TAESA (TAEE11) A Pricey "Safe Play" Source: Company data, Credit Suisse estimates.

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1 Americas/Brazil Equity Research Utilities Rating NEUTRAL* Price (23 Jul 13, R$) Target price (R$) 22.00¹ 52-week price range Market cap. (R$ m) 7, Enterprise value (R$ m) 11, *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Research Analysts Vinicius Canheu, CFA Pedro Manfredini TAESA (TAEE11) INITIATION A Pricey "Safe Play" We initiate coverage on TAEE11 with a Neutral rating and target price of R$22. We believe Taesa offers a case of "super-defensiveness" that sounds attractive in the current volatile market, but we believe such feature is reflected in its valuation. Looking forward, we note that the scenario of declining real interest rates seen in Brazil over the last few years that served as a major windfall to its business strategy (acquisitions + higher leverage) is unlikely to remain a relevant value driver, justifying our more cautious stance on the name. At the current level, we believe TAEE11 properly prices in its 1) high cash-flow predictability, 2) top-notch operation margins, 3) lowest regulatory and political risk among utilities, and 4) high-quality management. Moreover, we believe the market has not incorporated the interest hike cycle for TAEE11, which directly affects the company's leveraged balance sheet and investors' interest in Taesa's dividends. Stable cash flow and high dividends at a high price. We understand that during uncertainties investors seek a combination of stable cash flows and decent dividends. Taesa shows up well in such screening exercise, given its shielded cash flow and 9.3% 5-year dividend yield (nominal terms). However, we believe investors need to keep in mind the cash-flow cliff that will hit the company in upcoming years, driving down its potential for dividend distribution in Such feature does not make its valuation multiples very helpful for long-term-oriented investors. TAESA trades at 2013 EV/EBITDA - P/E of x (regulatory multiples) Growth outlook mainly dependent on M&A. Greenfields still look too competitive and too small to make a difference for a company of Taesa's size. There is still ample room for M&A in the sector, and we believe consolidation should continue as strategic players with greater financial strength such as Taesa grow over smaller and construction-oriented players. In our view, this is the main value driver for the stock. Share price performance Daily Jul 24, Jul 23, 2013, 7/24/12 = R$ Jul-12 Nov-12 Mar-13 Price Indexed Price Relative On 07/23/13 the SAO PAULO SE BOVESPA INDEX closed at Quarterly EPS Q1 Q2 Q3 Q4 2012A 2013E 2014E Financial and valuation metrics Year 12/12A 12/13E 12/14E 12/15E Revenue (R$ m) 1, , , ,306.8 EBITDA (R$ m) 1, , , ,105.0 EBIT (R$ m) 1, , , ,103.2 Net income (R$ m) EPS (CS adj.) (R$) Dividend yield (%) P/E (x) EV/EBITDA P/B (x) ROE stated - return on equity ROIC (%) Net debt (R$ m) 2,549 4,026 3,824 3,511 Net debt/equity (12/13E, %) Capex (R$ m) , Source: Company data, Credit Suisse estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Introduction We initiate coverage on TAEE11 with a Neutral rating and target price of R$22. We believe TAEE11 offers a case of "super-defensiveness" that sounds attractive in the current volatile market, but we believe such feature is reflected in its valuation. Looking forward, we note that the scenario of declining real interest rates seen in Brazil over the last few years, which served as a major windfall to its business strategy (acquisitions + higher leverage), is unlikely to remain a relevant value driver, justifying our more cautious stance on the name. Exhibit 1: M&As vs. Real Yield Brazilian Govt Bonds (NTNB-2017) 9.0% 8.0% Apr 09; Terna Acquisition 7.0% July 12; Acquisition of 50% in Unisa 6.0% 5.0% Nov 11; Abengoa Brasil Acquisition 4.0% May 12; TBE Acquisition 3.0% Real Yield - Brazilian Govt Bonds (NTNB 2017) 2.0% Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Source: Thomson Reuters; Credit Suisse At the current level, we believe TAEE11 properly prices in its 1) high cash-flow predictability, 2) top-notch operation margins, 3) lowest regulatory and political risk among utilities, and 4) high-quality management. Moreover, we believe the market has not incorporated the interest hike risk for TAEE11, which directly affects the company's leveraged balance sheet and investors' interest in Taesa's dividends. TAESA (TAEE11) 2

