleans and the Baton Rouge area.

The announcement did not come as a surprise to those on the November shareholder call. Just days earlier, Entergy had published a press release detailing its intent to sell its gas utilities to the firm, which is led by Baton Rouge businessman Jim Bernhard, a former state Democratic Party chair and prolific political campaign donor. Bernhard has created a new company, called Delta States Utilities, also referred to as simply Delta Utilities in company filings, to run the gas distribution business.

But the deal needs to pass regulatory muster with the Louisiana Public Service Commission — the elected board that regulates utility providers in Louisiana outside of New Orleans — and the New Orleans City Council, which regulates utilities in the city. Both are tasked with determining whether a new private equity-owned gas utility will best serve ratepayers.

Bernhard Capital argues that the deal will let both Delta States Utilities and Entergy focus resources and capital on their respective utilities, enabling each to improve their services. But critics of the deal argue that regulators should not support an agreement that incentivizes the natural gas utility to expand its reach and raise rates, especially in light of the documented emissions of natural gas use.

Gas distribution is a small fraction of Entergy’s overall operations, bringing in just $180 million in revenue for the company in 2023 compared to the $11.8 billion in revenue from electricity sales. Marsh told shareholders that Entergy could make some easy money from the sale, which could pay back some of the company’s outstanding debt and support critical capital improvements, like improving the resiliency of the electrical grid or investing in renewable energy sources.

The proposed sale appears to be good for Entergy’s bottom line, potentially infusing it with more than twice as much money as it makes in one year of revenue from natural gas distribution and divesting the company of a business that some analysts project will decline in the coming years, at least in the United States. The sale also appears to be good for Bernhard Capital, expanding its portfolio of utilities, which are known for stable and consistent cash flows.

The question now is whether the sale is good for ratepayers. And the debate over this question raises concerns about the long-term future of gas utilities in the city and state and whether private equity — known for acquiring, dramatically restructuring and then reselling companies — should play a role in that future as the city continues to face the adverse impacts of climate change.

In the months since Entergy first proposed the sale, opposition has begun to form, especially in New Orleans, where the company provides natural gas to approximately 109,000 households and businesses.

The Alliance for Affordable Energy, a consumer and environmental advocacy nonprofit group based in New Orleans, is leading the fight along with the Energy Future New Orleans coalition, asking the City Council to reject or significantly modify the terms of the proposed sale.

They argue that the sale of Entergy’s gas utility would be an undue burden to ratepayers in New Orleans. It would hand over gas utilities to private equity, which would be incentivized to grow its customer base and raise rates to pay back its sizable investments in the utility. Private equity firms frequently advertise themselves as delivering higher returns through private ownership than shareholders would get through publicly-traded companies. Critics also argue that Bernhard Capital has no prior experience in natural gas utilities, and the sale would give residents an additional bill each month and a new company to negotiate those bills with. Currently, New Orleanians receive one bill from Entergy for both electricity and gas.

Jesse George, policy director with the Alliance for Affordable Energy Credit: Courtesy Alliance for Affordable Energy

However, the Alliance argues that more than inexperience and inconvenience, the sale of a gas utility to a private equity firm would undermine the city’s climate commitments to move away from the use of fossil fuels by 2035 and risk leaving the most resource-strapped households footing the bill.

“The idea of creating a new utility whose sole business is selling fossil gas seems just completely contradictory to all of our climate goals,” Jesse George, the Alliance’s policy director, said in an interview with Verite News. “It’s totally antithetical to our climate and clean energy goals and the steps that we absolutely must take to make this city habitable for the future.”

Getting approval

Soon after Entergy announced the sale of its gas utilities to Bernhard Capital, the two companies filed applications with both the New Orleans City Council and the PSC to begin the approval process.

In New Orleans, the process began with little fanfare. At a sparsely attended meeting in January, Bernhard Capital representatives Julius Bedford and Ryan King gave a presentation to a City Council committee outlining the overall sale and its transition timeline.

“We’re really excited to get a chance to give a brief introduction of our company and why we’re so excited about the opportunity here in New Orleans,” Bedford said.

