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HSBC Utilities Day

November 27, 2008

Manoel Zaroni Torres - CEO

Tractebel’s Hydro Allocation Process

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At CCEE the “resources” of a generation co. are compared to its sales on a monthly basis.

“Resources” stand for:

Purchases from third parties

Thermal generation

Hydro energy allocated

Difference between “resources” and sales is settled at Spot Price (PLD).

Tractebel 's energy availability is almost fully contracted up to 2010.

Tractebel is entitled to fuel reimbursement by CDE when coal-fired plants are dispatched due to merit order or inflexibility.

Background

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Thermal Generation Exposure to Spot Prices

2008

Assured Energy (Port. MME 303)

PLD Exposure~ 375 avgMW

Inflexibility (CDE)~ 375 avgMW

t

Note: figures referred to CCEE’s settlement point.

MaximumDispatch

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~ 375 avgMW

~ 375 avgMW

Dispatch due to inflexibility (based on the purchase of

200,000 tons of coal per month)

Thermal Substitution Energy (Merit)

Thermal Assured

Energy

Settled by PLD (expenses)

TBLE is entitled to coal reimbursement (by CDE)

2008

Maximum Dispatc

h~ 280 avgMWSettled by PLD (revenue)

Thermal Dispatch (Merit)

Inflexibility

t

1

2

BRL/MWh

Permanence

PLD Curve

Thermal SubstitutionCost

1 - Minimal Exposure Cost2 - Maximum Exposure Cost

Thermal Generation Exposure to Spot Prices

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Year

“Seasonalized” HydroAssured Energy

Maximum Dispatch

Real Dispatch

Allocated Energy (MRE)

Hydroelectric generation above or belowthe “Seasonalized” Assured Energy is valued by “MRE Tariff” (~ R$ 8/MWh)

Allocated Energy above or below the “Seasonalized” Assured Energy is settled by PLD

Secondary Energy (MRE): settled by PLD (revenue)

GSF < 1 (MRE): settled by PLD (expenses)

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The impact on the results is less significant than the thermal substitution

Hydro Generation Exposure to Spot Prices

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Mechanisms to Mitigate Thermal Plants Exposure

Hydro Assured Energy

Total Sales Contracts

Purchase Contracts

Thermal Inflexibility

PLD Exposure

Merit Thermal Generation

ok

Net Buyer

at CCEE

Net Seller at CCEE

... and so on

m m+1 m+2 m+3

Portfolio x Resources

An appropriate monthly allocation of the hydro resources over the year can mitigate the

exposure arising from the thermal substitution energy to be purchase at spot price

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PLD in a year’s 1st half is likely to be lower than in 2nd half

Spot Price History Data

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Year X1

Hydro Assured Energy

ThermalInflexibility

Thermal AssuredEnergy

Sale Contracts

PLD Expectation

Assured Energy can be allocated monthly over year x1

Decision is taken in Dec. Year x0

(unchangeable afterwards)

t

PurchaseContracts

Monthly Allocation of Hydro Resources

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Year X1

Hydro Assured Energy

Thermal AssuredEnergy

Sale Contracts

Net Buyer at CCEE

Net Seller at CCEE

Thermal Dispatch

PLD Expectation

ThermalInflexibility

t

PurchaseContracts

Monthly Allocation of Hydro Resources

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Regulatory uncertainties

• Risk aversion mechanisms (i.e., Risk Aversion Curve and Target Level)

• Changes in PLD pricing model

• Out-of-merit thermal dispatch

GSF resulting from overall hydro allocation

Unexpected unavailability of power plants

Price/availability of short-term energy purchased from third parties to (i) offset a net buyer position and (ii) leverage future overallocation

Trade off: sales of short-term energy at PLD+Δ% X future overallocation leverage

Decision Traps