Drew Wilson
A hedge fund with a large stake in Duke Energy says the company’s stock has underwhelmed, but changes in the C-suite could put it back on track. The utility company isn’t buying it.
Elliott Investment Management had previously recommended Duke Energy split into three companies — one covering the Carolinas, another covering Florida and a third covering the Midwest. Duke Energy balked at the suggestion, but hedge fund managers say it has received “an outpouring of feedback” from other stakeholders that Elliott isn’t alone in believing there are inefficiencies at Duke Energy.
The new letter, dated July 19, says Duke Energy has a “poor track record of delivering on commitments” and there is investor skepticism over whether current management can “maximize the value” of its Florida and Midwest operations without changes to the company’s board.
Elliott says investors agree Duke Energy has “one of the highest quality collections” of utility businesses. Yet Elliott says these investors also agree that missteps have led to an “erosion of value” at the company.
“Under the leadership of the current management team, the Company has grown EPS by approximately 2% annually since 2013 despite guiding to 4% to 6% EPS growth over this period,” the letter reads.
“Because of the Company’s inability to execute, Duke’s stock has underperformed the XLU by 20% and the regulated utility peer group by 63%. This performance ranks in the 36th percentile of the XLU and is second-worst among Regulated Peers.”
XLU is an exchange traded fund that includes several large utility companies. Duke Energy makes up about 7.5% of the fund’s holdings. The regulated utility peer group includes companies with the ticker symbols SO, D, AEP, XEL, WEC, ES, AEE, CMS, EVRG, and LNT.
Elliott says Duke Energy Florida, in particular, could be better served by new leadership. The hedge fund points to programs at NextEra Energy subsidiary Florida Power & Light, such as its 5-year-old drone inspection program, that have helped the company reduce costs. Elliott says Duke is lagging behind and has only entered the pilot phase of a similar program.
Jargon aside, the hedge fund says it and other investors believe they would have made more money if Duke’s management team had made better business decisions.
To achieve better gains for investors, Elliott recommends Duke Energy “address investor concerns over the independence of the Board” by making its board chair an independent director.
In a response, also dated July 19, Duke Energy said the letter is Elliott’s “latest attempt to push its short-term agenda at the expense of long-term shareholder value as well as the interests of Duke Energy’s employees and the communities it serves.”
Duke said Elliott is pushing a “shareholder value-destroying plan that has no support.”
“Duke Energy’s management team and Board are focused on executing on its long-term strategy, which enjoys broad and deep shareholder and stakeholder support, and continuing to deliver customer benefits and create jobs in the communities the company serves,” the response reads. “Duke Energy and its Board will always advocate for the best long-term interests of its shareholders and other stakeholders over any narrow special or short-term interest.”
The company also rebuffed claims that it has failed to deliver value to shareholders, noting that it has delivered a 3-year return of 47%, which outpaces the UTY Index and the S&P Utility Index. Both indexes include an overlapping mix of utility companies as those included in the XLU ETF that Elliott cited in its letter.
It also went to bat for its board members, noting that all have senior leadership experience across multiple industries and that seven of the 13 members have “deep operational experience in the utility industry.” It also said the board fully supports the current management team.
“Duke Energy will continue running the business in the best long-term interests of all shareholders and stakeholders, and not those of a single hedge fund focused only on the short-term and with a decidedly mixed track record in its other interventions in the utility sector,” it concluded.
