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US utility executives face new era of activist shareholders

SNL Image

Debbie Hall, of Sanford, N.C., holds a sign protesting coal ash ponds outside the Duke Energy Corp. headquarters May 7, 2015, before the company's shareholders' meeting in Charlotte, N.C.
Source: Associated Press


Shareholders of investor-owned electric utilities are becoming more active and exerting greater environmental pressure, but executives maintain they are making strategic transitions because it is the smart thing to do.

"When you look at the kind of steps we have taken recently, the acquisition of [AGL Resources Inc., now known as Southern Co. Gas], the repositioning of gas, closing down coal, the sale of Elizabethtown and then the Florida assets, and creating in just the past year or so $4 billion of incremental value to shareholders, I think we are doing everything an activist would do," Southern Co. Chairman, President and CEO Thomas Fanning said in a recent interview.

"I am always interested in good ideas, but I think we have a great track record," Fanning added. "I think the Southern trading right now is really influenced by [the Alvin W. Vogtle Nuclear Plant expansion], but we are making great progress on Vogtle."

Duke Energy Corp. Executive Vice President and CFO Steven Young said he believes that the moves the company has been making in the past few years "have been very well received by our investors."

"We exited merchant generation in 2015. We exited [the] international business in 2016. And we built a regulated gas platform," Young said in an interview. "I think all of those structural moves have been well received."

Top executives at Southern, Duke Energy and American Electric Power Co. Inc. also touted their progress on environmental, social and governance, or ESG, practices when asked about the rise in shareholder activism and its impact on their strategy.

"On the environmental front, we have long had a view of complying with environmental [regulations] quickly, efficiently, and we continue to drive that," Young said. "So, I think we are very well in sync with what our investors are looking for strategically."

Duke Energy was thrust into the national spotlight in 2014 following one of the worst environmental disasters to plague the industry. A break in a 48-inch stormwater pipe at the company's retired Dan River coal plant in North Carolina in February 2014 led to the discharge of almost 39,000 tons of coal ash and 27 million gallons of coal ash wastewater into the nearby river.

The incident led to increased and ongoing scrutiny from Duke Energy shareholders.

"[T]he tentacles that developed from that event were quite impactful for the company," Duke Energy Chairman, President and CEO Lynn Good said in an interview earlier in 2018.

Duke Energy is now closing its ash basins and transitioning to cleaner generation.

The company released a report in late March in which it envisions eliminating coal generation by 2050 to align with the goals of the Paris Agreement on climate change, despite President Donald Trump's pledge to pull the U.S. from the pact. Duke Energy's report builds on the company's goal of cutting carbon emissions by 40% by 2030 from 2005 levels.

"We certainly think that makes a lot of sense," Young said. "But that logic in what we are doing is driven in part by what we are hearing from customers, shareholders. We are seeing a lot of investors that want us to move in a cleaner generation direction."

Staying engaged

AEP Chairman, President and CEO Nicholas Akins said the company is focused on "regular engagement" with shareholders. "And really any time we have that kind of engagement it tells us something," Akins said. "We are going to continue to make a lot of advancements from a technological perspective, and it really sort of helps to give us sort of an outside view of how well we are doing."

AEP in February unveiled its strategy to reduce emissions from its power plants by 60% from 2000 levels by 2030 and 80% from 2000 levels by 2050. This plan would cut CO2 emissions to 33 million metric tons in 2050 from 167 million metric tons in 2000.

"We have been successful because we have made it our corporate mission to balance out our portfolio, to reduce our carbon emissions," Akins said. "I think it exemplifies the culture and direction of the company, [which] goes a long way in those kinds of [shareholder] discussions. We are not afraid of those discussions. We don't run from them."

The AEP CEO added that the company is largely focused on "advancing the electrification of the economy."

"A lot of times, we have to explain to [investors] the challenges we face, not only from a regulatory standpoint in the states that we do service in, but also just the system requirements of resiliency and reliability, and how fast you can move at any particular time," Akins said.

When asked how he faces those tough discussions with active shareholders, Southern's CEO reflected on his time as the top financial officer at the company's international business in the late 1980s. Fanning said the company launched a leveraged buyout study around the time a New York investment firm run by billionaire Henry Kravis launched the more than $25 billion takeover of RJR Nabisco.

"The simple question was this: 'What would Henry Kravis do to Southern?'" Fanning said. "It was a very interesting question. The idea was to essentially do those things ourselves. If we could create shareholder value, why do we need somebody like Henry Kravis to come in? Why wouldn't we do that ourselves? And that embarked on a decades-long march that I kind of have personally been invested in."

Nothing to fear?

Rating agencies have definitely taken note of the rise in shareholder activism as well.

Fitch Ratings analyst Barbara Chapman recently noted that while "direct activist involvement historically has not been that common in the investment grade utility sector," there were three situations in the past year that involved activist investors.

A group of prominent and active investors led by Elliott Management Corp. and Bluescape Energy Partners LLC in January backed a $2.5 billion equity infusion into FirstEnergy Corp. The issuance helped cut holding company debt and provide financial support as FirstEnergy severed ties with its bankrupt unregulated business.

Then in June, Elliott and Bluescape Resources Company LLC announced their plan to unlock $11 billion to $16 billion in new equity at Sempra Energy and simplify the diversified energy company's business structure. Shortly thereafter, Sempra began a strategic transformation by selling its renewable portfolio and select midstream assets.

San Francisco-headquartered ValueAct Capital Management LP in October acquired a $50 million stake in Hawaiian Electric Industries Inc. through investment vehicle ValueAct Spring Master Fund LP. The hedge fund reportedly plans to push Hawaiian Electric to accelerate its use of renewable energy and end its dependence on imported oil.

"Just the mention of the word activist sparks fear in fixed-income investors' hearts. But this may not always be the case, and Fitch will evaluate on a case by case basis," Chapman said to a room full of Wall Street analysts and asset managers at an industry conference. "Given the interest in infrastructure and assets, we believe that the potential for valuation differentials are likely to continue to drive requests to unlock value: just what these activists are looking for."