It actually wouldn't be totally shocking to see Apple release a newly designed, budget model iPhone. They're still selling millions of iPhone 4 & 4S models that aren't equipped with the latest cellular tech or Apple's new proprietary Lightning connector.
Eventually it becomes less cost effective to continue using old components than it does to update them with what's currently on the market in large quantities, or to maintain consistency with other products.
If Apple is pursuing emerging markets with this theoretical product, the last thing they'd want to do is get that whole market embedded with the old connector. It makes no sense.
Updating the iPhone 4 design to utilize the Lightning connector also makes little sense. An attractive design could certainly be built using plastics. It would help to reduce costs and pricing as a result. It could also incorporate the 16x9 aspect ratio of the new iPhones, reducing fragmentation of the OS as well.
Will Apple release a $99 no contract iPhone? I don't think so for a minute. But replacing the aging 4th generation design would make sense on a few different levels.