NRG Energy Inc.'s deal announced June 1 to sell its 44% stake in the 2,645-MW South Texas Project nuclear plant to Constellation Energy Corp. for $1.75 billion should concern both shareholders and bondholders, some industry analysts said.

NRG shares settled down 4% on June 1 at $32.40 after announcing the transaction, which analysts at Guggenheim and Morningstar described as a "surprise" as it is taking place amid an activist campaign by Elliott Management Corp. pushing for board changes, cost cuts and a potential spinoff of recently acquired smart home security platform Vivint Smart Home Inc. Since announcing the Vivint transaction in December 2022, NRG's stock has plummeted nearly 19%.

NRG separately announced Bruce Chung, head of strategy and mergers and acquisitions, will succeed CFO Alberto Fornaro, effective June 1.

"These moves don't entirely line up with Elliott's proposed changes or management's strategic direction," Morningstar analysts told clients June 1. "We think investors should be concerned about where the company is headed and who is in charge."

For Guggenheim, selling the South Texas Project stake was surprising in that it represents a significant portion of the company's Texas portfolio, could be eligible for new federal production tax credits and did not pose the "terminal value issue" that helped drive previous sales or retirements by NRG of coal-fired assets in the PJM Interconnection LLC market.

"In our view, the sale simply lifts out a legacy source of [free cash flow] generation and does not represent a strategic or financial (credit) shift," Guggenheim analysts wrote June 1.

The South Texas facility is operated by an entity called the South Texas Nuclear Project Operating Co. Municipal utility City Public Service of San Antonio, known as CPS Energy, holds a 40% stake in the plant, with the remaining 16% held by city-owned utility Austin Energy. NRG's 44% stake represents approximately 1,100 MW of output and is the company's only nuclear asset in its owned power generation portfolio.

On the debt side, CreditSights analysts said the deal "puts the company in the home stretch of finalizing its asset-lite strategy that we view as an unequivocal negative for bondholders as hard assets are much better collateral than home security and retail electric supply customer relationships."

Divesting the South Texas Project stake could also cause NRG to contend with other valuation headwinds, including a potential 2023 adjusted EBITDA guidance miss, Morningstar added.

Guggenheim noted that the plant's sale "potentially strengthens the arguments around needed reductions in [general and administrative] overhead on the generation side." Morningstar posited that the CFO change "might suggest that NRG's board will push back on Elliott."

Elliott, which manages funds owning a combined $1 billion worth of shares in NRG, or a more than a 13% 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.

Selling the South Texas Project stake means the power producer "will get about 80% of its earnings from the retail business, including Vivint, which Elliott opposes," according to Morningstar.

Given that Elliott's plan may not be the best strategy to attract long-term investors to NRG, Guggenheim reiterated that the company could still be a private buyout target if it also divests Vivint.

"The sale of the chunky nuclear asset makes a take-private scenario more palatable," particularly if NRG's retail core attracts a private generation company, the analysts wrote.

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