Electric Utilities - Fine Tuning 2009.05

8/6/2019 Electric Utilities - Fine Tuning 2009.05

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Electric Utilities

Bradesco S.A. Corretorade Ttulos e Valores Mobilirios (Bradesco Corretora) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Bradesco Corretoraand its affiliates may have a conflict of interest that could affect the objectiv ity of this report. Investors should consider this report as only a single factor in making their investment decision.

For full disclaimer and definitions, please refer to the end of this report.

Bradesco Corretora Av. Paulista, 1450 7 andar So Paulo, Brazil 5511 3556 3001

Equity Research - BrazilThursday, May 28, 2009

Research Analyst:

Marcelo [email protected] 11 2178 5323

UpdateFine Tuning 2009

Despite a harsh economic environment, discos resilient salesto residential and commercial customers should continue tocushion the downturn. Gencos should benefit from an upwardtrend in long-term prices and low impact on earnings due totake-or-pay contracts. Discos should have mixed results in 2009 asa result of a deteriorated economic environment. Those having lowoperating leverage on industrial consumption should post the bestresults in a peer comparison. Low leverage, falling interest rates andnegligible exposure to FX should add to bottom lines. Gencos arealmost fully contracted for 2009-2011, providing a fantastic

opportunity to play ramping-up energy prices in the long term. Wesee diminished risks of oversupply down the road, and pricedynamics point to long-term energy prices stabilizing only around2013. Juicy dividend yields are one of the main pillars, with low risksahead. Above all, utilities results should prove the gentle impact onearnings from adversities the Brazilian economy faces.

Discos. Light (LIGT3; Outperform), having implemented asuccessful turnaround, features a resilient sales mix and negligibleexposure to the USD, and should deliver steady results goingforward. Light has the smallest exposure to industrial consumptionin our coverage. Celesc (CLSC6; Underperform) should continue toface challenges as a result of its heavy cost structure and above-

average exposure to industrial consumption.

Gencos. Tractebel (TBLE3; Outperform) has designed a suitablestrategy to protect short-term cash flows and take advantage ofsupply bottlenecks expected for 2011-2012. Cesp (CESP6;Outperform) should be driven by a likely solution for concessionrenewal surfacing in 2H09.

Holding cos. Copel (CPLE6; Outperform), thanks to its long-termEBITDA growth already secured by forward generation sales, is thevaluation play for 2H09. Energias do Brasil (ENBR3; Outperform) isa nice bet for growth coupled with a huge medium-term dividendcomponent, although impacted in the short term by slowing

industrial consumption. CPFL (CPFE3; Market Perform) shouldcontinue delivering the industrys top returns and dividends. Cemig(CMIG4; Market Perform) should be leveraged by positive resultsand sentiment on the generation segment, but continue to facechallenges in distribution due to above-average exposure toindustrial consumption and concerns over its M&A spree.

2009 2010 2009 2010

CELESC CLSC6 Underperform 32.90 38.00 15.5% 8.9 5.4 3.9 2.6

ENERGIAS DO BRASIL ENBR3 Out pe rf orm 27.40 40.00 46.0% 9.3 7.8 4.7 4.2

CPFL ENERGIA CPFE3 Market Perform 31.80 42.20 32.7% 9.3 9.0 6.6 6.4

CEMIG CMIG4 Market Perform 26.05 33.50 28.6% 9.5 9.0 6.4 5.4

COPEL CPLE6 Outperform 27.40 47.80 74.5% 7.6 7.5 4.1 3.9

CESP CESP6 Outperform 17.21 30.80 79.0% 10.8 8.4 5.9 5.5

TRACTEBEL TBLE3 Outperform 18.50 26.50 43.2% 9.9 8.3 6.0 5.3

LIGHT LIGT3 Outperform 24.65 34.20 38.7% 7.3 6.3 5.5 5.0

Target UpsideP/E EV/EBITDA

Company Ticker Rating Price


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Equity Research Brazil: Thursday, May 28, 2009

Contents Page

New target prices and ratings 3

Light (LIGT3) 8

Copel (CPLE6) 11

Cesp (CESP6) 15

Energias do Brasil (ENBR3) 17

Tractebel (TBLE3) 21

CPFL (CPFE3) 24

Cemig (CMIG4) 26

Celesc (CLSC6) 31


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New target prices and ratings. We incorporated into our estimates 1Q09 results,

adjusted volume growth for discos, long-term energy prices, and new inputs from our

economic research team for macro indicators (inflation, FX, interest rates), generally

resulting in a mild downward revision of YE09 target prices with few notable

exceptions.

We have attributed Outperform ratings for Light (LIGT3, TP R$34.20 YE09, 39%

upside), Copel (CPLE6, TP R$47.80 YE09, 75% upside; ELP, TP US$20.00 YE09,

46% upside), Tractebel (TBLE3; TP R$26.50 YE09; 43% upside), Cesp (CESP6; TP

R$30.80 YE09; 79% upside) and Energias do Brasil (ENBR3; TP R$40.00 YE09;

46% upside). For CPFL (CPFE3, TP R$42.20 YE09, 33% upside; CPL, TP US$52.70

YE09, 10% upside) and Cemig (CMIG4, TP R$33.50 YE09, 29% upside; CIG, TP

US$14.00, 7.4% upside) we have attributed a Market Perform rating. Our rating for

Celesc (CLSC6; TP R$38.00 YE09; 16% upside) remains Underperform.

Changes to main valuation assumptions. We assume: (i) long-term sovereign riskof 300 bps; (ii) equity premium of 600bps; (iii) liquidity risk premium of 100bps for

utilities; (iv) long-term regulatory risk of 147bps to reflect differences in Brazils

regulatory framework compared to other countries, thus adjusting the cost of equity

for local utilities operating under incentive and benchmark regulation; (v) long-term

regulatory WACC for discos of 8.81% (as opposed to the current 9.95%); (vi)

marginal cost of debt in USD of 10% for privately-controlled companies and 12% for

state-owned companies. On average, our changes resulted in WACC ranging from

12.9% to 15.4% in nominal BRL, on average 200bps lower than our previous mean.

Changes to macroeconomic assumptions. Data provided by our macroeconomic

research team: (i) GDP growth of -2.0% in 2009, from a previous forecast of +2.2%,and (ii) FX rate of R$2.40/US$ for YE09 and R$2.50/US$ for YE10 (R$2.10/US$ and

R$2.10/US$, respectively, in the previous forecasts).

Figure 1 Main Macro Assumptions

Previous New Previous New

2009E 2.10 2.40 2.2% -2.0%

2010E 2.10 2.50 3.7% 3.0%

FX Rate GDP Growth

Source: Bradesco Research

Investment thesis: What is ahead for utilities in 2009? In spite of current

economic conditions, the fundamentals for Brazilian utilities remain solid and

practically unchanged since our main October 08 report in which we discussed the

2009 outlook. Utilities stand as the most reliable source of cash, revenues, dividends

and returns in an environment of depressed economic activity. Despite the harsh

environment and the uncertainties surrounding economic recovery, we maintain a

positive view on utilities due to attractive valuations, high yields and resilience of

earnings to economic weakening.

The rationale for Brazilian utilities is based on: (i) sale of an item of first necessity,

with superior resilience to GDP fluctuations; (ii) very low or no debt exposure to the

USD, as a result of business revenues being linked to local fundamentals and a

consistent process of reducing USD-denominated debt since the 2001-2002

rationing; (iii) domestically-driven cashflows; (iv) conservative, low and suboptimal


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leverage to deal with capital spending and dividends, which should result in no need

for major cuts in payouts in coming years; (v) long-term debt profile, with strong cash

generation and short-term cash holdings to match short-term debt service; (vi)

access to earmarked funds at the Brazilian Development Bank (BNDES) for its capex

commitments; (vii) high dividend yields and regular payouts due to stability in cash

flows; (viii) predictable regulatory framework that has been constantly improved to

provide for a stable business environment and capital attraction.

(i) Consolidation. Since the crisis broke out in full force in 2H08, we have seen M&A

activity regain momentum in the last months. Cemigs acquisition of Terna is the most

compelling deal (R$3.3bn in total equity value). With the re-opening of debt capital

markets, consolidators took a deep breath and went out on the street to find

opportunities. However, most of the acquisitions are opportunistic and do not

necessarily represent a consistent trend in the industry. We still believe the financial

situation of most of the utilities listed on Bovespa is strong, with little willingness to

dispose of assets at a time of depressed valuation. Except for Cemig, whichcontinues to move ahead with acquisitions, other players appear to have put aside

deals and wait for better days.

In spite of the end of the tariff review process, we believe consolidation among

distribution should recede for a while due to low visibility on an economic recovery

process that could justify acquisitions. On the flip side, we understand another

rationale applies for gencos. We expect the announcement of long-term energy sales

in the free market to confirm our call of rising and resilient long-term prices, reflecting

a tight but adjusted balance of supply and demand going forward.

(ii) Expansion. We foresee no major concerns for greenfield projects in generationand ongoing capex for discos. The federal government continues to give ample

support to the sector through BNDES. The only positive issue that should surface in

2009 is the governments efforts to auction more hydropower plants, in order to curb

the long-term trend for prices. We expect the HPP Belo Monte (11 GW) auction to

take place in November as scheduled, representing another landmark for capacity

expansion. Given the size of this venture, players should gather in consortiums to bid

on the asset. From the governments standpoint, risk lies in low competition given the

capex commitment and environmental constraints that push players towards an

association (Cemig and CPFL have declared their interest in taking part in the

auction, but only in joint ventures).

(iii) Prices. Gencos have a very tranquil situation for 2009, as most of its assured

energy has already been sold in the regulated market and in take-or-pay contracts in

the free market. The exercise of flexibility provisions in PPAs by free customers seen

in 4Q08 and 1Q09 has given gencos an opportunity to resell this energy at higher

prices in the regulated market (R$145/MWh on average), thus implying an

improvement in earnings.