In Bedford’s telling, Bernhard Capital was a hometown firm with a stated commitment to New Orleans and deep experience in delivering utilities to residential and commercial customers, perfectly situating it to take over the city’s gas utility. He pointed to the company’s success with other utilities, such as National Water Infrastructure, which Bernhard acquired in 2020 and manages wastewater in Ascension, Livingston and East Baton Rouge Parishes, and United Utility, which Bernhard acquired in 2018 and manages electric transmission and distribution infrastructure and recently moved its headquarters to New Orleans.

A map illustrating Bernhard Capital Partner’s “national footprint” in a presentation given to a New Orleans City Council committee in January 2024.

On a slide titled “Sale Benefits,” King emphasized that the new utility would have its headquarters in New Orleans, guarantee employment to Entergy’s existing 200 gas workers and hire more than 100 more Louisiana-based employees. The utility is promising to upgrade the existing gas infrastructure through “modernization and technology,” King said.

Councilmember Joseph Giarrusso launched into concerns about the company’s motives.

“When I hear Bernhard Capital, and then I hear Delta State, I just want to make sure that Delta State is being set up fully as an integrated company to run these assets and that the plan isn’t to try and squeeze as much out of the assets as possible and then hand a liability back to somebody else in like two years,” Giarrusso said.

“Yeah, DSU is absolutely going to be a standalone entity,” Bedford replied. “It’s the model we follow across all of our portfolio companies. We set them up as individual platform investments.”

Giarrusso pressed further. “Okay, I guess another way of asking this is: is the plan for DSU to stay in the market and be a standalone company for as long as feasible?”

“Yes,” Bedford and King both replied.

‘Corporate raiders’

Giarrusso’s worries came from private equity’s reputation for “cutting and running” after purchasing companies.

Known as “corporate raiders” in the 1980s for their aggressive takeovers of publicly-traded companies through leveraged buy-outs, private equity firms have come to touch almost every corner of the American economy. The private equity playbook typically consists of buying up undervalued companies, usually with borrowed funds, and then dramatically re-structuring those companies – often through re-organization and cost-cutting, such as layoffs and asset selling – so that they can be sold for a profit.

In recent years, private equity has begun to eye the utilities sector, including water, electricity and gas services. For cities with struggling public infrastructure, private equity firms make the case that they can provide large amounts of cash upfront to finance desperately needed improvements, meaning that local governments don’t have to issue bonds, but many cities are wary of this promise.

Private equity firms argue that they provide large capital investments to help turn companies around, helping to make them more technologically and structurally efficient as well as financially prudent. But critics argue that private equity firms are more interested in their own near-term profit than a company’s quality or longevity. They point to the negative impact that private equity has had in the nursing home, real estate and health care industries, as well as to research that shows that companies purchased by private equity firms are far more likely to go bankrupt.

Like many other large firms, Bernhard Capital is making a play for utilities across the country.

Bernhard Capital’s portfolio already includes several companies that service or operate electricity and wastewater utilities. In fact, buying utilities is a key part of the firm’s branding. As reported by the American Prospect, Bernhard has been explicit about its goals, advertising itself as being in “the business of being essential” in a trade publication.

The purchase of New Orleans’ gas utility appears to be part of the firm’s ambition to own and operate a large gas utility across the Deep South.

Antitrust concerns

Weeks after the company’s City Council presentation, Bernhard Capital announced an agreement with CenterPoint Energy to acquire its natural gas operations in Louisiana and Mississippi, which serve more than 381,000 customers across both states. The acquisition was financed by Blackstone, a firm known for its ubiquity across almost every sector of the global economy.

If both the CenterPoint and Entergy sales are successful, Delta States Utilities would become one of the largest natural gas utilities in Louisiana. The sales would also transition both utilities away from ownership by publicly-traded companies.

When a utility switches from public to private company ownership, that utility is no longer required to regularly disclose its financial information through quarterly reports, making it less transparent to the public. Private equity also has a reputation for seeking much higher returns on its investments compared to publicly-traded companies.

“Shareholders expect a certain level of return, but private equity expects more,” George said. “That gives them an incentive to squeeze ratepayers as much as possible.”

“The use of a private equity business model in no way changes the level of regulatory oversight and accountability of the utility and Delta Utilities will continue to operate under the full guidance and auspices of the state and local regulators,” a Delta States Utilities spokesperson told Verite News in an email.

