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CPFL Energia is the largest private company in Brazilian electricity sector, operating through its subsidiaries in the distribution, generation and commercialization of electricity, in free and regulated markets. The company operates in the States of Sao Paulo, Parana, and Rio Grande do Sul, three major economic and industrial centers in Brazil. CPFL's subsidiaries and areas of business are divided as follows:


In the distribution segment, CPFL Energia controls 100% of Companhia Paulista de For a e Luz CPFL Paulista, Companhia Piratininga de For a e Luz CPFL Piratininga, Companhia Luz e For a Santa Cruz CPFL Santa Cruz, and the four distributors making up CPFL Jaguari na (formerly CMS Energy Brazil) - Companhia Paulista de Energia El trica, Companhia Sul Paulista de Energia, Companhia Jaguari de Energia and Companhia Luz e For a Mococa) - as well as retaining a 99.76% stake in Rio Grande Energia RGE. CPFL Energia leads this segment with a 13.1% national market share. Together, these companies (excluding CPFL Jaguari na) cover 550 municipalities and distribute 31,778 GWh of electricity to 5.9 million clients in the states of S o Paulo, Paran and Rio Grande do Sul.


The Company's wholly-owned subsidiary, CPFL Comercializa o Brasil S.A. CPFL Brasil, commercializes electricity nationwide on the free market and also provides energy-related services with a market with a 23% national market share.


In the generation segment, CPFL Energia retains outright control of CPFL Comercializa o Brasil S.A. CPFL Gera o, a holding company with stakes in five other subsidiaries with installed capacity over 1,072 MW.

Demand for electricity in Brazil has been growing rapidly, due to the local economic recovery. The current economic growth in Brazil has been fueled by a more benign domestic monetary policy. The Brazilian Central Bank started to cut local interest rates in September 2005. Interest rates declined from 19% to 11.25% today, and they are still very high if compared to other emerging markets, mainly considering that current inflation is just 4%. Nevertheless, Brazilian Central Bank decided to stop cutting basic interest rates in the very short-term. Indeed, after the August Bank meeting, an official report was released with strong comments on domestic inflation pressures. In October, it decided to leave rates unchanged for the first time in two years. While the news is not encouraging, the outlook for Brazil for the medium-term remains promising. We believe that the continued improvement in the Brazilian economic environment will allow Brazil to reach investment grade within the next twelve months, thus leading to a multiple expansion for Brazilian stocks. In the following years, we expect Brazilian domestic rates to converge to international standards, providing a lasting effect of local demand for electricity.

According to ANEEL (the Brazilian National Agency for Electric Utilities), the demand for electricity in Brazil is expected to increase by 4.5% in average in the upcoming years. CPFL is in a unique position to take advantage of this short-to-medium-term growth environment. Most of the Brazilian electric utilities are still old fashioned State owned companies, which lack aggressiveness to lead the consolidation of the Brazilian electricity sector. In this sense, we considered very positive that during the second quarter 2007 CPFL announced the acquisition of CMS Energy Brasil, subsidiary of CMS Energy and Gas LLC, by US$211 million. The acquisition was an important step ahead in the consolidation of the energy distribution and generation in the key area of Sao Paulo and points out to a future of continued acquisitions.

There is room for continued growth in energy consumption in Latin America in the medium-to-long term. Per head consumption is around 1.600 KWH (Kilowatt per hour) in countries like Peru and Colombia, while countries like Brazil, Chile, and Argentina have a per head consumption rate of 2000 to 2,500 KWH. These totals lag behind European per head consumption of 5,000 KWH to 8,000 KWH and the U.S., which is above 13,000 KWH, as we can see in the graph below:

CPFL continues to post encouraging operating numbers. During the first nine months 2007, sales within the company's concession area were up 12.6%. We expect continued growth in sales the short-term. Additionally, the company benefited from the tariff readjustments of 7.06% for CPFL Paulista in April 2007 and 6.05% for RGE also in April 2007. The continued increase in revenues from the tariff for the use of the Distribution System paid by free customers is very good news. Additionally, the company has a very aggressive dividend policy that should attract income seeking investors, even though the current dividend yield is not sustainable.

Despite the continued growth and the positive business environment for electric utilities in Brazil there are some concerns that should be considered. Due to higher fuel prices and the recent shortage of natural gas, cost of electric power for resale has been increasing and this is a major problem for CPFL, since the company is not self sufficient in energy. However, we believe this situation is about to improve in the very short-term. Most of the electric generated in Brazil came from hydroelectric plants and the dry season in the South of Brazil is now finished. In fact, we are approaching the summer and the rains are expected to fulfill the reservoirs in the following months, reducing the price of electric power. CPFL's operating costs and expenses also increased considerably during the third quarter 2007. This was direct result of the acquisition of Santa Cruz and CMS Energy. Discounting the effect of the acquisitions cost increases would have been almost flat. We believe this is a short-term problem that will be addressed as the recently acquired companies are absorbed into CPFL's structure, creating synergies.

Apart from the acquisitions, CPFL continues to invest in organic growth. During the third quarter of 2007, R$316 million (US$165 million) were invested in the maintenance and expansion of the existing network. Particularly interesting are the investments in the Castro Alves, 14 de Julho, and Foz do Chapeco hydroelectric plants. We believe that the continued increase in demand in Brazil, coupled with all the new investments and acquisitions will fuel earnings in the short-to-medium term. Moreover, during the first quarter of 2007, the Brazilian government announced an ambitious four-year US$235 billion infrastructure investment plan called PAC. A huge part of the investments will be directed to energy generation and energy distribution. The Brazilian domestic electric companies will receive some tax benefits to encourage new investments. We believe CPFL will benefit from this plan in the following years.

Finally, we think that CPFL still has an attractive valuation compared to other international electric utilities, mainly considering the growth potential in Brazil. We remain confident that demand for electricity will continue to increase in Brazil both in the short-term and in future years. All considered, we are rating CPFL as a Buy.


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