EXHIBIT 99.2
(A free translation of the original in Portuguese)
Espirito Santo Centrais
Eletricas S.A.
Report of Independent Accountants
on Limited Reviews of the
Quarterly Information (ITR)
June 30, 2004
(A free translation of the original in Portuguese)
Report of Independent Accountants
on Limited Reviews
To the Board of Directors and Stockholders
Espirito Santo Centrais Eletricas S.A.
1 We have carried out limited reviews of the Quarterly Information (ITR) of
Espirito Santo Centrais Eletricas S.A. - ESCELSA and Espirito Santo
Centrais Eletricas - ESCELSA and its subsidiaries for the quarters and
periods ended June 30, 2004 and March 31, 2004 and June 30, 2003. This
information is the responsibility of the Company's management.
2 Our reviews were carried out in conformity with specific standards
established by the Institute of Independent Auditors of Brazil (IBRACON),
in conjunction with the Federal Accounting Council (CFC), and mainly
consisted of: (a) inquiries of and discussions with management responsible
for the accounting, financial and operating areas of the Company with
regard to the main criteria adopted for the preparation of the quarterly
information and (b) a review of the significant information and of the
subsequent events which have, or could have, significant effects on the
Company's financial position and operations.
3 Based on our limited reviews, we are not aware of any material
modifications that should be made to the quarterly information referred to
above in order that such information be stated in conformity with the
accounting practices adopted in Brazil applicable to the preparation of
quarterly information, consistent with the Brazilian Securities Commission
(CVM) regulations.
4 The Quarterly Information (ITR) also includes accounting information for
the quarter ended June 30, 2003. This information was reviewed by other
independent accountants, who issued an unqualified report thereon dated
July 17, 2003.
November 22, 2003
Espirito Santo Centrais Eletricas S.A.
5 As mentioned in Note 4.1, the Quarterly Information (ITR) of Espirito Santo
Centrais Eletricas S.A. - ESCELSA and of Espirito Santo Centrais Eletricas
S.A. - ESCELSA and its subsidiaries includes amounts for electric energy
traded in the Wholesale Energy Market (MAE), with a balance payable by the
parent company of R$ 309 thousand at June 30, 2004 (R$ 722 thousand at
March 31, 2004), and a balance receivable in the consolidated quarterly
information of R$ 2,824 thousand at June 30, 2004 (R$ 2,072 thousand at
March 31, 2004), respectively, which were recorded based on amounts
informed by MAE. The liquidation of these amounts is dependent on the
receipts from companies which did not effect net financial settlements as
determined by ANEEL and the conclusion of the judicial discussion about the
interpretation of market rules, which will define the amounts involved.
Vitoria, July 16, 2004
PricewaterhouseCoopers
Auditores Independentes
CRC 2SP000160/O-5
Luiz Marcio Malzone Ronaldo Matos Valino
Contador CRC 1RJ031376/O-2 "S" ES Contador CRC 1RJ069958/O "S" ES
(A free translation of the original in Portuguese)
01.01 - IDENTIFICATION
======================================================================================================================
1 - CVM CODE 2 - COMPANY NAME 3 - Federal Corporate Taxpayer's Registration Number (CNPJ)
01534-2 Espirito Santo Centrais Eletricas S.A. 28.152.650/0001-71
======================================================================================================================
4 - State Registration Number - NIRE
32300002480
======================================================================================================================
01.02 - HEAD OFFICE
============================================================================== ======= ==================================
1 - ADDRESS 2 - SUBURB OR DISTRICT
Rua Sete de Setembro, 362 Centro
============================================================================== ======= ==================================
3 - POSTAL CODE 4 - MUNICIPALITY 5 - STATE
29015-000 Vitoria ES
======================== ========================== ========================== ============================= ============
6 - AREA CODE 7 - TELEPHONE 8 - TELEPHONE 9 - TELEPHONE 10 -TELEX
27 3321-9000 - - 55238
======================== ========================== ========================== ============================= ============
11 - AREA CODE 12 - FAX 13 - FAX 14 - FAX
27 3222-8650 - -
=========================================================================================================================
15 - E-MAIL
escelsa@escelsa.com.br
=========================================================================================================================
01.03-INVESTOR RELATIONS OFFICER (Company Mail Address)
=================================================== ============== ========================================= ============
1 - NAME
Sergio Pereira Pires
=================================================== ============== ========================================= ============
2 - ADDRESS 3 - SUBURB OR DISTRICT
Rua Sete de Setembro, 362 Centro
=================================================== ============== ========================================= ============
4 - POSTAL CODE 5 - MUNICIPALITY 6 - STATE
29015-000 Vitoria ES
================================= ================= ======================================================== ============
7 - AREA CODE 8 - TELEPHONE 9 - TELEPHONE 10 - TELEPHONE 11 - TELEX
27 3321-9163 3321-9199 - -
======================== ========================== ========================== ============================= ============
12 - AREA CODE 13 - FAX 14 - FAX 15 - FAX
27 3222-8949 - -
=========================================================================================================================
16 - E-MAIL
sergiop@escelsa.com.br
=========================================================================================================================
01.04-GENERAL INFORMATION/INDEPENDENT ACCOUNTANT
================================ ========================================== ====================================================
CURRENT YEAR CURRENT QUARTER PRIOR QUARTER
================================ ========================================== ====================================================
1-BEGINNING 2-END 3-QUARTER 4-BEGINNING 5-END 6-QUARTER 7-BEGINNING 8-END