There is also concern over the fact that Delta States Utilities is trying to capture such a large market share across Louisiana and Mississippi through its purchases of both Entergy and CenterPoint gas utilities.

Under such purchases, customers might have less input, said Alissa Jean Schafer with the Private Equity Stakeholder Project, a nonprofit that works to bring transparency and accountability to the private equity industry and empower impacted communities​​.

“If you have a private equity firm that is simply focused on building a monopoly, extracting every bit of profit out of the utility as possible, that just raises a lot of red flags,” Schafer said. “The further you get away from the community, like a direct relationship to the community, the higher the risk is that the focus is just going to be on profit.”

However, both the CenterPoint deal and the Baton Rouge portion of the Entergy deal will require clearance from the PSC. The commission will evaluate the deals based on whether Delta States Utilities can provide reliable and affordable service to Louisianians.

Davante Lewis, who was elected Public Service Commissioner for Louisiana’s District 3 in a runoff election on Dec. 10, 2022, is seen in this undated photo.

“While those are two separate applications, I am actually evaluating them in one whole swap in terms of whether or not it makes sense because of antitrust issues,” Davante Lewis, a Public Service Commissioner, said in an interview with Verite News.

In addition to the antitrust concerns, Lewis said the PSC will also look at whether Delta States Utilities is capable of maintaining the utility long term.

“I think there are some concerns about [Bernhard Capital’s] former business practices,” Lewis added. “What does that mean for workers? What does that mean for their gas systems? Could this private equity firm come in, take [the utility], get their capital, sell it, and disappear? As we continue our investigation and go through the process, we’ll see how much those questions stand.”

For its part, Entergy says the sale will allow it to better focus on its electric utility.

“We feel it is in our customers’ interest to sell the gas business to a company with the size, scale and core focus of Delta Utilities,” an Entergy spokesperson said in an email to Verite News. “The announced sale of our Louisiana gas utility business represents an opportunity for Entergy to simplify our operations, strengthen our credit through the repayment of debt and continue to focus on growing our regulated electric utility business for the benefit of our customers.”

Campaign contributions

Jim Bernhard made his reputation through his work with The Shaw Group, which worked in manufacturing and construction and secured no-bid contracts from the U.S. Army Corps of Engineers and FEMA to work on flooding infrastructure, emergency housing and cleanup in the wake of Hurricane Katrina. After exiting The Shaw Group in 2013, Bernhard started his private equity firm with the intention “to invest $15 billion buying and managing municipal utilities in the Southeast,” according to Lafayette’s The Daily Advertiser.

Shaw Chairman Jim Bernhard speaks during a news conference as Gov. Bobby Jindal, left, listens in Lake Charles, La. Tuesday, Aug. 26, 2008. Construction firm The Shaw Group Inc. will build a Lake Charles manufacturing plant and create 1,400 jobs as part of a state tax incentive deal worth $210 million to the company. (AP Photo/Brad Puckett, American Press)

Bernhard and Jeff Jenkins, both founders and partners of Bernhard Capital, have made sizable donations to elected PSC officials, who are tasked with determining whether this sale will pass regulatory muster.

This includes donations to Commissioner Craig Greene, who received $20,000 from Bernhard and $20,000 from Jenkins, and Lewis, who received $3,500 from Jenkins and $5,000 from Dana Bernhard, Jim Bernhard’s wife.

“I made a campaign pledge that I would not take campaign donations from regulated entities,” Lewis said. “At the time that [Bernhard] and [Jenkins] donated to me, there had been no announcement of the acquisition nor knowledge that an acquisition was coming. If Delta Utilities is approved and becomes a utility, then I will no longer accept donations from them going forward.”

Greene, Bernhard and Jenkins did not respond to Verite News’ requests for comment in time for publication.

Still, chief among the considerations by regulators should be whether the deal will negatively impact ratepayers.

Bernhard Capital has pledged not to raise rates on customers for at least one year and claims that its commitment to efficiency and modernization will provide a better customer service experience. But in expert testimony filed with the New Orleans City Council by the Alliance for Affordable Energy, Karl Rabago, an experienced utility commissioner and executive, argued that the utility has every incentive to raise rates on consumers in the long term in order to pay back its $484 million purchase and any further investments it makes in upgrading the gas utility.