3 Valuation and Earnings Forecast We set a target price of R$22/TAEE11, based on a DCF-FCFF, using an average WACC of 9.2% (nominal terms). At our target price, TAEE11 would trade at P/Es of x (Regulatory Accounting). Moreover, we see the company paying an average dividend yield of 9.3% (nominal) in the next 5 years and 8.6% in the next 10 years. Exhibit 2: Valuation Table 2012A 2013E 2014E 2015E 2016E 2017E Regulatory P/E EV/RAP EV / EBITDA IFRS P/E EV/RAP EV / EBITDA Source: Credit Suisse Estimates DDM approach suggests TAEE11's rich valuation (R$20/TAEE11), as we point out in the exhibit below. Despite the attractive amount of dividends to be paid in the next 5 years, we highlight a smooth but negative trend for dividends over time, as the concessions move through their 16th year. Exhibit 3: DDM Dividend Discounted Model, in R$mn 2013E 2014E 2015E 2016E 2017E 2018E 2019E-2038E EPS, in real terms Pay Out Ratio 85% 91% 92% 92% 91% 94% 83% DPS - real terms DY - Real terms 9.0% 9.1% 8.8% 8.0% 7.4% 7.0% 4.0% DPS at present value (Ke) Source: Credit Suisse Estimates TBE consolidation to boost Taesa's net income. Taesa's minority stake in TBE will allow the company to consolidate its proportional stake in the recently acquired asset on the equity income line, as of 2Q13 (one month). With that, we expect Taesa's consolidated earnings to jump 33%, along with the dividend base. If we were to adjust Taesa's EBITDA by TBE's stake under the regulatory accounting (old BR GAAP, note that under IFRS, noncontrolling stakes are incorporated only in the equity income line) we would have an increase of R$324mn, to ~R$1.647 in Exhibit 4: Consolidated Regulatory Net Income, in R$mn A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Taesa, ex TBE TBE Equity Income Source: Credit Suisse Estimates TAESA (TAEE11) 3

4 IFRS vs. Regulatory Accounting. IFRS accounting has been in place for all Brazilian companies since 4Q10. Within the utilities, the changes to the new accounting standards have affected mainly the transmission business, especially on the revenues side, which have been split in three major components: financial income, O&M, and construction. The idea is that the new revenues calculation should be based on the project s internal rate of return. Exhibit 5: IFRS Transmission Revenues: Three Major Components Financial Income Financial income is the rate of return applied to the outstanding amount of the financial asset (NPV of cash flow). O&M Revenue O&M revenues, operating costs of the transmission line, is a fixed amount during concession and is adjusted for inflation. Construction Revenues Construction revenue is the capex spent during construction and is booked while the project is being developed. Source: Credit Suisse On the balance sheet, the main change was the change of the Net PPE into financial asset. The rationale behind such move is that the concessionaire doesn't own the asset. Actually, it just has the right to operate the public services on behalf of the grantor, following the conditions set in the concession contract. The financial asset of the current year is calculated based on the: a) financial asset of the previous year, + b) the financial income of the period, which is basically the remuneration of the financial asset (based on the IRR calculated by the concessionary); + c) the O&M linked to the concession + d) the construction cost, a proxy of the capex deployed in the period; - d) the RAP of the period. Exhibit 6: Financial Asset Reconciliation Financial Asset D+0 Financial Income O&M Construction RAP Source: Credit Suisse Financial Asset D+1 TAESA (TAEE11) 4

5 Investment Positives Highly predictable, inflation-hedged cash flow. Taesa has the most predictable and protected cash flow generation within our coverage universe, since it is a full transmission business with no construction risk (Alupar comes second to Taesa, since it has meaningful assets under construction). Revenues from its assets are set during the auction (annual permitted revenues; RAP) and can vary from the contractual terms based on availability. Also, these revenues are adjusted annually for inflation (in July for IGP-M or IPCA inflation, depending on the contract). At the same time, Taesa has very limited disbursements to O&Ms (current EBITDA margin of ~90%) and maintenance capex (>5% of EBITDA). Exhibit 7: Cash Flow, in R$mn Cash Flow 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E (=) EBIT 1,028 1,117 1,188 1,241 1, (-) Tax (+) Depreciation (-) Capex (-) M&A -1, (=) FCFF ,036 1,076 1,107 1, (+/-) Change in Debt (+/-) Monetary Variation (+/-) Financial Result (=) FCFE -1, (-) Dividends (+) Dividends from TBE (+/-)Tax Adjustment (=) FCF -1, Source: Credit Suisse Estimates High operating margins. With EBITDA margins close to 90% and net margins between 40-50%, Taesa operates with the highest operating margins within our utilities space. It is true that transmission companies usually have higher margins than gencos and discos, but Taesa probably ranks in the first positions among Transcos as well. We attribute this high efficiency to (1) the fact that it has the highest concentration of Type-II transmission lines (with the bulk of revenues concentrated in the first 15 years of the concession), (2) its skilled management, (3) its high scale, and (3) Taesa's decision to substitute the outsourced O&M contracts for in-house work. Since the migration began, Taesa's EBITDA margin has expanded from 86% (2005) to 89% (2013E). Exhibit 8: Adjusted FCFF and EBITDA Margin FCFF calculated as = EBIT * (1-Tax) + Depreciation Capex; In R$mn 90% 90% 90% % 88% 1,115 1,035 1,035 1,107 1,114 1,076 88% 88% 88% 88% 88% 88% % 84% 81% 81% 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E FCFF, FCFF, before before acquistions acquistions EBITDA EBITDA Margin Margin Source: Taesa; Credit Suisse Estimates TAESA (TAEE11) 5