================== ============= ============ ================ ============ ================== =============== =================
1/1/2004 12/31/2004 2 4/1/2004 6/30/2004 1 1/1/2004 3/31/2004
=========================================================================== ================= ==================================
9 - INDEPENDENT ACCOUNTANT 10 - CVM CODE
PricewaterhouseCoopers Auditores Independentes 00287-9
=========================================================================== ====================================================
11 - PARTNER RESPONSIBLE 12 -INDIVIDUAL TAXPAYERS' REGISTRATION NUMBER OF
Luiz Marcio Malzone THE PARTNER RESPONSIBLE
019.495.868-04
=========================================================================== ====================================================
1
01.01 - IDENTIFICATION
======================================================================================================================
1 - CVM CODE 2 - COMPANY NAME 3 - Federal Corporate Taxpayer's Registration Number (CNPJ)
01534-2 Espirito Santo Centrais Eletricas S.A. 28.152.650/0001-71
======================================================================================================================
01.05- CAPITAL COMPOSITION
================================ ============================ ========================= ==========================================
Number of shares Current Quarter Prior quarter Same quarter in prior year
(thousand) 6/30/2004 3/31/2004 6/30/2003
================================ ============================ ========================= ==========================================
Paid-up capital
================================ ============================ ========================= ==========================================
1 - Common 4,551 4,551 4,551
================================ ============================ ========================= ==========================================
2 - Preferred 0 0 0
================================ ============================ ========================= ==========================================
3 - Total 4,551 4,551 4,551
================================ ============================ ========================= ==========================================
Treasury Stock
================================ ============================ ========================= ==========================================
4 - Common 0 0 0
================================ ============================ ========================= ==========================================
5 - Preferred 0 0 0
================================ ============================ ========================= ==========================================
6 - Total 0 0 0
================================ ============================ ========================= ==========================================
01.06- CHARACTERISTICS OF THE COMPANY
================================================================================
1 - TYPE OF COMPANY
Commercial, industrial and other
================================================================================
2 - SITUATION
Operational
================================================================================
3 - NATURE OF OWNERSHIP
National private
================================================================================
4 -ACTIVITY CODE 112 -
Electric energy
================================================================================
5 - MAIN ACTIVITY
Generation and distribution of electric energy
================================================================================
6 - TYPE OF CONSOLIDATION
Total
================================================================================
7 - TYPE OF REPORT OF THE INDEPENDENT ACCOUNTANT
Without exception
================================================================================
01.07- COMPANIES EXCLUDED FROM THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1 - ITEM 2 - CNPJ 3 - NAME
================================================================================
01.08- DIVIDENDS APPROVED AND/OR PAID DURING AND AFTER THE QUARTER
==================================================================================================================================
1 - ITEM 2 - EVENT 3 - DATE APPROVED 4 - AMOUNT 5 - DATE OF PAYMENT 6 - TYPE OF 7 - AMOUNT PER SHARE
SHARE
==================================================================================================================================
2
1. OPERATIONS
ESPIRITO SANTO CENTRAIS ELETRICAS S.A. - ESCELSA is a public Brazilian
corporation, controlled by the Eletricidade de Portugal S.A. - EDP Group,
through IVEN S.A., as from October 2002. The Company activities comprise the
generation, transmission, distribution and sale of electric energy, and these
activities are regulated by the Brazilian Electricity Regulatory Agency (ANEEL),
an agency of the Ministry of Mines and Energy.
ESCELSA is the majority shareholder of MAGISTRA PARTICIPACOES S.A., which holds
the share control of EMPRESA ENERGETICA DE MATO GROSSO DO SUL S.A. - ENERSUL, a
concessionaire responsible for the generation, distribution and sale of electric
energy in the State of Mato Grosso do Sul, and also has full control of CASTELO
ENERGETICA S.A. - CESA, which was incorporated to operate in the exploitation of
water resources, thermal energy generation and transmission lines. ESCELSA is
also the majority shareholder of TV A CABO VITORIA S.A. - TVIX, a company
operating in pay-TV and related services, in the municipalities of Vitoria and
Vila Velha - ES, and has full control of ESCELSA PARTICIPACOES S.A. -
ESCELSAPAR, which renders Internet access services and various information
technology services.
The consolidated quarterly information comprises the balance sheets and
statement of operations of its subsidiaries MAGISTRA, TVIX and ESCELSAPAR.
2. PRESENTATION OF THE QUARTERLY INFORMATION
The quarterly information has been prepared and is presented in conformity with
accounting practices adopted in Brazil, together with specific legislation
established by ANEEL, and the regulations of the Brazilian Securities Commission
(CVM). These practices are consistent with those adopted in the financial
statements for the year ended December 31, 2003, published on March 19, 2004,
except for the Value-Added Tax on Sales and Services (ICMS) provision incident
on the contracted demand which, for a better disclosure is being presented net,
with the reclassification of the prior quarter amounts.
