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Dynegy Upgraded by Calyon Days After Downgrade

Dynegy Upgraded by Calyon Days After Downgrade

Calyon Securities upgraded its recommendation last Tuesday on Dynegy Inc., less than a week after it downgraded the company. In a research note to clients, analyst Craig Shere said the move to "add" from "neutral" came from the weakness in Dynegy's share price, which plunged last week after the company said it expects to lose money next year.

Dynegy cut its 2004 earnings estimate on Dec. 8 and said losses in 2005 could be as high as $391 million (see NGI, Dec. 13).

The company's shares fell about 10% the day of the announcement, then dropped another 5% Dec. 9 after Shere downgraded the company in a research note to "neutral" from "buy." In the downgrade, Shere cited the lower earnings outlook as well as expected dilution from a stock sale.

However, Shere now believes there will be "less possible dilution" than he had previously expected. Calyon increased its 12-month price target on Dynegy by 20 cents to $5.20 a share and upgraded the stock to "add" from "neutral."

In the note, Shere wrote, "We would view any weakness in the shares as buying opportunities and recommend active participation in any ultimate secondary equity offering."

Although he still expects Dynegy to issue equity in 2005, Shere wrote in a note to clients that "through 2009, our model suggests that DYN will be able to both retire maturing debt and fund incremental environmental capital expenditures through a combination of free cash flow and excess liquidity."

The note also said "a major assumption" is that Dynegy's power-producing margins will deliver "significant free cash flow" before the company's midstream operations reverse their positive trend. If the assumption proves incorrect, "financial distress before the end of the decade is a distinct possibility."

More than $1.2 billion in debt will mature in 2010, and Dynegy may have to spend an increased amount on environmental compliance, said Shere. "To avoid the risk of longer-term financial distress, we believe the company's proposed equity issuance makes sense." In the near term, he added, the leading risk to Dynegy's stock is the sell-off "that's often seen ahead of an offering."

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