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A little more than a year into his tenure as chief executive of NRG Energy in 2017, Mauricio Gutierrez found himself in the crosshairs of Elliott Management, with the feared activist investor calling for a reboot of the power company’s strategy.
Elliott largely got its way. NRG cut the size of its generating fleet and refined its focus on selling retail electricity in competitive power markets. NRG’s share price surged, becoming the best-performing stock on the S&P 500 index that year.
Six years later Paul Singer’s aggressive hedge fund is back and calling for the head of Gutierrez, attacking him as “a deficient leader”. But after capitulating the first time around, this time NRG’s boss and board are standing their ground.
NRG’s performance and strategy will be in focus this week as the Houston-based company reports financial results. Analysts surveyed by S&P Global expect the company, which has a market capitalisation of more than $8bn, to post net second-quarter net profit of $760mn on Tuesday, compared to $513mn a year before.
Not widely known outside the energy industry, NRG says it has 7.3mn customers including a huge presence in Texas, home to 60 per cent of its 16 gigawatts of generating capacity. Its traditional competitors include other power producers and utilities.
In March, NRG closed a $5.2bn deal, including assumed debt, for a company whose competitors instead include Amazon and Google. Vivint Smart Home offers connected devices such as home security cameras and thermostats. Elliott described Vivint as the “single worst deal in the power and utilities sector in the past decade” when it disclosed a 13 per cent stake in NRG in May and demanded that it rethink its pivot into home services.
At the heart of the conflict is a debate over how far an energy company should stray outside its core competency. NRG, which operates in competitive retail electricity markets, plans to cross-sell energy services and Vivint’s devices.
Elliott succeeded in flexing its muscle in 2017. Demanding it slash costs and narrow its portfolio, the fund installed two board members — John Wilder, executive chair of Bluescape Energy Partners, with which it had launched the campaign, and Barry Smitherman, former chair of the Public Utility Commission of Texas.
Within months NRG had announced $1.1bn in cost savings and almost $3bn in divestitures — including fossil fuel generation business GenOn, which it had acquired in 2012, and its stake in NRG Yield, which later became Clearway Energy, now one of the country’s biggest renewable power developers.
People familiar with Elliott’s strategy said the fund felt the company lost its way after Wilder and Smitherman stepped down in 2018. “The company started getting to M&A again and is trying to really become something different — they don’t want to be a power company,” one of the people said. “Essentially, a lot of the same issues that the company faced seven to 10 years ago are resurfacing.”
The negotiations come during a summer in which blistering heat has stretched power supplies in the US south including Texas, where the grid has repeatedly broken daily demand records. “For utilities and especially for independent power producers, hot weather cures a lot of ills,” said Travis Miller, a utilities analyst at Morningstar.
“I think it’s going to be tough to entirely . . . understand the impact from the Vivint deal during the next two quarters simply because of the hot weather should be a big benefit,” Miller said.
NRG’s purchase of Vivint was poorly received by the market, with its shares falling 15 per cent the day it was announced in December. NRG declined to put Gutierrez or another executive forward to be interviewed for this article.
At an investor day in June, Gutierrez said the company would commit to returning 80 per cent of cash to shareholders and refreshing the board. But Vivint was there to stay.
“We have strengthened our core energy business with a leading smart home technology platform, positioning NRG to capitalise on the convergence of electricity and smart technologies inside the home,” Gutierrez said in a statement on the investor day.
Elliott retorted that the moves were “wholly insufficient to remedy a deeply flawed strategy overseen by a leadership team unfit to execute” and said the commitment to curtail growth investments amounted to putting “guardrails” around the chief executive. The hedge fund called on the board to fire him.
A person familiar with Elliott’s thinking said the group is no longer focused on unpicking the Vivint deal, but rather wholesale management change. The hedge fund, the person said, has “a lot of conviction on this” and would be willing to go “all the way” if required.
Nominations for new directors open in December and analysts anticipate Elliott will push ahead with nominating candidates and angling to oust Gutierrez.
“I think that Elliott will continue talking with management and trying to amicably work with them to get the change they want — whether it’s board seats or whether it’s a new CEO,” said Ken Squire, president of 13D Monitor, a research group that tracks shareholder activism.
“If December comes around and they’re not happy with the changes or the progress, I would expect them to nominate directors to the board.”