We see pressure on prices in the free market in 2010-2012 on the back of low

availability of assured energy to be sold and few hydropower plants starting up

generation. The riskiest period is 2011-2012, as prices approach and even overshoot

the long-term trend seen recently in contracts in the free market. 2012 prices are

being negotiated at around R$150/MWh, as opposed to R$140/MWh for delivery in


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2013 and thereafter. With more hydropower plants starting up from 2013 onwards,

long-term prices should recede, although not substantially, as Brazil should

marginally continue to increase its thermal capacity over time. The country has not

been constructing large-reservoir hydropower plants since last decade (3.1-GW HPP

Xingo and 1.3-GW HPP Serra da Mesa were the latest examples, having started up

in the late 90s), opting for run-of-river plants. As consequence, management of

reservoirs have become more volatile, resulting in the need to marginally continue to

build thermals and thus pressuring long-term energy prices, preventing them from

being substantially curbed.

Figure 2 Energy Storage Capacity in Reservoirs

0

50

100

150

200

250

300

1950 1960 1970 1980 1990 2000

GW/Month

Source: Economia e Energia, ONS

As short-term catalysts, we expect the announcement of long-term supply deals in

the free market to confirm the upward trend in energy prices, fueled by a structurally

tight balance of supply and demand, addition of thermal plants, environmental

constraints and transmission costs. Current long-term prices in the free market are

reflecting the tight balance of supply and demand going forward and the pressure

from escalating prices in the regulated market.

Figure 3 Forward Prices

8895 98

101

116

126 127 128 130 130

115

133138

150

140120

130

150

170

140 140 140 140 140 140

70

90

110

130

150

170

190

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Regulated Market New Free Market Previous Free Market

Source: Bradesco Research


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(iv) Concession renewal. In generation, the lack of a clear definition on the model

used to renew concessions in Brazil is also behind the current price trend. Gencos

with concessions expiring in the next 6 to 7 years cannot sign long-term contracts,

adding further pressure to long-term prices in the free market.

The current regulatory framework established that concessions have to be re-

auctioned upon expiry of contracts. In this scenario, the government could require

payment for the concessions and/or lower prices. Retiring concessionaires have the

legal right to receive the value of its non-depreciated assets, although the auction

format could establish that the proceeds be used to reimburse the retiring

concessionaire as the federal government clearly would not bear the load of paying

back billions simply to have the concessions back. Therefore, we believe the current

regulatory framework and the need to reimburse retiring concessionaires prevent any

dramatic change in prices, as a consequence of the residual value of concessions to

be repaid.

Consequently, our bet is that the government should choose the price cap / fixed

percentage charge model for concession renewal. The price cap model would imply

a maximum fixed price for energy to be sold by hydroplants whose concession would

be renewed. We understand that the price cap model should offer current

concessionaires an opportunity to renew concessions under lower prices. In our view,

the cap price should disregard the contribution of return of capital (depreciation), as

most of those hydropower plants estimated useful lives (on the books) should have

substantially lapsed. In other words, concessionaires should return to prices the

benefit of holding depreciated plants (although not fully depreciated). On average,

our calculations based on the current effects of depreciation yielded a decrease of

20%-25% in prices for greenfield assets. As long-term energy prices will bemarginally and gradually reflecting the energy price delivered by newly-built assets,

we assumed renewed-concession plants should offer a 20%-25% discount on the

marginal-cost-of-expansion price target (i.e. a discount on long-term energy prices,

currently standing at ~R$140/MWh). This model would provide for preservation of

cash flows in the sector and ensure financial strength of gencos to compete for new

greenfield assets in auctions, while maintaining energy at market prices and

transferring the benefits of diminished depreciation to final consumers. We opted for

this top-down approach in our financial models, pricing in energy sold by plants with

concession renewed at R$105/MWh (Cesp is the most material case, with 67% of its

capacity contingent upon renewal).

We believe a solution for concession renewal has to surface soon, most likely in

2H09. We understand there is an economic reason behind it: the pool mechanism for

discos to buy energy. Discos have to buy in 2010 energy to be delivered in 2013

onwards (A-3 auction) and 2015 onwards (A-5 auction). The largest chunks of energy

sold in existing energy auctions were in 8-year contracts back in 2004/2005 (~17

GWa) and cannot be resold unless concessions maturing in 2015 are renewed. In

that sense, discos could be forced to buy expensive energy in 2010 (A-3 auctions are

meant for thermal plants due to the construction schedule) simply because they

should have no visibility on concession renewal of gencos. Since penalties apply

heavily to discos that are caught short on supply, their decision would likely be to

disregard any concession renewal and buy energy in the A-3 and A-5 auctions.


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Although this the legal path to follow, this potential decision by discos lacks grounds

from an economic standpoint. There are surely alternatives for this environment, as

the government can waive the requirement to buy energy in the A-3 and A-5 auctions

until a solution for renewal comes out. However, if the government targets lower

prices and no uncertainty in the sector, it should encourage a solution for concession

renewal in the short term.


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Light (LIGT3)

Outperform. We are upgrading LIGT3 to Outperform and raising our YE09 TP to

R$34.20 for LIGT3 (which includes an estimated R$1.69 09 DPS). Total return

expected for LIGT3 is 39%, composed of 32% in capital appreciation and 7% individends (2009).

Main fundamentals. Light is a successful turnaround story, with impressive short-

term results. Since management took the helm in mid-2006, Light has been

implementing cost cuts, cracking down on delinquency, reducing leverage, and had a

realistic tariff review in late 2008. Growth is the next step, with capacity addition in its

generation business.

In our view Light features strong defensive fundamentals that outshine in the current

scenario of falling industrial consumption. The distribution business has one of the

smallest exposures to industrial consumption among listed stocks (8.7% in the

captive market; 18.3% in total electricity distributed). Its tariffs do price in the potential

loss of two large industrial customers migrating their connection points to the national

grid, being thus neutral for Light for valuation purposes.

Improving the distribution business profitability should be the main goal in this tariff

review cycle. Aneel priced in a higher level of energy losses in Lights tariffs, allowing

the company to get better cost coverage. In that sense, initiatives to reduce losses

add value in this review cycle. The company plans to commit R$850mn in capex

through 2013 to push the loss rate to at least 19.15% from the current 20.79%,

leading to an additional estimated R$95mn in EBITDA per year. We conservatively

assumed no additional gain from loss reduction in our estimates, leaving this as an

upside to our target price.

We see no risks for 2009 dividends, with upside in the company increasing its payout

going forward (Light currently distributes 50% of its earnings as dividends).

Regarding debt, Light is one of the largest beneficiaries of falling interest rates, as

the company carries the largest portion of debt linked to the CDI (71%) among

utilities in our coverage. Leverage stands slightly above peers (1.8x Net-Debt-to-

EBITDA, assuming pension fund obligations) and provides room for regular and

steady dividends.

As for corporate ownership, we expect the BNDES and EDF share blocks, worth

R$2bn at market prices, to be put up for sale as soon as capital market conditions

improve. This may be the main source of overhang on the stock, although the strong

fundamentals that back our rating should prevail, in our view.

Valuation and stock performance. Our valuation for Light entails a 13.6% WACC

(vs. 15.1% previously), leading to implicit EV/EBITDA multiples of 6.9x for 2009 and

6.3x for 2010. Light is trading at 7.3x P/E 09 and 6.3x P/E 10. In terms of

EV/EBITDA, LIGT3 stands at 5.5x for 09 and 5.0x for 10, vs. 5.0x 09 and 4.9x 10 for

its main peer Eletropaulo. The stock underperformed the Ibovespa YTD (24.2% vs.


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41.3%) and its peers when compared to the IEE (Bovespas Electricity Energy Index),

24.2% vs. 28.3% for the IEE.

Figure 4: Lights Performance YTD vs. Ibovespa vs. IEE

90.00

100.00

110.00

120.00

130.00

140.00

Dec-08 Jan-09 Mar-09 Apr-09 May-09

IBOV Equity LIGT3 Equity IBOVIEE Index

Source: Bloomberg and Bradesco Corretora

Figure 5:New Estimates for LightPrevious

2009E 2010E 2011E 2009E 2010E 2011E

Net Revenues 5,495 5,848 6,054 5,647 5,956 6,277

EBITDA 1,373 1,499 1,561 1,520 1,483 1,636

EBITDA Margin 25% 26% 26% 27% 25% 26%

Net Earnings 689 795 819 768 747 840

Shareholders' equity 3,158 3,556 3,965 3,158 3,532 3,952

DPS 1.7 1.9 2.0 1.9 1.8 2.1

Dividend Yield* 6.9% 7.9% 8.1% 7.6% 7.4% 8.4%

Target Price 34.20 33.00

Recommendation Outperform Market Perform

* May 28th closing price

New

Source: Bradesco Corretora estimates


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Income Statement Company Description

R$ million 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Net Revenues 5,495 5,848 6,054 6,522 7,238 7,343 7,848 8,370 8,940 9,403

Cost of goods/services sold (3,824) (4,053) (4,184) (4,453) (4,716) (4,954) (5,224) (5,509) (5,810) (6,119)

Gross Profit 1,671 1,795 1,870 2,069 2,522 2,388 2,623 2,861 3,130 3,284

EBIT 1,065 1,173 1,205 1,360 1,769 1,600 1,801 2,003 2,236 2,352

EBITDA 1,373 1,499 1,561 1,747 2,186 2,040 2,262 2,486 2,741 2,882

Financial income/expense (105) (91) (88) (67) (19) 53 120 190 257 332

Equity Income 0 0 0 0 0 0 0 0 0 0

Operating income 960 1,082 1,117 1,293 1,750 1,653 1,921 2,194 2,493 2,684

Non-operating result 5 0 0 0 0 0 0 0 0 0

Pretax income 966 1,082 1,117 1,293 1,750 1,653 1,921 2,194 2,493 2,684 Gross Margin %

