Dynegy Lowers 2002 Guidance, Faces SEC Probe

Regulators are looking into one of the energy company's natural gas deals. The company is cooperating.

Author:: Michael Dunn
Publish date:: Apr 25, 2002 9:28 AM EDT

Dynegy

(DYN)

was down another 18% Friday morning after a series of analyst downgrades rocked the already battered stock.

Bank of America lowered its rating on the company to Market Perform from Buy, JP Morgan Chase dropped its rating to Market Perform from Long-Term Buy, and Salomon Smith Barney lowered its rating to Neutral from Buy, all primarily based on a warning from Moody's Investors Service that it might downgrade Dynegy's debt rating.

Moody's said that, based on "a lack of financial transparency in the company's financial disclosure" and its aggressive business practices, Dynegy's sustainable recurring cash flow must improve in order to keep its investment grade debt rating.

Merrill Lynch, in contrast to the other analysts, reiterated its Strong Buy rating on Dynegy but dropped its price target on the stock to $29 from $40.

The 17% stock price drop comes a day after Dynegy fell 30% on news that it had slashed its full-year guidance and was being investigated by the

Securities and Exchange Commission

for accounting practices involving one of its natural gas deals.

The energy company said it will report first-quarter earnings, excluding charges, in line with previous guidance at $173 million, or 41 cents a share, compared with last year's $137 million, or 41 cents a share. According to Thomson Financial/First Call, analysts had been looking for 40 cents a share.

When calculated according to generally accepted accounting principles, Dynegy expects to post a first-quarter loss of $140 million, or 41 cents a share. Reported results will include noncash charges of $313 million, or 74 cents a share.

For the rest of the year, Dynegy said it has lowered its outlook because of continued weakness in the telecommunications and technology markets. The company now expects full-year earnings of $2 to $2.05 a share, well below the previous guidance of $2.26 and the First Call estimate of $2.23.

Dynegy said the SEC has launched an informal investigation into one of its natural gas deals, and the company is cooperating with the investigation. Dynegy had originally said the deal in question resulted in "significant" tax benefits, but it will now record the deal as "financing activity." The company says this won't affect the 2001 tax benefit.

Shares of Dynegy were recently falling 18.3% to $15.70 after closing at $19.21 Thursday.