Tractebel's Hydro Allocation Process for HSBC Utilities

1. Tractebel’s Hydro Allocation Process HSBC Utilities Day November 27, 2008 Manoel Zaroni Torres - CEO 1

2. Background • At CCEE the “resources” of a generation co. are compared to its sales on a monthly basis. • “Resources” stand for: • Purchases from third parties • Thermal generation • Hydro energy allocated • Difference between “resources” and sales is settled at Spot Price (PLD). • Tractebel's energy availability is almost fully contracted up to 2010. • Tractebel is entitled to fuel reimbursement by CDE when coal-fired plants are dispatched due to merit order or inflexibility. 2

3. Thermal Generation Exposure to Spot Prices 2008 Maximum Dispatch Assured Energy (Port. MME 303) PLD Exposure ~ 375 avgMW Inflexibility (CDE) ~ 375 avgMW t Note: figures referred to CCEE’s settlement point. 3

4. BRL/MWh PLD Curve 2 1 Permanence Thermal Generation Exposure to Spot Prices Maximum Dispatch Thermal Dispatch (Merit) Settled by PLD (revenue) ~ 280 avgMW Thermal Substitution Cost Thermal Assured Energy Thermal Substitution Energy (Merit) Settled by PLD (expenses) ~ 375 avgMW 1 - Minimal Exposure Cost 2 - Maximum Exposure Cost Inflexibility Dispatch due to inflexibility (based on the purchase of 200,000 tons of coal per month) ~ 375 avgMW TBLE is entitled to coal reimbursement (by CDE) t 2008 4

5. Hydro Generation Exposure to Spot Prices Secondary Energy (MRE): settled by PLD (revenue) GSF < 1 (MRE): settled by PLD (expenses) Year Maximum Dispatch Real Dispatch Hydroelectric generation above or below the “Seasonalized” Assured Energy is valued by “MRE Tariff” (~ R$ 8/MWh) “Seasonalized” Hydro Assured Energy Allocated Energy (MRE) Allocated Energy above or below the “Seasonalized” Assured Energy is settled by PLD t The impact on the results is less significant than the thermal substitution 5

6. Mechanisms to Mitigate Thermal Plants Exposure Net Buyer at CCEE PLD Exposure Net Seller at CCEE ok Total Sales Contracts Merit Thermal Generation Thermal Inflexibility Hydro Assured Energy ... and so on Portfolio x Resources Purchase Contracts m+3 m+1 m+2 m An appropriate monthly allocation of the hydro resources over the year can mitigate the exposure arising from the thermal substitution energy to be purchase at spot price 6

7. Spot Price History Data PLD in a year’s 1st half is likely to be lower than in 2nd half 7

8. Monthly Allocation of Hydro Resources Year X1 PLD Expectation Hydro Assured Energy Sale Contracts Assured Energy can be allocated monthly over year x1 Decision is taken in Dec. Year x0 (unchangeable afterwards) Thermal Assured Energy Thermal Inflexibility Purchase Contracts t 8

9. Monthly Allocation of Hydro Resources Net Seller at CCEE Net Buyer at CCEE Year X1 PLD Expectation Hydro Assured Energy Sale Contracts Thermal Assured Energy Thermal Dispatch Thermal Inflexibility Purchase Contracts t 9

10. Decision Traps • Regulatory uncertainties • Risk aversion mechanisms (i.e., Risk Aversion Curve and Target Level) • Changes in PLD pricing model • Out-of-merit thermal dispatch • GSF resulting from overall hydro allocation • Unexpected unavailability of power plants • Price/availability of short-term energy purchased from third parties to (i) offset a net buyer position and (ii) leverage future overallocation • Trade off: sales of short-term energy at PLD+Δ% X future overallocation leverage 10