6 Long concession life but short-duration cash flows. Type-II assets make a difference. Taesa's main concessions expire in , posing no significant expiration risk in the short term. We also note the duration of Taesa cash flows is shorter than those of the rest of the sector. We estimate TAEE11 s duration to reach some 7-years, below sector's average (~10/11-years). What explains this discrepancy is the fact that Taesa s almost entire portfolio is seeing a 50% reduction in revenues in the 16th year of the concession, mostly concentrated in On the bright side, it is worth mentioning that even the bumps in the road for Taesa (meaning the 50% cut in revenues) are supposedly well known by the market, offering no surprise to investors. Exhibit 9: Taesa's Portfolio Asset Taesa Stake Asset Type RAP, Taesa Stake Concession Start Concession 50% reduction in Expiration RAP NOVATRANS 100% Type II Dec-30 Jun-18 TSN 100% Type II Dec-30 Jun-18 ETEO 100% Type II May-30 Oct-16 ETAU 53% Type II Dec-32 Apr-20 PATESA 100% Type II Dec-32 Sep-19 GTESA 100% Type II Jan-32 Aug-18 MUNIRAH 100% Type II Feb-34 Oct-20 BRASNORTE 39% Type III Feb-34 - NTE 100% Type II Jan-32 Jan-19 STE 100% Type II Dec-32 Jul-19 ATE 100% Type II Feb-34 Dec-20 ATE II 100% Type II Mar-35 Jan-22 ATE III 100% Type II Apr-36 Mar-23 São Gotardo 100% Type III Sep-42 - EATE 50% Type II Jun-31 Mar-18 ETEP 50% Type II Jun-31 Aug-17 ENTE 50% Type II Dec-32 Feb-20 ECTE 19% Type II Nov-30 Mar-17 ERTE 50% Type II Dec-32 Sep-19 STC 40% Type II Apr-36 Nov-22 Lumitrans 40% Type II Feb-34 Oct-22 EBTE 74% Type III Oct-38 - ESDE 50% Type III Nov-39 - ETSE 19% Type III May-42 - Source: Taesa Exhibit 10: Transmission Asset Regulation Transmission Lines Category I (Non-auctioned lines) Assets built before 1998 Concession that initially were to expire in 2015 Companies already agreed to renew the contracts for 30 years beginning in 2013 RAP adjusted annually for inflation Tariff review every 5 years but terms are yet to be defined Category II (Auctioned lines) Assets auctioned between 1999 and 2006 RAP annually adjusted for IPCA or IGP-M RAP reduction by 50% in the 16th year of concession No tariff review Contract with 30-year term Category III (Auctioned lines) Assets auctioned from 2007 onwards RAP annually adjusted for IPCA inflation Tariff review every 5 years (limited to 3 reviews): pass-through of lower cost of debt Contract with 30-year term Source: Credit Suisse TAESA (TAEE11) 6

7 Concession extension a long shot but an open option. The current regulatory rules do not provide for concession extensions, however we cannot rule out this possibility. If the government were to apply the same ~70% cut offered for transmission assets recently (MP 579; now law 12,783), we still see Taesa generating at least 6% of the current EBITDA. In our view, a potential contract extension could add R$1-2/TAEE11 to our target price, since we did not include this feature in our numbers. Exhibit 11: RAP 50% Reduction 2019, 10% 2020, 8% Exhibit 12: End of Concession Terms (% of RAP) % % 2018, 42% 2022, 10% 2023, 4% No Cut, 2% 2016, 7% % % % 2017, 16% 2036+, 7% Source: Taesa, Credit Suisse Estimates Source: Taesa, Credit Suisse Estimates Dividends to remain high in nominal terms. We expect TAEE11 to pay a high ten-year forward dividend yield of 8.6%, one of the highest in the sector. Most of this aboveaverage dividend yield comes from the company's stable operating cash flow and low capex needs. Nevertheless, we highlight that as the concessions reach the 16th year under the contract, Taesa's revenues will be cut 50%, affecting cash flow generation and consequently its capacity to pay dividends and keep debt levels as high as in previous years. TAESA (TAEE11) 7

