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.
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.
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.
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.
Elliott Investment Management
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SOURCE Elliott Investment Management L.P.