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NRG, a power company leaning green, faces activist challenge

By Diane Cardwell and Alexandra Stevenson, New York Times
April 9, 2017 at 1 a.m.

This Nov. 11, 2012, photo shows surfers on a broad, sandy beach near the NRG El Segundo power plant in El Segundo, Calif. A new study predicts that with limited human intervention, 31 percent to 67 percent of Southern California beaches could completely erode back to coastal infrastructure or sea cliffs by the year 2100, with sea-level rises of 3.3 feet (1 meter) to 6.5 feet (2 meters). The study released Monday, March 27, 2017, used a new computer model to predict shoreline effects caused by sea level rise and changes in storm patterns due to climate change. (AP Photo/John Antczak)

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.

It is but the latest skirmish in NRG's long struggle to make several kinds of energy products — conventional and renewable, large-scale and decentralized — profitable under one corporate umbrella.

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 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," 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."

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.

Conflict's roots

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 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 decadelong 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 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.

The Texas landscape

As for investor concerns about the appointment of Smitherman, Elliott pointed to the fact 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," 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."

Smitherman and 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 Stringer's letter. The company's full board has 13 directors, according to its website.

Smitherman, an ally of Rick Perry, the energy secretary and former Texas governor, was chairman of the Texas Public Utility Commission, where he helped usher in the high-voltage transmission lines that spurred the development of a robust wind industry. He then ran the state Railroad Commission, which largely regulates the oil and gas industries.

It was not until about 2013, when he announced his candidacy for state attorney general, that 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.

Trying to transform

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."

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 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 Wilder and 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.

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