Paul Singer’s Huge Bet Pays off as NRG Energy (NYSE:NRG) Surges

NRG Energy Inc. (NYSE:NRG) recorded its largest gain in nearly nine years after it announced a transformation plan that includes raising up to $4 billion via asset sales and cutting debt by $13 billion.
 
The largest independent power producer in the U.S. began working on the plan in February, a month after Paul Singer’s Elliott Management Corp. joined forces with BlueScape Energy Partners to take a 9.4% position in the company.
 
In their January filing, Elliott and BlueScape said they believe NRG’s shares were “deeply undervalued”, although there were opportunities to raise shareholder value via strategic initiatives and operational and financial improvements.
 
As part of a cooperation agreement struck in February with Elliott and BlueScape, NRG formed a five-person committee to assess cost-cutting, asset sales, capital allocation and wider strategic alternatives.
 
The agreement also led to the retirement of NRG Chairman Howard Cosgrove and Edward Muller from the company’s board. Lawrence Coben was appointed as NRG chairman while Bluescape Executive Chairman C. John Wilder and Barry Smitherman were named to the company’s board.

The Plan

NRG crafted the plan to substantially strengthen earnings and cost competitiveness, while also reducing risk and volatility and creating shareholder value.
 
And while this is a three-year plan, the company expects to achieve the majority of targets by the end of 2018, providing the company with clear line of sight to results.
 
“The transformation plan announced today demonstrates our commitment to simplify and strengthen the company to thrive through any market cycle,” NRG President and CEO Mauricio Gutierrez said.

Asset Sales

NRG targets raising between $2.5 billion and $4.0 billion from off-loading certain assets, including 6 gigawatts of conventional generation and businesses, and 50% to 100% of the company’s NRG Yield (NYSE:NYLD) and its leading renewables platform.
 
NRG Yield had a market valuation of approximately $3 billion at the close of business on July 11th.
 
The power producer said it aims to simplify its corporate and business structure while also preserving its ability to provide comprehensive energy solutions to consumers.
 
The asset sale procedures are “well underway” and NRG expects to announce signed agreements in the fourth quarter of 2017. It has tapped Citi, Goldman Sachs and Morgan Stanley for certain sale processes.

Capital Enhancements

NRG sees the plan resulting in pro forma annual adjusted EBITDA of $1.85 billion, pro forma annual free cash flow before growth of $1.23 billion and pro forma net debt of $6 billion.
 
Additionally, the company expects having up to about $6.3 billion in excess cash to deploy through 2020, including $4 billion by the end of 2018.
 
This cash would be earmarked for either projects or investments with at least 12% to 15% unlevered pre-tax returns or shareholder return programs.
 
NRG ended the day trading at $21.09 per share, up 29.39%.