Recommends Renewed Focus on Leadership,
Operations And Strategy & Capital Allocation
Changes
Sees More Than $5
Billion Value Creation Opportunity, Driving Stock to
$55 per Share
Full Letter and Presentation Available at
RepowerNRG.com
WEST
PALM BEACH, Fla., May 15, 2023
/PRNewswire/ -- Elliott Investment Management L.P. ("Elliott"),
which manages funds that have an investment of approximately
$1 billion representing a more than
13% economic interest in NRG Energy, Inc. (NYSE: NRG) ("NRG" or the
"Company"), today sent a letter to the Board of Directors of NRG.
According to the letter, the purpose of the materials is to present
a clear path forward for how best to remedy NRG's meaningful
underperformance and create significant and sustainable value.
Elliott previously disclosed a large investment in NRG in 2017,
and its engagement with the Company catalyzed the highly successful
Transformation Plan and resulted in NRG becoming the
best-performing stock in the S&P 500 in that year, Elliott
wrote. In its letter, Elliott said that since the conclusion of its
prior engagement with NRG, the Company has meaningfully
underperformed due to a number of operational and strategic
missteps. Among the missteps, Elliott wrote, is the Company's
recent acquisition of Vivint, which, measured by the one-week
market reaction following its announcement, was the single worst
deal in the power and utilities sector in the past decade.
In its letter, Elliott outlined the necessary steps for the
Company to take to right the course in the following three
areas:
- Leadership: Add new independent directors with strong
power and energy industry expertise to refresh the Board and help
guide the necessary changes
- Operations: Improve operations and reliability.
Achieve at least $500 million of
recurring, EBITDA-accretive cost reductions
- Strategy and Capital Allocation: Conduct a strategic
review of its home services strategy, including Vivint. In
conjunction, establish a new capital allocation framework to return
to shareholders at least 80% of free cash flow, with growth
investments focused on its generation and retail businesses
Elliott believes that successful execution of this plan could
create over $5 billion of shareholder
value, driving the Company's stock price to reach or exceed
$55 per share, the letter said.
Elliott looks forward to meeting with the Board in the near term to
work constructively with the Company toward the implementation of a
new value creation plan.
The full letter and presentation can be downloaded at
RepowerNRG.com.
The full text of the letter follows:
May 15, 2023
The Board of Directors
NRG Energy, Inc.
910 Louisiana Street
Houston, TX 77002
Attn: Dr. Lawrence Coben (Chairman
of the Board)
Dear Dr. Coben and Members of the Board,
We write on behalf of Elliott Associates, L.P. and Elliott
International, L.P. (together, with its affiliates, "Elliott" or
"we"), which have an investment of approximately $1.0 billion representing a more than 13%
economic interest in NRG Energy, Inc. (the "Company" or "NRG").
As you know, this is not the first time that Elliott has made a
large investment in NRG. In 2017, we disclosed a large ownership
stake and approached NRG's management team and Board with a plan to
address the Company's share price underperformance. The opportunity
we saw at the time was both significant and unique: We made the
case that through a combination of operational improvements and
portfolio actions, NRG could rapidly improve its competitive
position and create a significant amount of shareholder
value.
The Board was receptive to our case, and we worked
constructively with the Company to develop the highly successful
Transformation Plan, a roadmap for NRG to become an efficient and
focused integrated power company. At the conclusion of our
engagement, we believed that with continued adherence to the
principles of the Transformation Plan, NRG was well-positioned to
drive sustained long-term value creation for shareholders. As proof
that investors believed that the Company was on the right course,
in 2017 NRG was the best-performing company in the S&P 500.
Unfortunately, despite this initial progress and shareholder
enthusiasm, NRG has sharply pivoted away from the parameters
of the Transformation Plan and now resembles the unfocused company
that we first encountered six years ago. Since the conclusion of
our involvement, NRG has suffered operational setbacks, missed
financial guidance, and – with the recent acquisition of Vivint, a
home security business with stark operational differences to NRG's
core power businesses – regressed to the same unfocused,
overleveraged business model that predated our initial
involvement.
