The independent power producer has been under fire from activist investor Elliott Management Corp. since May for agreeing to purchase the smart home security platform for $5.2 billion in December 2022 and pivoting away from the generation business. The Wall Street Journal reported June 22 that Elliott wants to replace NRG President and CEO Mauricio Gutierrez.
During an analyst event the same day, however, Gutierrez and executive vice president Rasesh Patel reassured investors that Vivint will not stunt free cash flow conversion and jeopardize NRG's balance sheet.
"Due to the improvements in our unit economics, combined with the key initiatives enabled by the NRG platform, we expect free cash flow before growth conversion to improve from 20% to over 55%," Patel said.
"Our service margin has expanded from 69% to 79%, and so that expansion in margin obviously is very good in terms of it translating to cash, particularly over a nine-year customer life," Patel said. "The second thing that I would point you to is that we have taken deliberate steps to reduce customer acquisition costs."
Gutierrez acknowledged that NRG "could have done a better job in being a lot more forthcoming [and] clear about the growth potential that Vivint represents for the entire consumer platform that we have."
Elliott in May called on NRG to pursue board changes, cut $500 million in recurring costs and launch a strategic review of Vivint to resolve financial underperformance and recover stock price losses. Since then, the producer has announced a new CFO and agreed to sell its 44% stake in the 2,645-MW South Texas Project nuclear plant to Constellation Energy Corp. for $1.75 billion, a transaction that analysts called a cause for concern.
NRG's Gutierrez doubled down on the company's strategy for refining its generation portfolio June 22.
"We have evolved our supply strategy from one where we own every megawatt that we use to serve our customers to one where we diversify our risk and strike the right balance between plant performance risk, counterparty or credit risk and market risk," he said. "I want to be clear, we will own generation, but we need to make sure it has the right attributes to help manage our customers' power demand and help deliver stable margins to our consumer business."
Gutierrez said NRG revised its capital allocation framework to 80% return of capital and 20% to growth, and that the increased share repurchase authorization would lead to at least $2.7 billion in buybacks through 2025.
Still, analysts at Guggenheim told clients they remain skeptical that the measures announced June 22 will be enough to satisfy Elliott.
"The day's events largely eschewed directly addressing the recent activist points regarding larger cost cuts or strategic direction," they wrote. "In our view, the totality of the update was helpful for better understanding the proforma entity and growth drivers therein, however we continue to believe there are more fundamental questions with the platform."
"Based on our recent conversations, the activist remains very engaged on appointing what they view as more credible leadership," the analysts continued.
Evercore ISI, meanwhile, called $2.7 billion of buybacks "encouraging," while Bank of America sees "merit to [waiting] it out for the Vivint integration, as skew is positive under most scenarios."
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