One of Duke Energy's 10 largest investors, Elliott Management Corp., on Monday sent a letter to the utility, urging it to break into three separate companies in order to create billions of dollars in value for shareholders.
The investment company said it believes Duke "owns one of the highest-quality and most under-appreciated collections of utility franchises in the country" but that "top-tier results have proven elusive," leaving "few benefits" for stakeholders. In particular, the group says Duke's Midwest and Florida subsidiaries are "undermanaged and undervalued," and splitting its business into Midwest, Florida and Carolinas companies could unlock $12-15 billion in shareholder value.
- Duke said in a statement it is still reviewing the management company's proposal, but added the strategy "runs counter to the strategic direction" of the broader power sector's efforts to make large scale investments.
Elliott has been proposing ways for Duke to boost its stock price since July, according to the utility, though Duke has thus far rebuffed its plans, determining they are "not in the best interests of the company, its shareholders and other stakeholders."
Moody's Investors Service in March downgraded Duke's long-term ratings in response to a settlement the utility reached with environmentalists over how it would pay for its multi-billion dollar coal ash clean up. Under the settlement, Duke agreed to earn a lower rate of return on the cleanup, and write off hundreds of millions of dollars in coal ash costs from ratepayer bills.
Given Duke's "discounted valuation and long-term share price underperformance," Elliott is proposing the utility "conduct a thorough, unbiased review" of potentially separating its company into three regionally focused, publicly-traded utility companies: One in its Indiana/Ohio/Kentucky territory, one in its North Carolina/South Carolina/Tennessee region, and a third in Florida. Such a move could unlock equity market valuations $54-55 billion in its Carolinas region, $22-23 billion in its Florida footprint, and $14-15 billion in the Midwest, according to Elliott, a total of $90-93 billion that "greatly exceeds" its current $78 billion market capitalization.
"[W]e believe a separation would provide considerable benefits for customers and other key stakeholders because these standalone local utility businesses would benefit from greater operational focus, improved execution, lower cost of capital and increased capital investment in critical infrastructure," said Elliot in the letter.
Indiana ratepayer advocate Kerwin Olson said Elliot might be "onto something."
"Duke Energy Indiana is living in the past and doing all that it can to maintain the status quo and delay the clean energy transition. Not only is this foot dragging harmful to consumers, but apparently folks like Elliott Management believe [it is] also detrimental to investors and the Company itself," Olson, executive director of Citizens Action Coalition of Indiana, said in an email. "They could be right. The markets, via Elliott Management, are telling Duke Energy to get their act together and move with the markets, instead of pushing back against market forces and living in the past."
Duke said in a statement that it is poised to deploy over $125 billion of capital over the next 10 years, including a $59 billion investment in clean energy in the next five years, and deliver 5% to 7% annual earnings growth to shareholders. It criticized Elliott's proposal for running against what the utility sees as an industry-wide strategy to scale up.
"This 'shrink-the company' strategy that underlies all of Elliott's proposals runs counter to the strategic direction of the entire industry at a time when scale is needed to efficiently finance the company's unprecedented capital investment and growth opportunities," Duke said. "It also ignores the obvious capital structure and credit issues, material equity issuance requirement, dis-synergies, dividend sustainability risk, regulatory issues and overall execution risks."