UBS Warburg Raises Dynegy's EPS, Rating

Due in part to the company's limited exposure in California and "overdone negative market sentiment" pertaining to the decline in spark spreads and fears of regional capacity overbuild situations, UBS Warburg analyst James Yannello said Dynegy is a company that is on the move, upgrading its rating from 'buy' to 'strong buy' last week.

In conjunction with the rating upgrade, the analyst said UBS Warburg is raising its recurring 200l earnings per share (EPS) estimate for Dynegy to $2.10 from $2. The current Street consensus is $2.05. Yannello said the "increase reflects our expectations that Dynegy's merchant-leveraged generation fleet performed exceptionally well during the recent heat wave while it continued to exploit highly favorable inject now/sell forward arbitrage spreads in the natgas futures market."

The firm also said it is raising its recurring 2002 estimate from $2.50 to $2.60. Yannello said Dynegy's recent share price of $41 is just 4.5% higher than the company's 52-week closing low of $39.25 reached on Jan. 11. "This, despite several increases in earnings guidance, limited exposure to California, narrowing spark spreads, favorable asset purchase announcements and absolutely no connection to widely-covered personnel departures at Enron," Yannello said in a recent UBS Warburg Research Note. "We view this overall decline, especially the recent sympathy with [Enron], as overdone and providing an excellent entry opportunity."

Yannello said he believes Dynegy will rise above all of the overbuild capacity fears, due in part to location. He said that the company's peaker plant focus, along with its "keen obsession with location, location, location" and "overlying wholesale marketing prowess" should allow Dynegy to grow profitably in the power plant market for years.

The analyst also said that the fears regarding recent changes at the Federal Energy Regulatory Commission have weighed on Dynegy's shares. He added that these fears are "overdone." The reality of the situation is that beyond temporary price caps and the pending retroactive calculations, the industry will likely see increased market monitoring and new reporting requirements, he said.

"We believe this important regulatory body will not issue draconian measures and that it remains highly focused on open markets," Yannello said. In his opinion, Dynegy will continue to thrive in the current environment, especially as the scattered power grids become interconnected.

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