Although Citigroup's Brian Chin didn't have a lot of good to say in the near term about RRI Energy (NYSE:RRI), over the long term he does believe the company will perform better, and raised his rating on them from "Hold" to "Buy."
Chin said:
"We project forward capacity prices will move higher because of increasingly restrictive EPA policies for power plants. This will tighten power supply in the Pennsylvania/Jersey/Maryland region, causing capacity prices to rise over the next 2-3 auctions. Catalysts for our thesis: The EPA will finalize its SO2 and Hazardous Air Pollutants rules over the next 12-18 months. RRI Energy is the most levered name to this dynamic, because it has no regulated utility to dilute its earnings.
"We continue to be bearish forward natural gas prices, and RRI remains levered to natural gas prices. The annual capacity auction takes place in May 2011, and even our forecast expects capacity prices to be relatively flattish next year. Our RRI upgrade then, is clearly more of a long term call on our part."
RRI closed Monday at $3.55, gaining $0.03, or 0.85 percent. Citi has a price target of $5.50 on the company.
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