Jefferies Comments On NRG Energy; Raises PT To $23

Although rail costs at NRG Energy NRG are mostly locked in through 2015, the current trend of rising rail transportation costs could adversely impact future margins, according to Jefferies. It believes that higher coal transportation costs will erode margins for most merchant coal-fired generators. A recent analysis of rail costs shows that transportation costs are rising for both Eastern and Western Coal. Although PRB 8800 has only increased by approximately $1.00 per ton over the past year, rail costs have continued to rise. Currently rail costs are estimated to be about $0.026 per mile, which excludes a diesel surcharge. This would imply a rail charge of $33.50 per ton for PRB coal to ship from Casper, WY to Houston, TX. As if the higher rail costs were not squeezing the margins for coal-fired operators, increased diesel prices will also inflict some margin compression. Jefferies estimates that 2010 residential margins were $40/MWh. Additionally it believes 2010 commercial and industrial margins were in the $11/MWh range. On a long-term basis Jefferies' forecast assumes retail margins for residential customers declines to $25/MWh and C&I margins to $7/MWh. Jefferies has a Hold rating and $23 PT and on NRG NRG closed Tuesday at $21.34