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Duke Energy CFO says activist's proposals lack 'financial or strategic benefits'

Duke Energy Corp.'s CFO is defending the company's investment decisions and leadership direction against an activist investor waging a campaign to highlight an "erosion of value" at one of the nation's top utilities.

"Our investors have certainly told us that we're on the right track. They are very pleased with what we're doing," Duke Energy Executive Vice President and CFO Steven Young said in a July 20 interview with S&P Global Market Intelligence. "I think our market performance has reflected the strong work we've done."

A day earlier, Elliott Investment Management LP publicly released another letter it sent to the company's board of directors reiterating concerns about the oversight of the utility giant's current leadership team.

"Duke has generated anemic EPS growth and poor returns for shareholders as a result of avoidable operational, investment and strategic setbacks," Elliott senior portfolio manager Jeff Rosenbaum and managing partner Jesse Cohn wrote in the July 19 letter.

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Duke Energy CFO Steven Young contends that the company is moving in the right strategic direction as activist pushes for leadership changes.
Source: Duke Energy Corp.

The New York hedge fund, which manages nearly $42 billion in assets, contended that Duke Energy has grown earnings by 2% annually since 2013 and the stock has underperformed the utility index by 20%.

"Given this disappointing record, investors are skeptical that the same leadership at Duke will deliver better outcomes going forward," the firm wrote.

Elliott said there is "broad agreement" among fellow investors, research analysts, industry executives and stakeholders that "a series of execution missteps has led to the erosion of value in what was once a premium utility company."

Elliott believes that the company should require the chair of the board to be an independent director, thus removing CEO Lynn Good from this post, and should improve operational performance in line with its higher electricity rates in Florida, "accelerate growth in Indiana," and "show investors how it intends to close its valuation gap" with other utility holding companies.

"We have always entertained those ideas, and we have continued to have dialogue with Elliott," Young said. "But thus far, Elliott's ideas have lacked any strategic or financial benefits. We have reviewed these proposals in depth. We have shared this with our board but determined they are not in the best interest of our shareholders."

No strategic sense

On May 17, Elliott disclosed that it sent a letter to the board outlining its plan to create $12 billion to $15 billion in near-term value for shareholders through the tax-free separation of the company into three publicly traded entities in the Carolinas, Florida and the Midwest.

Duke Energy called the plan "the latest in a series of proposals that the hedge fund has offered to Duke Energy since July 2020."

Prior proposals included what Duke Energy called a "preferential equity transaction" through which Elliott sought $7 billion of common equity securities, or about 10% of Duke Energy's value, "at a material discount to the public market value of Duke Energy's equity."

Elliott also proposed a spinoff of Duke Energy's Midwest and Florida utilities, according to the company.

"Those ideas just didn't make sense," Young said. "We will continue to listen to our investors, but again, we just have not seen anything at this point that makes sense for us."

The CFO added that Duke Energy leadership is "very excited" about the company's current strategic plan, which involves a transition to cleaner energy backed by $59 billion of capital investment over the next five years.

"We're sitting here with franchises in the Southeast and the Midwest that have very strong organic growth," Young said. "People are moving to these areas, and we've got a great opportunity to reduce our carbon footprint and participate in the investment that opportunity provides for us."

Duke Energy also pointed to strong investor reaction from the January announcement that it would forgo plans to raise $1 billion in common equity by selling a 19.9% interest in subsidiary Duke Energy Indiana LLC to a Singaporean sovereign wealth fund in a $2.05 billion all-cash deal.

In conjunction with that announcement, Duke Energy increased its long-term adjusted EPS growth rate from 5% to 7% through 2025.

Elliott has also flagged the cancellation of the Atlantic Coast pipeline, coal ash remediation costs inclusive of a $1 billion write-off and the "overpriced" acquisition of Piedmont Natural Gas Co. Inc. as among the "strategic missteps" that have led to a weakened balance sheet and impaired shareholder value.

'A fabulous job'

Young said the company has successfully navigated these hurdles, which addresses Elliott's concerns.

"I think they are trying to gather facts that really aren't relevant for investors right now," the CFO said. "Our focus is on where we're headed and where we're going, and that is where the 5[%] to 7% growth is going to come from."

Duke Energy is approaching the five-year anniversary of closing its $6.7 billion acquisition of Piedmont Natural Gas.

"Piedmont has been a great investment for us just on a number of fronts," Young said, pointing to the cost and operational synergies, along with the ability to share best customer practices, given the overlapping service territories in the Carolinas. "It was, in my view, the premium LDC business in the country. And as I mentioned, it sat in our laps, if you will."

Duke Energy has received positive feedback from investors on rate case settlements in the Carolinas, Indiana and Florida as its "customer satisfaction has consistently improved," Young said.

Company management also has defended what Elliott called "poor execution" at Duke Energy Florida LLC and Duke Energy Indiana.

"When you think about Florida, I think we have done a fabulous job with that franchise," Young said. "When we first entered Florida with the Progress [Energy] acquisition, they were investing in repairing nuclear plants, building new nuclear, and we have transformed the investment profile to renewables and to grid investments in Florida."

"In Indiana, I think we've handled that jurisdiction very well for a long time. We have deep roots in Indiana, and the stakeholders there appreciate what we've done," the CFO said. "An example of how well we've run the Indiana franchise is the GIC transaction. They looked closely at the business, at the people that run the business, and they made a decision to invest at a strong valuation in that business."