NRG’s New Plan: Sell Assets, Change Focus, Raise Cash

NRG Energy said it will sell as much as $4 billion in assets as it seeks to lower its debt and cut costs after a revolt by activist investors unhappy with the company’s direction.

Shares of the company jumped 29% to a two-year high on July 12 after NRG announced the moves as part of a “transformation plan” designed to divest most if not all of its NRG Yield renewable energy business along with some of its conventional energy assets, including coal- and natural gas-fired power plants.

NRG, headquartered in Houston, Texas, said it wants to remove $13 billion in debt and generate more than $850 million in annual free cash flow, with a goal of adding more than $6 billion to its balance sheet through 2020 that would be available for new projects and investments.

NRG Energy unveiled a new plan to sell assets and change its focus in an effort to increase the company's value for shareholders. Courtesy: NRG Energy

NRG Energy unveiled a new plan to sell assets and change its focus in an effort to increase the company’s value for shareholders. Courtesy: NRG Energy

Mauricio Gutierrez, the company’s president and CEO, unveiled the plan to investors and told reporters that “We’re looking at the entire package. You should think about the development company, the operating company, and the yield as an integral part of the proposition that we have on the market.”

Gutierrez said company executives would focus on strategies to increase revenues and operational flexibility. He said most of the asset sales and cost reductions would occur by year-end 2018.

The NRG plan announced this week seeks to move the company further away from a strategy developed under former CEO David Crane, who was fired as chief executive in late 2015. Crane wanted to make NRG a leader in providing renewable energy such as wind and solar power. But the strategy never jelled with the company’s board, particularly as NRG’s earnings and share price dropped.

Paul Singer, the hedge fund manager behind Elliott Management who in January revealed he had taken a stake in NRG, led the push for the changes after partnering with Bluescape Energy, the investment firm whose chairman, Charles John Wilder Jr., is heavily involved in the utility industry. Singer was able to add both Wilder and former Texas Public Utility Commission chairman Barry T. Smitherman to NRG’s board earlier this year, and the group began reviewing the company’s strategy with an eye toward increasing value for shareholders.

Elliott Management in January sent a letter to shareholders in which it said NRG’s stock was “deeply undervalued,” and that operational changes were needed to boost the price. The stock has been as low as $9.84 a share in the past year; this week’s announcement has spurred a run-up to above $23 a share.

Jeff Rosenbaum, a portfolio manager at Elliott Management, told The Wall Street Journal he was “pleased that this process has delivered such a strong plan for shareholders.”

Low electricity prices and continued weak power demand have negatively impacted the bottom lines of NRG and other independent U.S. power companies. GenOn Energy, an NRG subsidiary, in June filed for chapter 11 bankruptcy, citing $1.8 billion in debt.

NRG said its new plan should enable the company to cut costs, and generate profit, even with sustained low wholesale prices for electricity. NRG said it hopes to cut generating costs by 25%, and said it would sell about 6 GW of its conventional (coal and natural gas) generation, about 12% of its total generating assets. The plan also calls for divesting 50% to 100% of its ownership of NRG Yield, along with reducing total debt by $13 billion.

The company said it would also achieve savings by laying off workers and increasing its outsourcing of some operations. It did not announce how many workers would be affected.

-Darrell Proctor is a POWER associate editor (@DarrellProctor1, @POWERmagazine)