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NRG Energy Launches Transformation Plan

PRINCETON, N.J.--(BUSINESS WIRE)--NRG Energy, Inc. (NYSE: NRG) today announced its “Transformation Plan.”

“By establishing the BRC, the Board kick-started an exhaustive four-month review where nothing was sacred. The Board and management scrutinized and challenged every available opportunity that could create value for our shareholders - and embraced the plan being announced today. The Board unanimously and enthusiastically supports this transformational plan.”

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The Transformation Plan Targets:

  • $1.065 Billion Recurring Cost and Margin Improvements, including:
  • $2.5-$4.0 Billion Targeted Asset Sale Net Cash Proceeds, plus

Pro Forma Effect of Transformation Plan1:

  • Pro Forma Net Debt: $6 Billion or 3.0x Net Debt / Adj EBITDA
  • Excess Cash to Deploy: Up to approximately $6.3 Billion through 2020 ($20/share2), including $4 Billion by end of 2018 ($12.5/share3)

The Business Review Committee (BRC) unanimously recommended the Transformation Plan and it received the unanimous support and approval by the NRG Board of Directors and management.

Mauricio Gutierrez, President and CEO, NRG: “The transformation plan announced today demonstrates our commitment to simplify and strengthen the company to thrive through any market cycle. This plan is the result of a comprehensive review of our entire business by the board and management to simplify our business, right-size our portfolio and strengthen our balance sheet to create significant value for all our stakeholders.”

Larry Coben, Chairman of the NRG Board of Directors: “By establishing the BRC, the Board kick-started an exhaustive four-month review where nothing was sacred. The Board and management scrutinized and challenged every available opportunity that could create value for our shareholders - and embraced the plan being announced today. The Board unanimously and enthusiastically supports this transformational plan.”

John Wilder, Chairman of the NRG Business Review Committee: “The BRC, composed of five experienced and skillful directors and supported by two exceptionally qualified independent advisors, worked continuously for four months on a comprehensive review of NRG’s operations and cost structure to dramatically improve NRG’s financial performance and competitiveness. We developed an extremely detailed transformation plan that was unanimously approved by the BRC and the board. We targeted divesting businesses that represent over 60% of NRG’s EBITDA to generate $2.5-4.0 billion of net proceeds and facilitate $13 billion of debt reduction. We targeted rapidly executing annual improvements with 72% of run rate annual benefits of $1.07 billion achieved in 2018, 92% in 2019, and 100% achieved in 2020. Finally, we established a rigorous capital allocation process to ensure NRG is financially flexible for years to come and to ensure NRG wisely allocates its expected 2017-2020 $6 billion of excess cash flow in 12-15% or better unlevered internal rate of return investments, or distributes the excess cash to our shareholders.”

Jeff Rosenbaum, Portfolio Manager at Elliott Management: "NRG's management and Board deserve substantial praise for the hard work and clear thinking reflected in their truly transformational plan announced today. This new business rightsizing strategy, recommended by CEO Mauricio Gutierrez and Business Review Committee Chair John Wilder and backed unanimously by the Board, will focus NRG on substantial cost cuts, portfolio streamlining, balance sheet deleveraging and a strong capital investment / shareholder return program. All of the stated objectives have transparent and achievable targets. We are pleased that this process has delivered such a strong plan for shareholders.”

The Transformation Plan

The Transformation Plan is designed to significantly strengthen earnings and cost competitiveness, lower risk and volatility, and create significant shareholder value. The three-part, three-year plan is comprised of targets in the areas of operational and cost excellence, portfolio optimization, and capital structure and allocation enhancement. Importantly, the majority of targets and results are achievable by the end of 2018, providing investors and the company with clear line of sight to results. This plan is the product of a comprehensive, “blank slate” evaluation of all NRG businesses, assets, and functions, collectively conducted by the BRC, NRG management, and independent consultants and advisors to the BRC. The Transformation Plan’s components consist of:

1. Operations and cost excellence:

$1.065 billion total annual cost and margin enhancement (approximately 70% expected to be achieved by year-end 2018), including $855 million recurring, annual FCFbG accretive cost and margin enhancement that consist of: $590 million Adj. EBITDA-accretive cost savings4 (approximately 85% expected to be achieved by year-end 2018), $215 million Adj. EBITDA-accretive margin enhancement program (net of recurring costs), and $50 million maintenance capex reduction. The total cost reduction also targets $210 million in permanent SG&A reduction associated with asset sales and divestments (run rate realized in 2018).

The plan also expects to realize (i) $370 million non-recurring working capital improvements through 2020 and (ii) approximately $290 million in one-time costs to achieve.

2. Portfolio optimization:

Targeting $2.5-$4.0 billion of asset sale net cash proceeds5, including divestitures of 6 gigawatts (GWs) of conventional generation and businesses6 and 50-100% of NRG’s interest in NRG Yield and its leading renewables platform.

NRG is well underway in a process to explore strategic alternatives for its interest in NRG Yield and the renewables platform. The strategic alternatives span a variety of ownership structures and partnership types, including the potential partial or full monetization of the renewables platform and NRG’s interest in NRG Yield with a goal to optimize how NRG participates in renewables and to deconsolidate the associated debt. Beyond creating value, NRG seeks to simplify its corporate and business structure while preserving the ability to provide comprehensive energy solutions to customers.

In addition, as previously disclosed, NRG has entered into a restructuring support agreement to restructure and divest its ownership interest in GenOn Energy, Inc. (approximately 15 GW). On June 14, 2017, GenOn filed for a pre-arranged Chapter 11 bankruptcy with 93% noteholders’ support and expects emergence before year-end 2017.

With respect to asset sales and the strategic alternatives process, NRG expects to announce signed agreements during the fourth quarter of 2017. NRG has engaged Citi, Goldman Sachs and Morgan Stanley for certain asset sale processes that are well underway.

3. Capital structure and allocation enhancements:

A clearly prioritized capital allocation strategy that targets a reduction in consolidated net debt from approximately $18 billion to approximately $6 billion of consolidated net debt / Adj. EBITDA from 6.4x7 to 3.0x by year-end 2018. In addition to achieving the 3.0x target leverage ratio, the plan expects to provide up to $6.3 billion of excess cash for allocation through 2020, including up to $4 billion of excess cash by year-end 2018. NRG expects to deploy this excess cash in either projects or investments with at least 12-15% unlevered pre-tax returns or shareholder return programs.

The full Board of Directors will maintain oversight of the execution of the...