Merril Lynch LATAM UTILITIES: Cemig and Chilean Regualtory Reform ,
 FYI
---------------------- Forwarded by Brent Hendry/ENRON_DEVELOPMENT on 
28/02/2000 08:14 AM ---------------------------


Alexandre Bueno
25/02/2000 07:11 PM
To: BCC
cc:  (bcc: Brent Hendry/ENRON_DEVELOPMENT)
Subject: Merril Lynch LATAM UTILITIES: Cemig and Chilean Regualtory Reform 
02/2000




Investment Highlights:

* A swift victory in AES/Southern's new federal appeal would be a
strong short-term catalyst. Although the STJ should be more politically
neutral than the MG courts, at this stage a favorable outcome is still far
from assured.
* Even if the partners are reinstated under an injunction, the
original lawsuit is still expected to run for several years; ongoing
conflict with the State will likely weigh on Cemig's fundamental performance
and valuation.
* Cemig's stock is down by 10% since we initiated coverage on January
13 and, at 5.0x 2001E cash flow, downside risk is now more limited.
Considering the ongoing risks, however, we still see more fundamental upside
in Copel (ELP; D-1-1-7; US$8 1/16).
Fundamental Highlights:
* AES/Southern filed a new injunction with the STJ, a federal court in
Brasilia. This seems designed to fast-forward the dispute into a more
neutral political arena.
* A previous direct appeal to the STJ was rejected pending the state
ruling. While a similar rejection is possible this time, the STJ could issue
its first ruling as early as this week.


http://ei-sp-data01/biblioteca/merrill/cemig_02_2000_I.pdf






Investment Highlights:

* Following the rejection of their second federal appeal today,
AES/Southern must now wait for the state court (TJMG) to issue its final
verdict before taking further action.
* Although a final state court opinion is due imminently, the federal
court's latest ruling opens the risk that Minas Gerais will continue
stalling the process at the state level.
* We still believe that the legal battle will drag on longer than
generally expected. In addition, even if the partners are eventually
reinstated under an injunction, ongoing conflict with the State (the
original lawsuit may run for years) will likely weigh heavily on Cemig's
fundamentals and stock performance.
Fundamental Highlights:
* The STJ, a federal court in Brasilia, today rejected the most recent
protective injunction filed by AES/Southern in their battle with the MG
government for control of Cemig.
* In rejecting AES/Southern's injunction the STJ upheld an action
filed by Minas Gerais on Tuesday. The State argued that there were no
material developments since STJ's rejection of a similar AES/Southern appeal
late last year.


http://ei-sp-data01/biblioteca/merrill/cemig_02_2000_II.pdf




Investment Highlights:

* AES/Southern executives will likely return to Cemig following
yesterday's ruling. Even so, ongoing legal conflict with the State and the
suspended veto rights will likely weigh on fundamentals and stock
performance.
* We expect the stock to remain volatile, but essentially range-bound.
Periods of optimism are as likely to be offset by disappointment with the
protracted ongoing legal process.
* Stories of a possible buyout of AES/Southern have circulated
recently in the news media. We view these as both improbable and not
necessarily positive.
Fundamental Highlights:
* The latest step in AES/Southern's legal battle with the Minas Gerais
government came yesterday with the TJMG (state court) clarifying its
previous divided verdict. The outcome effectively confines AES/Southern to a
minority shareholder position.
* Next steps are contingent on the publication of the official TJMG
ruling which may yet take 30 days or more. An appeal to the STJ (federal
court) may now be allowed, although further rounds at the state level cannot
be ruled out.


http://ei-sp-data01/biblioteca/merrill/cemig_02_2000_III.pdf



Investment Highlights:

* Following two years dominated by drought and corporate activity,
regulatory reform will be a key investment driver for the Chilean electric
utilities during 2000. On January 25, the National Energy Commission (CNE)
published draft legislation which, so far at least, has been met with
studied silence on the part of the companies.
* With a new Government due to take office on March 11, it is very
unlikely that the current draft will be the final one. In addition, the
approval process for any new legislation of this nature is likely to take at
least several months. Substantial revisions are expected, but to the extent
that elements of the draft are eventually incorporated into final
legislation, we would see negative investment consequences for most of the
leading Chilean electricity stocks.
* While aware that the draft is by no means definitive, our intention
in this report is to use the proposals as a framework to discuss key
regulatory areas where changes to existing legislation are anticipated.


http://ei-sp-data01/biblioteca/merrill/chile_02_2000.pdf
Sara Shackleton@ENRON_DEVELOPMENT