Hedge funds get seats on board
Major shareholders of NRG Energy struck a deal to oust the company’s board chairman and secure two open seats, the first move in an effort by the two hedge funds to boost the company’s stock by unloading underperforming assets, such as coal-fired power plants and some renewable energy projects.
The board shake-up continues efforts to scale back the company’s investments in wind and solar projects, which have produced disappointing returns and weighed on the company’s stock price.
In 2015, former CEO David Crane, a champion of electric car-charging
stations and residential solar panels, was fired and replaced by Mauricio Gutierrez, who favors more traditional sources of power such as natural gas-fired plants.
Now that two hedge funds, Dallas-based investment firm Bluescape Energy Partners and the New York hedge fund Elliott Associates, have secured seats on the 13-member board, they will likely push to unwind more investments in wind and solar power, analysts said.
“My expectation is that, since they are now inside the tent, they are going to start to put brakes on those kinds of things,” said Praveen Kumar, a professor at the University of Houston who studies hedge fund activism.
NRG said Monday that it reached an agreement with the hedge funds, which control a combined 9.4 percent of NRG stock, to create two openings on the board for their designees through the retirement of board Chairman Howard Cosgrove, who held the position since 2003, and another director, Edward Muller. The hedge funds’ picks included John Wilder, the former chief executive of TXU, who cut costs and drove the Dallas power company’s stock higher before its sale to private equity firms in 2007. Their second is Barry Smitherman, a Houston lawyer who has served as chair of the state Public Utility Commission and the Railroad Commission of Texas, which oversees the state’s oil and gas industry.
Smitherman is said to be under consideration by President Donald Trump to lead the Federal Energy Regulatory Commission.
Neither Wilder, who is also the chairman of Bluescape, Smitherman, nor representatives of the hedge funds responded to requests for comment. NRG declined to comment.
NRG, which has headquarters in Houston and Princeton, N.J., has struggled in recent years. In the third quarter, the most recent earnings reported by the company, NRG said that its operating revenue, bogged down by weaker demand for electricity, low prices and debt, fell 10 percent to $4 billion from $4.4 billion in same period in 2015. In November, NRG’s stock price closed below $10 a share, down from nearly $13.50 a year earlier and a recent peak above $37 a share in June 2014.
NRG shares rose 9 cents Monday to close at $16.75.
In January, the hedge funds combined their shares of NRG stock in a bid to get seats on the board. In a Securities and Exchange Commission filing, they took aim at NRG’s “deeply undervalued stock” and said they would unload debt-laden subsidiaries and push the company to lower operating costs.
Kumar said the new board members will likely pressure management to cut costs and put the NRG subsidiary GenOn into bankruptcy to relieve the parent company of GenOn’s $2.5 billion debt. GenOn operates coal-fired power plants in the Middle Atlantic states.
The new board could also push management to divest some renewable energy projects. Gutierrez, who also serves on the 13-member board, has said he remains committed to investing in renewable energy. In September, NRG bid up to $188 million to acquire a massive West Texas solar farm run by Sun-Edison, a bankrupt renewable energy company.
Kumar expects that NRG won’t kill all investment in renewables — which can still be profitable — but that its focus will be on natural gas-fired power plants, which are cheaper to run than coal-fired power plants and have a more stable revenue.