Morgan Stanley initiated research coverage of Dynegy Wednesday with an “equal weight” rating and a 12-month stock price target of $15. Dynegy shares, it said, have the potential to ratchet up or down in the short term. “At $9 we see $2 to $3 of downside, with $6 to $7 of upside. If Dynegy survives, as we expect it to, the return to investors should be exceptional, in our view.”

Several “factors still weigh on the company’s outlook and on the stock,” however. “Credit concerns, SEC investigations, shareholder suits and poor U.S. power outlook weigh on the stock. Unquantifiable legal risks trouble us.” In the long term, though, Morgan Stanley said the outlook for the company and the industry was positive.

J.P. Morgan lowered its 2002 and 2003 earnings estimates for Dynegy Wednesday to $1.30 a share from $1.97 for 2002 and to $1.45 from $2.42 for 2003. It did not change its “market outperform” rating on the stock. The analyst removed its price target on Dynegy’s shares because it said 2003’s “estimate is subject to a major revision in light of variable power market outcomes and earnings power changing after a major restructuring later this year.”

Dynegy Corp. told FERC last week that an internal review has found no round-trip natural gas trading activity in the grid that includes California or in Texas between 2000-2001 (see related story). Two previously disclosed sham transactions with CMS Energy Corp., which were revealed last month, were not executed in the West and did not benefit the company volumetrically or financially, it said. Dynegy’s part in the phony trading schemes led to the resignation last month of founder Chuck Watson (see NGI, June 3).

Dynegy said its internal review found no round-trip trades in the time period FERC requested — 2000-2001 — in either Texas or the Western Systems Coordinating Council (WSCC), the interconnected grid that includes California. COO Steve Bergstrom said the FERC filing “underscores that Dynegy has acted responsibly in our business practices — and we are committed to continuing to do so. We will continue to cooperate fully with various agencies regarding our trading activities and consider timely and accurate responses an important part of our efforts to reaffirm our credibility. In the meantime, we are focusing sharply on the business and operating opportunities before us.”

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