3
3. MARKETABLE SECURITIES
The portfolio composition is as follows:
PARENT COMPANY
=============================================================
FINANCIAL INSTITUTION TYPE MATURITY 06/04 03/04
==================================================================================================================
Banco Pactual S.A.............................. NBC-E 11/16/2006 107,468 103,683
Banco BBA Credtanstalt S.A..................... NBC-E 10/12/2006 89,411 86,429
Banco BBA Credtanstalt S.A..................... NBC-E 11/16/2006 5,095 4,923
Citibank S.A................................... Investment funds Immediate 4,889 2,839
BRADESCO S.A................................... Bank Deposit Certificate (CDB) 08/04 to 06/05 2,580 2,491
Other.......................................... Other Immediate 110 135
========== ========
209,553 200,500
========== ========
CONSOLIDATED
==============================================================
FINANCIAL INSTITUTION TYPE MATURITY 06/04 03/04
=============================================================================================================
Banco Pactual S.A.......................... NBC-E 11/16/2006 107,468 103,683
Banco BBA Credtanstalt S.A................. NBC-E 10/12/2006 89,411 86,429
Banco BBA Credtanstalt S.A................. NBC-E 11/16/2006 5,095 4,923
Citibank S.A............................... Remunerated account Immediate 1,080 6,957
Banco Brasil S.A........................... Investment funds Immediate 6,628 9,396
Citibank S.A............................... Investment funds Immediate 4,889 2,839
BRADESCO S.A............................... CDB 08/04 to 06/05 4,991 3,608
Other...................................... Other Immediate 532 842
=========== ==========
220,094 218,677
=========== ==========
These marketable securities are basically represented by federal securities
(NBC-E), which carry interest and exchange variations, and which are stated net
of a provision for devaluation to market value, when applicable, and are
recorded in current assets due to their liquidity in the market or expectation
of short-term realization.
4
4. CONSUMERS AND CONCESSIONAIRES
PARENT COMPANY
==================================================================
Falling Overdue up to Overdue over Total
=====================
due 90 days 90 days 06/04 03/04
============ ============== ================ =====================
CURRENT
CONSUMERS
Residential................................ 31,963 21,422 1,258 54,643 61,429
Industrial................................. 38,022 3,489 3,293 44,804 37,594
Commercial, services and other activities.. 20,757 6,322 3,400 30,479 33,317
Rural...................................... 7,088 1,781 599 9,468 8,838
Public entities:
Federal.................................. 556 353 365 1,274 4,128
State.................................... 1,294 390 656 2,340 2,459
Municipal................................ 1,881 1,153 1,940 4,974 366
Public lighting........................... 3,876 1,526 3,544 8,946 9,753
Public service............................ 2,960 90 105 3,155 3,021
Regulatory asset...........................
Losses................................... 35,730 - - 35,730 34,430
Free energy.............................. 7,217 - - 7,217 17,117
Debt installments.......................... 13,653 829 4,039 18,521 24,294
Other receivables.......................... 12,121 - - 12,121 14,169
=========== ============== ============= ========== ==========
177,118 37,355 19,199 233,672 250,915
=========== ============== ============= ========== ==========
CONCESSIONAIRES
Supplies-basic............................. 3,020 - - 3,020 3,173
Supplies-short-term........................ 142 - 2 144 264
========== ============== =========== ============ ==========
3,162 - 2 3,164 3,437
========== ============== =========== ============ ==========
ENERGY GRID CHARGES 315 - - 315 392
========== ============== =========== ============ ==========
TOTAL 180,595 37,355 19,201 237,151 254,744
========== ============== =========== ============ ==========
LONG-TERM RECEIVABLES
CONSUMERS
Regulatory asset...........................
Losses..................................... 78,569 - - 78,569 83,835
Free energy................................ 60,055 - - 60,055 55,409
========== ============== =========== ============ =========
TOTAL 138,624 - - 138,624 139,244
========== ============== =========== ============ ==========
5
CONSOLIDATED
==================================================================
Falling Overdue up to Overdue over Total
=====================
CURRENT due 90 days 90 days 06/04 03/04
============ ============== ================ =====================
CURRENT
CONSUMERS
Residential............................... 55,819 37,084 5,904 98,807 106,893
Industrial................................ 51,445 5,819 4,539 61,803 50,611
Commercial, services and other
activities................................ 34,002 12,778 10,056 56,836 61,937
Rural..................................... 10,547 4,350 1,313 16,210 15,770
Public entities
Federal................................. 1,674 1,033 727 3,434 8,083
State................................... 3,193 426 657 4,276 4,570
Municipal............................... 4,176 2,889 3,178 10,243 5,178
Public lighting........................... 8,564 2,506 7,394 18,464 18,989
Utilities................................. 5,117 250 145 5,512 6,291
Regulatory asset..........................
Losses.................................. 58,756 - - 58,756 56,784
Free energy............................. 17,223 - - 17,223 26,831
Debt installments......................... 31,909 1,919 7,638 41,466 47,899
Provision for tariff adjustment........... 37,536 - - 37,536 29,448
Other receivables......................... 25,829 617 83 26,529 26,919
============ =============== ================ =========== ==========
345,790 69,671 41,634 457,095 466,203
============ =============== ================ =========== ==========
CONCESSIONAIRES
Supplies - basic.......................... 3,251 - - 3,251 3,412
Supplies - short-term..................... 511 - - 511 625
Other..................................... 103 - - 103 90
============ =============== ================ ============ =========
3,865 - - 3,865 4,127
============ =============== ================ ============ =========
ENERGY GRID CHARGES 1,138 - - 1,138 931
============ =============== ================ ============ =========
TOTAL 350,793 69,671 41,634 462,098 471,261
============ =============== ================ ============ =========
LONG-TERM RECEIVABLES
CONSUMERS
Regulatory asset..........................