8 Investment Risks Interest rates hike is a risk for TAEE11 valuation. We note that TAEE11's average dividend yield (no terminal value) and a Real Brazilian Government Bond with similar duration (NTNB-2022; with terminal value) is currently yielding 90bps (4.7% - NTNB vs. 5.6% - implied IRR/equity), significantly lower than in previous years. This means that the market seems to have incorporated an increasing scenario for interest rates in Brazil, but has not yet reflected the same adjustment for Taesa, a security which can be considered a proxy for bonds in R$. According to our sensitivity analysis, each 100bps of higher discount rate (real Ke) cuts our fair value for Taesa in 7%. Exhibit 13: Risk Yield - Brazilian Bonds, pretax vs. TAEE DY (real terms) 9.0% 9.1% 8.8% 8.0% 7.4% 7.0% 4.7% 4.7% 4.7% 4.7% 4.7% 4.7% 4.7% 4.0% 2013E 2014E 2015E 2016E 2017E 2018E E Real Yield - Brazilian Bonds, pretax TAEE11 DY - real terms Source: Credit Suisse Estimates Room for significant changes in ownership structure. Taesa is jointly controlled by a group of financial investors, through a vehicle known as FIP Coliseu and Cemig, a strategic investor. This combination was responsible for quite substantial value creation over the past few years. Currently, there are no indications that such structure will change, but we note that a potential departure of the current group of financials investors could raise questions about the sustainability of the company's "private profile," which allows greater room for operational, financial, and fiscal efficiency. Exhibit 14:Ownership Structure (% total shares) FIP Coliseu CEMIG Free Float CEE Pension Fund (25%) Santander Brasil (25%) Forluz (22.6%) Banco do Brasil (15%) Other(12.4%) 29.5% TAESA 43.4% 27.1% 38.7% 52.6% 100% 100% 49% Brasnorte ETAU ATE III São Gotardo TBE Source: Taesa TAESA (TAEE11) 8

9 Regulated business. Taesa is exposed to the sector regulations issued by the Brazilian National Electric Energy Agency (ANEEL). Although the contracts and revenues are the most protected from interference (type-ii transmission assets), unexpected regulatory changes could negatively impact the company. Limited room for organic growth. Taesa has very little room for organic growth over the next few years, given (1) the nature of transmission contracts (no real growth) and (2) the young age of its assets, which does not provide much room for reinforcements in the short-to-medium term. Finite-life concessions. The transmission business in Brazil works in a 30-year concession model, with finite life cash-flow cycle and no meaningful residual value. In our estimates, we assumed that at the end of each concession term the company will receive the residual value of its assets (not yet depreciated). There are elements to believe that this will happen (MP579), but the main uncertainty is the size of the residual value that will be ascribed to those assets, which can differ from the company s estimates. At any rate, the long-term profile of its concessions assures that this amount will represent a very low share of its NAV. Highly competitive environment driving down returns. State-owned utilities and many construction companies have increased their participation in the transmission lines since 1999 and have demanded increasingly lower and sometimes sub-optimal ROAs a trend that has become more and more significant over the past few years. We believe this could prevent more significant growth opportunities for rational players in the transmission sector. TAESA (TAEE11) 9

10 Growth Opportunities Transcos have no exposure to organic growth, with limited options for earnings expansion through 1) M&A, 2) greenfield auctions, 3) reinforcements, and 4) cost cutting. Mergers and Acquisitions Over the past ten years, Taesa has concluded ~20 deals and is now shaping up to be one of the main transmission operators in Brazil and the largest private one. Looking back, we note that this was a great strategy as it allowed the company to benefit from (1) the drop in capital costs in Brazil, since most of the M&As were concluded when interest rates were higher than current levels and the implied IRRs were higher; and (2) its ability to improve the asset s operations, lifting EBITDA margins from 75% 80% of assets recently added to 85% 90%. Exhibit 15: M&As vs. Real Yield Brazilian Govt Bonds (NTNB-2017) 9.0% 8.0% Apr 09; Terna Acquisition 7.0% July 12; Acquisition of 50% in Unisa 6.0% 5.0% 4.0% 3.0% Nov 11; Abengoa Brasil Acquisition May 12; TBE Acquisition Real Yield - Brazilian Govt Bonds (NTNB 2017) 2.0% Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Source: Thomson Reuters; Credit Suisse We expect Taesa to continue prioritizing new M&As over greenfield auctions. We like such strategy, since it permits the capture of operational synergies and the maintenance of a more balanced capital structure. However, we believe potential gains in new transactions could be more limited, especially compared to those concluded in the last ten years. Higher competition is an important component of this equation, as players like State Grid from China has become more present in the sector's deals. We believe there are roughly > 30 transmission concessions in the hands of local and foreign companies (e.g., Abengoa, Isolux etc), evidencing how fragmented the sector is. We understand that most of these assets could be sold, as their holders are generally pure EPC companies with a very thin track record on operating assets that usually divest after the start-up of the lines. As a result, many of these smaller concessions are likely to make room for operational and financial arbitrage between large and smaller operations in transmission. TAESA (TAEE11) 10

