Introduction

Methodological Aspects

Portfolio Composition - September to December/2008

Current Portfolio Composition - 12/04/2008

1st. Preview of the Portfolio - January to April/2009

INTRODUCTION

Existing for many years in the international markets, the sector indexes have the purpose of providing a segmented view of the stock market performance. They are composed by the most significant publicly-held companies of specific economic sectors, representing the aggregated performance of the sector considered.

The Electric Power Index (IEE) was the first sector index created by BOVESPA. It was launched in August 1996 to measure the performance of the electric power sector. In this sense, the index is an instrument that makes possible the performance analysis of portfolios specialized in the electric power sector.

With the launching of IEE, BOVESPA aimed at developing the Brazilian stock market and its liquidity by creating new trading opportunities both for brokerage firms and investors.

Electric Power Index - IEE

The index is calculated by using "equal-Reais" weighting to ensure that each component security included in the index is represented in approximately "equal Reais" amount in the index portfolio.

The use of the "equal-Reais" weighting method for the different companies included in the index prevents one company from dominating another one within the portfolio. Therefore, aiming at "equal-Real" weighting of the portfolio's components, an initial amount of R$10.000,00, at market prices, was invested in each IEE-participating company. Based on such amount, the quantity of each stock integrating the index will rounded out to the nearest whole round lot (for example, a company whose stock was quoted at R$50,00 per lot of /1000 shares, would participate with 200.000 shares in the index portfolio.)

The portfolio was set up on December 29, 1994, based on data of that year. For statistical purposes, the portfolio's aggregated value was reduced by a divisor (represented as a in the index formula - Appendix A), in order to establish the initial index value at 1000 points.

The portfolio will be rebalanced every four months, based on the closing prices for such period (April, August, December), with the objective of ensuring that the stocks included in the index portfolio are equally weighted.

It is important to point out certain methodological aspects which were used to define the adoption of a price index and whose parameters differ from the ones prevalent on Ibovespa:

• As this is a sectoral index and there are disparities in the trading standards of the various stocks that integrate the sector, it was decided not to use the liquidity parameter as a weighing factor, as such use would restrict the range of the indicator.
  
  
• The new index includes the sector’s most actively traded stocks; more specifically, such stocks have to account for at least 80% of the total trading. Additionally, a minimum of two (2) trades/day on at least 80% of the sessions mentioned above is required. The objective of this parameter is to ensure that the average price trend of the stock is supported by a significant information base, and at the same time avoid the inclusion of low-liquid assets.
  
  
• Given the objective of the sector index, which is to reflect average price trends of the sector's stocks, only one kind of stock from each company may be included in the portfolio. In effect, reasons that may affect the perspectives of a specific company are equally reflected in the prices of the different kinds of such company’s stocks. Thus, the inclusion of more than one type of stock issued by the same company might result in index concentration without the benefit of information for the market.
  
  
• Selected procedures were adopted to initiate daily announcements of the index. The index is announced only after the opening of at least 60% of the portfolio's stocks. Such a procedure seeks to ensure that the opening index is representative.
  
  
• Seeking to provide the market with an index whose concept allows for the development of derivatives, it was decided to include assets whose quantities are rounded out to their closest round lot or multiples in the portfolio. To this effect, the amount resulting from the invested R$10.000,00 was rounded out to its closest rounded-out multiple. Thus, the relative weight of each stock may differ somewhat.
  
   

Number of shares upon IEE portfolio rebalance at the beginning of the four-month period

METHODOLOGICAL ASPECTS

Presentation

The Electric Power Index (IEE) is designed to provide a segmented view of the stock market by measuring the electric power sector performance.


Shares Eligible for the Index

IEE is composed by the electric power sector’s most representative companies listed on BOVESPA, whose stocks have equal weight in the index portfolio (“equal-Reais weighting”). These stocks must meet the inclusion criteria described below.


Criteria for Inclusion in the Portfolio

The stocks that comply with the following criteria will be included in the portfolio:

a) participation in terms of financial value equal to or higher than 0,01% of BOVESPA’s cash market value (round-lot) over the last twelve months;

b) have been traded in at least 80% of the total trading sessions of the period;

c) have had at least 2 trades/day in 80% of the trading sessions in which the stock was traded.

Only the most liquid share type of an eligible company will be included in the portfolio (the one which had the highest negotiability index during the period considered).


Criteria for Exclusion from the Portfolio

A stock will be excluded from the portfolio if it has been traded in less than 70% of the trading sessions of the reevaluation base period, or if it fails to comply with one of the other inclusion criteria, during periodical reevaluations.

