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Duke Energy says a proposal to break up its business into three regional operations would increase costs and put pressure on utility rates.

The Charlotte, N.C.-based utility company said it will review Elliott Investment Management’s proposal but it has rejected other offers the Florida-based hedge fund has made since last summer, according to a Duke Energy press release.

The proposal was publicized in a letter in May.

The letter outlines Elliott’s arguments and asks Duke Energy to appoint new board members — including among candidates that it has identified “to bring fresh perspectives” — and to establish a review committee to explore the proposal.

A spokesperson for Duke Energy said on Monday that the next steps are up to the board but the company remains focused on running its operations. 

Last Friday, a delegation of elected officials from the Carolinas said Duke Energy has been a “critical partner” in providing energy and jobs for over a century and expressed concern.

“We would be concerned by any proposal that would risk job losses, electricity rate increases, and diminished energy reliability across the Carolinas without any benefit to our constituents,” said U.S. Reps. William Timmons, R-S.C., and Alma Adams, D-N.C., in a press release.

Elliott — one of the utility company’s largest investors, according to the hedge fund — suggests that Duke Energy should separate into three regionally-focused entities in the Carolinas, Florida and Midwest.

Currently, Duke Energy and its subsidiary businesses serve customers in six states under one entity.

Under Elliott’s proposal, a Carolina-focused entity would take over much of its subsidiaries — over half of its electric and natural gas customers are in the two Carolinas. Duke Energy Carolinas, Duke Energy Progress, Piedmont Natural Gas, Duke Energy Renewables, Commercial Transmission and International Energy would fall under this entity.

The Florida-focused entity would include Duke Energy Florida, and the Midwest-focused entity would include Duke Energy Indiana and Duke Energy Ohio Kentucky.

Elliott believes the separation could be done efficiently and with minimal financial costs and has a website dedicated to “refocusing” Duke Energy.

They say the separation into three entities would create $12 to $15 billion in short-term value to shareholders, as well as increased long-term growth, for a utility company that they believe has been underperforming.

Among their criticisms are downgraded earnings guidance in recent years, rates and product outages — particularly in the Florida market — and mismanagement of investments and operations despite a strong underlying utility portfolio.

Elliott believes the Carolinas would be “undiminished” after the separation and that “operating performance at the non-Carolina utilities will dramatically improve” but that all three markets would benefit.

They say the three entities would allow for more focused strategies and management of each region without creating lasting dis-synergies, which would lead to benefits for customers, stakeholders and plans for clean energy.

“We believe a separation would provide considerable benefits for customers and other key stakeholders because these standalone local utility businesses would benefit from greater operational focus, improved execution, lower cost of capital and increased capital investment in critical infrastructure,” Elliott said in its letter.

However, Duke Energy argues the exact opposite. They say a breakup would involve state and federal regulatory reviews, which pose a risk to its execution, and that increased costs would “put pressure on utility rates without any tangible benefit to customers.”

“There is no strategic logic to breaking the company apart, and there is a serious risk of dis-synergies that would weigh down the various spun-off entities and raise questions about the viability of the dividend to shareholders,” the company said in its public response to the proposal.

They believe that operating as one consolidated company gives them the size and scale to benefit customers and stakeholders. Duke Energy’s spokesperson added that it will always be adaptable and reallocate resources, especially during emergencies, which Gov. Henry McMaster noted in his letter to the utility.

“The turmoil created in the wake of the failed VC Summer project, coupled with the uncertain future of the public utility Santee Cooper, makes it even more important that our state has abundant access to reliable, consistent, and affordable power,” McMaster wrote in May.

In addition to this proposal and desires for added board seats, Duke Energy says the hedge fund previously attempted to get discounted shares which would have transferred about 10% of its value to Elliott and its allies.

The utility company says it’s moving toward its goal of transitioning to cleaner energy, remain focused on its customers and employees, and has recently increased its expected earnings growth rate through 2025, according to their press release.

Duke Energy employs 27,500 people. It serves 7.9 million electric retail customers and 1.6 million natural gas customers in six states, including 770,000 electric retail customers and 150,000 natural gas customers in South Carolina — most of which are in the Upstate.

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