11 Looking at recent history, the trend of the transmission segment of the past few years has been toward greater market concentration, given the significant number of transactions that took place. It is interesting to note that most of the transactions have sellers and buyers with very similar characteristics. At the selling end we have EPC companies, which usually bid aggressively in the greenfield auctions to secure the right to build the assets. Once the project is concluded, these companies seek to sell the asset and jump to a new project. At the buying end we have asset operators, which have a long track record in operating transmission assets. Exhibit 16: Recent M&A in the transmission sector, in R$mn Buyer Seller Year Assets KM RAP EV EV/RAP Net Debt Equity State Grid ACS Transmission Lines 2, , ,046 State Grid Abengoa, Cobra, Elecnor and Isolux 2010 Plena Transmissoras 2, , ,400 1,731 CTEEP EdP 2012 Evrecy Taesa Abengoa 2011/12 Abengoa Brasil 2, , ,067 Taesa Cemig 2012 TBE 1, , ,700 Source: Credit Suisse Going forward, we think the low IRR levels seen in the most recent Greenfield auctions (~7% on equity) may be the main obstacle for new M&As in the transmission business as we believe buyers are looking to accept higher implied IRRs. In other words, either sellers accept transferring assets below book value (in order to reach more suitable IRRs) or the recurrence of new deals will fall. The most recent M&A concluded by Taesa (May-13) was the acquisition of its parent company s stake, Cemig, in TBE. We believe the transaction reached a "fair valuation" (R$1.7bn equity/ 2013 EV/EBITDA of 6.7x and 8.8x P/E), creating a positive NPV of R$100-R$150mn for Taesa. In the future, if Cemig changes its idea of not mixing transmission assets with different concessions regimes, we could see the company looking to consolidated all its transmission assets under Taesa. This could be done by a sale of Cemig's remaining transmission assets, those who were recently renewed under the concession regime of Law In our view, the potential gain for Taesa would depend on company's ability to use its platform and track record to improve the current operation, (we estimate a potential EBITDA of R$40-60mn p.a.). TAESA (TAEE11) 11

12 Greenfield projects According to EPE (Brazilian energy planning agency), the transmission segment in Brazil demands the equivalent to ~50,000km in new high-voltage lines by 2021, creating opportunities in the greenfield projects. The total capex related to these news lines (to be auctioned) and substations should reach up to R$32bn, ~3.0x Taesa's EV. This is surely a very attractive data point for growth-oriented players, like Taesa, though it has not been a driver for the company owing to the lack of adequate returns on these projects vs. their construction risks. In our view, such growth will be significant only for a company of the size of Taesa if (1) the competition for such projects eases and (2) MME and ANEEL start using more reasonable estimates for both the projects' capex and return rates. Currently, the regulatory WACC for Greenfield projects used to set the cap RAP in auctions is 4.6% in real terms. In our view, the lower-than-usual level of competition seen in the auctions in 2013 (see notes "1nd Transmission Auction 2013: More of the Same" - link - and "2nd Transmission Auction" - link - published earlier this year) is an important sign for the regulator that the more recent greenfield projects are not attracting as much interest from investors as they should, which is a concerning point in our opinion, given Brazil's major need to expand the transmission system. In this context, we highlight that out of the 17 lots offered in the 2 auctions that took place in 2013, 6 of them did not have any bids. We see this a sign to the federal government that it is time to rethink the return rates ascribed to projects in the power sector as well, replicating the move recently made for toll roads. In our view, the delay costs associated with such lack of interest can be much higher to Brazilian society than those of higher RAPs. Exhibit 17: 2013 Transmission Auctions Lot Winner Winning Rap Max Rap Discount Estimated Capex 1 st Auction R$mn R$mn R$mn A Engeglobal/ Bimetal % 409 B Abengoa % 531 C Abengoa % 528 D No Bids none 3 23 E No Bids none F No Bids none G Neoenergia % 180 H Isuloux % 560 I Abengoa % 1,888 J No Bids none Total % 4,096 2 nd Auction R$mn R$mn R$mn A No Bids none B FIP Caixa Milao/ Celg/ Furnas % 304 C FIP Caixa Milao/ Bimetal / Geonergia % 346 D MGF/ Geonergy % 119 E MGF/ Geonergy % 54 F CEL/ CELG 4 5 4% 47 G No Bids none Total % % 4,966 Source: Aneel & MME TAESA (TAEE11) 12