Losses.................................. 125,692 - - 125,692 140,010
Free energy............................. 80,565 - - 80,565 78,600
Supplies - short-term..................... 3,068 - - 3,068 3,068
Provision for tariff adjustment........... 25,937 - - 25,937 26,926
Other receivables......................... 8,479 - - 8,479 8,763
============ =============== ================ =========== ==========
TOTAL 243,741 - - 243,741 257,367
============ =============== ================ =========== ==========
6
4.1 - Wholesale Energy Market (MAE)
The Company has recorded in current assets R$ 144 thousand (R$ 3,581 thousand -
consolidated) and in current liabilities R$ 453 thousand (R$ 757 - consolidated)
related to the sale and purchase of energy and system service charges realized
in the Wholesale Energy Market (MAE). A portion of these amounts is subject to
change depending on the judicial proceedings in progress, filed by companies of
the Sector, about the interpretation of market rules in effect.
PARENT COMPANY CONSOLIDATED
================================ =====================================
ASSETS LIABILITIES ASSETS LIABILITIES
========== ====================== ========== ==========================
SYSTEM SYSTEM
SERVICE SERVICE
SALE PURCHASE CHARGES SALE PURCHASE CHARGES
========== ============ ========== =========== ========== ===========
At March 31, 2004 264 460 526 3,783 904 807
Additions - - - - 219 270
Settlements (120) (287) (246) (202) (774) (669)
========== ============ ========== =========== ========== ===========
At June 30, 2004 144 173 280 3,581 349 408
========== ============ ========== =========== ========== ===========
4.2 -Tariff adjustment
On April 8, 2004, ANEEL published Approval Resolution 73/04 altering the
periodical tariff adjustment of the subsidiary ENERSUL in April 2003, and
changing the adjustment percentage from 42.26% to 43.59%, and the X Factor from
2.35% to 1.35%.
In this Resolution, the phasing of the tariff adjustment was maintained, as had
been defined in 2003 by that Regulatory Agency, in order to follow the principle
of low tariffs and economic and financial balance of the agreement, as follows:
a) In the first year, the tariffs for supply of electric energy were adjusted
based on the Tariff Adjustment Index (IRT) of 32.47%; and
b) In the annual tariff adjustments to be approved from 2004 to 2007, the
difference between IRT and the tariff adjustment (RT) will be added to
Portion B.
7
Considering item "b" above, ENERSUL provisioned during this quarter the income
and related taxes amounting to R$ 14,461, and started recoveries via tariff in
April 2004, recovering in the quarter R$ 7,362. The balances of these assets are
recorded in "provision for tariff readjustment", the movement on which during
the period was as follows.
CONSOLIDATED
-------------------------
CURRENT LONG-TERM
------------ ------------
At March 31, 2004 29,448 26,926
Recovery via tarif (7,362) -
Transfers 15,450 (15,450)
Constitution - 14,461
------------ ------------
At June 30, 2004 37,536 25,937
============ ============
4.3 -Tariff readjustment
On April 8, 2004, ANEEL approved through Resolution 84 of April 7, 2004 the
annual readjustment of ENERSUL tariffs, authorizing an average readjustment of
17.02% with the following composition:
a) Contractual Annual Tariff Readjustment Index of 6.28%;
b) 4.94% index related to the installment of 2003 readjustment;
c) 2.60% index related to 50% of deferred CVA (Compensation Account for Portion
A costs) in 2003;
d) 3.02% index related to CVA between March 2003 and March 2004; and
e) 0.18% index relate to the costs of Emergency Program for Reduction of
Electrical Energy Consumption (PERCEE).
In this readjustment the X factor of 1.35% was applied on the General Market
Price Index (IGPM) variation, as follows:
o 0.98% related to the component Xe, which reflects the productivity gains
expected from the change in the scale of operations by an increase in the
consumption of electrical energy in the area served;
o 0.577% related to the component Xc which reflects the evaluation of the
consumers on the concessionaire, obtained with the use of the result of the
ANEEL Index of Consumers Satisfaction (IASC) research ; and
o Reduction of 0.2887 related to component Xa which reflects the application of
the Amplified Consumer Price Index (IPCA) for the component manpower of
Portion B (non-manageable costs) of the concessionaire.
5. GENERAL ELECTRIC ENERGY SECTOR AGREEMENT
The General Electric Energy Sector Agreement, to which the Company became a
party on December 20, 2001, established conditions for settling contractual and
administrative disputes, thus eliminating the threat of judicial or
extrajudicial suits over issues arising from the electric energy rationing
period. The main points of the Agreement are as follows:
o Declaration of withdrawal of any plea or suit;
o Purchase agreement for net contractual surpluses;
8
o Agreement for reimbursement of free energy;
o Addendums to the initial contracts; and
o Energy Development Account (CDE).
Based on Provisional Measure 14/01, converted into Law 10438/02, and related
legislation, the Company calculated the amount of the extraordinary tariff
recomposition applicable to all electric energy distribution companies, for the
purpose of neutralizing the margin losses resulting from the Emergency Program
for Reducing Electric Energy Consumption (PERCEE), in effect from June 2001 to
February 2002.
At the same time, in common with the other electric energy distribution
utilities, the Company calculated the monthly variations in additional
non-manageable costs (Portion A) and listed all the additional energy purchase
costs in the MAE (free energy) to be transferred to the generators.
