RRI Energy IncRRI

Morningstar Rating

Stock Research and Analysis

by Mark Barnett

As an independent power producer, RRI Energy generates and sells electricity into deregulated power markets across the United States. The cyclical nature of this industry, coupled with the extreme volatility of power prices, makes such a merchant generator a risky proposition during the best of times. Read more

Bulls Say

Disposing of its retail business, which required large amounts of collateral, should ease RRI's capital needs.

Tough economic conditions could hamstring the construction of new power plants. In the long run, this will lead to tighter power markets and higher prices as supply and demand tighten.

RRI's mid-Atlantic coal plants participate in robust and well-developed power markets, allowing more sophisticated strategies and more efficient allocation of resources.

RRI has nearly $1.5 billion in cash on its balance sheet that could be used to pay down debt and to acquire valuable power plants from distressed competitors at fire-sale prices.

The company has rolled out a modest hedging platform, contrary to past practice. Should power prices remain weak or slide further, this should help shield cash flows. Read more

Bears Say

Carbon legislation could significantly lower the value of RRI's coal plants. The winds from Washington have been blowing in the direction of aggressive action.

Merchant power generation is an extremely difficult business. Industry cyclicality and volatile power prices can bury even the sharpest management team.

RRI sold a significant portion of its business in the worst possible climate, impairing a significant amount of shareholder capital.

RRI contracted for most of its 2009 coal supply at unusually high prices in 2008, making it unlikely that its coal plants will generate significant margin in 2009.

The decision to put on hedges in a very weak pricing environment hobbles some of RRI's upside should power prices recover. Read more

Strategy

RRI has completed a near-total restructuring of its operations after exiting the retail business. RRI plans to remain focused on improving operating efficiency across its generation fleet, and it is interested in eventually owning assets in Texas and New England. Read more

Management

We think RRI earns decent marks for stewardship, though 2008 proved that good stewardship practices only go so far. Former CFO Mark Jacobs has been CEO since May 2007. Jacobs was formerly a managing director at Goldman Sachs GS. His predecessor, Joel Staff, stepped down this year as RRI's chairman of the board following the sale of the retail business. Read more

Profile

RRI is an energy holding company whose subsidiaries generate power in nonregulated markets. The company operates more than 14,000 megawatts of generating capacity and sells power into deregulated energy markets across the country. Read more

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