Duke Energy Pushes Back On Hedge Fund's Call For Company Reorganization
Duke disagreed with the proposal, which would split it into three companies — one operating in Florida, one in the Carolinas and one in Indiana, Ohio and Kentucky.
Duke Energy pushed back Monday against a hedge fund’s call for Duke to make changes that could include breaking off its Florida subsidiary into a standalone utility.
Elliott Investment Management, in a detailed letter released publicly, backed splitting the North Carolina-based Duke into three companies, with one operating in Florida, one in the Carolinas and one in Indiana, Ohio and Kentucky.
Elliott, a major investor in Duke, argued in the letter that the company’s “current ownership of utility businesses across three separate geographies has delivered few benefits for stakeholders and has left its Florida and Midwest utilities undermanaged and undervalued.”
“To be clear, Duke’s underlying utilities are strong,” the letter said. “Yet despite their strength, and given the company’s numerous investment and operational missteps, investors have lost confidence in the company’s current multi-jurisdictional, noncontiguous utility model. To regain investors’ trust, the company’s current management and board must simplify its footprint to a more manageable and logical service territory, refocusing on its core Carolinas utilities and recommitting to operational and investment excellence.”
But Duke released a response disputing Elliott’s arguments and saying Duke’s “business is stronger and more impactful as a consolidated, standalone entity that remains as one.”
“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 in the response.
Duke Energy Florida is the second-largest utility in Florida, with more than 1.9 million customers, trailing only Florida Power & Light. It was created after Duke merged with Progress Energy in a deal that was completed in 2012.
In its response Monday, Duke said it had received a series of proposed changes from Elliott since July 2020. It said the Duke Board of Directors “has reviewed their proposals in depth and determined that they are not in the best interests of the company, its shareholders and other stakeholders.”
Elliott called Monday for appointing new independent directors who would lead a review of splitting Duke into three regional companies. It also compared Duke’s Florida operation with FPL and other utilities.
“As a standalone entity, Duke Energy Florida would have a management team solely dedicated to that business,” the letter said. “With that level of focus, Duke Energy Florida could accelerate critical infrastructure investment and rate base growth to increase system reliability and accelerate renewables build-out, while also managing the impact on customer bills through cost reductions. More focused peers such as FPL have successfully operated under such a structure within the state, as have others across the nation, creating clear lines-of-sight to value creation. With improved operational focus, a path to industry-leading rate base growth and single-state exposure to perhaps the strongest regulatory jurisdiction in the country, we are confident that a standalone Duke Energy Florida could achieve the highest valuation of any regulated utility.”
In its response, Duke noted that the Florida Public Service Commission on May 4 approved a three-year base-rate settlement for Duke Energy Florida. Duke said Florida’s “constructive regulatory framework and significant potential in renewables and clean energy make Florida a central element of Duke Energy’s business and investment plans.”
It also contended that creating three companies would lead to increased costs.
“Standing up smaller, independent utilities would require considerable new costs and would reverse a decade of cost cutting efforts by integrating corporate functions of predecessor companies,” the Duke response said. “These unavoidable new costs would put pressure on utility rates without any tangible benefit to customers and would be highly unlikely to be recoverable from customers, impacting the credit and growth rate of the smaller utilities.”