Company Report Initiation of Coverage

Thursday, May 13, 2010

Electric Utilities

Defensive play

IEEX versus Ibovespa

(base 100)

Source: Economática

Sérgio Tamashiro

55 11 3175-8353 sergio.tamashiro@safra.com.br

Diogo Amaral 55 11 3175-9740

diogo.amaral@safra.com.br

e

• Dividends or Growth. We are initiating coverage of the

utilities sector, which we believe has become a good investment alternative in light of the high market volatility. In our coverage universe of 13 stocks, we have an outperform rating for Tractebel, Cemig, Cesp, and MPX Energia; an underperform rating for AES Tietê, CPFL Energia, Eletrobras PNB, Energias do Brasil and Light; and a neutral rating for Copel, CTEEP, Eletrobras ON and Eletropaulo.

• Preference on generation. We especially like the investment cases focused on generation growth and dividend payments. The combination of high capex and attractive dividends is possible, since a relevant portion of capex is debt financed and the companies have low leverage levels.

• Tractebel is our top pick. The best company to combine no political risk, good dividends, EBITDA growth, solid management and good upside is Tractebel, which is our top pick in the sector.

• Eletropaulo is our pick for dividend players. Among the companies paying double-digit dividend yields, Eletropaulo is our pick. We estimate a 14.8% dividend yield in 2010, which drops to 10.6% in 2011 due to the tariff review.

• Long ON - Short ELET6. The market has overpriced the R$4 spread between ELET6 and ELET3. Based on our estimated results, 50% payout and the fact that the PNB dividends should always be 10% higher than those paid for the ON shares, the spread should be R$1.8.

Valuation Summary

Company Ticker Rating

Price

R$

Target

Price

R$

Upside

%

10E

EV/

EBITDA

10E

P/E

10E

Dividend-

yield

AES Tietê GETI4 UP 19.39 22.00 13% 6.1 9.6 10.4%

Cemig CMIG4 OP 27.85 35.00 26% 6.6 11.6 4.1%

Cesp CESP6 OP 24.76 31.00 25% 6.7 9.7 8.3%

Copel CPLE6 N 35.85 41.00 14% 5.6 8.8 2.8%

CPFL Energia CPFE3 UP 36.90 40.00 8% 8.0 11.9 8.0%

CTEEP TRPL4 N 46.20 55.00 19% 6.3 9.1 10.5%

Energias do BR ENBR3 UP 33.10 38.00 15% 6.1 8.7 5.8%

Eletrobras ON ELET3 N 23.41 27.00 15% 4.1 9.3 5.2%

Eletrobras PNB ELET6 UP 27.73 29.00 5% 5.0 11.1 5.0%

Eletropaulo ELPL6 N 32.35 37.00 14% 4.8 6.4 14.8%

Light LIGT3 UP 22.65 26.00 15% 5.5 7.5 6.7%

MPX MPXE3 OP 21.95 27.00 23% nm nm 0.0%

Tractebel TBLE3 OP 21.70 27.00 24% 8.0 12.1 4.5%

17% 6.1 9.7 6.6% Source: Safra Stock prices as of May 12, 2010 OP: Outperform; N: Neutral; UP: Underperform

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SECTOR INVESTMENT THESIS

1. Investment thesis

We believe investors should be buying utility companies because of the good growth prospect with stable pattern of cash flows. The highest 5-year (2009-2014E) EBITDA CAGR we have is 15% for Cesp, followed by Cemig with 11%, and CPFL Energia and Tractebel with 10%. The growth is not high compared to those of retail or real estate companies, but there is a little risk it will not occur. Electricity prices are mostly inflation adjusted, while electricity demand is expected to grow 5.4% per year until 2019.

On the utilities sector, we prefer generation companies because of the potential EBITDA growth, which may come from the electricity re-pricing. We do not have a clear supply tightness scenario in 2011-2013 as we had at the beginning of 2009, but we also do not have an excess of capacity as we had in 2009. In our base case scenario, we have an equilibrated supply-demand curve and long-term electricity price of R$120/MWh.

2. Valuation

Chart 1: 10E EV/EBITDA vs 5-year (09-14E) EBITDA CAGR

AES Tietê

CESP6

Tractebel

Cteep

Cemig

Copel

EDP

Light

Eletropaulo

CPFL

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%

Source: Safra Bubble size represents market cap.