Income tax (248) (257) (266) (308) (416) (393) (457) (522) (593) (792)Interest on own capital 0 0 0 0 0 0 0 0 0 0

Minority Interest (29) (30) (32) (34) (36) (37) (39) (42) (44) (46)Net earnings 689 795 819 951 1,298 1,222 1,424 1,630 1,856 1,846

Operating Margins2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Gross Margin 30% 31% 31% 32% 35% 33% 33% 34% 35% 35%

EBIT Margin 19% 20% 20% 21% 24% 22% 23% 24% 25% 25%

EBITDA Margin 25% 26% 26% 27% 30% 28% 29% 30% 31% 31%

Net margin 13% 14% 14% 15% 18% 17% 18% 19% 21% 20%

Balance SheetR$ million 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Current + long term assets 4,823 4,935 5,056 4,851 5,003 5,015 5,665 6,414 7,280 8,004 EBITDA Margin %

Cash + short term investment 533 596 651 347 421 372 914 1,549 2,291 3,017

Net receivables 2,107 2,175 2,261 2,378 2,475 2,555 2,681 2,814 2,957 2,973

Inventories 18 19 20 21 22 23 25 26 27 29

Other 2,165 2,145 2,125 2,105 2,085 2,065 2,045 2,025 2,005 1,985Permanent assets 4,505 4,838 5,266 5,646 5,874 5,949 6,028 6,114 6,206 6,303

Total assets 9,328 9,774 10,322 10,497 10,877 10,963 11,693 12,528 13,486 14,307

Check

Current + long term liabilities 6,170 6,218 6,357 6,056 5,788 5,262 5,280 5,300 5,330 5,228

Suppliers 491 518 550 582 613 644 676 710 745 782

Accounts payable 1,661 1,663 1,661 1,657 1,648 1,632 1,614 1,593 1,566 1,536

Dividends due 345 397 410 476 649 611 712 815 928 923

Total debt ST + LT 2,095 2,055 2,143 1,737 1,268 760 649 541 434 330

Other 1,577 1,584 1,593 1,604 1,609 1,615 1,628 1,641 1,655 1,657

Deferred Income 0 0 0 0 0 0 0 0 0 0

Shareholder's equity 3,158 3,556 3,965 4,441 5,090 5,701 6,413 7,228 8,156 9,079

Total liabilities 9,328 9,774 10,322 10,497 10,877 10,963 11,693 12,528 13,486 14,307

Cash flowR$ million 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 EBITDA R$ million

EBIT 1,065 1,173 1,205 1,360 1,769 1,600 1,801 2,003 2,236 2,352

Depreciation 307 326 356 387 417 440 461 483 506 530EBITDA 1,373 1,499 1,561 1,747 2,186 2,040 2,262 2,486 2,741 2,882

Changes in working capital (38) 23 34 62 49 32 68 74 81 (35)

Income tax 264 288 296 330 423 375 416 457 506 679

Capex 441 660 784 767 645 514 541 569 598 627

Minority Interest 29 30 32 34 36 37 39 42 44 46Free cash flow to the firm 678 498 416 554 1,034 1,082 1,197 1,345 1,513 1,565

Check

Key Indicators2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

EPS 3.4 3.9 4.0 4.7 6.4 6.0 7.0 8.0 9.1 9.1

P/E 7.3 6.3 6.1 5.3 3.9 4.1 3.5 3.1 2.7 2.7

Implied P/E 10.1 8.8 8.5 7.3 5.4 5.7 4.9 4.3 3.8 3.8

P/BV 1.6 1.4 1.3 1.1 1.0 0.9 0.8 0.7 0.6 0.6

P/Free cash flow 7.4 10.1 12.1 9.1 4.9 4.6 4.2 3.7 3.3 3.2

Free cash flow yield 13% 10% 8% 11% 21% 22% 24% 27% 30% 31%

Net earnings - CAGR (3 years) n.m. -10% -6% 11% 18% 14% 14% 8% 15% 9% Net Income R$ million

PEG n.m. -0.7 -1.1 0.5 0.2 0.3 0.2 0.4 0.2 0.3

EV/EBITDA 5.5 5.0 4.8 4.3 3.4 3.7 3.3 3.0 2.7 2.6

Implied EV/EBITDA 6.9 6.3 6.0 5.4 4.3 4.6 4.2 3.8 3.4 3.3

EBITDA - CAGR (3 years) 23% 11% 1% 8% 13% 9% 9% 4% 10% 8%

EVG 0.2 0.5 6.2 0.5 0.3 0.4 0.4 0.7 0.3 0.3

ROE (final) 22% 22% 21% 21% 25% 21% 22% 23% 23% 20%

Dividends 345 397 410 476 649 611 712 815 928 923

Dividend per share (BRL) 1.7 1.9 2.0 2.3 3.2 3.0 3.5 4.0 4.5 4.5

Payout 50% 50% 50% 50% 50% 50% 50% 50% 50% 50%

Dividend yield 7% 8% 8% 9% 13% 12% 14% 16% 18% 18%

Net debt (BRL million) 1,562 1,459 1,492 1,390 847 388 (265) (1,008) (1,856) (2,688)

Adj. Net debt (BRL million) - Brasli 2,472 2,359 2,377 2,256 1,690 1,202 516 (263) (1,152) (2,029)

Net debt/Shareholder's equity 0.5 0.4 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3

Net debt/EBITDA 1.8 1.6 1.5 1.3 0.8 0.6 0.2 -0.1 -0.4 -0.7

Financial expenses/EBITDA -0.1 -0.1 -0.1 0.0 0.0 0.0 0.1 0.1 0.1 0.1

0%

5%

10%

15%

20%

25%

30%

35%

40%

2009

2010

2011

2012

2013

2014

0%

5%

10%

15%

20%

25%

30%

35%

200

9

201

0

201

1

201

2

201

3

201

4

0

200

400

600

800

1,000

1,200

1,400

200

9

201

0

201

1

201

2

201

3

201

4

0

500

1,000

1,500

2,000

2,500

200

9

201

0

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1

201

2

201

3

201

4

Light is the fourth-largest electric holding company in Brazil,

operating in the distribution (Light Sesa), generation (Light

Energia) and trading and services (Light Esco) businesses.

Light Sesa is the electricity distribution concession holder

for the Rio de Janeiro metropolitan area, serving 3.9mn

customers which consumed 23,721GWh year-to-date. Light

Energia generates energy at three different sites, holding

assets comprising 855 MW (537 MWa).


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Copel (CPLE6)

Outperform.We are maintaining ourOutperform rating for Copel and cutting our

YE09 TP to R$47.80 for CPLE6 (which includes an estimated R$0.95 09 DPS) and

US$20.00 for ELP (46% upside). Total return expected for CPLE6 is 74.5%,

composed of 71.2% in capital appreciation and 3.3% in dividends (2009).

Main fundamentals. Copels investment thesis is intrinsically based on generation,

on the back of forward energy price dynamics and re-contracting of its assured

energy in long-term contracts (from 2013 onwards). Copel has the most discounted

NAV valuation among Brazilian utilities, despite the natural repricing of its generation

contracts, which more than counterbalance the impacts of a higher WACC resulting

from its low leverage and restrictive dividend distribution policy. In a peer

comparison, assuming distribution and transmission assets are valued at an average

of multiples (1.7x EV/RAB for pure discos and 4.8x EV/AAR for pure transcos), its

generation assets are implicitly traded at a 66% discount.

Figure 6:Copel NAVGeneration

TBLE CESP GETI Mean CPLE

EV 14,802 11,066 7,666 10,906

Assured Energy (MWa) 3529 3,916 1,275 2,511

EV/Mwa 479 323 686 496

Distribution

ELPL LIGT COCE Mean CPLE

EV 8,367 7,500 2,512 3,238

RAB 4,737 4,701 1,552 1,950

EV/RAB 1.8 1.6 1.6 1.7

Transmission

TRPL CPLE

EV 8,188 679

AAR 1,707 142

EV/AAR 4.8

Total* EV 14,823

Market EV EV 7,648

Implied Discount Generation Assets 66%

*Value does not consider other assets

** Prices as of May 28th Source: Bradesco Corretora estimates

The generation business should give 3-year EBITDA a boost. Copel will have almost

100% of its assured energy to resell in the free market at higher prices (R$135/MWh

vs. current R$81/MWh). The company has been selling forward most of this energy

to be freed up, locking in 65% of the amount available from 2013 onwards. Natural

repricing of generation contracts should progressively change the risk of the

business, as the company should collect 60% of its EBITDA from the generation

segment in the long run.

Growth in greenfield projects (medium-sized and small hydros, co-generation) couldalso add to this view, although the company has to loosen constraints of state laws


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that force it to hold control of new ventures. Our target price assumes no additional

value from this new frontier.

We also expect Copel to maintain its capital discipline, as seen when the company

walked away from the HPP Baixo Iguau auction. However, we understand the high

level of cash could raise concerns about decretive or non-core investments. In spite

of this risk, in our view the depressed valuation offers enough room even for

unpleasant surprises.

Copel renewed the TPP Araucaria tolling agreement with Petrobras for 2009,

securing cost coverage while the company awaits better market conditions to sell the

thermal plants assured energy in long-term regulated market auctions. Our

conservative assumption is that gas-fired TPP Araucaria should deliver power in

regulated market contracts by 2015, as Petrobras should have increased its gas

production in the country from 2011 onwards.

We continue not to see much upside in the distribution and transmission businesses.

In Copels disco, we expect healthy volumes but aligned with Aneels estimates

embedded in the X Factor (3.2% YoY). In transmission, we assume revenues

growing in line with EPE estimates for capacity addition in the grid for 2008-2017,

leading to an average R$200mn per year on the top line (3.2% of consolidated

revenues).

