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A Houston-based power company has become the latest target of activist hedge fund Elliott Management’s efforts to drive up returns in the energy sector. Their brewing battle could test federal antitrust rules on investor ownership of public utilities.
Last month, Elliott asked the Federal Energy Regulatory Commission (FERC) for permission to buy up to 20 percent of stock in NRG Energy, a power company with most of its generating capacity in Texas, which has recently ventured into selling smart meters.
In an earlier intervention at NRG in 2017, Elliott successfully pushed the company to shrink its generating fleet. The overhaul boosted the stock all the way to the top of the S&P 500 for that year. This time, the Financial Times reports, the company is fighting off the hedge fund’s Repower NRG campaign.
Elliott has been especially critical of NRG’s recent acquisition of Vivint, a company that sells and installs smart meters and other energy-efficiency technology. Elliott has called the acquisition “the single worst deal in the power and utilities sector in the past decade.”
Elliott’s typical playbook is to build up an economic interest in the companies it singles out, force management changes, pare down investment, drive up the stock price, and get out. Led by activist investor Paul Singer, Elliott is known for its creative tactics to squeeze debt payments out of developing countries. In 2012, it famously seized an Argentine naval vessel off the coast of Ghana as part of an effort to collect on defaulted bonds. Lately, it has taken aim at the power sector, taking stakes in utilities such as Duke Energy, Evergy, and Sempra.
With NRG fighting off the demanded changes, Elliott’s petition to FERC to acquire up to one-fifth of the company’s stock could be a power play. In its filing, the hedge fund notes that it asked NRG whether it would participate in the filing as a joint applicant. NRG apparently declined.
Elliott is asking for permission because federal antitrust law dating back to 1935 prevents an investor from acquiring a sizable stake in a public utility unless FERC finds the acquisition to be consistent with the public interest.
Current FERC rules set the bar for that stake at 10 percent. That is, shareholders of utility stocks are considered affiliates of the public utility if they control more than 10 percent of a company’s shares, including “indirect” control. An affiliate is subject to greater scrutiny around mergers and acquisitions and other regulatory oversight.
Since May, Elliott has publicly broadcast its stake of “approximately $1 billion representing a more than 13 percent economic interest in NRG,” as part of a campaign to get the company to cut costs, ditch investments like Vivint, and fire the CEO.
Yet in its application to FERC, Elliott writes that it currently holds just 2.36 percent of NRG’s common stock. In a footnote, it adds that it owns “passive, economic interests in NRG through their ownership of derivative instruments which do not confer any voting rights with respect to NRG common stock.” The stock and derivatives total more than 13 percent, Elliott acknowledges.
In a new filing, Tyson Slocum, director of the energy program at the progressive activist group Public Citizen, takes issue with that apparent loophole. Slocum argues that Elliott has circumvented FERC’s 10 percent threshold, using derivatives to skirt federal oversight.
“Elliott provides no detail on how its ‘ownership of derivative instruments’ only result in a ‘passive’ economic interest in NRG Energy,” Slocum said in the filing. Indeed, far from holding only a passive interest, he added, “Elliott Management has a history of using derivatives to amplify its indirect control over a target company.”
“These derivatives likely convey indirect voting control to Elliott,” Slocum went on. The filing argues that Elliott should disclose details on the derivative contracts it used to acquire an “economic interest” in NRG, including public identification of counterparties, since they may show that they confer Elliott indirect control.
In particular, Slocum argued to the Prospect, Elliott may exercise control through private banks that serve as counterparties to the derivative contracts, particularly if those banks frequently enter similar deals.
Elliott did not respond to a request for comment on Tuesday.
Elliott has current holdings in other energy companies including the utility NiSource and Peabody, a coal producer. As part of its argument that the acquisition of more NRG shares would have “no adverse impacts on vertical market power,” Elliott’s application claims that the hedge fund is “not involved in the day-to-day operations of Peabody.”
Notably, two of Elliott’s executives currently sit on the board of Peabody.
