We are reaffirming our $37 fair value estimate for NRG Energy NRG after the company announced it is selling its 44% interest in the South Texas Project nuclear plant for $1.75 billion and replacing its CFO. We are reaffirming our no-moat rating and High Morningstar Uncertainty Rating.
These are the first significant changes since activist investor Elliott Management disclosed its 13% economic interest in NRG. However, these moves don’t entirely line up with Elliott’s proposed changes or management’s strategic direction. We think investors should be concerned about where the company is headed and who is in charge.
The STP sale is particularly surprising. We thought management would achieve its planned $500 million of asset sales by divesting fossil-fuel plants outside of Texas. Although we think NRG received a fair price for STP, the proceeds far exceed NRG’s financing needs. We think accelerating debt reduction and adding $650 million of share buybacks create little incremental shareholder value.
The STP sale also removes about 25% of NRG’s forecast power generation in Texas and its largest source of carbon-free generation. We now expect NRG will get about 80% of its earnings from the retail business, including Vivint, which Elliott opposes. We think the retail business has no economic moat and only provides incremental value when paired with NRG’s wholesale generation.
The CFO change also seems surprising. New CFO Bruce Chung presumably signed off on the Vivint deal as head of strategy and M&A. This might suggest that NRG’s board will push back on Elliott. The last time Elliott was involved with NRG in 2016-18, NRG effectively implemented Elliott’s plan by replacing the CEO, reducing debt, cutting costs, and divesting generation assets.
Without STP, we expect adjusted 2023 EBITDA to fall below management’s $3.0 billion-$3.25 billion guidance, including Vivint. We expect little core EBITDA growth unless NRG can achieve its $400 million Vivint synergy target.