Elliott Investment Management on Tuesday urged NRG Energy’s board of directors to replace CEO Mauricio Gutierrez, who the activist investor contends has led a management team with a “deeply flawed” strategy.
NRG should also consider selling Vivint Smart Home, a home security company NRG bought in March in a $5.2 billion deal, to focus on its core business, according to a letter from Elliott to NRG’s board. New members should be added to the board, the firm said.
“The company is once again at an important crossroads – it can either knowingly choose to once again put investors’ capital in the hands of the current CEO, who over the past seven years has failed to deliver on NRG’s financial and capital-allocation commitments, or it can entrust the company to a new management team with a track record of capital discipline and high-performance operations,” Elliott said.
In May, Elliott raised its concerns about NRG, which owns about 16 GW and has about 7.5 million retail electric and gas customers. Elliott manages funds with a roughly $1 billion, or 13%, stake in NRG, according to the firm.
NRG said its board fully supports Gutierrez and the company’s strategy, which was outlined at a June 22 investor meeting.
“NRG is executing on a strategy that is delivering additional customer penetration, robust cash flows, significant capital returns, responsible debt reduction, meaningful cost savings, and high-margin, recurring revenues,” a company spokesperson said in a statement. “We are confident that our plan will deliver substantial additional near- and long-term value.”
Bank of America analysts had a “constructive” view of NRG after the investor meeting, and reiterated their “buy” rating on the company, according to a June 23 note.
NRG is adopting an increasingly shareholder-friendly capital allocation framework, with 80% of available cash to go to share buybacks and dividends, up from 50%, the analysts said.
The Bank of America analysts said they and investors were skeptical about Vivint's prospects to achieve NRG’s targeted 30% free cash flow compound average growth rate starting this year.
Even so, there are reasons in letting the plan with Vivint play out, including regulatory diversification away from Texas, according to the analysts.
“While clearly a gambit, we see merits to enabling a growth pathway for the equity into new geographies and capitalizing on existing relationships,” they said. “We see customer stickiness and a very real margin expansion story tied to successful integration of Vivint as underappreciated by investors.”
Elliott said NRG’s plan unveiled earlier this month is made of “defensive half-measures” that failed to ease investor concerns.
“Investors are deeply frustrated by the company’s poor operational performance and are highly skeptical of the home services strategy that the current CEO has championed,” Elliott said.
In its May critique, Elliott said NRG was failing to properly manage its power plant fleet, including its roughly 10 GW in Texas. Several NRG power plants failed to run during winter storms Uri and Elliott and have been hit with other outages, reducing revenue and driving up costs, according to the firm.
NRG is increasingly focusing on its generating fleet on Texas, according to the investor presentation. It expects its Texas fleet will make up 69% of its overall capacity this year, up from 63% in 2021.
Following recent Texas legislation aimed at boosting power supplies in the state, NRG is considering adding about 1.5 GW there.
However, even with the new “performance credit mechanism,” or PCM, created by the legislation, the Bank of America analysts said returns on new generation would likely be in the low double-digits.
“We would not expect NRG or other large conventional power plant developers to dedicate significant equity capital to new development without additional visibility into economics,” they said, noting the PCM’s $1 billion cost cap may not be high enough to spur companies to build power plants.
“On balance we remain concerned on just how the ERCOT market will resolve itself — the ability to absorb cost increases necessary to enable grid build out to meet demand growth remains a clear lingering risk,” they said.