13 Reinforcements and Network Updates Usually, the possibility of providing reinforcements and updates to its existing network is the most profitable growth option for a Transco, since it offers return rates higher than greenfield projects with a much lower execution risk. The remuneration for these projects is given by ANEEL, following a regulatory WACC of 6.55% in real terms. Exhibit 18: Regulatory WACC Composition Reinforcement Greenfield We 38% 36% Wd 62% 64% Ke- nominal terms 13.4% 11.5% Ke- real terms 10.7% 8.8% Rf 4.6% 4.6% Equity Risk Premium 5.8% 5.8% Beta Country Risk 3.5% 3.5% Kd - nominal terms 10.0% 9.0% Kd - real terms 7.4% 3.3% WACC - nominal/post tax 9.2% 7.2% US Inflation 2.5% 2.5% WACC - real/post tax 6.6% 4.6% Source: Aneel From time to time, ANEEL authorizes some transmission companies to improve the transmission grid, either because the asset is outdated (new technology is available) or because it needs a capacity booster to transmit a greater flow of energy (usually when there is a big project coming on line in the surrounding area). The request can also come directly from the transmission companies, but they require final approval by ANEEL. At present, Taesa does not have a sizeable pipeline of reinforcements given the relative young age of its assets, so it is hard to expect that such potential could generate meaningful NPV for the company. But in the long term, as its assets mature and the demand for electricity expands in the areas reached by Taesa s network, we should expect the value of this optionality to become more visible. TAESA (TAEE11) 13

14 Company Description Taesa is one of the largest private transmission companies (~9,400km) in Brazil, jointly controlled by a private equity fund, FIP Coliseu, and Cemig. Since its IPO, in 2006, Taesa has kept the same business model: growing through M&A, with more than 20 assets acquired. Exhibit 19: Taesa's Lines Geographical Location Grupo TBE Taesa NTE e UNISA Source: Taesa Taesa was first established in 2006, by the Italian Company, Terna S.p.A, under the name Terna Participacoes S.A., with the purpose to gather the Brazilian assets of the parent company under the same structure. Its portfolio at the time, was constituted by two concession assets acquired in 2003 (Novatrans and TSN), amounting 2,347km in transmission lines and 13 substations, mainly concentrated in the North/Northeast regions. In October 2006, Terna raised R$557mn in an IPO in the BOVESPA, adhering to the second level of corporate governance and with the ticker TRNA11. The amount raised was used primarily for new acquisitions, and, from 2006 to 2009, the company acquired 5 concession assets through its subsidiaries (Munirah, GTESA and PATESA, ETEO, ETAU and Brasnorte), amounting a total of 1,385 km in transmission lines and 16 substations. TAESA (TAEE11) 14

15 In November 2009, FIP Coliseu and Cemig acquired the controlling stake of Terna from the Italians and re-named it to Transmissora Aliança de Energia Elétrica (Taesa) in the same year. Currenlty, Cemig GT and FIP Coliseu together have 73% of of Taesa's total shares. The remaining 27% shares are part of the free float. More recently, in mid-2012, Taesa raised R$1,755 mn in a primary offering in order to fund the acquisition of TBE and Abengoa. Exhibit 20: Taesa Time Line Terna s IPO; R$ 557mn raised in a primary offering. Acquisition of Munirah for R$ 49 mn (100%) RAP: R$ 27mn. Acquisition of Brasnorte (38.7%) RAP: R$ 8.3mn. Acquisition of ETAU (52.6%) for R$ 58.5mn. RAP: R$ 17mn. Acquisition of GATESA /PATESA (100%) for R$90mn. RAP: R$ 23mn. Acquisition of ETEO (100%) for R$570mn RAP: R$ 131mn. Cemig and FIP Coliseu acquire the controlling stake of the company. Terna Participações is re-named Taesa. Tender Offer to Minority Shareholders. Acquisition of the assets of Abengoa group: 100% of NTE and 50% of ATE, ATE II, ATE III and STE UNISA for R$ 1.2bn. RAP: R$ 323mn. Taesa wins the right to build São Gotardo substation in a greenfield auction (100%). RAP: R$ 3.7mn. Acquisition of the remaining stake in UNISA (50%) for R$ 904mn. RAP: R$ 209.5mn Re-IPO: 24 million units raising R$ 1.755bn. Concluded the acquisition of Cemig stake in TBE for R$ 1.7bn. RAP: R$ 360mn (First announced in 2012) Source: Taesa; Credit Suisse Exhibit 21: Valuation Table Generation (Brazil) Integrated (Brazil) Distribution (Brazil) Transmission (Brazil) AES Tiete Tractebel CESP EDP BR Light Eletropaulo CTEEP TAESA Alupar Ticker GETI4 TBLE3 CESP6 ENBR3 LIGT3 ELPL4 TRPL4 TAEE11 ALUP11 Price R$ TP R$ Rating N O O O O U N N O Market Cap R$ mn 8,731 23,629 6,842 5,526 3,349 1,054 5,086 7,837 3,728 Div Yield % 5.2% 2.9% 7.1% 0.5% 8.4% 15.0% 6.6% 2.8% % 4.2% 12.5% 8.2% 6.1% 0.0% 0.0% 9.0% 9.4% % 4.8% 16.5% 8.2% 5.8% 0.0% 2.8% 9.6% 9.4% % 5.0% 9.7% 9.1% 11.8% 0.0% 3.2% 9.7% 9.4% % 8.5% 3.9% 10.0% 8.5% 12.5% 3.5% 9.2% 10.7% P/E x 15.4x 22.4x 9.4x 7.9x 3.0x 6.0x 15.1x 16.9x x 14.1x 5.3x 8.7x 7.9x nm nm 10.1x 13.8x x 12.5x 4.0x 7.8x 9.9x nm 33.7x 9.5x 14.2x x 12.1x 6.8x 6.7x 8.3x nm 29.3x 8.5x 10.3x x 11.8x 13.7x 6.8x 7.3x nm 27.1x 7.8x 9.1x EV/EBITDA x 8.3x 4.3x 5.2x 8.1x 3.5x 5.1x 9.5x 12.5x x 7.7x 3.0x 5.2x 5.8x 7.4x 27.9x 8.4x 11.9x x 6.8x 1.7x 5.0x 6.6x 24.5x 20.0x 7.0x 13.1x x 6.4x 2.4x 4.0x 6.0x 12.2x 17.8x 6.5x 9.9x x 6.1x 3.9x 4.0x 5.9x 4.1x 16.9x 6.0x 8.8x Net Debt / EBITDA x 0.9x 1.3x 1.8x 5.0x 2.5x 2.0x 2.3x 4.2x x 0.6x 0.6x 2.0x 3.5x 5.4x 1.6x 2.8x 3.9x x 0.2x (0.4)x 1.9x 4.0x 18.3x 1.1x 2.3x 5.3x x (0.3)x (1.2)x 1.4x 3.7x 9.3x 0.8x 2.0x 4.1x x (0.5)x (3.0)x 1.3x 3.7x 3.1x 0.5x 1.6x 3.6x Source: Credit Suisse Estimates TAESA (TAEE11) 15