The purpose of today's letter and the accompanying presentation
is to present a clear path forward for how best to remedy NRG's
underperformance, building on the same framework of cost excellence
and portfolio simplification that we advocated during our initial
investment in the Company. We hope the Board will consider these
views, which we are making public today in the spirit of fostering
a transparent and robust discussion. We look forward to
meeting in the near term to work constructively with the Company
toward the implementation of a new value creation plan.
The 2017 Transformation Plan
When we first invested in NRG, we saw a company with enormous
potential for value creation. The Company had an attractive
collection of generation and retail assets but, due to operational
weaknesses and an unfocused portfolio, had significantly
underperformed and cumulatively lagged the S&P over a 10-year
timeframe by 140%. We believed that the Company had lost its focus
as it expanded beyond its core merchant power and retail
electricity businesses, resulting in an uncompetitive cost
structure, overleveraged balance sheet and excessively complex
asset portfolio.
At the time, we recommended that NRG focus on its core
businesses by aggressively reducing costs, monetizing non-core
assets to simplify its portfolio and paying down debt. We worked
closely with NRG as it conducted an intensive, four-month business
review that culminated in the Transformation Plan. The new plan
reinvigorated NRG by targeting clear, "line-of-sight" initiatives,
including $1.065 billion of total
cost and margin improvement, $2.5
billion to $4.0 billion of
asset divestitures and $13 billion of
debt reduction. During Elliott's engagement, NRG achieved a 156%
total shareholder return ("TSR").1
Importantly, the growing support for NRG as a public investment
reflected a belief that the Company had made a renewed commitment
to operational excellence and portfolio focus that would be
maintained over the long term. Unfortunately, that belief was
misplaced and has not been rewarded.
NRG Has Since Meaningfully Underperformed
Since the conclusion of our engagement, NRG has reversed much of
the progress made under the Transformation Plan. The Company has
underperformed the S&P Utilities Index by 44% and integrated
power peers by 53%2, and NRG's share price
today is lower than it was at the conclusion of our
engagement3. This is not dissimilar to NRG's
performance before our involvement – in the two years prior, NRG
stock declined by 46%. In fact, in the past ten years, the
only period of sustained outperformance was during Elliott's
engagement with the Company in 2017-2018. We believe that the
underperformance prior to and subsequent to our involvement
reflects repeated missteps in execution and strategy in the
absence of a true and enduring commitment to operational excellence
and portfolio focus.
Operational Failures
In 2021 and 2022, NRG missed two years of financial guidance
after struggling with repeated plant outages (including at both of
its key Limestone and Parish power plants) and demonstrating an
inability to manage through extreme weather events. This record of
poor execution stands in contrast to strong earnings achieved by
peers in 2022. Consistent execution and plant reliability are
particularly important to the success of NRG's asset-light retail
strategy, but operational missteps have eroded investor confidence
in management.
Loss of Strategic Direction
Additionally, NRG lost strategic direction with its poorly
conceived, "all-in" pivot to the home security business founded on
the acquisition of Vivint. We and other investors struggle to
understand why NRG would make such a significant bet on a strategy
that many other companies have already failed to execute
successfully, especially given the Company's previous lack of
success in entering home services. The market's reaction to the
Vivint transaction – a 20% decline in NRG's market capitalization
over the first week, or nearly $2
billion in value loss – was both predictable and
justifiable. As measured by the share price reaction following its
announcement, the Vivint transaction ranks as the single
worst deal in the power and utilities sector during the past
decade.4 The transaction continues
to draw near-universal skepticism among investors and sell-side
analysts.