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Table 1: Utilities Valuation Summary - I

Company AES Tietê CESP6 Tractebel MPX Eletrobras CteepTicker GETI4 CESP6 TBLE3 MPXE3 ELET6 TRPL4

Sector Gener Gener Gener Gener Gener Trans

Recommendation UP OP OP OP UP N

10YE Target Price - R$ 22.00 31.00 27.00 27.00 29.00 55.00

Current Price - R$ 19.39 24.76 21.70 21.95 27.73 46.20

Upside Potential 13% 25% 24% 23% 5% 19%

Market Value R$ mm 7,393 8,109 14,165 3,000 31,400 7,034

10YE Net Debt - R$ mm 535 4,506 5,451 1,796 (11,591) 1,810

EV - R$ mm 7,927 12,615 19,616 4,796 19,809 8,843

# of Shares - mm 381 328 653 137 1,132 152

Multiples10E PER 9.6 9.7 12.1 nm 11.1 9.1

10E EV/EBITDA 6.1 6.7 8.0 nm 5.0 6.3

10E Dividend Yield 10.4% 8.3% 4.5% 0.0% 5.0% 10.5%

Debt/Equity 60% 40% 45% 70% 0% 60%

Beta 0.85 1.05 1.05 1.25 0.00 0.80

Net Revenue - R$ mm2009A 1,674 2,653 3,497 27 22,668 1,656

2010E 1,677 2,771 4,067 60 25,415 1,704

2011E 1,772 2,895 4,323 338 26,504 1,869

2012E 1,871 3,064 4,483 1,168 28,478 2,076

2013E 1,955 3,486 4,672 1,417 29,553 2,170

2014E 2,042 4,100 4,987 1,481 31,258 2,308

5Y CAGR (09-14) 4.1% 9.1% 7.4% 123.1% 6.6% 6.9%

EBITDA - R$ mm2009A 1,260 1,459 2,178 (93) 3,202 1,336

2010E 1,309 1,882 2,465 (146) 5,335 1,397

2011E 1,415 1,970 2,942 61 5,424 1,546

2012E 1,492 2,094 3,153 689 6,337 1,737

2013E 1,556 2,423 3,225 871 6,610 1,816

2014E 1,622 2,922 3,497 917 9,868 1,938

5Y CAGR (09-14) 5.2% 14.9% 9.9% -258.0% 25.2% 7.7%

Net Income - R$ mm2009A 780 763 1,134 (76) 171 828

2010E 767 840 1,167 (157) 2,840 774

2011E 845 868 1,479 (47) 2,618 780

2012E 894 1,042 1,713 452 3,071 861

2013E 938 1,327 1,837 620 2,705 901

2014E 979 1,736 2,098 669 4,519 963

5Y CAGR (09-14) 4.7% 17.9% 13.1% -254.4% 92.6% 3.1%

Capex - R$ mm2009A 55 138 323 323 4,298 375

2010E 80 150 2,816 1,551 4,640 1,146

2011E 87 150 178 304 3,366 968

2012E 92 120 115 320 2,615 352

2013E 96 123 123 94 2,070 359

2014E 101 129 129 99 2,146 375

5Y CAGR (09-14) 12.9% -1.4% -16.8% -21.1% -13.0% 0.0%

Dividends - R$ mm2009A 780 145 771 48 742 576

2010E 767 672 642 0 556 736

2011E 845 743 773 37 508 741

2012E 894 891 895 292 588 818

2013E 938 1,134 960 560 535 856

2014E 979 1,484 1,096 604 900 915

5Y CAGR (09-14) 4.7% 59.3% 7.3% 65.6% 4.0% 9.7%

Net Debt - R$ mm2009A 501 4,960 3,585 90 (14,529) 825

2010E 535 4,506 5,451 1,796 (11,591) 1,810

2011E 549 4,017 4,481 1,692 (9,601) 2,566

2012E 563 3,471 3,315 1,499 (8,676) 2,756

2013E 579 2,904 2,073 1,352 (9,678) 2,938

2014E 595 2,294 716 1,199 (11,201) 3,138

5Y CAGR (09-14) 3.5% -14.3% -27.5% 67.9% -5.1% 30.6% Source: Safra and Economática Prices as of May 12, 2010

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Table 2: Utilities Valuation Summary - II

Company Cemig Copel CPFL EDP Light EletropauloTicker CMIG4 CPLE6 CPFE3 ENBR3 LIGT3 ELPL6

Sector Integ Integ Integ Integ Integ Distr

Recommendation OP N UP UP UP N

10YE Target Price - R$ 35.00 41.00 40.00 38.00 26.00 37.00

Current Price - R$ 27.85 35.85 36.90 33.10 22.65 32.35

Upside Potential 26% 14% 8% 15% 15% 14%

Market Value R$ mm 19,005 9,811 17,709 5,247 4,619 5,414

10YE Net Debt - R$ mm 9,576 476 8,768 2,793 2,972 3,940

EV - R$ mm 28,581 10,286 26,476 8,041 7,591 9,353

# of Shares - mm 682 274 480 159 204 167

Multiples10E PER 11.6 8.8 11.9 8.7 7.5 6.4

10E EV/EBITDA 6.6 5.6 8.0 6.1 5.5 4.8

10E Dividend Yield 4.1% 2.8% 8.0% 5.8% 6.7% 14.8%

Debt/Equity 50% 45% 65% 45% 40% 55%

Beta 1.00 1.00 0.90 1.00 1.05 0.95

Net Revenue - R$ mm2009A 11,705 5,617 10,566 4,648 5,432 8,050

2010E 13,343 6,121 11,850 5,123 5,898 9,183

2011E 14,454 6,529 13,152 5,331 6,412 9,617

2012E 15,541 6,938 14,255 5,837 6,948 10,116

2013E 15,397 7,744 15,255 6,131 7,703 10,909

2014E 15,837 8,379 16,491 6,451 8,268 11,750

5Y CAGR (09-14) 6.2% 8.3% 9.3% 6.8% 8.8% 7.9%

EBITDA - R$ mm2009A 3,303 1,739 2,776 1,446 1,201 1,573

2010E 4,308 1,848 3,313 1,586 1,388 1,956

2011E 5,032 1,930 3,827 1,537 1,423 1,668

2012E 5,746 2,003 4,096 1,802 1,586 1,568

2013E 5,386 2,463 4,213 1,867 1,645 1,502

2014E 5,533 2,723 4,480 1,948 1,694 1,702

5Y CAGR (09-14) 10.9% 9.4% 10.0% 6.1% 7.1% 1.6%

Net Income - R$ mm2009A 1,861 1,026 1,286 625 605 1,063

2010E 1,645 1,115 1,485 601 616 845

2011E 2,000 1,193 1,758 575 624 679

2012E 2,492 1,297 1,930 787 723 622

2013E 2,359 1,662 2,031 917 753 556

2014E 2,517 1,893 2,221 1,077 770 697

5Y CAGR (09-14) 6.2% 13.0% 11.5% 11.5% 4.9% -8.1%

Capex - R$ mm2009A 3,083 979 1,327 786 564 532

2010E 3,609 1,343 1,851 1,000 690 500

2011E 1,173 960 1,645 815 731 545

2012E 1,239 680 1,051 420 799 576

2013E 1,190 477 958 432 839 601

2014E 1,244 492 912 451 877 629

5Y CAGR (09-14) -16.6% -12.8% -7.2% -10.5% 9.2% 3.4%

Dividends - R$ mm2009A 931 249 1,227 296 432 1,080

2010E 781 279 1,410 303 308 803

2011E 950 298 1,670 290 312 645

2012E 1,184 324 1,833 396 361 591

2013E 1,120 831 1,929 462 377 528

2014E 1,196 947 2,110 542 385 662

5Y CAGR (09-14) 5.1% 30.6% 11.5% 12.9% -2.3% -9.3%

Net Debt - R$ mm2009A 7,849 147 7,353 2,377 2,834 3,898

2010E 9,576 476 8,768 2,793 2,972 3,940

2011E 8,697 155 9,791 2,964 3,139 3,928

2012E 7,574 (549) 10,169 2,650 3,286 3,991

2013E 6,193 (1,300) 10,376 2,236 3,445 4,003

2014E 4,913 (2,189) 10,537 1,755 3,580 4,068

5Y CAGR (09-14) -8.9% -271.6% 7.5% -5.9% 4.8% 0.9% Source: Safra and Economática Prices as of May 12, 2010

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3. Supply and Demand

10E 9.7% YoY demand growth. The electricity market has been growing steadily in the last few months. According to the Energy Planning Company – EPE, 1Q10 consumption grew 9.6% in comparison with the same period of last year. Considering 8.8%-10.4% YoY growth in Apr-Dec 2010, we expect 2010 demand to grow 9.7% in comparison to 2009. Though strong, this figure is just slightly better than 2008 figures, meaning consumption (black line in chart 1) has not returned to the historical growth level expected for 2010 (upper dotted blue line).

Chart1: 2007-2010E Brazil Monthly Demand – in MW-average

30,000

31,000

32,000

33,000

34,000

35,000

36,000

37,000

38,000

39,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2007A 2008A 2009A2010E 2008E no crisis 2009E no crisis2010E no crisis

Source: EPE & Safra

Still weak industrial demand. The major responsible for the weak performance is the industrial segment, which consumption significantly dropped in 2009 to 2006 levels. Considering over 15% YoY growth from April – December, 2010E consumption (blue dotted line in chart 2) will be just 5.1% higher than 2008 figure (black line).

Chart 2: 2007-2010E Industrial Monthly Demand – in MWW-average

12,000

13,000

14,000

15,000

16,000

17,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2007 2008 2009 2010E

Source: EPE & Safra

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No expected shortage of energy in 2012-2014. Differently from market perception, we do not believe in supply tightness, which would be good for price increase. The major responsible for this weaker-than-expected demand is the industrial demand, which is still weak. Due to potential excess of capacity and low electricity prices, industrial customers have not been rushing to sign long-term high-cost contracts.

Chart 3: 2005A-2016E Brazilian Supply & Demand – in MW-average

0

1,000

2,000

3,000

4,000

5,000

6,000

2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E Source: EPE & Safra

Long-term price of R$120/MWh. We are estimating long-term electricity price of R$120/MWh, annually adjusted by the inflation, which mostly reflects lower cost of capital and a less tight electricity market.

Chart 4: 2010-2016E Free-market prices – in R$/MWh

80

100

120

140

160

180

2010E 2011E 2012E 2013E 2014E 2015E 2016E

Source: Safra

Target price sensitivity to electricity price. We run a target price sensitivity for generation companies changing free-market prices. Our base target prices consider R$120/MWh for all companies with expiring contracts. We change R$10/MWh from the base case until R$100/MWh and R$140/MWh.

Highest impact on AES Tiete. The highest change was for AES Tiete, which target price increases 9% considering R$130/MWh electricity price. With electricity prices at R$140/MWh, the target price would increase 14% to R$25. The high impact is because 100% of AES Tiete contract with Eletropaulo expire in 2015.

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Lowest impact on Cesp. We calculated the lowest target price change was on Cesp because just a small portion of its portfolio is non-contracted. We estimate the bulk of its capacity, 67%, will have the concessions expiring in 2015. For these concessions, we estimate a price of R$60/MWh.

Table 3: Target-price % change to electricity price R$100/MWh R$110/MWh R$120/MWh R$130/MWh R$140/MWh

AES Tietê -14% -5% 0% 9% 14%Tractebel -7% -4% 0% 4% 7%Cesp -6% -3% 0% 3% 6%Copel -7% -5% 0% 2% 7%Cemig -6% -3% 0% 6% 9% Source: Safra

Table 4: Target-price sensitivity to electricity price – in R$ per share

R$100/MWh R$110/MWh R$120/MWh R$130/MWh R$140/MWhAES Tietê 19.00 21.00 22.00 24.00 25.00Tractebel 25.00 26.00 27.00 28.00 29.00Cesp 29.00 30.00 31.00 32.00 33.00Copel 38.00 39.00 41.00 42.00 44.00Cemig 33.00 34.00 35.00 37.00 38.00 Source: Safra

4. Elections

2010 is a key year for state owned companies as we have general elections in October. The level of changes is relevant as we will have a new president and new governors in the states of São Paulo, Minas Gerais, Paraná and Santa Catarina. With a new president and new governors, we will probably have changes in the management of Cesp, Copel, Cemig, Celesc and Eletrobras.

State of São Paulo. In the state of São Paulo, we may have one of the easiest governor elections in Brazil. According to Datafolha poll, candidate Geraldo Alckmin of PSDB party was leading with 49% of voting intentions. The strongest opponent was Aloísio Mercadante of PT party, who had 13% of voting intentions.

Cesp privatization with Alckmin. Confirming Alckmin’s victory, we believe he will go ahead with Cesp’s privatization. In our view, Mr. Alckmin has a clear view on the “minimum state”, which means government participation only where the state must be in. In this situation, the government may continue to invest directly in security, health, education and transportation and not in electricity supply.

State of Minas Gerais. The state of Minas Gerais still has an unclear political framework. Only the PSDB party has announced its candidate. Antonio Anastasia will run for re-election with the full support of the former governor Aécio Neves. The opposition has not defined their candidates. The PT may indicate Fernando Pimentel and the PMDB may indicate Hélio Costa.

Anastasia. The victory of Mr. Anastasia is positive for Cemig and Copasa as the management or investment policies may remain the same. The most uncertain situation would be the victory of Mr. Costa, who would probably change all the management and introduce a completely different policy on Cemig, Copasa and Gasmig. We do not believe Fernando Pimentel would be a negative event. According to Datafolha December 18 poll, Hélio Costa was leading with 48% of voting intentions, while Mr. Anastasia had just 12%.

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State of Paraná. The state of Paraná has a polarized political scenario. The PSDB candidate, Beto Richa, was leading the Datafolha December 18 poll with 40% of voting intentions. The PDT candidate, Osmar Dias, had 30% of the voting intentions. In the 2006 election, Osmar Dias lost to Roberto Requião for 10 thousand vote difference. No Requião risk. The market has almost eliminated the so called “Requião risk”, as Copel shares have appreciated 33% in the last 12 months, compared to Cemig’s 24% gain. In the last few years, CPLE6 have been traded at 20%-30% discount to CMIG4 in terms of EV/EBITDA multiples. We cannot assume that either Beto Richa or Osmar Dias will be good governor for Copel’s stock performance. No management change on private sector companies. Differently from state owned companies, we do not see any change in

management due to the elections in privately-owned companies. AES

Tietê, Eletropaulo, CPFL Energia, Energias do Brasil, Tractebel, Light,

MPX Energia, and Transmissão Paulista will maintain their management

teams.

5. Sector Consolidation

We see relevant consolidation in the Brazilian electricity sector. We may

have 5 players with over 15% market share in the distribution,

generation and transmission segments. We do not see real

consolidation as we will probably continue to have large state-owned

companies.

Chart 5: Brazilian major distribution companies

Source: Abradee & Safra

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In the distribution segment, we have some companies controlled by

state governments, which will only sell the control if the businesses are

at risk after continuing poor results. In the medium-term, we continue

to see Copel, Cemig, Celesc, CEEE, and CEB under state control.

Excluding state owned companies, we see CPFL Energia leading the

consolidation. The merger with Neoenergia is one alternative, with

acquisitions or asset swaps being ongoing alternatives.

We list below the potential consolidation movement in the sector and

growth opportunities:

• CPFL Energia: (i) potential merger with Neoenergia; ii) acquisition

of Elektro and Eletropaulo; (iii) asset swap with Energias do Brasil’s

Bandeirante; (iv) acquisition of SHPs;

• Energias do Brasil: (i) asset swap with CPFL Energia’s generation assets; (ii) bid on new SHPs, biomass projects, and natural gas

thermal-plants;

• Tractebel: (i) acquisition of AES Tietê; (ii) acquisition of SHPs

• Cemig: (i) acquisition of CEB, Elektro, Eletropaulo, Ampla, Coelce

and Rede’s distribution assets; (ii) acquisition of SHPs; (iii)

acquisition of exiting transmission assets; (iv) operation of state-

owned distribution companies; (v) bid in new generation and

transmission lines;

• Transmissão Paulista: (i) acquisition of existing transmission

assets; (ii) bid in new transmission lines;

• Copel: bid in new generation and transmission lines;

• AES Tietê: New generation capacity;

• Eletropaulo: no acquisition strategy;

• Cesp: no acquisition strategy;

• Light: no acquisition strategy;

• Eletrobras: i) no acquisition strategy; ii) bid in new generation and transmission lines.

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Table 5: Sector Growth & Consolidation

C o mpanyExist ing

D istributo rsExist ing

Generatio nExist ing

T ransmissio nN ew

Generat io nN ew

T ransmissio n

AES Tietê

Cesp

Tractebel

Eletropaulo

Cemig

Copel

CPFL Energia

Energias do Brasil

Light

M PX

Eletrobras

CTEEP

Source: Safra

: High chance

: Medium chance

: Low chance

6. Debt Level: no dollar or IGPM

Comfortable financial situation. The utilities companies we cover

have 09A net debt equivalent to 1.7x 10E EBITDA, with debt duration

of approximately 3.0 years. Besides low debt level, the sector is not

exposed to dollar or IGP-M denominated debt. With the expected spike

on the IGP-M inflation index, some companies would have results hurt

if revenues were not adjusted by the same index.

Loser on high IGP-M: Eletropaulo. Eletropaulo might be the most

affected company with the IGP-M / IGP-DI high variation. The company

has R$2.0 billion debt against the pension fund, which has a cost of 6%

plus the IGP-DI inflation index. Safra’s economic team estimates IGP-M

variation in 2010 of 9.0% and 9.1% variation of the IGP-DI.

Eletropaulo’s IGP-DI debt represents 43% of the total debt and is

equivalent to 101% of the 10E EBITDA of R$1.9 billion.

The second most exposed company to the IGP-DI spike is Light, which

has 28% of its debt linked to these inflation indexes. Light’s pension

fund debt of R$956 million represents 71% of the estimated EBITDA of

R$1.28 billion for 2010. Light’s tariffs are mostly adjusted by the IPC-A

inflation index, which is expected to change 4.9% in 2010.

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Table 6: Utilities debt exposure

IN D EX T R P L GET I C ESP T B LE M P X ELET C M IG C P LE C P F E EN B R LIGT ELP L

US$ 0% 0% 35% 7% 0% 35% 2% 4% 2% 8% 3% 0%

IGPM 2% 0% 6% 28% 0% 2% 9% 18% 12% 0% 28% 43%

CDI 46% 100% 34% 35% 30% 10% 73% 41% 56% 40% 53% 43%

TJLP 52% 0% 24% 30% 70% 0% 13% 37% 30% 52% 16% 0%

PRE 0% 0% 0% 0% 0% 53% 4% 0% 0% 1% 0% 14%

TOTAL 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

IGP-M/EBITDA 1% 0% 31% 54% 0% 5% 29% -1% 31% 0% 71% 101% Source: Safra

Winners on high IGP-M: AES Tietê and CTEEP. Differently from

companies with cost and debt indexed to the IGP-M, companies with

revenues adjusted by the IGP-M will benefit the most. In this front, AES

Tietê and Transmissão Paulista are the winners as 100% of their

revenues are adjusted in July by the IGP-M change in the last 12

months.

7. Concession Renewal

Concession risk in 2015. State owned companies will have most of

their distribution, transmission and generation concessions expiring in

2015. Privately owned companies will not suffer this risk as during

privatization, all concession were reset and extended for 30 years.

Besides the initial concession, privatized companies will have the option

to extend for another 20 years upon Aneel criteria.

Definition by 2011-2012. We believe the federal government will not

address this issue before the elections. In a first scenario, if Dilma

Rousseff wins the presidential election, the government may issue a

Provisional Measure (MP) to the Congress in order to be voted in a fast-

track. In a secondary scenario, both Dilma Rousseff and José Serra

would address this issue only in 2011. The Congress would issue a

Draft Bill and the law would be approved in 2011-2012.

Generation price of R$60/MWh. We believe the government will

extend all expiring concessions for another 20 years. In the case of

generation, a price-cap would be implemented. A new tax on free

electricity prices would have a similar effect to a price cap. In our

model, we consider R$60/MWh in all generation plants with expiring

concessions.

Generation. The most affected companies in the generation sector

with expiring contracts in 2015 are Chesf, Cesp, CGTEE, Furnas, Cemig

and Copel. We rule-out the possibility of returning the concession to the

federal government as the most affected companies would be Chesf

and Furnas, CGTEE and not only Cesp. In the case of a new concession

auction, Chinese or other new entrants could aggressively bid and leave

federal companies with almost no asset.

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Table 7: Generation concession contracts expiring in 2015-2017

InstalledCapacity(MW)

2015-2017ExpiringConcession(MW)

% ofExpiringContracts

AES Tietê 2,651 0 0%

Cemig 6,764 676 10%

Cesp 7,456 4,996 67%

CGTE 490 490 100%

Chesf 10,618 9,215 87%

Copel 5,147 307 6%

CPFL Energia 1,737 0 0%

Eletronorte 9,293 0 0%

Energias do Br 1,741 0 0%

Furnas 10,216 2,266 22%

Light 855 0 0%

MPX Energia nm 0 0%

Tractebel 6,432 0 0%

Total 63,400 17,950 28% Source: Safra

Return on transmission assets. Transmission companies will have

their concession contracts expiring in 2015. The so called “old

transmission”, which has revenue annually adjusted by the IGP-M

inflation index may have a substantial revenue cut in 2016. In order to

extend the contracts for another 20 years, the government will

probably implement a tariff review process and change the IGP-M to

IPCA as the adjustment index.

30% RAP cut. In our models, we estimate a 30% cut in the annual

permitted revenue – RAP in order to bring return on assets to 9.18%,

or 14.12% pre-tax. We assume this RAP cut for Furnas, Chesf, CTEEP,

Eletrosul, Cemig and Copel.

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IMPORTANT GENERAL DISCLOSURES

1. This report has been prepared by Safra Corretora de Valores e Cambio Ltda. (Safra Corretora”), a subsidiary of Banco Safra S.A. Safra Securities LLC, a FINRA/SIPC member firm, is distributing this report in the United States. This report is provided for informational purposes only and does not constitute or should not be construed as an offer to buy or sell or solicitation of an offer to buy or sell any financial instrument or to participate in any particular trading strategy in any jurisdiction. The information herein is believed to be reliable as of the date in which this report was issued and has been obtained from public sources believed to be reliable. Safra Group does not make any representation or warranty, express or implied, as to the completeness, reliability or accuracy of such information, nor is this report intended to be a complete statement or summary of the securities, markets or developments referred to herein. Opinions, estimates, and projections expressed herein constitute the current judgment of the analyst responsible for the substance of this report as of the date in which it was issued and are therefore subject to change without notice. Prices and availability of financial instruments are indicative only and subject to change without notice. Safra Group has no obligation to update, modify or amend this report and informs the reader accordingly, except when terminating coverage of the issuer of the securities discussed in the report.

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14

accept any liability whatsoever for any direct or consequential loss arising from any use of this report or its content.

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RATINGS CRITERIA 12-month horizon

OUTPERFORM (OP) – Stock’s return expected to outperform the market’s expected return in at least 5%.

NEUTRAL (N) – Stock’s return expected to lie within a range of -5% and +5% of the market’s expected return.

UNDERPERFORM (UP) – Stock’s return expected to underperform the market’s expected return by at least 5%.

15

RESEARCH MACROECONOMIC RESEARCH

CHIEF-ECONOMIST Cristiano Oliveira da Silva cristiano.oliveira@safra.com.br (55 11) 3175-7406

ECONOMIST Beatriz T. Aguiar beatriz.aguiar@safra.com.br (55 11) 3175-9749

ECONOMIST Daniel Xavier Francisco daniel.xavier@safra.com.br (55 11) 3175-7596

ECONOMIST Marcelo Portilho Marcelo.portilho@safra.com.br (55 11) 3175-9456

ECONOMIST Marcos Bredda de Marchi marcos.demarchi@safra.com.br (55 11) 3175-7096 EQUITY RESEARCH

STRATEGY Sergio Goldman sergio.goldman@safra.com.br (55 11) 3175-7387

CONSUMPTION/ RETAIL Erick Guedes, CFA erick.guedes@safra.com.br (55 11) 3175-8046

Carolina da Costa Carvalho carolina.carvalho@safra.com.br (55 11) 3175-7821

FINANCIALS Rafael Ferraz rafael.ferraz@safra.com.br (55 11) 3175-8450

Sergio Goldman sergio.goldman@safra.com.br (55 11) 3175-7387

INDUSTRIALS/AGRIBUSINESS Cassio Lucin cassio.lucin@safra.com.br (55 11) 3175-7517

Caroline Canapini Dalago caroline.dalago@safra.com.br (55 11) 3175-8157

MINING/STEEL/PULP&PAPER Rogerio Zarpao rogerio.zarpao@safra.com.br (55 11) 3175-7931

REAL ESTATE Sergio Goldman sergio.goldman@safra.com.br (55 11) 3175-7387

Ricardo Rezende ricardo.rezende@safra.com.br (55 11) 3175-7383

TRANPORTATION/LOGISTICS/INFRASTRUCTURE Marcello Gunther marcello.gunther@safra.com.br (55 11) 3175-8127

UTILITIES Sérgio Tamashiro sergio.tamashiro@safra.com.br (55 11) 3175-8353

Diogo Almeida do Amaral diogo.amaral@safra.com.br (55 11) 3175-9740

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