Business: Duke operates as an energy company in the United States that is the product of a merger with Cinergy in 2006; a merger with Progress Energy in 2012; and the acquisition of Piedmont Natural Gas in 2016. It operates through three segments: Electric Utilities and Infrastructure, Gas Utilities and Infrastructure, and Commercial Renewables. The Electric Utilities and Infrastructure segment generates, transmits, distributes, and sells electricity in the Carolinas, Florida, and the Midwest; and uses coal, hydroelectric, natural gas, oil, renewable sources, and nuclear fuel to generate electricity. It also engages in the wholesale of electricity to municipalities, electric cooperative utilities, and load-serving entities. The Gas Utilities and Infrastructure segment distributes natural gas to residential, commercial, industrial, and power generation natural gas customers; and owns, operates, and invests in pipeline transmission and natural gas storage facilities. The Commercial Renewables segment acquires, owns, develops, builds, and operates wind and solar renewable generation projects, including nonregulated renewable energy and energy storage services to utilities, electric cooperatives, municipalities, and commercial and industrial customers.
Stock Market Value: $79.2B ($103.06 per share)
Percentage Ownership: n/a
Average Cost: n/a
Activist Commentary: Elliott is a $40+ billion hedge fund with tremendous resources to analyze potential investments. Their team includes analysts from leading tech private equity firms, engineers, operating partners — former technology CEOs and chief operating officers. When evaluating an investment they also hire specialty and general management consultants, expert cost analysts and industry specialists. They often watch companies for many years before investing and have an extensive stable of impressive board candidates. Although Elliott is known for their activism in the technology sector, they have been successful activists in many sectors, including utilities. In recent years, Elliott has engaged with a number of companies in this space: Sempra Energy, NRG Energy, FirstEnergy, DTE Energy and Evergy, to name a few. In some of these situations, Elliott called for myriad strategic and operational changes from cost cuts to spin-offs and settled for board seats in most cases. A common theme to many of Elliott's campaigns is "get back to your basics."
On May 10, 2021, The Wall Street Journal reported that Elliott Management has built a stake in Duke Energy Corp. (DUK) and is calling for the company to add directors to its board. Elliott reportedly may also call for the company to sell some assets or make operational improvements.
Duke's geographical business is broken down by the Carolinas, Florida and Indiana, which account for 60%, 25% and 15% of the company's rate base, respectively. The company focuses 90%+ of its time on the Carolinas and the valuable assets of Indiana and Florida tend to go under-managed. These are valuable assets in high growth areas with opportunities to cut costs and make additional investment.
As a result, the company trades at a discount to its peers — the Regulated Utilities index trades at 19 times earnings, NextEra trades at 26 times earnings and the company trades at 18 times earnings. This is not a reflection of its assets, but of the management of its assets. The Carolinas should trade at around industry average of 19 times, but in January 2021, the company sold 20% of its Indiana business for 22 times earnings, and Florida should be even more valuable than that.
Management needs to redeploy its focus, optimize operations, cut costs and serve its customers better so that the true value of its assets are reflected in its stock price. If they cannot do that, there are strategic ways to recognize value through spin-offs and sales. After all, there is no reason that non-contiguous utilities should be owned by the same company.
Elliott has not yet released any letters or presentations on the company, but based on past investments in this area and the level of engagement, we expect that they have a $1B+ investment in Duke. With the annual meeting recently passing, director nominations for next year are not due until January 2022, so management has time to prove itself. However, we do not expect Elliott to sit by quietly during that time. We expect them to become vocal and engaged shareholders putting pressure on management to create value. The right plan could create tens of billions of dollars of value for shareholders.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.