The Repower NRG Plan
Notwithstanding these setbacks, we have strong conviction in the
attractiveness of NRG's integrated power business and the critical
role that the Company plays in Texas and other energy markets in the
Northeast and Midwest. The Company's retail franchise is a crown
jewel that has remained a market leader in Texas for more than 20 years, navigating a
rapidly evolving industry backdrop. We believe that with the right
leadership and strategy, NRG can correct its course and create
significant and sustainable value. The necessary steps are
familiar, and include elements that NRG undertook following
Elliott's engagement with the Company in 2017:
- Leadership. First, NRG must restore the credibility of the
management team and the Board. We believe that the Company should
add new independent directors with expertise in the power and
energy industry. Elliott has identified five highly credible
executives to help guide the necessary operational and strategic
changes. The Board should also evaluate the management team's
ability to drive high-performance operations on a sustained
basis.
- Operations. We believe that NRG is capable of achieving at
least $500 million of recurring,
EBITDA-accretive cost reductions by 2025. Additionally, we believe
NRG has headroom to realize these cost savings while sustaining
elevated maintenance capex to improve its fleet reliability and
mitigate outage risk.
- Strategy and Capital Allocation. As evidenced by the
strong outperformance by NRG in 2017 and 2018, we are convinced
that an optimized NRG focused on its core integrated power business
can drive compelling shareholder returns. For this reason, NRG must
conduct a strategic review of its home services strategy, including
Vivint. In conjunction, NRG should establish a new capital
allocation framework to return to shareholders at least 80% of free
cash flow, with any growth investments focused on its generation
and retail businesses. By implementing the Repower NRG Plan, the
Company would have the ability to return $6.5 billion of excess capital, or approximately
85% of NRG's current market cap, to shareholders over the next
three years.
Successful execution of the Repower NRG Plan could create
over $5 billion of shareholder value,
driving the Company's stock price to reach or exceed $55 per share. We believe the execution of
these initiatives is squarely within the Company's control and can
be carried out in the next 18 months.
Given NRG's failure to sustain the momentum of the
Transformation Plan, strong management will be key to the success
of the Repower NRG Plan. The Board must ensure that the management
team has the appropriate skillset and expertise to carry out the
necessary changes as well as maintain long-term cost leadership and
strategic focus. The Repower NRG Plan is predicated on enduring
cost discipline and high-performance operations; an operationally
focused management team, along with improved governance and
oversight, is critical to winning back the confidence of investors
and setting the Company on the path to long-term success.
Moving Forward
We have strong conviction in the attractiveness of NRG's assets
and believe that the Company can become the leading integrated
power company in North America.
However, the Company's strategic decisions, execution and stock
price underperformance make clear that significant changes are
needed to Repower NRG and restore the level of strategic focus and
investor trust that drove the Company's outperformance six years
ago.
We look forward to discussing our recommendations with you. We
believe that the addition of new highly credentialed board members
and the establishment of a formal Board-level committee and review
process (much like the 2017 Business Review Committee) are the
logical next steps for NRG. Our goal is to engage with the Company
constructively and align with the Board on the path forward as soon
as practicable. We thank you again for your consideration, and we
will make ourselves available promptly to meet in person and begin
working together on next steps.
Sincerely,
John
Pike
Partner
Bobby
Xu
Portfolio Manager
About Elliott
Elliott Investment Management L.P. manages approximately
$55.2 billion of assets as of
December 31, 2022. Founded in 1977,
it is one of the oldest funds under continuous management. The
Elliott funds' investors include pension plans, sovereign wealth
funds, endowments, foundations, funds-of-funds, high net worth
individuals and families, and employees of the firm.
1 Trading day prior to Elliott's Schedule 13D filing
on 1/17/17 to John Wilder's retirement from the NRG Board on
11/8/18.
2 Integrated power peers include Vistra Corporation and
Constellation Energy. Constellation measured from the spin-off date
of 1/19/22.
3 Measured from 11/8/18.
4 Measured among transactions announced since 2013 in
which the buyer is a power or utility company and the target TEV is
greater than $1 billion.
Media
Contact:
Casey
Friedman
Elliott Investment
Management
(212)
478-1780
cfriedman@elliottmgmt.com
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SOURCE Elliott Investment Management L.P.