ANEEL Resolutions 480 and 481 (concerning margin losses), 482 (concerning
Portion A costs) and 483 (concerning free energy), all dated August 29, 2002,
approved the amounts of the revenue recomposition, the extraordinary electric
energy tariffs of which were as follows:
o 2.9% for residential customers (except low income users), rural users
and public lighting;
o 7.9% for all other customers.
9
ANEEL Resolution 1/04 fixed new periods for application of the Extraordinary
Tariff Recomposition (RTE) (losses and free energy), modifying the tariff
recovery period from 70 to 69 months (82 to 73 months - ENERSUL), starting as
from December 2001.
Studies undertaken by management indicate that these assets will be fully
collected over the maximum period established, and therefore no provision for
losses was constituted.
5.1 - Recovery of electric energy supply losses
These losses, which are part of RTE, were as follows during the period:
PARENT COMPANY CONSOLIDATED
==================== ====================
Current Long-term Current Long-term
========= ========== ========= ==========
At March 31, 2004............. 34,430 83,835 56,784 140,010
Recovery thorugh tariff
increase.................... (9,257) - (15,182) -
Transfers..................... 10,557 (10,557) 17,154 (17,154)
SELIC index adjustments...... - 5,291 - 2,836
========= ========== ========= ==========
At June 30, 2004.............. 35,730 78,569 58,756 125,692
========= ========== ========= ==========
The amounts were recorded in the Consumers and concessionaires account, in
current assets and long-term receivables.
5.2 -Free energy
Free energy refers to electric energy that was generated but is not part of the
initial or any equivalent agreements.
According to the Free Energy Reimbursement Agreement, electric energy generation
companies, guided by article 2 of Law 10438, paid market prices for the free
energy allocated to them by MAE (MAE prices) during the PERCEE period according
to pre-established rules.
The distribution utilities, benefited by the Extraordinary Tariff Recomposition
(RTE), will reimburse the generating utilities for the difference between the
MAE price and R$ 49.26 per MWh.
10
The amounts of this reimbursement were calculated according to MAE accounting
and shared on a pro rata basis among distribution companies, proportionally to
individual consumption of energy in the National Interconnected Electricity
System. The amount of this electric energy is being reimbursed to the generating
companies, in conjunction with the RTE over 69 months (73 months for Enersul),
composed as follows:
PARENT COMPANY CONSOLIDATED
==================== ====================
DESCRIPTION CURRENT LONG-TERM CURRENT LONG-TERM
=============================== ==================== ====================
AT March 31, 2004 17,117 55,409 26,831 78,600
Recovery through tarif increase (3,285) - (5,714)
Transfers (6,615) 6,615 (3,894) 3,894
Unrecoverable energy - (6,235) - (6,235)
SELIC index adjustment - 4,266 - 4,306
========= ========== ========= ==========
At June 30, 2004 7,217 60,055 17,223 80,565
========= ========== ========= ==========
The amounts were recorded in "consumers and concessionaires" in current assets
and long-term receivables, with a contra entry to "unbilled revenue". An
obligation in the same amount was recorded in "energy suppliers" in current and
long-term liabilities, with a corresponding charge to "energy purchased for
resale" - short-term.
5.3 -Variation in the composition of Portion A costs
In order to determine the concessionaires' tariffs, the electric energy
distribution concession agreements establish amounts for each item of those
exogenous costs that are part of the operating expenses known as the variable
Portion A of the IRT formula, as follows:
o Tariff for the transfer of the energy potential from Itaipu Binacional;
o Tariff for the transport of the electric energy from Itaipu Binacional;
o Quota for the Fuel Consumption Account (CCC);
o Costs for transmission infrastructure usage on the basic grid;
o Financial compensation for use of water resources;
o System Service Charges (ESS);
o Energy purchased as established in the initial agreements;
o Quota for the Global Reversion Reserve Contribution (RGR);
o Electric energy service inspection fee;
o Connection charges;
o Cost of energy development (CDE).
Provisional Measures 2227/01 and 14/01, converted into Law 10438/02, and ANEEL
Resolution 90/02 set up a pro-forma account for recording the differences,
positive or negative, between the amount of each of these items from the date of
the last tariff increase to the date it was effectively paid.
The balance is being increased by financial remuneration based on the Special
System for Settlement and Custody (SELIC) interest rate.
These amounts were recognized as "prepaid expenses" in long-term receivables,
with a contra entry to "operating expenses", according to their nature.
11
5.3.1 - Portion A
The Portion A amounts that will be recovered after the end of RTE (losses and
free energy) balance, calculated in the period from January 1 to October 25,
2001, and computed in the extraordinary tariff recomposition, were as follows:
PARENT COMPANY CONSOLIDATED
==================== ====================
LONG-TERM
============================================
At March 31, 2004 61,516 103,919
SELIC remuneration........... 757 (553)
==================== ====================
At June 30, 2004 62,273 103,366
==================== ====================
ANEEL Resolution 1/04 modified the procedure for the recovery of Portion A,
extending the period of the RTE to that necessary to meet the amount approved,
by using the same mechanism, that is, the extraordinary tariff application.
