Elliott Management Corp.'s campaign to steer NRG Energy Inc. toward board changes, cost cuts and a potential spinoff of Vivint Smart Home Inc. may not be the best plan to attract long-term investors, industry analysts said.
Elliott, which manages funds owning a combined $1 billion worth of shares in NRG, or a more than a 13% economic interest, informed the independent power producer's management May 15 that it aims to create another $5 billion in shareholder value in light of issues it said include operational difficulties during severe weather and financial underperformance following the $5.2 billion Vivint deal.
Since NRG announced plans to purchase the smart home security platform in December 2022, its share price declined over 18% to $32.79 as of the May 12 market close. On May 15, NRG shares saw a 2% bump following news of Elliott's latest round of shareholder activism. NRG shares dipped less than 1% on May 16.
"Without Vivint NRG is left with a depleted retail/IPP comp set that continues to move away from it (towards clean generation), while with Vivint NRG screens to us as a differentiated [sum of the parts entity] still in search of growthier peers," analysts at Guggenheim wrote May 15.
Offloading Vivint would leave NRG without a way to differentiate its portfolio from other retail and power generation companies that are moving toward clean generation, but retaining Vivint leaves the independent producer still looking less attractive than some peers with clearer growth plans, the Guggenheim analysts said. "While Elliott's proposal is generally aligned with our/investor views, this deeper issue leads us to question whether there is a viable investor base to own NRG in the [long-term]."
NRG's board could also decide during discussions with Elliott that a better option is to be taken private, according to Guggenheim.
BMO Capital Markets analysts voiced concerns about the "lack of clarity on the background and efficacy of the proposed new independent board members," given that an additional $500 million of cost cuts may not even be necessary if NRG agrees to spin off or sell Vivint.
Tougher than 2018
Compared to Elliott's first investment in NRG in 2017 and 2018, when it successfully convinced NRG to target $2.5 billion to $4 billion in asset sales, $13 billion in debt reduction and $1.07 billion in cost cuts, a strategic shift now would not necessarily have significant upside, according to Morningstar analysts.
"Elliott more than doubled its money the last time it took an activist stake in NRG," Morningstar said May 15. "[I]t's unlikely NRG will unwind the Vivint acquisition ... we think there is more upside if management integrates Vivint and tops the $400 million of synergies by 2025."
CreditSights agreed that a strategic redirection may be harder to execute than in 2018 because "there are no easy levers to pull anymore like the bankrupting of non-recourse, coal-based GenOn Energy Holdings Inc. and the sale of NRG Yield (now Clearway Energy Inc.)."
Analysts also questioned the wisdom of Elliott's suggestion to grow NRG's retail business.
"There is limited value in expanding NRG's retail business, which is approaching three-fourths of NRG's earnings," Morningstar wrote. "We think the retail business has no economic moat and only provides incremental value when paired with NRG's wholesale generation."
Operational improvements
Elliott noted that power plant outages in 2021 and 2022 due to severe weather, particularly at NRG's coal-fired W.A. Parish 5-8 plant south of Houston and the Limestone gas and coal-fired plant east of Waco, Texas, have also "eroded investor confidence in management." One unit at the Parish plant has been out of service for about a year because of a fire.
During a February investor call, NRG CFO Alberto Fornaro said the company may owe the PJM Interconnection LLC an estimated $80 million in penalties for power plant underperformance during a December 2022 winter storm. Meanwhile, the prolonged Parish outage also accounted for $220 million of lost margin in 2022, Fornaro noted.
When the Vivint deal closed in March, S&P Global Ratings downgraded NRG's issuer-level credit rating to BB from BB+, noting both to the financial toll of the plant outages and the Vivint transaction's debt component.
"NRG continues to face operational risks that are exacerbated by its asset-light business strategy," S&P Global Ratings analysts wrote March 1. "Unlike some peers that have excess generation, NRG's asset-light strategy implies that it needs its generation assets to perform more consistently."
The Vivint deal alone would likely not impact NRG's risk profile, according to Ratings.
Elliott has invested in other utilities in recent years to steer changes in direction, including Duke Energy Corp., which it exited in May 2022, and prior to that, Evergy Inc. In both cases, Elliott got new members named to the utility's board of directors.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.