If, during the life cycle of the portfolio, the issuing company changes its main economic activity or enters a regime of judicial reorganization or files for bankruptcy, its shares will be excluded from the index portfolio. In case of a public offering which results in the removal of a significant proportion of shares from the market, the company’s shares will be excluded from the portfolio. In such circumstances, the necessary adjustment will be made to ensure the continuity of the index.


Term of the Portfolio

The theoretical portfolio will be valid for four months, for the periods of January to April, May to August and September to December.

The portfolio will be recalculated at the end of each four-month period, according to the procedures and criteria of this methodology.


Weighting Criterion

IEE measures the return on a theoretical portfolio composed by securities that comply with the inclusion criteria described above. IEE’s component stocks receive the same investment amount, therefore having equal participation in the portfolio in terms of Reais invested (“equal value weighted”), at the portfolio creation and in the periodical reevaluations.

Although being equal at the beginning of each four-month period, the relative participation of the component stocks will change according to the individual price movements during this period. Moreover, considering that the theoretical quantity will be constituted by the stock round lot and its multiples (disconsidering odd quantities), some adjustments may occur causing small differences in the relative weights.

The base for IEE has been set at 1,000 points for the date of December 29th 1994. In order to adapt to the initial base, the portfolio market value has been adjusted using a reducer (adjustment coefficient), designated by α in the index formula. That is,

Initial index = Value of portfolio / α = 1.000

The index reducer will be altered whenever necessary to accommodate inclusions in or exclusions from the portfolios, on the occasion of periodical rebalancing or on the occasion of any adjustments arising from benefits/events given by the companies.

Whenever issuing companies of component stocks distribute benefits, the necessary adjustments will be made to guarantee that the index reflects not only stock price variations but also the impact caused by benefit distribution. Because of such methodology, IEE is considered an index that evaluates the total return of the stocks comprising its portfolio.


Index Calculation

BOVESPA calculates IEE in real time considering the prices of the last trades carried out on the cash market (round lot) with the component stocks. The index is only disclosed to the market when stocks representing at least 60% of the portfolio’s total weight have been traded.


Suspension of Trading

In the event of suspension of a component stock, the index will use the price of the last trade registered on the Exchange until normal trading is resumed. If such suspension continues for 50 days as of the date of its beginning, or in case of lack of perspectives of trading resumption, or in case of portfolio rebalancing, such stock will be excluded from the portfolio. In such cases, the necessary adjustments will be made to ensure the continuity of the index.


Procedures for Rebalancing

In the rebalancings at the end of each four-month period the following procedures will be adopted:

1. The rebalancing of the index notional portfolio will take place after the closing of the last trading session of the four-month period and will be based on that day’s closing index.

2. BOVESPA calculates the data relative to value and trading session participation (see “Criteria for Inclusion in the Portfolio”) of the electric power sector stocks and, after selection of the companies that comply with the inclusion criteria, the Exchange selects the most liquid stock type to compose IEE’s portfolio.

3. The next step is to identify, among the stocks that belong to the current portfolio, if any of them might be excluded.

4. Once selection of the companies that will compose the portfolio for the coming four-month period has been concluded, the Exchange divides the market value of the closing portfolio of the previous four-month period by the new component stocks, in order to determine the new theoretical quantities. These quantities are then adjusted to the multiples of the stocks’ round lots, and the market value of the new portfolio is calculated.

5. Each stock’s theoretical quantity will remain unchanged during the four-month period, being altered only in case of benefit distribution by the issuing companies (dividends, bonuses, subscriptions, etc.).

6. The reducer adjusted for the new portfolio is calculated by dividing the portfolio’s new economic value (calculated pursuant to item 4) by the closing index of the four-month period.

7. The adjustment of the reducer aims to ensure the continuity of the index by not enabling the number of index points to change as a result from the rebalancing. Therefore, both the division of the index notional portfolio’s “new market value” by the new reducer and the division of the “previous notional portfolio’s market value” by its respective reducer will result in the same index points.


Index Adjustments

IEE will be adjusted for all the benefits distributed by the issuing companies of the component stocks in order to measure the total return on its notional portfolio.

The adjustment is made considering that the investor sold its stocks at the last closing price before the benefit distribution and used the amount obtained to purchase the same stocks without the benefit (“ex-right”).

If necessary, BOVESPA adjusts the new theoretical quantities – which changed due to the benefits distributed – so that they become multiples of the stocks round lots (see Formula for Change in the Theoretical Quantity in the Annex).


Special Procedures

1. Adjustments in case of Company Spin-off

a) Announcement/Spin-off Substantiation

The announcement of the issuing company’s decision to make a spin-off does not alter its situation in the index theoretical portfolio.

Once the spin-off has been made and while awaiting the resulting companies to be operational and registered, these companies will be considered as a trading unit and will remain in the index portfolio (under a “spin-off” condition).

