As Activist Elliott Urges Change, NRG Says It’s Already Cuttingby and
Stock has outperformed since attracting activist attention
Weak electricity demand growth, cheap gas have taken a toll
NRG Energy Inc.’s chief executive officer says he’s focused on cutting costs as the company finds itself in the crosshairs of billionaire investor Paul Singer and turnaround titan C. John Wilder.
The largest U.S. independent power producer has gained about 17 percent since Singer’s Elliott Management Corp. and Wilder’s Bluescape Energy Partners formed a group seeking change at the company and disclosed a combined stake of about 9.4 percent. Its profits have been squeezed by slower electricity demand growth and a slump in power prices caused by cheap natural gas.
“We reduced costs significantly in 2016, and I said before that is a priority,” NRG CEO Mauricio Gutierrez said in an interview on Friday in Houston, where the company has naming rights to the stadium where the Super Bowl was to be played on Sunday. “We put a target, we told the Street that we are on track. Once we do that, then there will be the next program of cost reductions.”
Elliott and Bluescape are seeking talks with NRG about measures “including operational and financial improvements as well as strategic initiatives,” according to filings on Jan. 17. They may nominate directors for election at the company’s 2017 annual meeting.
Analysts expect Elliott to push NRG to step up cost reductions, which Gutierrez said amounted to $400 million last year. Of the major U.S independent power producers, NRG had the highest selling, general and administrative expenses per megawatt-hour in the third quarter, excluding its retail operations, according to data compiled by Bloomberg.
“Elliott and Bluescape -- they are an important investor,” the CEO said in the interview. “I value them. I value the ideas that they can provide like any other investor.”
The company has paid for marketing, such as the naming rights to the stadium in Houston, to help expand its brand awareness and market share in a competitive retail power business, he said. Recently, it uploaded three web ads tied to the Super Bowl that feature Gutierrez and actor Tony Hale, known for his role in the show Arrested Development.
Such spending may clash with the cost-cutting approach of its activist investors. Wilder, Bluescape’s executive chairman, ran Texas utility TXU Corp. from 2004 until its $48 billion sale to private equity firms KKR & Co. and TPG in 2007. His overhaul of TXU involved selling assets including art at the company’s headquarters to shrink debt and cut costs to boost cash flow.
NRG rose Friday amid a report by CNBC on speculation that the company had hired an adviser on a takeover offer. NRG spokeswoman Marijke Shugrue declined to comment on the report.
Along with reducing costs, Gutierrez said he has been focused on cutting debt while adding large-scale renewable power plants. He replaced David Crane as CEO at the end of 2015 after investors grew tired of a money-losing home solar business and the company lost about 60 percent of its market value that year.
Natural gas prices are in a "trough" and Gutierrez predicted a rebound by the end of the decade. “The first half of this decade was all about supply," he said. "The second part of this decade we’re going to see it’s all about demand."
Growth will be driven in part by increased power generation in Mexico -- a country whose relations with the U.S. have deteriorated since President Donald Trump pledged to rewrite trade rules and stick his southern neighbor with a bill for building a wall to keep illegal immigrants out.
Gutierrez was optimistic the two nations could work together when it comes to energy.
“There is a view that North America should be more integrated, not less integrated, from an energy infrastructure standpoint," he said. “I certainly hope that’s the spirit and the direction of the new administration.”