Vivint Smart Home Inc., which NRG Energy Inc. acquired for $5.2 billion in March, accounted for $217 million, or more than a quarter, of the power producer's second-quarter adjusted EBITDA.
Activist hedge fund Elliott Management Corp. recently launched a campaign to force changes at NRG driven in part by concerns that the smart home platform deal indicated a pivot away from the company's core power business. But during a June 22 investor day, NRG management more than doubled expected free cash flow estimates for the Vivint business and announced a $1.7 billion increase in stock buybacks.
"Our customers are engaging more with our platform and are staying for a longer period of time," President and CEO Mauricio Gutierrez said during an Aug. 8 earnings conference call. "Acquisition costs are higher due to the impact of higher interest rates and more products being sold, but they were more than offset by higher revenue on new subscribers."
"Overall, the profitability of the business is very strong," Gutierrez continued.
The Vivint deal is also driving "customer conversion rates on qualified leads of around 6%" and moving toward 10%, he noted.
Elliott on June 27 called for NRG to replace Gutierrez and conduct a strategic review, saying the company "has lost the confidence of the core investor base" and that the investor day announcements will not alleviate "the true cause of the company's underperformance."
Since June 22, NRG shares have gained nearly 9% to settle at $37.52 on Aug. 7, but the stock has still not completely recovered from the initial 15% drop the day the Vivint transaction was announced.
The company completed $50 million in stock repurchases in July, but Gutierrez declined to comment on whether opposition to NRG's sale of its 44% stake in the South Texas Project nuclear plant to Constellation Energy Corp. might affect future buybacks.
NRG told the US Nuclear Regulatory Commission Aug. 4 that the $1.75 billion deal must close by the end of 2023 to "avoid considerable adverse tax consequences." The plant's co-owners — City Public Service of San Antonio, which holds a 40% share, and Austin Energy — have filed regulatory challenges to the deal.
NRG recorded net income of $308 million for the second quarter, down from $513 million a year ago. Adjusted EBITDA was $819 million, compared to $386 million during the prior-year period. The S&P Global Capital IQ consensus EBITDA estimate for NRG in the second quarter was $763 million.
Elliott seeks more shares
Elliott asked the Federal Energy Regulatory Commission on July 21 to allow the hedge fund and its affiliates to buy up to a combined 20% of NRG's common stock. The entities already owned 2.36% of those shares as of July 19 but told FERC the increase would be "consistent with the public interest" since Elliott does not own 10% or more.
Consumer advocacy organization Public Citizen, however, told the commission Aug. 7 that a disclosure that Elliott manages funds owning a combined $1 billion worth of shares, or more than a 13% economic interest, in NRG does violate FERC rules, which typically deem firms to be affiliated if one company owns 10% or more of the other.
"Elliott Management ... initiated an aggressive campaign targeting the management and business activities of NRG Energy, anchored by an acquisition of more than 10% of NRG's 'economic interest' utilizing derivatives," the filing said. "These derivatives likely convey indirect voting control to Elliott Management."
"Even if the derivatives contract does not explicitly convey control, the financial incentive of retaining Elliott's future business may create an implicit agreement by the counterparty to acquiesce to Elliott on matters such as voting rights," Public Citizen continued. "As such, Elliott Management's use of such derivatives to indirectly control voting rights of a public utility appears to meet the Commission's definition of affiliate."
After FERC clarified its affiliate rules in October 2022, Public Citizen energy program director Tyson Slocum said FERC's orders mean passive investment firms like Elliott could become an affiliate of companies in power markets if they forced a member onto the boards of the energy companies.
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