“The 33% increase in staffing and the costs of establishing new service support functionality creates a significant cost that customers will face when [Delta States Utilities] proposes new rates,” Rabago said in his testimony.

But Delta States Utilities contests this.

“Approval in this filing would result in no incremental rate impacts for ratepayers, as Delta Utilities is requesting to ‘step into the shoes’ of the existing rates, schedules, and periodic filings of the utilities,” a spokesperson said in an email. “Any future rate changes will be subject to regulatory review and approval. Moreover, Delta Utilities is not seeking a rate increase to recover any acquisition or transaction costs.”

However, the Alliance further argues that as more and more ratepayers move to fully electrify their homes and businesses, the gas utility will be incentivized to raise prices on a dwindling pool of customers, who are more likely to lack the means to electrify their homes or businesses. This is especially concerning, George said, since the Sewerage and Water Board is moving to electrify its operations. According to some estimates, the Sewerage and Water Board is responsible for approximately 10% of natural gas use in the city.

“That shrinking pool of ratepayers who are left behind and who are left dependent on gas in their homes are going to be bearing more and more of the cost of these new expenditures,” George said.

Environmental impact

Beyond whether the deal will make sense in dollars and cents for New Orleanians, there are also questions about how the deal squares with the city’s stated climate goals.

According to New Orleans’ most recently published climate strategies, the city aims to move toward 100% clean energy by 2035, in part by curbing natural gas use and making the electric grid cleaner, so it will no longer be powered by fossil fuels but instead by sustainable, renewable energy sources. This goal came after a study showed that natural gas use was responsible for “33% of energy-related and 17% of total [greenhouse gas] emissions.”

However, the city is constrained in its ability to place limits on natural gas use. In 2020, the Louisiana Legislature passed a bill prohibiting any locality from placing restrictions on the use of natural gas. This has meant that New Orleans has had to lead more by example than by decree by implementing its own “green” policies with city-run buildings and departments.

Still, one of the few levers available to the city is its role as a regulator of Entergy New Orleans. The city has said as much in its own climate report, “Net Zero by 2050.”

“More than half (51%) of the greenhouse gas emissions in New Orleans are derived from how we produce, distribute, and use energy,” reads a report released by the city titled “Net Zero by 2050.” “The City is uniquely well-positioned to address these emissions because the City Council regulates Entergy New Orleans (ENO) and can align the utility’s goals with those of the City.”

While many of those emissions are tied to the energy used to power the electric grid, such as at the contested New Orleans Power Station, they also include the emissions caused by natural gas use in homes and businesses. Accordingly, George argues that the city’s role as a regulator should empower it to reject the Bernhard Capital deal on account of the city’s climate commitments, especially because Delta States Utilities wants to seek out more customers for its gas utilities.

“They need to seriously consider the implications of approving this deal as is,” George said.

If the city does not want to reject the sale outright, the Alliance argues that councilmembers should impose conditions on the sale, including requiring the utility to develop and implement a plan to work to electrify all residential and small commercial demand for gas while also ensuring an across-the-board rate decrease for at least three years.

But a Delta States Utilities spokesperson said that natural gas is in line with the city’s commitment to being environmentally responsible.

“Natural gas distribution systems play a critical role in reducing emissions and rank among one of the most efficient energy sources,” a spokesperson said in an email, pointing to a recent report by the American Gas Association, a trade group for gas providers, claiming that homes that rely on natural gas appliances have a lower carbon footprint than those that rely on electric.

A proposed timeline of the sale of Entergy’s gas assets in Louisiana to Bernhard Capital, in a presentation given to a New Orleans City Council committee in January 2024.

In New Orleans, the application for Delta States Utilities is still relatively early in the approval process: at this point, the Council is going through several rounds of testimony. Following an an evidentiary hearing in September, interested parties will file briefs. And then, once November comes, the decision will be in the hands of the council.

Verite News requested comment from the five councilmembers who serve on the Utility, Cable, Telecommunication & Technology committee. All declined to be interviewed for this story.

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