“As of one Duke’s largest investors, we remain skeptical that the same structure and leadership team that have presided over a long history of operational and stock price underperformance are capable of delivering meaningfully better results,” Elliott said in the letter.
The latest letter follows the formal launch in May of a campaign by the Paul Singer-led fund urging the Charlotte, N.C.-based company to install new directors, hire advisers and consider breaking itself into three regionally focused, publicly traded utilities because it purportedly suffered from a “conglomerate discount.” Duke rejected the proposal the same day.
The latest escalation, which again pushed for consideration of breakup alternatives, argued Duke has no directors with “credible public policy experience in or ties to Florida or Indiana” even though nearly 40% of Duke’s value resides outside the Carolinas.
The activist fund also appears to have chairman and CEO Lynn Good in its crosshairs, even though it doesn’t mention her by name. In the letter, Elliott urged the company to consider separating the role of chair and CEO, noting a proposal was submitted seeking the move at the company’s annual meeting in May. The measure, introduced by New York City pension funds, was backed by about 35% of voting shares.
The fund also raised concerns about Good’s executive compensation, arguing she was paid $14.5 million in 2020, “which is among the highest in the utility sector.”
Another Elliott target: lead independent director Michael Browning, 75, who has served 15 years on the board, according to relationship mapping service BoardEx, a sister company to The Deal.
On Monday, Duke Energy pushed back against Elliott’s assertions, noting its management and board are focused on “executing on its long-term strategy, which enjoys broad and deep shareholder and stakeholder support.”
It added that Elliott’s attempt to “undermine Duke Energy’s leadership team ignores the diverse and experienced professional talent that drives this company and is silent on the significant accomplishments it has achieved.” The company noted that nine of its 13 directors have been appointed in the past five years.
According to FactSet Research Systems Inc., Duke Energy has total returns of 15%, 31% and 13% in 2021 and over the past one year and three years, respectively. The company has a $79 billion market capitalization.
Finally, Duke argued Elliott’s breakup thesis runs counter to the strategic direction of the entire utilities industry. It added that over the past several months, the energy company has been in “active dialogue” with the equity analyst community and institutional shareholders and found its “largest investors as well as analysts, public officials and other stakeholders” nearly universally rejected the breakup plan.
Even so, Elliott could launch a director contest to drive its activist agenda — or to seek to remove the chief executive. The deadline to nominate directors at the Delaware-incorporated company is Feb. 4 for a meeting expected in May. The company doesn’t have a classified board, which means Elliott could seek a change-of-control slate.
Elliott reiterated that it is one of Duke’s largest shareholders. The fund, however, hasn’t disclosed its position, which suggests a large part or all of it could be held in derivatives. Vanguard Group Inc., BlackRock Fund Advisors and State Street Corp. (STT) hold about 18% collectively and are Duke’s three largest holders, according to FactSet.
The company said it has already conducted a “multiyear transition divesting its international business, reducing its commercial business exposure” and acquiring Piedmont Natural Gas Co. Duke completed its $4.9 billion acquisition of Piedmont Natural Gas in 2016. That year it also sold plants in Brazil to government-owned China Three Gorges Corp. for $1.2 billion.
More recently, in January, the company sold a 19.9% position in its Indiana utility unit for $2.05 billion over two years to Singapore sovereign wealth fund GIC Pte. Ltd.
On Monday, Elliott doubled down on its breakup thesis, arguing that business “undermanagement” in Florida and the Midwest suggests that “alternatives should be explored” to identify if “operating utilities in Florida, Indiana, Ohio and Kentucky out of Charlotte” by Duke’s management and board in Charlotte is the “best outcome.”
A report earlier this month suggested that JPMorgan Chase & Co. is advising Duke in response to Elliott’s campaign.
The company’s shares are up about 30% since July 6, 2020, after it announced the previous day it had canceled efforts with Dominion Energy Inc. (D) to build the Atlantic Coast Pipeline, which would have transported natural gas from West Virginia to eastern North Carolina.