5.3.2 - Account of Installment A variation (CVA)
Amounts registered as Portion A - CVA cost variations, which are not part of the
extraordinary tariff recovery, calculated as from October 26, 2001, are recorded
in prepaid expenses, as follows:
PARENT COMPANY CONSOLIDATED
==================== ====================
06/04 03/04 06/04 03/04
========= ========== ========= ==========
CURRENT ASSETS
Prepaid expenses (CVA)........ 59,550 51,305 102,021 91,399
(-) CVA liability............. (29,791) (27,220) (39,821) (36,895)
========= ========== ========= ==========
29,759 24,085 62,200 54,504
========= ========== ========= ==========
LONG-TERM RECEIVABLES
Prepaid expenses - CVA........ 46,757 73,171 68,282 102,094
(-) CVA liability............. (12,467) (45,045) (17,616) (53,435)
========= ========== ========= ==========
34,290 28,126 50,666 48,659
Portion A..................... 62,273 61,516 103,366 103,919
========= ========== ========= ==========
96,563 89,642 154,032 152,578
========= ========== ========= ==========
According to Interministerial Ordinance 116/03, the CVA balance will be included
in the energy supply tariffs in the 24 months subsequent to the annual tariff
adjustment that will occur between April 8, 2004 and April 7, 2005. The
postponement includes, in the case of ESCELSA, the balance for the period from
August 2002 to July 2003 and, for ENERSUL, from April 2002 to March 2003, plus
an amount to be calculated in the 12 months subsequent to the adjustments from
August 2003 and April 2003, respectively.
The CVA approved and in formation is as follows:
12
PARENT COMPANY CONSOLIDATED
============================= ==============================
=============== ============= =========== ==================
CVA 06/04 03/04 06/04 03/04
================== =============== ============= =========== ==================
Approved 49,665 47,993 93,583 95,647
In formation 14,384 4,218 19,283 7,516
================ ============ =========== =================
64,049 52,211 112,866 103,163
================ ============ =========== =================
6. LOW INCOME CONSUMERS
Law 10438/02 set forth the guidelines for classifying the low income residential
sub-category, which was defined as a consumption unit with monthly consumption
of less than 80 kWh. Decree 4336/02 expanced the rules to include units with
monthly consumption between 80 and 220 kWh.
13
As a result of the new classification, the Company recorded the loss on
revenues, in the amount of R$ 12,420 at June 30, 2004 (R$ 10,314 at June 30,
2003), and the consolidated loss, in the amount of R$ 18,120 (R$ 14,021 at June
30, 2003), net of the Added Value Tax on Sales, Interstate and Intercity
Transport Services and Communications (ICMS).
As a result of Normative Act 03/03, published in the Diario Oficial do Estado do
Espirito Santo (Official Gazette), on November 24, 2003, issued by the Treasury
Secretariat of the State of Espirito Santo, which declares that the portion of
the subvention by the Federal Government which is in excess of the exempt
residential consumption, based on the ICMS state legislation (50 KWh/month) is
subject to ICMS tax, management, prudently, set up a provision for a probable
tax liability of R$ 10,351 (consolidated -R$ 13,840), charged against tax in
operating expenses.
7. TAXES TO BE OFFSET
PARENT COMPANY CONSOLIDATED
============================== =========================
TAXES 06/04 03/04 06/04 03/04
======================================================= ================ ============= ============ ============
Withholding income tax 584 1,594 9,816 12,008
Corporate Income Tax (IRPJ) recoverable 3,467 6,102 4,027 6,560
Social contribution on net income 2,369 2,369 3,008 2,996
Social Integration Program (PIS) contributions
recoverable - 631 759 1,685
Social Contribution on Revenues (COFINS) recoverable - 1,369 6 2,704
ICMS recoverable 499 767 5,889 2,709
Income tax on remittances abroad - - 2,675 2,675
Other 396 433 525 452
================ ============= ============ ===========
7,315 13,265 26,705 31,789
================ ============= ============ ===========
8. DEFERRED INCOME TAX AND SOCIAL CONTRIBUTION
The tax credits listed below relative to income tax and social contribution
losses and other amounts that constitute temporary differences, to be used for
reduction of future taxation, were recorded based on the Company's profitability
history and expected taxable income for the coming years, considering a maximum
period of ten years.
As a result of the rules laid down by CVM Instruction 371/02, the Company did
not record new credits, as from July 1, 2002, in the amounts of R$ 118,065 in
the parent company and R$ 162,772 in the consolidated information at June 30,
2004.