16 Exhibit 22: Taesa Output BASICS Sector Utilities/Transmission Ticker TAEE11 Price (R$) 22.8 Target (R$) 22.0 Recommendation NEUTRAL Mkt. cap. (R$ mn) 7,837 POSITIVES Free Float (R$ mn) 2,126 High cash flow visibility and efficient leverage ratios High 10-year forward dividends (nominal terms) SHAREHOLDING STRUCTURE ON PN TOTAL FIP Coliseu % - 0% % Cemig GT % % % NEGATIVES Free Float % % % Meaningful cash flow clif in TOTAL % % 1, % Negative exposure to hikes in the Selic COMPANY DESCRIPTION TAESA is pure play in the transmission sector in Brazil. Joinlty controlled by CEMIG GT and FIP Coliseu, TAESA has 23 concessions, comprising over 9,400 km of transmission lines in the country. Highly efficient operations and low political exposure RAP Breakdown - 50% Reduction in RAP (BRGAAP) Ownership Structure (% of total shares) 2022, 10.5% 2023, 4.3% 2016, 1.5% 2017, 2.8% CEE Pension Fund (25%) FIP Coliseu 29.5% CEMIG Free Float 43.4% 27.1% Santander Brasil (25%) 2020, 12.0% Forluz (22.6%) Banco do Brasil (15%) TAESA Other(12.4%) 2019, 11.6% 2018, 57.4% 38.7% 52.6% 100% 100% 49% Brasnorte ETAU ATE III São Gotardo TBE FINANCIAL METRICS (R$ mn)* 2012A 2013E 2014E 2015E 2016E 2017E OPERATING METRICS 2012A 2013E 2014E 2015E 2016E 2017E Net Revenues 1,245 1,396 1,498 1,577 1,639 1,664 RAP (R$ mn) 1,355 1,914 2,028 2,136 2,223 2,221 Total Expenses Km 6,272 9,407 9,407 9,407 9,407 9,407 EBIT 910 1,028 1,117 1,188 1,241 1,256 EBIT margin 73% 74% 75% 75% 76% 76% LEVERAGE 2012A 2013E 2014E 2015E 2016E 2017E EBITDA - Regulatory GAAP 1,093 1,234 1,323 1,394 1,447 1,462 Net Debt/EBITDA EBITDA margin 88% 88% 88% 88% 88% 88% Net debt / Total Capital 34.7% 47.1% 45.3% 42.4% 38.1% 33.2% EBITDA - Regulatory GAAP, including TBE 1,093 1,416 1,647 1,735 1,805 1,791 Average Cost of Debt 9.1% 10.1% 9.2% 8.7% 8.5% 8.3% Net financial expenses (278) (309) (319) (278) (245) (205) Capex / Operat.Cash Flow n.a n.a 3.2% 3.2% 3.2% 3.3% Taxes (158) (65) (183) (217) (244) (261) EBITDA/Net Interest Exp Equity Income Net income - Regulatory GAAP ,001 1,025 # units ('000) RETURN / YIELD 2012A 2013E 2014E 2015E 2016E 2017E EPS (R$/unit) - Regulatory GAAP ROIC 8.5% 11.0% 10.7% 11.2% 11.2% 11.3% NOPAT WACC 9.2% 9.2% 9.2% 9.2% 9.2% 9.2% Capex & M&A (886) (1,715) (33) (34) (36) (36) ROE 12.8% 15.9% 14.6% 15.8% 16.1% 15.9% FCFE - Taesa ex TBE 1,159 (1,152) ROA 5.9% 7.5% 7.1% 8.0% 8.5% 9.0% FCFE (inlcuding TBE) 1,159 (988) , FCFE Yield 14.8% -12.6% 11.2% 11.4% 14.1% 9.5% Dividends/ IOE Div. Yield 6.6% 9.0% 9.6% 9.7% 9.2% 9.0% DPS (R$/unit) - Regulatory GAAP Total assets 8,857 8,777 8,706 8,658 8,882 8,805 Cash 2, ,158 1,157 VALUATION - Regulatory 2012A 2013E 2014E 2015E 2016E 2017E Net debt (cash), Taesa ex TBE 2,150 3,687 3,490 3,221 2,869 2,470 P/E Net debt (cash), TBE 2,543 4,025 3,760 3,406 2,935 2,415 EV/RAP Book value 4,050 4,141 4,216 4,379 4,656 4,978 EV / EBITDA Market cap. 7,837 7,837 7,837 7,837 7,837 7,837 EV 10,381 11,863 11,597 11,243 10,773 10,253 Invested capital 8,857 8,777 8,706 8,658 8,882 8,805 VALUATION - IFRS 2012A 2013E 2014E 2015E 2016E 2017E EBITDA - IFRS 1,060 1,192 1,152 1,105 1, P/E EBITDA - IFRS, including TBE 1,060 1,365 1,438 1,379 1,306 1,218 EV/RAP Net Income - IFRS EV / EBITDA Source: Taesa; Credit Suisse Estimates TAESA (TAEE11) 16