The company almost fully deleveraged in 1Q09 (0.06x Net-Debt-to-EBITDA; cash of

R$1.6bn). Given growth in past years and a restrictive dividend policy, the overall

outlook is negative for cost of capital, which should remain high. In a scenario of

falling interest rates, EPS growth also is held back due to lower financial revenues.

The main catalysts would comprise (i) solutions for the company to re-leverage, such

as extraordinary dividends and/or higher payouts going forward (the company

currently pays out the minimum 25% of its earnings) and/or acquisitions fully financed

through equity, and (ii) higher-than-expected long-term energy prices.

With all the upside on the operating side, mainly in generation, we view Copel as the

top deep value choice for 2009, as we expect corporate governance risks to diminish

over time with the proximity of the 2010 elections.

Valuation and stock performance. Our valuation for Copel entails a 15.4% WACC


6.7x for 2010. Copel trades at 7.6x P/E 09 and 7.5x P/E 10. On an EV/EBITDA basis,

CPLE6 stands at 4.1x for 09 and 3.9x for 10. The stock has underperformed the

Ibovespa YTD (18.0% vs. 41.3%), as well as its peers when compared to the IEE

(Bovespas Electricity Energy Index), 18.0% vs. 28.3% for the IEE.


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Figure 7: Copels Performance YTD vs. Ibovespa vs. IEE

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IBOV Equity CPLE6 Equity IBOVIEE Index


Figure 8: New Estimates for Copel

Previous

2009E 2010E 2011E 2009E 2010E 2011E

Net Revenues 5,727 6,105 6,709 5,501 5,824 6,424

EBITDA 1,868 1,961 2,176 1,682 1,804 2,020

EBITDA Margin 33% 32% 32% 31% 31% 31%

Net Earnings 991 994 1,147 828 858 973


DPS 1.0 1.0 1.1 0.8 0.8 0.9

Dividend Yield* 3.5% 3.5% 4.0% 2.8% 2.9% 3.2%


Recommendation Outperform Outperform


New



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Income Statement Company DescriptionR$ million 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Net Revenues 5,727 6,105 6,709 6,884 8,395 9,417 10,527 10,921 11,595 12,352


Gross Profit 1,868 1,961 2,176 2,052 3,247 3,953 4,555 4,606 4,918 5,290

EBIT 1,452 1,497 1,669 1,509 2,665 3,330 3,889 3,896 4,160 4,484

EBITDA 1,868 1,961 2,176 2,052 3,247 3,953 4,555 4,606 4,918 5,290

Financial income/expense 57 36 98 201 242 338 468 610 705 852

Equity Income 11 0 0 0 0 0 0 0 0 0

Operating income 1,520 1,533 1,767 1,710 2,907 3,668 4,358 4,506 4,866 5,336 Gross Margin %


Pretax income 1,520 1,533 1,767 1,710 2,907 3,668 4,358 4,506 4,866 5,336

Income tax (513) (521) (601) (581) (988) (1,247) (1,481) (1,532) (1,654) (1,814)Interest on own capital 0 0 0 0 0 0 0 0 0 0

Minority Interest (15) (18) (19) (21) (23) (29) (71) (72) (73) (76)

Net earnings 991 994 1,147 1,108 1,895 2,393 2,806 2,902 3,138 3,446


Gross Margin 33% 32% 32% 30% 39% 42% 43% 42% 42% 43%

EBIT Margin 25% 25% 25% 22% 32% 35% 37% 36% 36% 36%

EBITDA Margin 33% 32% 32% 30% 39% 42% 43% 42% 42% 43%

Net margin 17% 16% 17% 16% 23% 25% 27% 27% 27% 28%



Cash + short term investment 1,839 2,062 1,817 2,144 3,127 4,149 5,831 7,578 9,503 11,703

Net receivables 1,550 1,598 1,724 1,698 1,951 2,106 2,287 2,289 2,454 2,589

Inventories 62 66 69 73 77 82 86 90 95 100

Other 2,434 2,434 2,434 2,434 2,434 2,434 2,434 2,434 2,434 2,434

Permanent assets 8,318 9,228 9,577 9,932 10,292 10,654 11,018 11,384 11,752 12,121

Total assets 14,2 04 15 ,388 15 ,6 22 16,2 81 17 ,8 82 19 ,425 21,6 57 2 3,776 2 6,238 28,946


Suppliers 417 446 496 530 565 599 664 704 746 791

Accounts payable 1,222 1,243 1,276 1,292 1,319 1,345 1,380 1,397 1,429 1,462

Dividends due 248 249 287 277 474 598 701 725 785 861

Total debt ST + LT 2,108 2,484 1,684 1,504 1,326 822 673 555 459 364

Other 1,172 1,184 1,238 1,206 1,305 1,371 1,446 1,426 1,497 1,561

Minority Interest 240 240 240 240 240 240 240 240 240 240

Shareholders' equity 8,796 9,542 10,402 11,233 12,654 14,449 16,553 18,729 21,083 23,667

Total liabilities 14,2 04 15 ,388 15 ,6 22 16,2 81 17 ,8 82 19 ,425 21,6 57 2 3,776 2 6,238 28,946

EBITDA R$ million

Cash flowR$ million 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

EBIT 1,452 1,497 1,669 1,509 2,665 3,330 3,889 3,896 4,160 4,484

Depreciation 416 464 507 544 582 623 666 710 757 806

EBITDA 1,868 1,961 2,176 2,052 3,247 3,953 4,555 4,606 4,918 5,290

adj.EBITDA 1,829 1,921 2,134 2,009 3,202 3,906 4,451 4,497 4,804 5,172

Changes in working capital 270 (8) 0 (42) 113 41 22 (31) 34 5

Income tax 493 509 567 513 906 1,132 1,322 1,324 1,414 1,525

Capex 1,313 1,373 856 898 942 986 1,030 1,076 1,125 1,175

Free cash flow to the firm (248) 47 711 640 1,241 1,747 2,076 2,127 2,231 2,468

Key Indicators (248) 47 711 640 1,241 1,747 2,076 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

EPS 3.6 3.6 4.2 4.0 6.9 8.7 10.3 10.6 11.5 12.6

P/E 7.6 7.5 6.5 6.8 4.0 3.1 2.7 2.6 2.4 2.2

Implied P/E 13.2 13.1 11.4 11.8 6.9 5.5 4.7 4.5 4.2 3.8

P/BV 0.9 0.8 0.7 0.7 0.6 0.5 0.5 0.4 0.4 0.3

P/Free cash flow nm nm 10.5 11.7 6.0 4.3 3.6 3.5 3.4 3.0

Free cash flow yield nm nm 9% 9% 17% 23% 28% 28% 30% 33% Net Income R$ million

Net earnings - CAGR (3 years) -7% -3% 2% 4% 24% 28% 36% 15% 9% 7%

PEG -1.0 -2.2 3.2 1.8 0.2 0.1 0.1 0.2 0.3 0.3

EV/EBITDA 4.1 3.9 3.5 3.7 2.4 1.9 1.7 1.7 1.6 1.4


EBITDA - CAGR (3 years) -2% -1% 6% 3% 18% 22% 30% 12% 8% 5%

EVG -2.2 -3.4 0.6 1.2 0.1 0.1 0.1 0.1 0.2 0.3

ROE (final) 11% 10% 11% 10% 15% 17% 17% 15% 15% 15%

Dividends 248 249 287 277 474 598 701 725 785 861


Payout 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%

Dividend yield 3.5% 3.5% 4.0% 3.9% 6.6% 8% 10% 10% 11% 12%

Net debt (BRL million) 150 303 (252) (759) (1,921) (3,446) (5,277) (7,143) (9,163) (11,457)

Net debt/Shareholders' equity 0.02 0.03 -0.02 (0.07) (0.15) (0.24) (0.32) (0.38) (0.43) (0.48)Net debt/EBITDA 0.08 0.15 -0.12 (0.37) (0.59) (0.87) (1.16) (1.55) (1.86) (2.17)

Financial expenses/EBITDA 0.03 0.02 0.04 0.10 0.07 0.09 0.10 0.13 0.14 0.16Net Debt 3t07

Companhia Paranaense de Energia Eltrica - Copel is

a state-owned integrated electricity company that

operates in the distribution, transportation and

generation segments. Copel serves more than 3

million customers in Parana State, has 7,265 km in

transmission lines and 5,170 MW installed capacity.

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Cesp (CESP6)

Outperform. We are maintaining ourOutperform rating for CESP6 and raising our

YE09 TP to R$30.80 (which includes an estimated R$0.40 09 DPS). Total return

expected for CESP6 is 79%, composed of 76.6% in capital appreciation and 2.4% individends (2009).

Main fundamentals. We used a top-down approach to price in concession renewal.

In our view, the model to be presented by the federal government should allow

current concessionaires to renew concession contracts under the restriction of price

caps for energy sold. Our estimates price in the price cap and/or fixed percentage

charge model. In these models, hydroplants undergoing concession renewal should

be charged a fixed percentage of their revenues to contribute to lower tariffs or be

allowed to sell energy under a cap. In both scenarios, the economics for gencos

should be equivalent.

In order to price the cap, our top-down approach assumes the cap price disregarding

the effect of return of capital on long-term energy prices. In other words, we assume

the maximum price at which gencos should sell energy should reflect the fact that

those plants are fully depreciated or have diminished residual value, i.e.

entrepreneurs have already had a substantial portion of their capital returned. In that

sense, we targeted the average contribution of depreciation to the formation of

energy prices. For newly-built plants arising from the latest New Energy auctions,

depreciation amounts to 20%-25% of the marginal cost of expansion in Brazil

(~R$140/MWh). Consequently, our model factors in Cesps Jupi and Ilha Solteira

concessions being renewed, but a price 25% below the current marginal cost of

expansion, or ~R$105/MWh.

