Elliott Calls for New CEO and Strategic Review at NRG Energy -- EnergyChoiceMatters.com

Elliott Calls for New CEO and Strategic Review at NRG Energy

Elliott Pans "Misguided Home Services Strategy"

June 28, 2023

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Reporting by Paul Ring • ring@energychoicematters.com

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Elliott Investment Management L.P. (Elliott), which said that it manages funds that have an investment of approximately $1 billion representing a more than 13% economic interest in NRG Energy, Inc. ('NRG' or the 'Company'), released a new public letter calling for a process to select a new CEO and to make enhancements to the Board of Directors at NRG.

Elliott called measures undertaken by NRG in response to a previously reported plan released by Elliott in May, concerning how to create additional value for NRG shareholders (see details on prior letter here), "defensive half-measures" that are, "wholly insufficient to remedy a deeply flawed strategy overseen by a leadership team unfit to execute."

In a statement provided to media outlets, NRG said, "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"

In a statement provided to media outlets, NRG further said, "We are confident that our plan will deliver substantial additional near- and long-term value."

Elliott said, "The Company’s Investor Day presentation represented 'more of the same,' reaffirming the status quo that has come to dominate the market’s perception of NRG."

Elliott said, "These recent actions have served to make clear the true cause of the Company’s underperformance: NRG’s CEO has lost the confidence of the core investor base, and the Board lacks the will to make the right decision for the Company. All of the steps taken in the past few weeks -- limiting the Company’s ability to deploy capital wastefully, changing capital-allocation policy, and making non-specific promises to bring in more Board oversight -- have confirmed that the Board is trying to put guardrails around a deficient leader. While the Board has been unwilling to acknowledge the Company’s suboptimal leadership, its series of 'solutions' will prove insufficient over time. Shareholders see it for what it is: a desperate attempt to prop up an underperforming CEO."

Elliott alleged, "Since sending our presentation and letter to the Board on May 15, we have received feedback from dozens of former, current and prospective NRG investors, and there appears to be broad consensus that new management is necessary at NRG. 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. This frustration is reflected in the stock’s deep and sustained underperformance over multiple years."

Elliott cited past statements dating back to 2017 from NRG to return capital to shareholders and alleged, "If these statements were credible, NRG would have succeeded in retiring its entire market cap at some point in the six years since 2017, or in creating significant value for shareholders. But now, these promises ring hollow, and NRG shareholders’ patience has not been rewarded: NRG’s share price today is at the same level as it was five years ago."

Elliott said, "The reason for this is clear: NRG’s management is not a disciplined allocator of capital and has always prioritized growth and M&A over capital return. NRG’s failure to uphold its promises to responsibly allocate capital in the past has caused investors to almost entirely dismiss its most recent commitments".

Elliott also said, "Furthermore, over time, NRG has changed its financial disclosures in a way that reduces transparency around the key performance metrics of its generation and retail businesses, including segment cost performance and unit margin performance. There is growing concern that the Vivint acquisition will provide another opportunity for management to further obfuscate the performance of the Company’s underlying business segments. This is symptomatic of a management team that holds little investor credibility; high-performing management teams welcome transparency and scrutiny, while underperforming management teams seek to limit investor insight into the business."

Elliott said, "Under the current CEO, NRG has engaged in value-destructive M&A and adopted a misguided home services strategy. Since announcing the Vivint transaction, NRG’s stock has meaningfully declined every time management has made public statements that further emphasize its commitment to the home services strategy."

Elliott said, "at the Company’s recent Investor Day, NRG agreed to reduce growth investments to no more than 20% of NRG’s excess free cash flow and to limit additional investment in Vivint. This concession -- which never would have been made if Elliott had not published materials questioning the Company’s direction -- received a mildly positive response from the market because it limited continued investment in a bad strategy. NRG’s market value remains nearly $2 billion below levels prior to the Vivint transaction, and NRG’s trading multiple remains lower than at any point in recent history."

Elliott alleged, "After engaging with scores of other companies facing the same or similar issues, our experience is that such measures almost never work. Investors too clearly see what NRG’s current CEO wants to do (speculative M&A) versus what he has no passion for (operational excellence and capital return)."

Elliott alleged, "In addition, the Board should not underestimate the amount of management time and distraction the continued pursuit of the challenged Vivint strategy will entail. Investors understand where managers prioritize their time, and if management focus and attention is not directed toward optimizing the core business, the result will be more underperformance. Long-time followers of the NRG story saw this dynamic play out with NRG’s previous CEO. Indeed, we have seen countless situations in our decades of active equity investing where companies and boards have allowed the inertia of a failed acquisition to create a drag on performance for years."

In its letter, Elliott urged the Board to adopt actions including:

"1. Immediately announcing and commencing a search for a CEO from externally sourced candidates who have the relevant operating experience to drive high-performance operations;
"2. Working with Elliott to add highly qualified directors to the Board who possess relevant experience in the power and energy sectors and can credibly guide the Company toward becoming a best-in-class operator; and
"3. Initiating a comprehensive business review, as outlined in Elliott’s May 15 presentation. Elliott believes a significant opportunity exists to improve the Company’s cost performance, refocus on its core businesses and increase capital return to shareholders."

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