Shares of wholesale power company NRG Energy Inc (NYSE:NRG) surged as much as 22.6% on Wednesday after it disclosed another plan to transform its business. At 11:45 a.m. EDT, shares were holding at a gain of 17.8% on the day.
Under pressure from activist investors, NRG has agreed to sell most of its renewable energy assets and dramatically lower costs. The plan says NRG will sell $2.5 billion to $4.0 billion of asset sales, mostly in renewables, and divest entirely from NRG Yield (NYSE:NYLD). The proposal is intended to remove $13 billion of debt from the balance sheet, which has a current level of $19.4 billion.
Long-term, the plan is to cut $1.065 billion in costs from the business to try to squeeze as much cash as possible from the remaining utility and fossil-fuel plants. If successful, NRG could be profitable with relatively low debt, but that's no guarantee in an environment where utilities are under pressure from rooftop solar and wholesale power prices are plunging with no sign of improvement.
The real story here is that NRG is trying to sell renewable assets it thinks the market isn't valuing highly enough, in an effort to improve its balance sheet. The utility and power producer that will be left will then be squeezed for as much cash as possible, but probably won't invest in growth the way NRG would have in the past.
That's likely the right move short-term, given NRG's share price, but the long-term future of the company is now more uncertain than ever. Doubling down on fossil fuels, in a world where wind and solar are dominating new electricity generation, isn't a path for growth...and the effort to squeeze value from NRG may doom the company long-term.