14
Based on these assumptions, the amounts of the tax assets to be accounted for
were determined as follows:
PARENT COMPANY CONSOLIDATED
===================== =====================
ASSETS 06/04 03/04 06/04 03/04
=========== ========= ========== ==========
Tax losses ..................... 287,910 223,414 684,948 623,929
=========== ========= ========== ==========
Temporary additions
Labor and civil claims ......... 26,056 26,056 52,430 52,430
Post-employment benefits ....... 30,451 30,451 30,451 30,451
Tax claims ..................... 77,658 77,658 93,726 93,729
Other additions ................ 1,576 1,576 1,576 1,576
=========== ========= ========== ==========
135,741 135,741 178,183 178,186
=========== ========= ========== ==========
423,651 359,155 863,131 802,115
Statutory rate ................. 25% 25% 25% 25%
=========== ========= ========== ==========
Income tax ..................... 105,913 89,789 215,783 200,529
=========== ========= ========== ==========
Social contribution loss ....... 376,498 304,267 667,842 598,818
Temporary additions
Labor and civil claims ......... 26,056 26,056 52,430 52,430
Post-employment benefits........ 30,451 30,451 30,451 30,451
Tax claims ..................... 31,519 31,519 31,519 31,519
Other additions................. 1,579 1,580 1,579 1,580
=========== ========= ========== ==========
89,605 89,606 115,979 115,980
=========== ========= ========== ==========
466,103 393,873 783,821 714,798
Rate............................ 8% 8% 8% 8%
=========== ========= ========== ==========
Social contribution ............ 37,288 31,510 62,706 57,184
=========== ========= ========== ==========
143,201 121,299 278,489 257,713
=========== ========= ========== ==========
Current assets ................. -- -- (7,608) (7,608)
=========== ========= ========== ==========
Long-term receivables .......... 143,201 121,299 270,881 250,105
=========== ========= ========== ==========
The expectation as to the realization of these deferred tax credits, segregated
between the amounts recorded and not recorded, is as follows:
15
Amounts recorded:
PARENT COMPANY
- --------------------------------------------------------------------------------
EXPECTATION
OF TOTAL
REALIZATION 2006 2007 2008 2009
==================== ====== ====== ====== ======= ========
Income tax 4,866 18,906 29,828 52,313 105,913
Social contribution 1,516 6,780 10,738 18,254 37,288
====== ====== ====== ======= ========
6,382 25,686 40,566 70,567 143,201
====== ====== ====== ======= ========
CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------
EXPECTATION TOTAL 2010 TOTAL
OF CURRENT TO LONG-
REALIZATION 2004 2005 2006 2007 2008 2009 2011 TERM
===================== ================ ======= ========== ============= ======== ========== =========== =========
Income tax 5,594 8,971 16,514 33,524 48,313 73,881 28,986 210,189
Social contribution 2,014 3,232 5,712 12,045 17,395 22,308 -- 60,692
================ ======= ========== ============= ======== ========== =========== =========
7,608 12,203 22,226 45,569 65,708 96,189 28,986 270,881
================ ======= ========== ============= ======== ========== =========== =========
Amounts not recorded:
FROM 2009 TO 2011
================================================
EXPECTATION OF REALIZATION PARENT COMPANY CONSOLIDATED
========================== ====================== ======================
Income tax 85,091 118,845
Social contribution 32,974 43,927
====================== ======================
118,065 162,772
====================== ======================
Based on an opinion issued in September 2002 by SRF (COSIT Opinion 26/02) and
decisions of the 1st, 2nd and 6th Federal Revenue Regional Superintendencies
(SRF), the subsidiary Enersul claimed the right at the administrative level to
defer taxes on RTE (recovery of rationing losses and free energy), as well as
spot market (MAE).
Through Notification 005/04, the Company was informed of Decision 03.103/03
issued by the Federal Tax Department's Regional Office in Campo Grande - MS,
approving the request for deferral of the above mentioned revenues in respect of
the related federal taxes.
16
In view of the above, the Company recorded the tax credits in Enersul,
originally written-off in 2001, and the following deferred tax liabilities were
recognized.
===================================================
PARENT COMPANY CONSOLIDATED
============================== ====================
LIABILITY 06/04 03/04 06/04 03/04
============================ ================ ============= ============= ======
Income tax 29,755 31,931 53,120 58,449
Social contribution 12,415 13,942 20,788 23,489
PIS - - 1,861 1,463
COFINS - - 8,706 6,746
================ ============= ========== =======
42,170 45,873 84,475 90,147
Current liabilities - - (24,779) (29,470)
================ ============= ========== =======
Long-term liabilities 42,170 45,873 59,696 60,677
================ ============= ========== =======
9. ASSOCIATED COMPANIES, SUBSIDIARIES AND PARENT COMPANIES
PARENT COMPANY
========================================================
ASSETS LIABILITIES RESULTS
================= ================= ====================
OTHER RECEIVABLES OTHER PAYABLES ELECTRIC ENERGY
===================================
FOR RESALE
=============
RELATED
PARTY 06/04 03/04 06/04 03/04 06/04 03/04
========= ======= ======= ======= ======= ======= =======
MAGISTRA 50 5 -- -- -- --
ENERSUL 750 809 103 50 -- --
ESCELSAPAR 68 7 95 -- -- --
CESA 621 1,295 -- -- 1,420 710
ENETRADE -- -- -- -- 41,756 19,571
OTHER 523 533 -- -- -- --
======= ======= ======= ======= ======= =======
2,012 2,649 198 50 43,176 20,281
======= ======= ======= ======= ======= =======
===============================================
CONSOLIDATED
===============================================
ASSETS RESULTS
====================== ========================
LOANS AND ELECTRIC ENERGY
RELATED FINANCING FOR RESALE
PARTY 06/04 03/04 06/04 03/04
========= ======== ======== ======= ========
ESC 90 79,321 77,286 - -
ENETRADE - - 76,985 39,479
OTHER 322 427 - -
======== ======== ======= ========
79,643 77,713 76,985 39,479
======== ======== ======= ========
9.1 - Other receivables and payables
These transactions basically refer to the transfer of costs of related
companies, including administrative, technical and scientific cooperation
activities.
9.2 - Energy purchased for resale
ENERTRADE
17
On December 23, 2002, ESCELSA and its indirect subsidiary ENERSUL signed with
ENERTRADE - Comercializadora de Energia S.A. an agreement for the purchase and
sale of electric energy, effective from January 1, 2003 to December 31, 2012,
covering, for the parent company, an average of 11.45 MW in 2003 and 52 MW as
from 2004, and for ENERSUL an average of 35 MW at prices of R$ 85.67/MWh
(ESCELSA) and R$ 80.21/MWh (ENERSUL), altered on February 19 and March 20, 2003,
to R$ 83.73/MWh and R$ 79.77/MWh, respectively.
