Merrill Lynch releases report on five power companies

April 23, 2003 — Merrill Lynch has released an in-depth report containing detailed analysis and investment recommendations on five power companies: AES (AES;C-2-9; $4.41), Calpine (CPN; C-2-9; $4.00), Duke Energy (DUK; C-3-8; $15.30), TECO Energy (TE; C-3-8; $10.82), and TXU Corp (TXU; C-1-7; $18.11).

This report was published by the ML Capital Structure Team (Steve Fleishman, Leo Kelser, David Silverstein, Yaw Debrah and Elizabeth Parrella) titled “Capital Structure Investing in Utilities – Joint Equity, Fixed Income and Convertible Research”.

These five companies were chosen from the numerous power companies under our coverage based on opportunities for investment ideas throughout the capital structure.

· This report is a collaboration between our Equity, Fixed Income and Convertible research groups. On each company, Merrill Lynch presents an extensive liquidity analysis including key rating triggers and covenants; balance sheet and credit ratios; a review of bank lines, debt, preferred and convertible issues including spreads and valuations for more liquid issues; sum-of-the-parts valuations as well as other metrics for the equity; and investment recommendations on equity, convertible, and debt securities.

· The power sector has experienced the full cycle of high hopes and then the tough reality of a deregulating industry. The California Energy crisis and the bankruptcy of the industry’s largest company, Enron, brought about tremendous credit and confidence issues for the sector that are just now showing signs of revival. From the October 9th bottom, stocks are up 24.8% as measured by the S&P Electric Utilities Index. Meanwhile, bonds and credit spreads have tightened dramatically.

· Some of this was a function of general improvements in credit spreads and the stock market since that time. However, the company believes actions taken by companies and the industry have helped. These include reduced capital spending, equity issuances and dividend cuts – all of which have provided better credit support. Strengthening bond markets also have allowed companies to issue new debt and reduce their reliance on bank lines.

More of the legal/regulatory issues associated with California and trading-related issues are on their way to being resolved. In addition, there have been signs of a renewal in the energy trading market, with better credit companies entering the business, new accounting rules and improved disclosures and some revival in volatility driven by higher gas prices.

Most recently, Merrill Lynch has seen a number of successful bank line renewals at terms that were not as onerous as many had thought. Moreover, new investors such as hedge funds have entered the market willing to provide liquidity to companies if the banks are not. While companies have had to secure these loans, the terms and cost have come down from the levels seen last year and early this year.

Investors should assume that Merrill Lynch is seeking or will seek investment banking or other business relationships with the companies in this report.

For information on recent investment banking relationships between Merrill Lynch and the companies covered in this report, which you may consider material, see www.ml.com/research/disclosure.asp.

OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating.

VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A – Low, B – Medium, and C – High.

INVESTMENT RATINGS, indicators of expected total return (price appreciation plus yield) within the 12-month period from the date of the initial rating, are: 1 – Buy (10% or more for Low and Medium Volatility Risk Securities – 20% or more for High Volatility Risk securities); 2 – Neutral (0-10% for Low and Medium Volatility Risk securities – 0-20% for High Volatility Risk securities); 3 – Sell (negative return); and 6 – No Rating.

INCOME RATINGS, indicators of potential cash dividends, are: 7 – same/higher (dividend considered to be secure); 8 – same/lower (dividend not considered to be secure); and 9 – pays no cash dividend.

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