In order to analyze the reasonability of this assumption, we looked into the most

recent (i) Existing Energy auctions, and (ii) New Energy auctions. As for (i), our

R$105/MWh assumption stands below the most recent price cap of R$120/MWh for

A-1 (delivery next year) auctions in 2007 and 2008 (both adjusted for inflation) and

the R$145/MWh outcome from the January auction. As for (ii), the average price of

the Madeira plants (70% sold in the regulated market and 30% in the free market)

stands between R$105/MWh and R$110/MWh. Given that our assumption is aligned

with those energy prices and we think the concession renewal solution should also

provide sound cash flows for state-owned companies, we estimated Cesp sellingenergy at R$105/MWh for plants with concessions expiring by 2015 (67% of Cesps

capacity).

We assume no gains from potential privatization after concession renewal. We

understand the State of So Paulo would highly consider selling its controlling stake

in the company (R$3.6bn at our target price) shortly after a solution for concession

renewal, although this potential upside is linked to the terms and conditions of

renewal to be unveiled by the federal government.

Cesp is highly exposed to the USD due to its US$1.0bn long-term debt. Although

most expenses are non-cash through 2011, potential financial losses may slash thebottom line should the BRL depreciate substantially like in 2H08. Despite having the


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highest leverage among utilities (3.6x Net-Debt-to-EBITDA), the debt amortization

schedule is aligned with the current cash flow and leads to no refinancing needs in

our estimates (which prices in mild USD behavior in the foreseeable future).

Valuation and stock performance. Our valuation for Cesp entails a 14.3% WACC


7.6x for 2010. Cesp is trading at 10.8x P/E 09 and 8.4x P/E 10. Looking at

EV/EBITDA, CESP6 stands at 5.9x for 09 and 5.5x for 10. In both cases, Cesp is

trading in line with its peers. The stock has underperformed the Ibovespa YTD

(14.3% vs. 41.3%), as well as its peers when based on the IEE (Bovespas Electricity

Energy Index), up 14.3% vs. 28.3% for the IEE.

Figure 9: Cesps Performance YTD vs. Ibovespa vs. IEE

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IBOV Equity CESP6 Equity IBOVIEE Index


Figure 10: New Estimates for CespPrevious

2009E 2010E 2011E 2009E 2010E 2011E

Net Revenues 2,759 2,953 3,086 2,790 2,997 3,132

EBITDA 1,926 2,079 2,159 1,768 1,911 1,983

EBITDA Margin 70% 70% 70% 63% 64% 63%

Net Earnings 538 689 844 339 575 722


DPS 0.4 0.5 0.6 0.3 0.4 0.6

Dividend Yield* 2.4% 3.1% 3.7% 1.5% 2.5% 3.2%




New



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R$ million 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Net Revenues 2,719 2,882 3,009 3,189 3,829 4,631 4,544 4,436 4,633 4,835

Cost of goods/services sold (827) (857) (909) (964) ( 1,021) ( 1,079) ( 1,139) ( 1,202) ( 1,268) ( 1,337)

Gross Profit 1,891 2,025 2,100 2,225 2,807 3,552 3,406 3,235 3,365 3,498

EBIT 1,404 1,534 1,606 1,729 2,309 3,051 2,902 2,729 2,856 2,986

EBITDA 1,891 2,025 2,100 2,225 2,807 3,552 3,406 3,235 3,365 3,498

Financial income/expense (700) (648) (563) (387) (206) (9) 167 320 448 607

Equity Income 0 0 0 0 0 0 0 0 0 0

Operating income 704 885 1,043 1,342 2,103 3,042 3,069 3,049 3,304 3,594Non-operating result (30) 0 0 0 0 0 0 0 0 0

Pretax income 674 885 1,043 1,342 2,103 3,042 3,069 3,049 3,304 3,594

Income tax (153) (211) (248) (319) (530) (934) (1,043) (1,037) (1,123) (1,222) Gross Margin %Interest on own capital 0 0 0 0 0 0 0 0 0 0


Net earnings 521 675 794 1,022 1,573 2,109 2,026 2,012 2,181 2,372


Gross Margin 70% 70% 70% 70% 73% 77% 75% 73% 73% 72%

EBIT Margin 52% 53% 53% 54% 60% 66% 64% 62% 62% 62%

EBITDA Margin 70% 70% 70% 70% 73% 77% 75% 73% 73% 72%

Net margin 19% 23% 26% 32% 41% 46% 45% 45% 47% 49%

Balance Sheet

R$ million 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Current + long term assets 2,732 2,874 3,056 3,854 4,763 6,694 8,162 9,791 11,658 13,731 EBITDA Margin %Cash + short term investment 690 814 980 1,755 2,573 4,384 5,909 7,502 9,341 11,387

Net receivables 401 419 434 455 546 665 607 641 668 694

Inventories 24 25 27 28 29 30 31 32 33 34

Other 1,616 1,616 1,616 1,616 1,616 1,616 1,616 1,616 1,616 1,616


Total assets 17,019 16,768 16,560 16,969 17,492 19,039 20,124 21,372 22,860 24,556


Suppliers 104 109 114 119 124 128 133 138 143 148

Accounts payable 699 706 717 728 743 758 765 777 788 800

Dividends due 125 169 199 256 393 527 506 503 545 593

Total debt ST + LT 6,141 5,312 4,452 4,004 3,103 2,765 2,383 2,073 1,839 1,665

Other 1,668 1,686 1,696 1,714 1,801 1,950 1,907 1,942 1,970 1,997



Cash flow EBITDA R$ million

R$ million 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

EBIT 1,404 1,534 1,606 1,729 2,309 3,051 2,902 2,729 2,856 2,986

Depreciation 487 491 494 496 498 501 503 506 509 512

EBITDA 1,891 2,025 2,100 2,225 2,807 3,552 3,406 3,235 3,365 3,498

Changes in working capital 10 (10) (8) (10) (10) (43) (29) (15) (14) (14)Income tax 334 365 400 465 785 1,037 987 928 971 1,015

Capex 95 99 103 108 112 116 121 125 130 134

Free cash flow to the f irm 1,453 1,571 1,605 1,662 1,920 2,441 2,327 2,197 2,279 2,363

Key Indicators2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

EPS 1.6 2.1 2.4 3.1 4.8 6.4 6.2 6.1 6.7 7.2

P/E 10.8 8.4 7.1 5.5 3.6 2.7 2.8 2.8 2.6 2.4

Implied P/E 19.4 14.9 12.7 9.9 6.4 4.8 5.0 5.0 4.6 4.3

P/BV 0.7 0.6 0.6 0.6 0.5 0.4 0.4 0.4 0.3 0.3

P/Free cash flow 3.9 3.6 3.5 3.4 2.9 2.3 2.4 2.6 2.5 2.4


Net earnings - CAGR (3 years) nm 56% nm 25% 33% 38% 26% 9% 1% 5% Net Income R$ million

PEG nm 0.1 nm 0.2 0.1 0.1 0.1 0.3 2.3 0.4

EV/EBITDA 5.9 5.5 5.3 5.0 3.9 3.1 3.3 3.4 3.3 3.2


EBITDA - CAGR (3 years) 13% 11% nm 6% 12% 19% 15% 5% -2% 1%

EVG 0.4 0.5 nm 0.9 0.3 0.2 0.2 0.7 -1.8 3.5

ROE (final) 6% 8% 8% 10% 14% 16% 14% 13% 12% 12%

Dividends 130 169 199 256 393 527 506 503 545 593


Payout 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%Dividend yield 2% 3% 4% 5% 7% 9% 9% 9% 10% 11%

Net debt (BRL million) 5,451 4,498 3,473 2,249 530 (1,619) (3,525) (5,429) (7,502) (9,722)

Net debt/Shareholders' equity 0.7 0.5 0.4 0.2 0.0 (0.1) (0.2) (0.3) (0.4) (0.5)

Net debt/EBITDA 2.9 2.2 1.7 1.0 0.2 (0.5) (1.0) (1.7) (2.2) (2.8)

Financial expenses/EBITDA (0.4) (0.3) (0.3) (0.2) (0.1) (0.0) 0.0 0.1 0.1 0.2

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CESP Companhia Energtica de So Paulo is

the largest power generation company in So

Paulo state and the third largest in Brazil,

according to ANEEL. The Company has 6

hydroelectric plants, 57 generating units, an

installed capacity of 7,456 MW and assured

power of 3,916 MW (average), representing 8%

and 10% of the national total, respectively.


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Energias do Brasil (ENBR3)

Outperform. We are maintaining our rating as Outperform and cutting our YE09 TP

to R$40.00 for ENBR3 (which prices in an estimated R$1.48 09 DPS). Total return

expected for ENBR3 is 46%, composed of 40.6% in capital appreciation and 5.4% individends (2009).

Main fundamentals. Our investment thesis for Energias do Brasil is based on growth

in generation, mainly in greenfield projects. The company is adding 414 MW (+24%)

to its generation installed capacity in the next five years, which should be responsible

EDB posting one of the highest EBITDA growth rates in this time span (15% 3-year

EBITDA growth). ENBR3 is also a deep value call, although stock liquidity is the main

issue. The company should completely change the nature of its business over time,

through greenfield assets in generation but also collecting a sound stream of cash

flows from its distribution business.

After an asset swap transaction with Grupo Rede in 2008 that resulted in the disposal

of disco Enersul and consolidation of HPP Lajeado, the company increased the

generation business total contribution to EBITDA (52% vs. 39% prior to the deal). In

our view, the deal provided greater stability in cash flows and reduced recurring

capital spending by R$100mn on average. As for capex plans, the company should

have HPP Santa Fe (29MW) and revamping of HPP Mascarenhas and Suia

(25MW) delivering power to the grid in 2009. The construction of 720-MW TPP

Pecem I (EDBs stake: 50%) remains on schedule, with start-up slated for 2012. New

investments in small hydro plants (601 MW in portfolio, of which we estimate 372 MW

being constructed in the next three years) should consume R$697mn in 2009 andR$726mn in 2010, financed by BNDES.