17 Companies Mentioned (Price as of 23-Jul-2013) Alupar (ALUP11.SA, R$17.89) Cemig (CMIG4.SA, R$21.25) Energias do Brasil (ENBR3.SA, R$11.6) TAESA (TAEE11.SA, R$22.75, NEUTRAL, TP R$22.0) Transmissao Paulista (TRPL4.SA, R$33.5) Important Global Disclosures Disclosure Appendix Vinicius Canheu, CFA and Pedro Manfredini, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts stock rating are defined as follows: Outperform (O) : The stock s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a sto ck s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relev ant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiveness of a stock s total return potential within an analyst s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the % and % levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese r atings were based on a stock s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts sector weightings are distinct from analysts stock ratings and are based on the analyst s expectations for the fundamentals and/or valuation of the sector* relative to the group s historic fundamentals and/or valuation: Overweight : The analyst s expectation for the sector s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst s expectation for the sector s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst s expectation for the sector s fundamentals and/or valuation is cautious over the next 12 months. *An analyst s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 42% (53% banking clients) Neutral/Hold* 40% (50% banking clients) Underperform/Sell* 15% (39% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, ou r stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individua l factors. TAESA (TAEE11) 17

18 Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for TAESA (TAEE11.SA) Method: Our R$22/TAEE11 target price is based on a sum of the parts analysis (Taesa old assets, abengoa and TBE). We are currenlty using a DCF-FCFF to valuate each asset, with an average WACC of 9.2% (nominal terms). Risk: Some risks to our R$22 TP are: Interest rates hike; change in the ownership structure; regulatory changes; limited room for organic growth Please refer to the firm's disclosure website at for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (TAEE11.SA) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Vinicius Canheu, CFA & Pedro Manfredini each certify that (1) The views expressed in this report solely and exclusively reflect my personal opinions and have been prepared independently, including with respect to Banco de Investimentos Credit Suisse (Brasil) S.A. or its affiliates ("Credit Suisse"). (2) Part of my compensation is based on various factors, including the total revenues of Credit Suisse, but no part of my compensation has been, is, or will be related to the specific recommendations or views expressed in this report. In addition, Credit Suisse declares that: Credit Suisse has provided, and/or may in the future provide investment banking, brokerage, asset management, commercial banking and other financial services to the subject company/companies or its affiliates, for which they have received or may receive customary fees and commissions, and which constituted or may constitute relevant financial or commercial interests in relation to the subject company/companies or the subject securities. Vinicius Canheu, CFA is the responsible analyst for this report according to Instruction CVM 483 To the extent this is a report authored in whole or in part by a non-u.s. analyst and is made available in the U.S., the following are important disclosures regarding any non-u.s. analyst contributors: The non-u.s. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-u.s. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Banco de Investments Credit Suisse (Brasil) SA or its affiliates.... Vinicius Canheu, CFA ; Pedro Manfredini For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at or call +1 (877) TAESA (TAEE11) 18

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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only. Taesa Initiation.doc TAESA (TAEE11) 19