Utilities Sector

Pedro Batista Eduardo Haiama, CFA Rafael Espírito Santo Strategist Analyst Analyst+5521 3262 9849 +5521 3262 9655 +5521 3262 8636pedro.batista@ubs.com eduardo.haiama@ubs.com rafael.espiritosanto@ubs.com

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Analyst Certification and Required Disclosures Begin on Page 46

This material has been prepared by UBS Pactual S.A.September 2008

2

Agenda

Key themes remain mostly intact

Main Events in the Short-/Mid-Terms— Concession Renewal Issue— Consolidation process— New energy auctions— Eletrobras: Role in the Future— Brasiliana: sale of BNDES stake?— Conclusion of methodology for the reference company costs

Supply x Demand

Transmission auctions

Distribution’s tariff revision

Companies overview

3

Key Sector Themes

Reservoir levels and potential rationing risk – now only in 2009 or later

Tight supply x demand to remain until 2010 leading to high spot prices

Concession renewals

Secular increase in generation prices

Positive impact of Investment Grade on the sector

Regulatory risk perception with the implementation of second cycle of tariff revisions

Consolidation move in Brazil and worldwide

Eletrobras’ role in sector investments

Favorable macro scenario

More attractive financing lines (?)

Comfortable financial situation of companies

Main Events

5

Main Events in 2008

Source: UBS Pactual, ANEEL

JAN | FEB | MAR | APR | MAY | JUN | JUL | AUG | SEP | OCT | NOV | DEC JAN | FEB | MAR | APR | MAY | JUN | JUL | AUG | SEP | OCT | NOV | DEC

2 0 0 8

CESP Privatizationfailure

Cemig, Paulista, RGE (CPFL),

Enersul (EDB) Tariff Revision

Brasiliana Sale??Copel Tariff Revision

Rio Madeira Auction(Jirau)

Transmissionauction

Reserve energy auction - Biomass

Light Tariff Revision

New energyauctions

Auction for Rio Madeira transmission

6

Concession Renewal Issue

Different methodologies for Generation, Transmission and Distribution

Generation:— Re-auction of the assets?— Low price cap or UBP?— Impacts on free and captive markets unknown depending on the proposed solution— Probable scenario: renewal of the concessions with low fee (political solution)

Transmission:— Probable scenario: renewal with full tariff process for all revenues (as opposed to

today’s regulatory framework that only applies to investments made after 1999)— RAP decrease by about 30% (real terms) in 2015 to adjust revenues to full tariff

revision

Distribution:— Probable scenario: concession renewal— Regulatory framework for tariff revisions already implemented (return on RAB)

7

Concession Renewal Issue

Power Plant Avg MW % of total Expiration CommentJ aguara 336 9% Aug-13 Not yet renewedSão Simão 1,281 33% J an-15 Not yet renewedCamargos 21 1% J an-15 Renewed onceItutinga 28 1% J ul-15 Renewed onceSalto Grande 75 2% J ul-15 Renewed onceTrês Marias 239 6% J ul-15 Renewed onceMiranda 202 5% Dec-16 New concessionVolta Grande 229 6% Feb-17 Renewed onceEmborcação 497 13% J ul-25 Renewed onceNova Ponte 276 7% J ul-25 Renewed onceIgarapava* 20 1% Dec-28 New concessionPorto Estrela* 17 0% J ul-32 New concessionAimorés* 90 2% Dec-35 New concessionFunil Grande* 44 1% Dec-35 New concessionOthers 516 13%Total hydro 3,870

Cemig CopelPower Plant Avg MW % of total Expiration CommentSegredo 603 29% Nov-09 Not yet renewedSalto caxias 605 29% May-10 Not yet renewedG.P. Souza 109 5% J ul-15 Renewed onceFoz do Areia 576 28% May-23 Renewed onceOthers 53Total 1,946

Power Plant Avg MW % of total Expiration CommentTrês Irmãos 370 9% Nov-11 Not yet renewedI lha Solteira 1,579 40% Oct-15 Renewed onceJ upiá 886 23% Oct-15 Renewed onceJ aguari 14 0% May-20 Renewed onceParaibuna 50 1% Mar-21 Renewed onceP. Primavera 1,017 26% May-28 Renewed onceTotal 3,916

Cesp

(*) Adjusted by Cemig’s stake in each plant

Capacity expiring in 2015 (already renewed once):— Cesp: 63%— Cemig: 9%— Copel: 5%— Eletrobras: 44%

Should government re-auction the concessions? What could be the alternatives?

— Highest concession rights (UBP)?— Lowest tariffs?— Impact on long-term energy prices (?)

8

Concession Renewal Issue

Assured Energy % of total End Of Concession Company

Paulo Afonso 2,225 15% October 2015 Chesf

Xingó 2,139 14% October 2015 Chesf

Luiz Gonzaga 959 6% October 2015 Chesf

Sobradinho 531 4% February 2022 Chesf

Boa Esperança 143 1% October 2015 Chesf

Paulo Afonso I 0 0% October 2015 Chesf

Pedra 7 0% July 2015 Chesf

Araras 2 0% July 2015 Chesf

Curemas 2 0% November 2024 Chesf

Tucurui 4,140 28% July 2024 Eletronorte

Samuel 216 1% September 2009 Eletronorte

Coaracy Nunes 78 1% July 2015 Eletronorte

Curuá-Una 24 0% July 2028 Eletronorte

Itumbiara 1,015 7% February 2020 Furnas

Marimbondo 726 5% March 2017 Furnas

Serra da Mesa 671 5% May 2011 Furnas

Furnas 598 4% July 2015 Furnas

Estreito 495 3% July 2015 Furnas

Peixoto (Mascarenhas de Morais)295 2% October 2023 Furnas

Corumbá I 209 1% November 2014 Furnas

Porto Colômbia 185 1% March 2017 Furnas

Funil 16 0% July 2015 Furnas

Manso 92 1% February 2035 Furnas

Total 14,784 100%

Eletrobras

9

Consolidation process

Most straightforward M&A already made: Cemar, Elektro, small independent distributors

Remaining companies are mostly financially sound (net debt/EBITDA less than 2.0x), limiting need for cash inflow

Smaller deals at competitive prices (at low implied IRR – strategic players willing to invest at rate of returns below 10% for existing assets)

Potential opportunities among small companies with good pipeline of projects and lack of access to capital

Big assets for sale: CESP and Brasiliana?

10

New energy auctions

Another thermal auctions (A-3 and A-5)

Lack of competitive supply (gas, fuel oil)

Coal should be the winner. In 2009, scenario should change

Lack of hydro power plant projects to increase thermal generation in future auctions

Lack of reservoirs translating into more volatility to spot prices

Energy reserve: the federal government’s solution for reducing higher volatility? It seems so.

11

Eletrobras’s role

Improving corporate governance?

ADR listing closer than before

New investments centralized at the holding level: — Mitigates risk of unrealistic / unsustainable low required rate of

returns— Reduces internal struggles between subsidiaries

Internationalization:— Not an easy path: Bolivia to invest alone… Peru reluctant to allow

investments, etc…— Need of bi-national treaties

Improvements in the federalized companies?— Single management structure for all distribution companies— Goal to eliminate cash drag in about 1-1.5 year

12

Multiples Comparison

Total EV/RABCompany Rating Price Target Return 2008E 2009E 2008E 2009E 2008E 2009E 2008E 2008EEletrobras (ON) Buy (CBE) 29.8 44.0 na. 2.9 2.5 10.1 10.9 32.0 1.6 1.3 1.0Eletrobras (PN) Buy (CBE) 24.7 44.0 80.3 4.5 4.3 10.1 10.9 6.0 6.0 1.6 1.0Energias do Brasil Buy (CBE) 29.5 38.0 33.0 7.0 6.5 11.9 11.3 4.2 4.4 1.3Light SA Buy (CBE) 22.4 33.5 54.3 4.1 4.8 7.4 16.4 6.7 3.1 1.0Tractebel Buy 21.3 29.0 43.0 7.7 7.5 11.5 11.5 6.4 6.9 5.1Cesp Buy (CBE) 27.1 44.0 62.4 10.3 8.1 60.8 22.8 0.0 0.0 3.9AES Tiete (PN) Buy (CBE) 16.0 20.5 39.0 5.4 4.8 10.1 9.1 9.9 11.0 5.0Copel Buy (CBE) 28.5 41.0 47.0 5.0 4.8 8.1 9.1 3.1 2.7 2.8 2.0Cemig Buy (CBE) 35.5 62.0 81.8 6.2 5.8 11.4 9.9 5.6 9.8 3.6 1.9Coelce Buy (CBE) 20.6 30.0 60.9 4.6 3.7 6.3 5.4 15.1 17.7 1.7CPFL Suspended 34.2 na na. 8.5 7.5 14.4 13.2 3.5 3.8Equatorial Buy (CBE) 15.0 22.0 59.3 3.9 3.7 7.5 10.2 12.6 9.3 1.7Eletropaulo Sell (CBE) 29.4 23.3 -12.5 5.9 5.8 11.3 11.0 8.4 8.6 1.9Celesc Sell (CBE) 44.5 40.0 -7.9 6.1 5.3 11.3 8.9 2.2 2.8 1.2Transmissao Paulista Buy (CBE) 46.8 62.0 43.4 6.0 5.9 8.7 9.0 10.9 10.6 1.4Terna Buy (CBE) 27.5 44.0 70.4 6.8 6.0 10.2 8.3 9.3 11.4Sabesp Neutral 38.0 47.0 na. 5.1 4.7 6.8 6.0 4.0 4.6Average 51.0 6.1 5.6 9.7 8.8 10.0 11.0 4.1 1.7

EV/EBITDA PE Div Yield EV/MW

Electricity Supply/Demand

14

Supply/Demand Balance - Scenarios

Alternative Scenario(Demand growth 5.5%, 40% of Proinfa, Delays in LNG)

Base Case(Demand growth 4.8%)

Source: Aneel and UBS Pactual estimates Source: Aneel and UBS Pactual estimates

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Hydro Thermal Proinfa Demand

Negative Balance of 1.2 GW in 2008 and 1.7 GW in 2009

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Hydro Thermal Proinfa Demand

Negative Balance of 2.4 GW in 2008 and 3.7 GW in 2009

15

Price Signals

Tight supply/demand scenario already driving energy prices up

LT energy prices in the free market are already above those of regulated market.

New energy auctions pointing to prices around R$130/MWh (understated in our view on unrealistic fuel cost for thermal plants).

Upside risk on upcoming auctions as fuel costs are adjusted and lower competitiveness for fuel oil thermal plants.

Price Evolution—Regulated vs. Free

Market

Source: CPFL and UBS Pactual

16

Contractual Situation

Source: CCEE, Companies, UBS Pactual

Copel Cemig

CESP Tractebel

0

1000

2000

3000

4000

5000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Contracted Probable Renew als Uncontracted

-300

200

700

1200

1700

2200

2007 2008 2009 2010 2011 2012 2013 2014 2015

Pool Celesc Free Clients Cemig Spot

0

1,000

2,000

3,000

4,000

5,000

2007 2008 2009 2010 2011 2012 2013

in a

vg. M

W

Contracted Energy Uncontracted Energy

-1,000

0

1,000

2,000

3,000

4,000

5,000

2,008 2,009 2,010 2,011 2,012 2,013 2,014 2,015 2,016 2,017

Auctions Free Market Small Distributors Spot

17

Contractual Situation

Source: Companies and UBS Pactual

Furnas Eletronorte

Chesf

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

2008 2009 2010 2011 2012 2013 2014 2015

Spot

Free Clients

2009 - 2016

2008 - 2015

2007 - 2014

2006 - 2013

2005 - 2012

Retail

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

2008 2009 2010 2011 2012 2013 2014 2015

Spot

Free Clients

2009 - 2016

2008 - 2015

2007 - 2014

2006 - 2013

2005 - 2012

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

2008 2009 2010 2011 2012 2013 2014 2015

Spot

Alumar

Albras

Onca Puma

2009 - 2016

2008 - 2015

2007 - 2014

2006 - 2013

2005 - 2012

Retail

18

Energy Supply: Which Sources?

Price per Source of Energy (R$/avg MW) for an IRR of 13%

Source: PSR and UBS Pactual

112125 130 137 139 144 145

160

200

0

70

140

210

Biom

ass

Hyd

ro

Impo

rted

Coa

l

Nat

ural

Gas

Fuel

Oil

Dom

estic

Coa

l

PCH

Die

sel

Win

dpow

er

Electricity Supply: Which Sources?

20

Energy Supply: Which Sources?

Challenging supply scenario => higher energy prices:

Lack of new hydro power projects. Only Rio Madeira so far (slightly above 1-year demand growth). It might take many years to approve new projects. Rising transmission and environmental costs to increase marginal cost of new power plants.

Gas supply issues. Problems with Bolivian supply and high demand growth to limit gas availability to thermal plants. LNG supply does not seem a feasible alternative. Recent gas crisis to benefit other energy sources such as coal.

Coal. Abundant commodity in the world and more stable prices (than oil and gas). Main problem is logistics for imported coal (plant sites).

Nuclear. High cost and even more difficult to approve environmental licenses. Angra III should provide only 1,350 MW of installed capacity.

Fuel oil / Diesel. Competitiveness in recent auctions reduced, as the federal government changed methodology for ICB (cost benefit for thermal capacity).

21

Energy Supply: Alternatives Sources of Energy? PCH (small hydro power plants). Competitive prices with subsidies (TUSD/TUST

discount, lower regulatory fees and tax rate) but with increasing costs for greenfield projects and acquisitions. On top of that, Aneel is changing regulatory framework for authorization process that creates uncertainty to the development of some projects. Estimated feasible capacity expansion around 5,000MW.

Biomass. After hydro power plants, it is the most preferred source of energy by the federal government. The economics are interesting (especially for greenfield projects). Problems are firm supply of bagasse for 15 years, connection to the grid and lack of equipments in the short-term. Total supply could reach 10,000avg. MW (considering retrofit projects). Same regulatory / fiscal benefits as PCHs. Last auction for energy reserve was a failure and only contracted 548 avg. MW of an estimated demand of 1,500-2,000 avg. MW.

Wind power. Least preferred source of energy by the federal government (after fuel oil). Potential supply of 70GW but still too many uncertainties on the demand side. Only feasible with federal auctions that should occur in 2009. Other bottleneck is the current high price of EPC in the country.

22

Alternatives – Hydro

Undergoing feasibility studies by the federal government.

No environmental license yet (only Rio Madeira so far) and it might be difficult to obtain (Amazon region or Indian territories) => more costly.

New power plants should have lower assured capacity (lack of reservoirs)

Location of new power plants far away from consumption sites (higher transmission costs).

Optimistically, new plants might be offered in 2009/2010

So far, most of power plants were mostly allocated to regulated market.

Plants With Feasibility Studies Under Aneel’s Analysis

Plants With Approved Feasibility Studies but not

Auctioned

Source: EPE Source: EPE

Plant River State MWIpueiras Tocantins TO 480Sacos Formoso BA 50Itaguaçú Claro Go 130Barra do Pomba Paraíba do Sul RJ 80Cambuci Paraíba do Sul RJ 50Baixo Iguaçu Iguaçu PR 350Salto Grande Chopim PR 53Total 1,193

Plant River State MWBelo Monte Xingu PA 11,182J irau Madeira RO 3,300Tupiratins Tocantins TO 620Serra Quebrada Tocantins TO/MA 1,328Mirador Tocantinzinho GO 80Telêmaco Borba Tibagi PR 120Total 16,630

23

Alternatives - Hydro

Main Plants With Feasibility Studies Under Development

Source: EPE

Plant River State MWMarabá Tocantins PA/MA 2,160Pedra Branca São Francisco PE/BA 320Riacho Seco São Francisco PE/BA 240Ribeiro Gonçalves Parnaíba PI /MA 173Uruçuí Parnaíba PI /MA 164Torixoréu Araguaia GO/MT 408Água Limpa das Mortes MT 320Porto Galeano Sucuriú MS 139Garibaldi Canoas SC 150São Roque Canoas SC 214Itapiranga Uruguai SC/RS 724Teles Pires Teles Pires MT 1,820Sinop Teles Pires MT 461São Manoel Teles Pires MT 746Colíder Teles Pires MT 342Total 8,381

24

Alternatives - Hydro

Rio Madeira – Not an indication for long-term prices

Not sufficient to cover demand growth. — Assured capacity of Santo Antonio and Jirau should be ~4,000 avg. MW over 4 to

5 years (versus an annual demand growth of about 3,000 avg. MW)—not to mention potential delays in construction schedule

– Tucuruí hydro plant took ~10 years to be constructed – Initial budget of US$4.2 billion increased to US$7.5 billion at the end of the

work– Flooded area, initially estimated in 1,630 km2 was actually 2.850 km2, with

a significant environmental impact

Price cap distorted by high assured energy capacity— Load factor of about 70% (vs. Brazilian average of about 55%), although run-of-

river with no reservoir. — Assuming load factor of 55%, cap would increase to R$153/MWh

Rising energy price for captive consumers— Auctions already contracted 3,320 MW of hydro at above R$130/MWh and 6,368

MW of thermal at prices above R$135/MWh— Considering R$110/MWh for Rio Madeira, weighted average price is R$126/MWh

(which we believe is conservative)— New thermal plants should be dispatched more often than current official

simulation (around 5% of the time) and at a cost higher than initially expected.

25

Alternatives – Natural Gas As an alternative for gas supply, Petrobras is implementing two LNG regasification

units in Brazil to attend the existing gas power plants

We believe the country still faces some difficulties in securing gas supply in the long run. Besides just supplying the thermal plants, LNG should also be used to reduce the dependence on Bolivian supply

We foresee limited availability of this fuel for thermal generation in Brazil, considering:

— Challenges in growing domestic gas production— Suppliers’ political instability (Bolivia, Argentina)— Increasing demand for industrial use of natural gas,

Half/ Half/ Half/ Half/ Half/ Half/ Half/ Half/ Half/ Half/ Half/

Natural Gas Supply/Demand Balance in Brazil

Source: Gas Energy

Transmission

27

Transmission

Clear and stable regulatory framework attracted private investments to the segment

First auctions (2000-2001) presented low or no discount to maximum revenues— Real IRR to Equity above 20%

Entrance of new players, particularly Spanish and construction companies increased competition in the segment

— Higher discounts— Lower returns (as low as 5%)

-

0.05

0.10

0.15

0.20

0.25

2001 2002 2003 2004 2005 2006 2007 2008

0%

5%

10%

15%

20%

25%

30%

RAP/Capex

IRR

IRR Evolution

Source: Aneel and UBS Pactual estimates

Transmission Auctions – Players Breakdown

Source: Aneel and UBS Pactual

0%

20%

40%

60%

80%

100%

2004 2004 2005 2006 2007 2008 Total

Priv ate

Mix ed

State-ow ned

Distribution – Tariff Revisions

29

How to Evaluate a Distribution Company?

The best proxy to evaluate a distribution company is to compare it to a FRN (floating-rate note) which has coupons “reseted” every 4/5 years.

Main factors are:– Regulatory Asset Base (RAB)— Regulatory WACC — Reference Costs— X Factor

The main difference is the possibility of obtaining higher or lower returns than the coupon due to the real performance compared to the reference company.

FRN DistributionNotional Asset Base (RAB)Coupon WACC

Notional Amortization Regulatory DepreciationNotional Reinvestment Investment

=>

30

Regulatory EBITDA x Real

Until now companies EBITDA drop indicate an average of 30% to 40%.

Despite that, most of results were relatively more predictable.

Most companies still trading at EV/RAB of 1.0x-2.0x after the tariff revision process.

What can be different from our forecasts?— Higher / Lower demand growth— Better other revenues => key example is Coelce— Better or worse manageable expenses— Better or worse energy losses / delinquency rate— Different mix of clients (average tariff)— Sharper drop in regulatory WACC in the future (after the

investment grade received by the country)