For trading purposes at BOVESPA, the spin-off substantiation means the act by which the stocks of companies resulting from the spin-off begin to be traded in the trading session.

b) Beginning of trading on the stock exchange of the companies resulting from the spin-off

The stocks of companies resulting from the spin-off which continue to operate in the electric power sector will remain in the index.

c) Next four-month recompositions

In order to select the stocks that cumulatively comply with index inclusion criteria, the following procedures will be adopted:

- up to 4 months as of the spin-off: the resulting companies will be considered as a trading unit, and their individual trading and value data will be estimated according to the participation of each stock closing price (in the adjustment trading session) in the sum of closing prices of all the stocks of the same type resulting from such spin-off;

- from 4 to 12 months as of the spin-off: the resulting companies will be considered as a trading unit, and their individual trading and value data will be estimated according to the participation of the negotiability index of each stock (calculated as of the beginning of the new stocks listing) in the sum of such indexes;

- after 12 months as of the spin-off: stocks will be considered separately.


2. Adjustments in case of Public Offerings

Whenever a company makes a public offer which causes the acquisition of a significant part of its outstanding stocks, BOVESPA may adopt one of the two procedures:

a) when the acquisition is lower than 2/3 (two thirds) of the outstanding shares, to exclude from the index the percentage of the outstanding capital which has been acquired by
the company, or

b) to exclude the stock from the index when the acquisition is higher than 2/3 (two thirds) of the outstanding shares.

In either case, an adjustment in the index reducer will be carried out.


3. Adjustments in case of Mergers

a) Company having stocks in the index mergers with a company whose stocks are also in the index

The incorporating company’s stocks remain in the index and their theoretical quantity is adjusted.

b) Company having stocks in the index mergers with a company whose stocks are not in the index

The incorporating company’s stocks remain in the index and the theoretical quantity is not changed.

c) Company having stocks in the index is incorporated by a company whose stocks are not in the index

Such situation will be analyzed on a case-by-case basis, and BOVESPA may at its discretion:
exclude such stock from the index;
replace the incorporated company’s stock by the incorporating company’s one.

Note: In either case, adjustments in the reducer will be made. In addition, on the occasion of the four-month reevaluations, the incorporated company’s negotiability data will be added to the incorporating company’s one.


Formula for Calculating the IEE

IEE may be calculated using the following formulas:

a) without using the reducer:

IEE(t) = IEE(t-1) *

where:

IEE_(t) = index value on day “t”
IEE_{(t-1) *} = index value on day “t-1”
n = number of shares included in the index theoretical portfolio
Qi_t-1= theoretical quantity of share “i” available for trading on day “t-1”. In the event of distribution of shares of the same type by the company, it refers to the theoretical quantity of share “i” available for trading on day “t-1”, recalculated because of such benefit.
Pi_t= price of share “i” at closing of day “t”
Pi_t-1= closing price for share “i” on day “t-1”, or its ex-theoretical price, in the case of benefit distribution on this day.

b) using the reducer:

IEEt=

=

where:

IEE_(t) = index value at moment “t”
n = total number of companies included in the index theoretical portfolio
Pi_t = last price of share “i at moment “t”
Qi_t = quantity of share “i in the theoretical portfolio at moment “t”
µ = reducer used to adjust the index value to the current base


Adjustment Procedure for Benefits

The theoretical quantities of the stocks will remain constant during the portfolio’s four-month period, and will only be altered in the event of benefit distribution in shares of the same type by the issuing companies (bonuses, splits, subscription, etc.).

The adjustment of the theoretical quantities in the exact proportion to the distributed benefit is carried out after the closing of BOVESPA’s trading session, on the last day prior to the ex-date of the corporate action.

The following formulas are used:


FORMULA FOR CHANGE IN THE THEORETICAL QUANTITY
(on the occasion of benefit distribution)

where:

Qn = new stock quantity
Qo = previous stock quantity
Pc = last closing price before the ex-date of the corporate action
Pex = ex-theoretical price, calculated based on Pc


GENERAL FORMULA FOR CALCULATION OF THE “EX-THEORETICAL” PRICE

where:

Pex = ex-theoretical price
Pc = last price before the benefit distribution
S = percentage of subscription, in index number
Z = issuing value of the share to be subscribed, in Brazilian currency
D = dividends received per share, in Brazilian currency
J = interest on capital, in Brazilian currency
Vet = theoretical economic value per share, resulting from benefits distributed in another share type/asset
B = percentage of bonus (or split), in index number

Note: The Vet is calculated considering the financial amount which would be obtained from the sale of shares of another type and/or other assets (debentures, shares of another company, etc.) received. For example, suppose that company A is distributing to its shareholders, free of charge, one share of company B for every two shares held of company A, and that the shares of company B are evaluated at $ 5.00/share. In this case, the Vet will be equal to $2.50.