We understand the 9.9% of the companys shares (R$312mn) held in treasury

causes overhang on the stock, although it could be seen as a means to manage

cash dividends in times of higher-cost debt. The company could (i) cancel shares

over time, while eliminating any threat of earnings dilution but with negative impacts

on liquidity, (ii) implement a share bonus with existing shares in treasury, and (iii)

resell shares in treasury in a block trade on Bovespa, like the procedure followed by

Bradespar in disposing of a substantial portion of its CPFL shares in May 09.

In terms of funding, we understand Energias do Brasil has secured all its needs forplanned ongoing capex in distribution and revamping of SHPPs in the coming five

years through the BNDES CALC stand-by credit line (R$900mn, 10-year tenor).

The remaining hydro and thermal generation projects should be funded through

project finance. SHPP Santa F recently received takeout loans from BNDES

(R$76mn) and TPP Pecm secured financing with the IDB and BNDES for

construction of the plant (~R$1.8bn). Although the company has 69% of its debt in

debentures maturing by 2011 (R$548mn), we see little chance of it not being rolled

over, as capital markets have reopened for local issues, not to mention the fact that

cash generation can fully match obligations at maturity.

We estimate dividends remaining at a 50% payout ratio as per the by-laws, althoughthere is the possibility of the company starting to pay higher dividends after huge


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capital commitments are over by 2011. In our view, ENBR3 is a nice bet for portfolios

targeting growth with a strong medium-term yield component.

Valuation and stock performance. Our valuation for Energias do Brasil entails a

13.6% WACC (vs. 15.1% previously), leading to implicit EV/adj.EBITDA multiples of

6.3x for 2009 and 5.7x for 2010. EDB is trading at 9.3x P/E 09 and 7.8x P/E 10.

Looking at EV/adj.EBITDA, ENBR3 stands at 4.7x for 09 and 4.2x for 10. In both

cases, ENBR is trading at the low end of its peers. The stock has underperformed the

Ibovespa YTD (29.3% vs. 41.3%) and outperformed the IEE (Bovespas Electricity

Energy Index), 29.3% vs. 28.3% for the IEE.

Figure 11: Energias do Brasils Performance YTD vs. Ibovespa vs. IEE

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IBOV Equity ENBR3 Equity IBOVIEE Index


Figure 12: New Estimates for Energias do Brasil

Previous

2009E 2010E 2011E 2009E 2010E 2011E

Net Revenues 5,006 5,332 5,842 5,267 5,595 6,308

Adj. EBITDA 1,246 1,389 1,590 1,422 1,498 1,871

EBITDA Margin 25% 26% 27% 27% 27% 30%

Net Earnings 470 556 658 549 573 810


DPS 1.5 1.8 2.1 1.7 1.8 2.6

Dividend Yield* 5.4% 6.4% 7.6% 6.3% 6.6% 9.3%




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R$ million 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Net Revenues 5,006 5,332 5,842 6,505 6,928 7,286 7,682 7,838 8,262 8,782


Gross Profit 1,373 1,529 1,745 2,045 2,158 2,234 2,348 2,220 2,336 2,532

EBIT 1,056 1,155 1,325 1,599 1,700 1,764 1,866 1,724 1,826 2,006

EBITDA 1,365 1,519 1,734 2,033 2,146 2,222 2,336 2,208 2,323 2,519

adj. EBITDA 1,246 1,389 1,590 1,904 2,024 2,097 2,207 2,074 2,184 2,375

Financial income/expense (178) (162) (161) (120) (53) (0) 49 85 115 159

Equity Income 0 0 0 0 0 0 0 0 0 0 Gross Margin %

Operating income 878 993 1,163 1,479 1,647 1,764 1,914 1,809 1,940 2,165Non-operating result (4) 0 0 0 0 0 0 0 0 0

Pretax income 874 993 1,163 1,479 1,647 1,764 1,914 1,809 1,940 2,165

Income tax (296) (338) (395) (500) (555) (592) (641) (603) (645) (718)

Interest on own capital 0 0 0 0 0 0 0 0 0 0


Net earnings 470 556 658 879 1,012 1,092 1,191 1,121 1,207 1,355


Gross Margin 27% 29% 30% 31% 31% 31% 31% 28% 28% 29%

EBIT Margin 21% 22% 23% 25% 25% 24% 24% 22% 22% 23%

EBITDA Margin 27% 28% 30% 31% 31% 31% 30% 28% 28% 29%

Adj. EBITDA Margin 25% 26% 27% 29% 29% 29% 29% 26% 26% 27%

Net margin 9% 10% 11% 14% 15% 15% 16% 14% 15% 15%

Balance SheetR$ million 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 EBITDA Margin %

Current + long term assets 2,588 2,573 2,686 2,795 2,848 3,205 3,702 4,191 4,859 5,621

Cash + short term investment 47 9 10 12 12 292 749 1,191 1,770 2,439

Net receivables 1,328 1,350 1,458 1,563 1,613 1,689 1,727 1,772 1,858 1,949

Inventories 8 9 10 10 11 12 13 13 14 15

Other 1,205 1,206 1,208 1,210 1,212 1,213 1,214 1,215 1,217 1,218


Total assets 10, 965 12,219 12,904 12,911 12,870 13, 140 13 ,560 13 ,969 14,568 15 ,271


Suppliers 399 400 429 459 496 529 561 596 633 671


Dividends due 235 278 329 439 506 546 595 560 604 677

Total debt ST + LT 3,446 4,358 4,542 3,876 3,189 2,769 2,485 2,306 2,140 1,965

Other 1,111 1,127 1,204 1,281 1,309 1,367 1,386 1,407 1,473 1,545

Minority Interest 1,646 1,646 1,646 1,646 1,646 1,646 1,646 1,646 1,646 1,646


Total liabilities 10, 965 12,219 12,904 12,911 12,870 13, 140 13 ,560 13 ,969 14,568 15 ,271 EBITDA R$ million


EBIT 1,056 1,155 1,325 1,599 1,700 1,764 1,866 1,724 1,826 2,006

Depreciation 309 363 410 434 446 458 471 484 498 512

EBITDA 1,365 1,519 1,734 2,033 2,146 2,222 2,336 2,208 2,323 2,519

adj.EBITDA 1,246 1,389 1,590 1,904 2,024 2,097 2,207 2,074 2,184 2,375

Changes in working capital (328) 2 (8) (14) (20) (25) (19) (16) (28) (32)

Income tax 359 393 450 541 573 592 625 574 607 666

Capex 1,565 1,632 982 332 351 371 393 405 428 453

Free cash flow to the firm (350) (638) 165 1,046 1,120 1,159 1,208 1,111 1,178 1,288

Key Indicators (350) (638) 165 1,046 1,120 1,1592009 2010 2011 2012 2013 2014 2015 2016 2017 2018

EPS 3.0 3.5 4.1 5.5 6.4 6.9 7.5 7.1 7.6 8.5

P/E 9.3 7.8 6.6 5.0 4.3 4.0 3.7 3.9 3.6 3.2

Implied P/E 13.5 11.4 9.6 7.2 6.3 5.8 5.3 5.7 5.3 4.7

P/BV 1.2 1.1 1.0 0.9 0.8 0.7 0.7 0.6 0.6 0.5

P/Free cash flow nm nm 26.3 4.2 3.9 3.8 3.6 3.9 3.7 3.4

Free cash flow yield nm nm 4% 24% 26% 27% 28% 26% 27% 30% Net Income R$ million

Net earnings - CAGR (3 years) 30% 12% 19% 23% 22% 18% 11% 3% 3% 4%

PEG 0.3 0.6 0.3 0.2 0.2 0.2 0.3 1.1 1.1 0.7

EV/EBITDA 4.3 3.9 3.4 2.9 2.7 2.6 2.5 2.7 2.5 2.3

EV/adj. EBITDA 4.7 4.2 3.7 3.1 2.9 2.8 2.7 2.8 2.7 2.5

Implied EV/adj. EBITDA 6.3 5.7 4.9 4.1 3.9 3.5 3.4 3.6 3.4 3.1

Adj. EBITDA - CAGR (3 years) 5% 9% 7% 15% 13% 10% 5% 1% 1% 2%

EVG 0.9 0.5 0.6 0.2 0.2 0.3 0.5 3.3 1.9 0.9

ROE (final) 13% 14% 15% 18% 19% 19% 19% 16% 16% 16%

Dividends 235 278 329 439 506 546 595 560 604 677


Payout 50% 50% 50% 50% 50% 50% 50% 50% 50% 50%

Dividend yield 5% 6% 8% 10% 12% 13% 14% 13% 14% 16%

Net debt (BRL million) 3,399 4,154 4,176 3,573 3,150 2,478 1,736 1,115 370 (474)Net debt/Shareholders' equity 0.91 1.04 0.97 0.75 0.60 0.43 0.27 0.16 0.05 -0.06

Net debt/ adj.EBITDA 2.73 2.99 2.63 1.88 1.56 1.18 0.79 0.54 0.17 -0.20

Financial expenses/ adj. EBITDA (0.14) (0.12) (0.10) (0.06) (0.03) (0.00) 0.02 0.04 0.05 0.07

Energias do Brasil is a holding company with

investments in the electricity sector, consisting of

electricity generation, distribution and dealing in

four important states: So Paulo, Esprito Santo,

Mato Grosso do Sul and Tocantins.

0%

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Tractebel (TBLE3)

Outperform. We are maintaining ourOutperform rating and cutting our YE09 TP to

R$26.50 for TBLE3 (upside of 43.3%, which prices in an estimated R$0.54 2H09

DPS). Total return expected for TBLE3 is 45.9%, composed of 40.4% in capitalappreciation and 5.5% in dividends (1H09 and 2H09).

Main fundamentals. Tractebel has one of the highest EBITDA growth in our

coverage (12.7%). The reasons behind this lie in solid fundamentals: (i) greenfield

projects (33-MW biomass cogeneration plant 55% Tractebels and 1,087-MW HPP

Estreito 40% Tractebels), (ii) consolidation of most recent acquisitions (3 small

hydros, 2 wind farms, comprising 114 MW), (iii) start-up of 243-MW HPP So

Salvador in 2009, (iv) escalating forward energy prices that provide for revenue

growth in real terms, (v) wise energy allocation proven over time (2008 and 1Q09 are

living proof), to protect short-term cash flows, and (vi) almost 100% of its assured

energy sold for the next three years at enticing step-up prices (see graph on page 5).

The company has been able to resell energy in the regulated market at higher prices

(45 MWa; R$145/MWh) after some free customers adjusted their intake through

flexibility provisions in PPAs, making money out of the harsh economic environment

and falling industrial activity. For 2010 and subsequent years there has been no

request by free customers to lower amounts in PPAs, as industrials also fear the tight

balance of supply and demand ahead. Flexible contracts account for 35% of

Tractebels total assured energy, with maximum flexibility of 20% in take-or-pay

contracts. The amount of assured energy that the company is at risk to clear at the

spot price is thus ~7%. For an average spot price expected to stay around R$80-

R$115/MWh in 2009 and average contract price of R$110/MWh, the risk for revenues

is less than 3% of the top line. We understand the situation is quite comfortable due

to the low impact on earnings.

Tractebels leverage is increasing over time as a result of its heavy capex program,

but still standing below the average for utilities (1.7x Net-Debt-to-EBITDA). However,

the current level easily accommodates its high and regular dividend payouts, also

thanks to growth. Leverage should show some inflection by 2011 with the start-up of

the main greenfield projects (Estreito, Andrade), which should make total capacity

also jump, by 13% between 2008 and 2010.

Tractebel acquired five different brownfield assets in 2008. Despite the small size, it

reinforces the companys consolidation mood. Should credit conditions in capital

markets improve, we expect Tractebel to take part in other accretive deals.

In our view, Tractebel offers the best combination of dividends and growth, with its

strong defensive features coupled with steady growth (11% EBITDA CAGR 2009-

2012). Dividends should remain at 55% payout in 2009, as the company should

avoid higher financing costs to manage its cost of capital and keep capacity addition

on track. Tractebel already has earmarked funding from BNDES for its greenfield

projects, easing pressures on cash. We expect Tractebel to return to 95% payout in

2010, with expected low capital spending.


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Valuation and stock performance. Our valuation for Tractebel entails a 13.9%

WACC (vs. 15.9% previously), leading to implicit EV/EBITDA multiples of 8.1x for

2009 and 7.1x for 2010. Tractebel is trading at 9.9x P/E 09 and 8.3x P/E 10. Looking

at EV/EBITDA, TBLE3 stands at 6.0x for 09 and 5.3x for 10. In both cases, TBLE is

trading in line with its peers as a result of a superior EBITDA CAGR (11% 2009-2012

vs. peers 4% for AES Tiet and 6% for Cesp). The stock has underperformed the

Ibovespa YTD (-0.3% vs. 41.3%) and its peers when compared to the IEE

(Bovespas Electricity Energy Index), -0.3% vs. 28.3% for the IEE.

Figure 13: Tractebels Performance YTD vs. Ibovespa vs. IEE

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IBOV Equity TBLE3 Equity IBOVIEE Index


Figure 14: New Estimates for Tractebel

Previous

2009E 2010E 2011E 2009E 2010E 2011E

Net Revenues 3,806 4,573 4,676 4,108 4,851 5,211

EBITDA 2,457 2,813 3,189 2,667 3,134 3,802

EBITDA Margin 65% 62% 68% 65% 65% 73%

Net Earnings 1,215 1,448 1,722 1,553 1,863 2,327


DPS 1.0 2.1 2.5 1.3 2.7 3.4

Dividend Yield* 5.5% 11.4% 13.5% 7.1% 14.7% 18.3%




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Income Statement Company DescriptionR$ million 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Net Revenues 3,806 4,573 4,676 4,826 5,149 5,295 5,126 5,318 5,511 5,706


Gross Profit 2,601 2,965 3,353 3,554 3,705 3,821 3,887 4,023 4,158 4,292

EBIT 2,117 2,428 2,780 2,971 3,113 3,222 3,281 3,408 3,535 3,661

EBITDA 2,457 2,813 3,189 3,383 3,529 3,641 3,703 3,834 3,965 4,095

Financial income/expense (302) (282) (253) (179) (130) (84) (49) (15) 12 51

Equity Income 0 0 0 0 0 0 0 0 0 0

Operating income 1,816 2,146 2,527 2,792 2,984 3,138 3,232 3,393 3,548 3,712


Pretax income 1,816 2,146 2,527 2,792 2,984 3,138 3,232 3,393 3,548 3,712 Gross Margin %

Income tax (601) (698) (805) (938) (1,004) (1,057) (1,089) (1,144) (1,196) (1,252)

Net earnings 1,215 1,448 1,722 1,854 1,979 2,082 2,144 2,250 2,352 2,460


Gross Margin 68% 65% 72% 74% 72% 72% 76% 76% 75% 75%

EBIT Margin 56% 53% 59% 62% 60% 61% 64% 64% 64% 64%

EBITDA Margin 65% 62% 68% 70% 69% 69% 72% 72% 72% 72%

Net margin 32% 32% 37% 38% 38% 39% 42% 42% 43% 43%



Cash + short term investment 1,111 1,163 1,286 1,360 1,527 1,658 1,691 1,977 2,260 2,555

Net receivables 471 550 560 570 603 617 599 619 638 658

Inventories 58 65 71 74 77 80 83 86 89 92

Other 628 600 548 538 529 520 511 502 493 484


Total assets 10,085 10,910 10,683 10,447 10,327 10,153 9,851 9,838 9,823 9,822

Current + long term liabilities 6,368 7,120 6,807 6,478 6,260 5,982 5,572 5,447 5,314 5,190Suppliers 239 337 233 205 249 247 162 168 174 180


Dividends due 354 709 855 903 964 1,012 1,041 1,093 1,142 1,195

Total debt ST + LT 3,837 3,976 3,511 3,100 2,706 2,334 1,972 1,734 1,496 1,257

Other 947 1,104 1,212 1,272 1,343 1,391 1,399 1,453 1,504 1,559



Total liabilities 10,085 10,910 10,683 10,447 10,327 10,153 9,851 9,838 9,823 9,822 EBITDA R million


EBIT 2,117 2,428 2,780 2,971 3,113 3,222 3,281 3,408 3,535 3,661

Depreciation 340 385 409 412 415 419 422 426 430 434

EBITDA 2,457 2,813 3,189 3,383 3,529 3,641 3,703 3,834 3,965 4,095

Changes in working capital (276) (167) 11 (21) (78) (29) 60 (38) (35) (38)

Income tax 703 794 891 999 1,048 1,085 1,105 1,149 1,192 1,235

Capex 2,019 1,101 94 98 102 106 110 114 118 122

Free cash flow to the firm 11 1,085 2,192 2,306 2,456 2,478 2,428 2,609 2,690 2,776

Key Indicators 11 1,085 2,192 2,306 2,456 2,478 2,428 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

EPS 1.9 2.2 2.6 2.8 3.0 3.2 3.3 3.4 3.6 3.8P/E 9.9 8.3 7.0 6.5 6.1 5.8 5.6 5.4 5.1 4.9

Implied P/E 14.2 11.9 10.0 9.3 8.7 8.3 8.1 7.7 7.3 7.0

P/BV 3.2 3.2 3.1 3.0 3.0 2.9 2.8 2.7 2.7 2.6

P/Free cash flow nm 11.1 5.5 5.2 4.9 4.9 5.0 4.6 4.5 4.3


Net earnings - CAGR (3 years) 7% 11% 16% 15% 11% 7% 5% 4% 4% 5% Net Income R$ millionPEG 1.3 0.7 0.4 0.4 0.6 0.9 1.1 1.2 1.2 1.0

EV/EBITDA 6.0 5.3 4.6 4.4 4.2 4.1 4.0 3.9 3.7 3.6



EVG 0.4 0.4 0.3 0.4 0.5 0.9 1.3 1.4 1.3 1.1

ROE (final) 33% 38% 44% 47% 49% 50% 50% 51% 52% 53%

Dividends 668 1,375 1,636 1,761 1,880 1,977 2,036 2,137 2,234 2,337


Payout 55% 95% 95% 95% 95% 95% 95% 95% 95% 95%

Dividend yield 6% 11% 14% 15% 16% 16% 17% 18% 19% 19%

Net debt (BRL million) 2,726 2,814 2,225 1,740 1,179 676 281 (243) (764) (1,298)

Net debt/Shareholders' equity 0.73 0.74 0.57 0.44 0.29 0.16 0.07 -0.06 -0.17 -0.28

Net debt/EBITDA 1.11 1.00 0.70 0.51 0.33 0.19 0.08 -0.06 -0.19 -0.32

Financial expenses/EBITDA (0.12) (0.10) (0.08) (0.05) (0.04) -0.02 -0.01 0.00 0.00 0.01

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Tractebel Energia is Brazil's largest private power

generator . Through i ts genera tion assets in the

States of Paran, Santa Catar ina, Rio Grande do

Sul, Mato Grosso do Sul and Gois, the company

has an installed capacity of 5,860MW.Tractebel

Energia is par t of SUEZ Energy International, the

business l ine of SUEZ which is responsib le for the

Group's energy activities outside Europe.


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CPFL (CPFE3)

Market Perform. We are maintaining our Market Perform rating for CPFL and

cutting our YE09 TP to R$42.20 for CPFE3 (32.7% upside, which includes a R$1.76

2H09 DPS) and US$52.70 for CPL (10% upside, which includes a US$2.20 2H09dividend per ADR). Total return expected for CPFE3 is 37.8%, composed of 25.6% in

capital appreciation and 10.2% in dividends (1H09 and 2H09).

Main fundamentals. We regard CPFL as one of the steadiest and most reliable

companies in our coverage, with solid results popping up on a quarterly basis. Tariff

reviews ended in 2008 (Paulista, RGE, Jaguarina, Santa Cruz) and should release

companies to collect better returns going forward. Above all, the 2008 tariff reviews

proved that companies deeply concerned about cost management can preserve

gains in tariff resets despite the regulator Aneel raising the bar on target costs.

Generation start-ups helped cushion the downward impact of tariff reviews in discos

and should also add to growth in coming years (HPP Foz do Chapec, TPP Baldin,

small hydropower plants).

Superior performance in costs the cornerstone of our investment case for CPFL. The

company should continue to beat its regulatory targets and capture additional returns

due to integration of activities among its controlled companies. Controlling a

corporate structure composed of several discos with tight geographical fit contributes

to cashing in synergic gains from SG&A and operating costs resulting from

downsizing. Scale plays an important role in cost performance and CPFL is the

company featuring the largest array of discos under the same ownership structure (8

discos). The company posts cash operating costs (personnel, material, third-party

services and others) of around R$140 per customer in its distribution business, at the

very low end of the industry (Cemig R$228/customer, Eletropaulo R$163/customer)

despite a larger concession area.

Due to its diligent and synergic-focused consolidation strategy, we do not expect

CPFL to venture into expensive transactions in the distribution business. The Santa

Cruz and Jaguarina acquisitions in 2007 and 2008, respectively, are proof of one of

the pillars of the investment case. Given the number of discos located in So Paulo

state likely to undergo M&A processes in coming years, we expect CPFL to corner

some of those potential transactions.

Growth in greenfield generation (HPP Foz do Chapec, TPP Baldin, small hydros)

should be the main driver for EBITDA growth in coming years. In the absence of

accretive opportunities for acquisition of distribution companies, CPFL should

continue developing efforts to increase the share of generation in its consolidated

figures. HPP Foz do Chapec (51%; 220MWa) should add R$130mn to EBITDA by

2010 and TPP Baldin (24MWa), R$41mn and small hydropower plants (38 MWa),

R$64mn by 2011. In three years, the generation business should account for 27% of

consolidated EBITDA, adding resilience to earnings and lowering the intrinsic risks of

the distribution activities.

CPFL manages leverage to deliver regular dividends at high payouts. We see norisks for dividends going forward. The current net-debt-to-EBITDA ratio (1.98x) is


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polluted by non-EBITDA-generating debt from the project finance of its greenfield

projects. With the start-up of these gencos, leverage should fall to 1.61x by 2011. In

order to manage cost of capital, dividends are the best alternative in the absence of

synergic acquisitions. It is worth noting that CPFL is the company whose debt-to-

total-capitalization ratio is closest to Aneels target (57.2% D/D+E), which proves

managements concern and efforts in targeting the regulatory cost of capital to

achieve the best return possible.

Valuation and stock performance. Our valuation for CPFL entails a 12.9% WACC


7.8x for 2010. CPFL trades above its peers at 9.3x P/E 09 and 9.0x P/E 10. On an

EV/EBITDA basis, CPFE3 stands at 6.6x for 09 and 6.4x for 10, above its peers.

The company also posts the third-highest ROE in the sector (31% for 09 and 32% for

10), standing only below AES Tiet and Tractebel. Year to date, the stock has

underperformed the Ibovespa (10% vs. 41.3%), and its peers when compared to the

IEE (Bovespas Electricity Energy Index), 28.3% YTD.

Figure 15: CPFLs Performance YTD vs. Ibovespa vs. IEE

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IBOV Equity CPFE3 Equity IBOVIEE Index


Figure 16: New Estimates for CPFL

Previous

2009E 2010E 2011E 2009E 2010E 2011E

Net Revenues 10,200 10,476 11,281 9,431 10,293 11,445

EBITDA 3,291 3,414 3,777 3,163 3,664 4,364

EBITDA Margin 32% 33% 33% 34% 36% 38%

Net Earnings 1,640 1,689 1,869 1,416 1,706 2,172


DPS 3.2 3.3 3.7 2.8 3.4 4.3

Dividend Yield* 10.2% 10.5% 11.6% 8.8% 10.6% 13.5%


Recommendation Market Perform Market Perform


New


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R$ million 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Net Revenues 10,200 10,476 11,281 12,274 12,989 14,001 15,045 15,688 16,869 16,536


Gross Profit 3,721 4,010 4,399 4,955 5,235 5,935 6,532 6,721 7,437 6,625

EBIT 2,900 2,998 3,337 3,845 4,076 4,727 5,273 5,409 6,070 5,200

EBITDA 3,291 3,414 3,777 4,305 4,559 5,233 5,804 5,966 6,655 5,815

Financial income/expense (353) (383) (435) (440) (413) (400) (382) (387) (367) (379)

Equity Income 0 0 0 0 0 0 0 0 0 0Operating income 2,546 2,614 2,902 3,405 3,663 4,328 4,891 5,022 5,703 4,821


Pretax income 2,546 2,614 2,902 3,405 3,663 4,328 4,891 5,022 5,703 4,821 Gross Margin %

Income tax (880) (889) (987) (1,158) (1,246) (1,471) (1,663) (1,707) (1,939) (1,639)


Net earnings 1,640 1,689 1,869 2,191 2,354 2,782 3,147 3,250 3,688 3,108


Gross Margin 36% 38% 39% 40% 40% 42% 43% 43% 44% 40%

EBIT Margin 28% 29% 30% 31% 31% 34% 35% 34% 36% 31%

EBITDA Margin 32% 33% 33% 35% 35% 37% 39% 38% 39% 35%

Net margin 16% 16% 17% 18% 18% 20% 21% 21% 22% 19%

Balance Sheet

R$ million 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Current + long term assets 6,153 6,161 6,342 6,530 6,641 6,855 6,985 7,170 7,385 7,237

Cash + short term investment 14 14 15 17 18 19 20 21 23 22 EBITDA Margin %

Net receivables 3,075 3,078 3,255 3,438 3,546 3,755 3,880 4,060 4,270 4,119

Inventories 15 17 18 19 20 21 22 24 25 26Other 3,049 3,052 3,054 3,056 3,058 3,061 3,063 3,065 3,068 3,070


Total assets 16,183 16,750 17,297 17,880 18,414 19,079 19,688 20,387 21,151 21,589


Suppliers 982 1,018 1,086 1,152 1,221 1,266 1,335 1,414 1,487 1,564


Dividends due 676 838 847 986 1,099 1,261 1,466 1,478 1,685 1,587

Total debt ST + LT 6,675 7,080 7,232 7,261 7,419 7,403 7,394 7,689 7,698 8,540

Other 1,497 1,487 1,542 1,604 1,634 1,715 1,750 1,809 1,882 1,795




Cash flow EBITDA R$ million

R$ million 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

EBIT 2,900 2,998 3,337 3,845 4,076 4,727 5,273 5,409 6,070 5,200

Depreciation 391 416 439 460 482 506 531 557 585 614

EBITDA 3,291 3,414 3,777 4,305 4,559 5,233 5,804 5,966 6,655 5,815

Changes in working capital (510) (23) 50 51 7 79 15 42 59 (139)

Income tax 866 889 987 1,158 1,246 1,471 1,663 1,707 1,939 1,639Capex 1,082 975 805 854 905 957 1,010 1,071 1,134 1,200

Free cash flow to the firm 1,852 1,573 1,934 2,242 2,401 2,726 3,115 3,145 3,523 3,115

Key Indicators2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

EPS 3.4 3.5 3.9 4.6 4.9 5.8 6.6 6.8 7.7 6.5

P/E 9.3 9.0 8.2 7.0 6.5 5.5 4.8 4.7 4.1 4.9

Implied P/E 12.3 11.9 10.8 9.2 8.6 7.3 6.4 6.2 5.5 6.5

P/BV 2.9 2.9 2.7 2.6 2.5 2.4 2.3 2.2 2.1 2.2

P/Free cash flow 8.2 9.7 7.9 6.8 6.4 5.6 4.9 4.9 4.3 4.9


Net earnings - CAGR (3 years) 5% 1% 14% 10% 12% 14% 13% 11% 10% 0% Net Income R$ million

PEG 1.8 9.8 0.6 0.7 0.6 0.4 0.4 0.4 0.4 -11.8

EV/EBITDA 6.6 6.4 5.8 5.1 4.8 4.2 3.8 3.7 3.3 3.8



EVG 1.0 32.0 0.5 0.5 0.5 0.4 0.4 0.4 0.4 58.8

ROE (final) 31% 32% 34% 37% 39% 44% 47% 47% 50% 44%

Dividends 1,558 1,605 1,775 2,081 2,236 2,642 2,990 3,087 3,503 2,952


Payout 95% 95% 95% 95% 95% 95% 95% 95% 95% 95%

Dividend yield 10% 11% 12% 14% 15% 17% 20% 20% 23% 19%

Net debt (BRL million) 6,661 7,066 7,216 7,244 7,401 7,384 7,374 7,668 7,675 8,518

Net debt/Shareholders' equity 1.25 1.33 1.30 1.24 1.23 1.16 1.10 1.11 1.05 1.21

Net debt/EBITDA 2.02 2.07 1.91 1.68 1.62 1.41 1.27 1.29 1.15 1.46

Financial expenses/EBITDA -0.11 -0.11 -0.12 -0.10 -0.09 -0.08 -0.07 -0.06 -0.06 -0.07

CPFL Energia is an integrated electricity company

that operates in distribution, comercialization and

generation. CPFL distr ibution subsidiar ies

currently provide energyfor more than sixmillion

customers in Sao Paulo and Rio Grande do Sul

states. Currently the company operates 5 hydro

power plants with 1,588 MW installed capacity.

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Cemig (CMIG4)

Market Perform. We are upgrading our rating

Electric Utilities - Fine Tuning 2009.05

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