Stock Traders Press

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Update: June 11, 2003


Dynegy, INC.

We continue to view Dynegy Inc. as an attractive turnaround situation.

The recent decline in the price of the shares of Dynegy Inc. can be traced to the following issues:

- A shareholder lawsuit has been initiated against the company because they allege the company did not outline its $850 million loan from Citibank. We are not too concerned about this lawsuit since such suits have become commonplace when a stock drops precipitously. Additionally, the company has said it is not concerned.

- The contemplated sale of the transmission lines in Illinois for about $240 million will be delayed for a short time. Despite this delay, S+P and Moody’s both announced that this short delay would not affect the company’s credit rating. It appears the market reaction to this news is more emotional rather than rational.

- The preferred stock ($1.5 billion) that is owned by Chevron Texaco recently caused concern that Dynegy may issue a significant amount of common stock. Under terms of the preferred stock, Dynegy can make the dividend payment with its common sock. While this could happen, the total amount of stock would approximate 20 million shares or about 5% of its outstanding stock. This potential has resulted in some arbitrageurs to sell short stock in view of potential dilution; however, keep in mind they will also have repurchased stock to cover their short position. We believe this event, if it occurs, will be short lived. Additionally, it should be noted that there are discussions with Chevron to sell some natural gas assets to them in satisfaction of the preferred stock.

While we recognize the above issues have had a near-term impact on the stock, the continuing improvement in the operations of Dynegy should not be overlooked or dismissed.

  • During the first quarter, debt was reduced by $490 million, which was quiet impressive.
  • As a result of these improved operating results and the fruits of the company’s restructuring program, Dynergy’s management has increased its earnings outlook for the remainder of 2003.
  • From a financial viewpoint the company has over $1.8 billion in liquidity and significant cash flow (over $1.6 billion annually) to continue its debt reduction program. Currently, Dynergy has a book value of $8.94 per share.

    We have established a target price of $8-$9 per share.

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