A view of Duke Energy’s Marshall Power Plant in Sherrills Ford, North Carolina, November 29, 2018.
Chris Keane | Reuters
Company: Duke Energy Corp. (DUK)
Companies: Duke is a US energy company that merged with Cinergy in 2006. a merger with Progress Energy in 2012; and the 2016 acquisition of Piedmont Natural Gas. The company operates in three segments: electricity utilities and infrastructure, gas utilities and infrastructure, and commercial renewables. The Electric Utilities and Infrastructure segment generates, transmits, distributes, and sells power in the Carolinas, Florida and the Midwest. and uses coal, hydropower, natural gas, oil, renewable sources and nuclear fuel to generate electricity. It also deals with the wholesale of electricity to municipalities, electrical cooperative suppliers and load utilities. The Gas Utilities and Infrastructure segment distributes natural gas to natural gas customers in the residential, commercial, industrial and power generation sectors. and owns, operates and invests in pipeline transmission and natural gas storage. The Commercial Renewables segment acquires, owns, develops, builds and operates wind and solar power generation projects, including unregulated renewable energy and energy storage services for utilities, electrical cooperatives, municipalities, and commercial and industrial customers.
Market value: $ 79.2 billion ($ 103.06 per share)
Activist: Elliott Associates
Percentage ownership: n / A
Average cost: n / A
Activist Comment: Elliott is a over $ 40 billion hedge fund with tremendous resources to analyze potential investments. Her team consists of analysts from leading tech private equity companies, engineers, business partners – former technology CEOs and chief operating officers. When evaluating an investment, they also hire specialist and general management consultants, experts in cost analysts and industry specialists. They often watch companies for many years before investing and have an extensive stable of impressive board members. Although Elliott is known for their activism in the technology sector, they have been successful activists in many sectors, including utilities. Over the past few years, Elliott has worked with a number of companies in this field: Sempra Energy, NRG Energy, FirstEnergy, DTE Energy, and Evergy, to name a few. In some of these situations, Elliott requested myriad strategic and operational changes from cost cutting to spin-offs, and in most cases, opted for board memberships. A common theme across many of Elliott’s campaigns is “Back to Basics”.
On May 10, 2021, the Wall Street Journal reported that Elliott Management had acquired a stake in Duke Energy Corp. (DUK) and is calling on the company to add directors to its board of directors. Elliott may also reportedly ask the company to sell some assets or make operational improvements.
Duke’s geographic business is split into Carolinas, Florida and Indiana, which make up 60%, 25% and 15% of the company’s tariff base, respectively. Over 90% of the company’s focus is in the Carolinas, and Indiana and Florida valuable assets tend to be under-managed. These are valuable assets in high growth areas with opportunities for cost reduction and additional investment.
As a result, the company trades at a discount to its peers – the Regulated Utilities Index trades at 19x, NextEra at 26x, and the company at 18x. This is not a reflection of his wealth, but of the management of his wealth. The Carolinas should trade at an industry average of 19, but in January 2021 the company sold 20% of its Indiana business for 22 times its profits, and Florida should be even more valuable.
Management needs to re-focus, streamline operations, cut costs, and better serve customers so that the real value of their assets is reflected in the share price. If they can’t, there are strategic ways to find value through spin-offs and sales. After all, there is no reason why unrelated utilities should be owned by the same company.
Elliott has not yet published any letters or presentations about the company. However, based on previous investments in this area and commitment, we expect an investment of over $ 1 billion in Duke. As the annual meeting passed recently, director nominations for next year aren’t due until January 2022, so management has time to prove itself. However, we don’t expect Elliott to sit quietly by it during this time. We expect them to become vocal and committed shareholders, putting pressure on management to create value. The right plan could create tens of billions of dollars in value for shareholders.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets.