Company Report

Initiation of Coverage
Thursday, May 13, 2010

Electric Utilities
Defensive play

• 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$1.8.
IEEX versus Ibovespa Valuation Summary
(base 100)
Target 10E 10E
Price Price Upside EV/ 10E Dividend-
Company Ticker Rating R$ R$ % EBITDA P/E 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%
Source: Economática Energias do BR ENBR3 UP 33.10 38.00 15% 6.1 8.7 5.8%
Sérgio Tamashiro Eletrobras ON ELET3 N 23.41 27.00 15% 4.1 9.3 5.2%
55 11 3175-8353 Eletrobras PNB ELET6 UP 27.73 29.00 5% 5.0 11.1 5.0%
[email protected]
Eletropaulo ELPL6 N 32.35 37.00 14% 4.8 6.4 14.8%
Diogo Amaral Light LIGT3 UP 22.65 26.00 15% 5.5 7.5 6.7%
55 11 3175-9740
MPX MPXE3 OP 21.95 27.00 23% nm nm 0.0%
[email protected]
Tractebel TBLE3 OP 21.70 27.00 24% 8.0 12.1 4.5%
e 17% 6.1 9.7 6.6%
Source: Safra
Stock prices as of May 12, 2010
OP: Outperform; N: Neutral; UP: Underperform
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
9.0

8.5 Tractebel

8.0 CPFL
7.5

7.0
Cteep
CESP6
6.5 EDP

6.0 Cemig

5.5 AES Tietê

Light Copel
5.0

4.5
Eletropaulo
4.0
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.

2
Table 1: Utilities Valuation Summary - I
Company AES Tietê CESP6 Tractebel MPX Eletrobras Cteep
Ticker GETI4 C ESP6 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
C urrent 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

Multiples
10E 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$ mm
2009A 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 C AGR (09-14) 4.1% 9.1% 7.4% 123.1% 6.6% 6.9%
EBITDA - R$ mm
2009A 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 C AGR (09-14) 5.2% 14.9% 9.9% -258.0% 25.2% 7.7%
Net Income - R$ mm
2009A 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 C AGR (09-14) 4.7% 17.9% 13.1% -254.4% 92.6% 3.1%
Capex - R$ mm
2009A 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 C AGR (09-14) 12.9% -1.4% -16.8% -21.1% -13.0% 0.0%
Dividends - R$ mm
2009A 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 C AGR (09-14) 4.7% 59.3% 7.3% 65.6% 4.0% 9.7%
Net Debt - R$ mm
2009A 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 C AGR (09-14) 3.5% -14.3% -27.5% 67.9% -5.1% 30.6%
Source: Safra and Economática
Prices as of May 12, 2010

3
Table 2: Utilities Valuation Summary - II
Company Cemig Copel CPFL EDP Light Eletropaulo
Ticker C MIG4 C PLE6 C PFE3 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
C urrent 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

Multiples
10E 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$ mm
2009A 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 C AGR (09-14) 6.2% 8.3% 9.3% 6.8% 8.8% 7.9%
EBITDA - R$ mm
2009A 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 C AGR (09-14) 10.9% 9.4% 10.0% 6.1% 7.1% 1.6%
Net Income - R$ mm
2009A 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 C AGR (09-14) 6.2% 13.0% 11.5% 11.5% 4.9% -8.1%
Capex - R$ mm
2009A 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 C AGR (09-14) -16.6% -12.8% -7.2% -10.5% 9.2% 3.4%
Dividends - R$ mm
2009A 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 C AGR (09-14) 5.1% 30.6% 11.5% 12.9% -2.3% -9.3%
Net Debt - R$ mm
2009A 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 C AGR (09-14) -8.9% -271.6% 7.5% -5.9% 4.8% 0.9%
Source: Safra and Economática
Prices as of May 12, 2010

4
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

39,000

38,000

37,000

36,000

35,000

34,000

33,000

32,000

31,000

30,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2007A 2008A 2009A
2010E 2008E no crisis 2009E no crisis
2010E 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
17,000

16,000

15,000

14,000

13,000

12,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2007 2008 2009 2010E

Source: EPE & Safra

5
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

6,000

5,000

4,000
3,000

2,000
1,000

0
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

180

160

140

120

100

80
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.

6
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%
C esp -6% -3% 0% 3% 6%
C opel -7% -5% 0% 2% 7%
C emig -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/MWh
AES Tietê 19.00 21.00 22.00 24.00 25.00
Tractebel 25.00 26.00 27.00 28.00 29.00
C esp 29.00 30.00 31.00 32.00 33.00
C opel 38.00 39.00 41.00 42.00 44.00
C emig 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%.

7
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

8
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.

9
Table 5: Sector Growth & Consolidation
E xis t ing E xist ing E xis t ing N ew N ew
C o m pa ny
D is t ribut o rs G e ne ra t io n T ra ns m is s io n G ene ra t io n T ra ns m is sio n

A ES Tietê

Cesp

Tractebel

Eletro paulo

Cemig

Co pel

CP FL Energia

Energias do B rasil

Light

M PX

Eletro bras

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.

10
Table 6: Utilities debt exposure
IN D E X TRP L GET I C ESP T B LE MPX E LE T C M IG C P LE C P F E EN B R LIG T E LP L

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

IGP M 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%
P RE 0% 0% 0% 0% 0% 53% 4% 0% 0% 1% 0% 14%
TOTA L 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

IGP -M
/EB ITDA 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.

11
Table 7: Generation concession contracts expiring in 2015-2017

2015-2017
Installed % of
Expiring
Capacity Expiring
Concession
(MW) Contracts
(MW)

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.
2. The analyst responsible for the production of this report hereby certifies that the views
expressed herein accurately and exclusively reflect his or her personal views and opinions about any
and all of the subject issuers or securities and were prepared independently and autonomously,
including from Safra Corretora. Because the personal views of analysts may differ from one another,
Safra Corretora, its subsidiaries and affiliates may have issued or may issue reports that are
inconsistent with, and/or reach different conclusions from, the information presented herein.
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which is generated through investment banking activities. Like all employees of Safra Corretora, its
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this reason, analyst’s compensation can be considered to be indirectly related to this report.
However, the analyst responsible for the content of this report hereby certifies that no part of his or
her compensation was, is, or will be directly or indirectly related to any specific recommendation or
views contained herein or linked to the pricing of any of the securities discussed herein. The analyst
declares that (s)he does not maintain any relationship with any individual who has business of any
nature with the companies or government and does not receive any compensation for services
rendered to or have any commercial relationship with the Company or any individual or entity
representing the interests of the Company. The analyst(s) and any member of his/her household do
not hold, directly or indirectly, more than 5% of their personal net worth in any securities issued by
the companies or government analyzed in this report in his/her personal investment portfolio, nor is
(s)he personally involved in the acquisition, sale or trading of such securities in the market. Neither
the analyst(s) nor any member of the analysts’ household serves as an officer, director or advisory
board member of the companies analyzed in this report. In addition, in adherence to Safra
Corretora’s Compliance policies, neither Safra Corretora or any of its employees have a direct or
indirect stake equal to, or higher than, 1% (one percent) of the capital stock of the companies or
government and are not involved in the acquisition, sale or trading of such securities in the market.
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report does not take into account the investment objectives, financial situation or particular needs of
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particular circumstances before making an investment decision on the basis of the information
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currency, a change in exchange rates may adversely affect the price or value of, or the income
derived from, the financial instrument, and the reader of this report assumes any currency risk.
Income from financial instruments may vary and its price or value, either directly or indirectly, may
rise or fall. Past performance is not necessarily indicative of future results, and no representation or
warranty express or implied, is made herein regarding future performances. Safra Group does not

13
accept any liability whatsoever for any direct or consequential loss arising from any use of this
report or its content.
5. This report may not be reproduced or redistributed to any other person, in whole or in part,
for any purpose, without the prior written consent of Safra Corretora. Additional information relative
to the financial instruments discussed in this report is available upon request.

Additional note to U.S. Investors: Safra Securities LLC accepts responsibility for the content of this
report. Any US Person receiving this report and wishing to effect any transaction in any security
discussed in this report should do so with Safra Securities LLC at 546 5th Ave, 2nd Floor, New York,
NY.

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%.

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RESEARCH

MACROECONOMIC RESEARCH
CHIEF-ECONOMIST
Cristiano Oliveira da Silva
[email protected] (55 11) 3175-7406
ECONOMIST
Beatriz T. Aguiar
[email protected] (55 11) 3175-9749
ECONOMIST
Daniel Xavier Francisco
[email protected] (55 11) 3175-7596
ECONOMIST
Marcelo Portilho
[email protected] (55 11) 3175-9456
ECONOMIST
Marcos Bredda de Marchi
[email protected] (55 11) 3175-7096

EQUITY RESEARCH
STRATEGY
Sergio Goldman
[email protected] (55 11) 3175-7387
CONSUMPTION/ RETAIL
Erick Guedes, CFA
[email protected] (55 11) 3175-8046
Carolina da Costa Carvalho
[email protected] (55 11) 3175-7821
FINANCIALS
Rafael Ferraz
[email protected] (55 11) 3175-8450
Sergio Goldman
[email protected] (55 11) 3175-7387
INDUSTRIALS/AGRIBUSINESS
Cassio Lucin
[email protected] (55 11) 3175-7517
Caroline Canapini Dalago
[email protected] (55 11) 3175-8157
MINING/STEEL/PULP&PAPER
Rogerio Zarpao
[email protected] (55 11) 3175-7931
REAL ESTATE
Sergio Goldman
[email protected] (55 11) 3175-7387
Ricardo Rezende
[email protected] (55 11) 3175-7383
TRANPORTATION/LOGISTICS/INFRASTRUCTURE
Marcello Gunther
[email protected] (55 11) 3175-8127
UTILITIES
Sérgio Tamashiro
[email protected] (55 11) 3175-8353
Diogo Almeida do Amaral
[email protected] (55 11) 3175-9740

BANCO SAFRA DE INVESTIMENTO S.A.

AV. PAULISTA, 2100
SÃO PAULO – BRASIL
01310-930

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