NRG, a Power Company Leaning Green, Faces Activist Challenge
Over the years, NRG, a leading independent power producer whose fleet once depended heavily on coal, has made big bets on low-carbon energy technologies and publicized its embrace of sustainability as essential to its future.
It pursued developing renewable energy for customers large and small and set aggressive goals to reduce its emissions of carbon dioxide — 50 percent by 2030, and 90 percent by 2050.
But now, the company finds its strategy challenged from within.
Activist hedge-fund investors, intent on extracting value from NRG assets, have installed two directors on the board who, in one potential approach, would push to sell off some of the company’s renewable-power projects, raising questions about how it would meet its clean-energy goals.
Raising further questions, one of the directors installed by the activists, Barry T. Smitherman, a lawyer and former energy industry regulator from Texas, has publicly questioned accepted climate science and called global warming a hoax. “Don’t be fooled — not everyone believes in global warming,” he said on Twitter from a presentation called “The Myth of Carbon Pollution” at a conference of regulators in 2013.
And that has drawn the attention of New York City’s comptroller, Scott M. Stringer, who oversees the city’s pension funds that are shareholders in NRG. On Friday, he filed a letter with the Securities and Exchange Commission urging shareholders to oust Mr. Smitherman at their annual meeting on April 27.
“In light of Mr. Smitherman’s stated views on climate change, which are incompatible with NRG’s disclosed business strategy and risks, we question his ability to act in the best interests of NRG and its shareholders,” Mr. Stringer wrote in the letter. “Additionally, we believe his role on the board sends a demoralizing message to the many NRG employees responsible for implementing the company’s existing business strategy and managing its risks.”
Mr. Smitherman did not return an email or phone call seeking comment about his views and how the board shake-up might affect NRG’s long-term strategies and goals.
The conflict has its roots in efforts led by Elliott Management, a multibillion-dollar hedge fund run by Paul E. Singer, and Bluescape Energy Partners, run by C. John Wilder, a former executive at the Texas utility TXU who has been credited with its turnaround.
Under Mr. Singer, an early titan of the hedge-fund industry who has also made a name for himself as a top Republican donor, Elliott has been known for its no-holds-barred approach to taking on companies and governments over its investments around the world.
As an activist investor, Elliott quietly builds up equity stakes in companies until it has a big enough position to start rattling the cages of a company’s management. In South Korea, Elliott became the first investor to publicly spar with Samsung, a conglomerate run by one of the country’s most powerful corporate dynasties. In Argentina, Elliott was pilloried in the local press as a “vulture” investor for waging a decade-long battle with the government over its defaulted debt.
In its investment in NRG, Elliott has so far remained largely behind the scenes. But in an emailed statement on Thursday, Elliott said that if a buyer in the market were willing to pay a premium for some of NRG’s renewables businesses, “it may be a good decision for NRG and its shareholders to crystallize that value.”
Most of the company’s power plants run on fossil fuels like coal and natural gas, but it has extensive wind and solar farms, including several unfinished projects it bought last year from SunEdison, which had gone bankrupt. Earlier this year, the company reported a loss of $891 million for 2016, largely because of low natural gas prices, down from a $6.4 billion loss the year before.
As for investor concerns about the appointment of Mr. Smitherman, Elliott pointed to the fact that Mr. Smitherman had extensive knowledge of the Texas regulatory landscape. NRG is one of the largest energy suppliers in Texas, and some of its assets in the state could be considered for sale, requiring extensive knowledge of the regulatory hurdles.
“Having someone with Mr. Smitherman’s strong Texas-centric utility regulatory background is crucial to helping NRG navigate this process,” said Michael O’Looney, an Elliott spokesman.
“At NRG, the debate is not over clean versus conventional generation,” Mr. O’Looney said. “The debate is simply over who is the best long-term owner of individual assets and fleets of assets that currently reside inside the broader NRG portfolio.”
Mr. Smitherman and Mr. Wilder are two of three independent board members on a five-member committee formed as part of the agreement with Elliott and Bluescape to make recommendations about cost savings, asset sales and other potential actions, according to Mr. Stringer’s letter. The company’s full board has 13 directors, according to its website.
It was not until around 2013, when he announced his candidacy for state attorney general, that Mr. Smitherman began publicly questioning climate science and global warming, according to energy experts in Texas. He appears to still support the development of renewable energy, writing in The Dallas Morning News in December about how beneficial Texas wind power development had been to the state.
NRG has reeled in recent years as it has sought to transform itself from a conventional-energy giant into a leader in the clean-energy economy.
“NRG is caught between what we consider the next generation of power supply and the status quo,” said Travis Miller, an energy and utilities analyst at Morningstar. “The move toward renewable energy and gas generation is a trend that won’t stop anytime soon so every power generator is trying to develop a strategy where they can benefit from the transition period.”
David Crane, a former chief executive, had tried to do that by transforming the company into the Google of green energy, investing in big renewable-energy projects and buying small start-ups to help capture emerging markets like rooftop solar, electric-vehicle charging and home automation. But the company pulled back from those ambitions as a combination of low oil and gas prices and the threat of rising interest rates led to turbulence in the energy markets and skittishness among renewable-energy investors and the company’s stock tumbled. Despite an elaborate reorganization aimed at cutting costs, reducing debt and better aligning the businesses with investors, Mr. Crane was pushed out in 2015, and replaced by Mauricio Gutierrez, the executive vice president and chief operating officer.
Mr. Gutierrez has continued to pursue the company’s sustainability and carbon reduction efforts, but in a more restrained way, focusing more on large-scale renewable projects and less on the emerging markets.
Marijke Shugrue, an NRG spokeswoman, said: “These are not altruistic, sustainability-only goals. We are firm believers in climate change and that CO2 emissions are a leading factor.”
The company, for instance, recently re-signed the Business Backs Low Carbon pledge organized by Ceres, an advocacy group.
But corporate aims may end up in the hands of directors with a different agenda.
In January, Elliott and Bluescape announced that they had each bought a large stake in NRG and were teaming up to put pressure on the company to make changes to its business. NRG was “deeply undervalued” and could be worth more if its management undertook “operational and financial improvements” as well as “strategic initiatives,” Elliott said at the time in a filing to the Securities and Exchange Commission.
Elliott said that Mr. Wilder and his team had “directly relevant experience in effectuating such improvements,” adding that they were in a dialogue with the board.
By February, NRG announced that it had struck an agreement with Elliott, which owned 6.9 percent of the company’s stock, and Bluescape, which had 2.5 percent, to replace two outgoing directors and appoint Mr. Wilder and Mr. Smitherman.
NRG also agreed to undertake a business review of the different parts of the company, including examining “potential portfolio and/or asset de-consolidations.”
The company’s renewables business is likely to be among the assets spun off. Some analysts have argued that those businesses are undervalued because they are housed within NRG’s legacy business, which involves burning natural gas, coal and oil.