These prices were established according to the rules on the Normative Value
(VN), applicable at the time the agreements were entered into and submitted for
registration with ANEEL.
During the tariff adjustment process of ESCELSA, the Company learned that ANEEL
did not approve the amount of the agreement and fixed the amount of R$ 74.79/MWh
(base date: December 2002), taking into consideration its Technical Notes.
During the tariff adjustment process, ENERSUL requested the transfer to the
tariff of the agreement amount restated through April 2003, that is, R$
104.74/MWh, based on current legislation. However, ANEEL recognized only R$
84.33/MWh, the average price in the Southeast region auctions for six-year
agreements.
18
On April 25, 2003 and August 29, 2003, ENERSUL and ESCELSA, respectively,
entered administrative appeals claiming the full amount of the agreement, for
recognition in the tariff, using the following arguments:
a) ENERSUL: (i) absence of rules for recognizing only R$ 84.33/MWh; (ii) the
cost of energy purchased limited by the VN methodology should be transferred to
the electric energy tariffs, as determined by the 5th and 6th subclauses, of
clause 7 of the Concession Agreement.
b) ESCELSA: (i) no market price references concerning long-term agreements
besides the marginal cost of expansion; (ii) the equivalence of contracted price
with VN, which is lower than the marginal cost of expansion, is aligned with the
low tariffs provided by the Concession Agreement; and (iii) the long-term
agreement assures stable and foreseeable prices to final consumers.
Through Official Letters 1769/03 and 1779/03-SFF/ANEEL, ANEEL did not approve
the ENERSUL and ESCELSA agreements, and confirmed the previous understanding to
recognize R$ 79.48/MWh with the base date of March 2003 and R$ 74.79/MWh with
the base date of December 2002, for each of the companies.
ENERTRADE submitted the issue to the Judiciary, obtaining a favorable decision
in Bill of Review 2004.01.00.007.806-5/DF, which determined the annulment of the
effects of Letters 1769/03 and 1779/03-SFF/ANEEL and approved the agreements for
all legal purposes, until a definite pronouncement of the Judiciary. This
decision was the object of notification through Letter 166/ENERTRADE, dated
March 15, 2004.
The subsidiary ENERSUL through Letter CT-PR-5/04, reported such decision to
ANEEL, with reiteration of the request for recognition of the amounts of R$
104.69/MWh in April 2003 and R$ 109.52/MWh in April 2004, in the tariff
adjustment process in course, which is still pending reply from that Agency.
On May 21, 2004, in the Periodical Tariff Review process, ESCELSA, through
letter CT-PR - 18/04, reiterated the request to repass to the tariffs the
contract amounts, signed on December 23, 2002 with ENERTRADE, based on the
decision of the judiciary power which determined that ANEEL approve the
mentioned contract.
In the first half of 2004, the price differences in question amounted to R$
6,233 thousand for ESCELSA and R$ 4,220 thousand for ENERSUL, recorded in
operating expenses.
19
The administrative decisions on the appeals are pending judgment, and possible
judicial solutions are applicable, in case of unfavorable decisions.
CESA
ESCELSA has an agreement for the purchase and sale of electric energy, effective
as from August 1, 2001 to December 25, 2025, for the average of 2.57 MW, as from
September 19, 2001, at the price of R$ 93.07/MWh, altered on August 7, 2003 to
2.80 MW, at the price of R$ 116.12/MWh, effective as from February 25, 2003,
already recognized in the tariff approved by ANEEL.
COSTA RICA ENERGETICA S.A.
The subsidiary ENERSUL has an agreement for the purchase and sale of electric
energy with Costa Rica, recognized by ANEEL, effective as from March 1, 1999,
for the average of 10.33 MW, altered on April 8, 2003, at the price of R$
89.30/MWh.
9.3 - Loans and financing
The consolidated financial statements show basically the balance of loans
between the subsidiary MAGISTRA and related company ESC90, which were made under
similar conditions applied to financing transactions practiced by the national
financial market.
The conditions of the two main loans are as follows:
1o) Interest: Long-term Interest rate (TJLP) + 4% p.a.;
Maturity: November 2004;
Balance: R$ 6,613 (R$ 6,399 on March 31, 2004)
2o) Interest: 100% of Interbank Deposit Certificate (CDI);
Maturity: various up to the end of 2004;
Balance: R$ 72,708 (R$ 70,887 on March 31, 2004)
The financial income of MAGISTRA from the related company ESC90 of R$ 5,597 (R$
7,392 - consolidated at June 30, 2003), is recorded in other financial income.
The loans are guaranteed by promissory notes equivalent to 125% of the
principal.
20
The Company does not engage in transactions or agreements with related parties
under terms or conditions more/less favorable than would be exercised with third
parties.
10. OTHER RECEIVABLES - UTE CAMPO GRANDE
CONSOLIDATED
=====================
06/04 03/04
========== =========
At the beginning of the quarter 49,446 49,116
Payments 845 1,218
Adjustment to market value (4,541) (888)
========== =========
At the end of the quarter 45,750 49,446
========== =========
As a result of the decision of ENERSUL management to sell the asset, an analysis
was undertaken of all the costs incurred with the project, including the
thermoelectric plant, substations and associated distribution lines, resulting
in a provision to reduce the assets to their market value. The Company expects
to sell the asset during 2004.
11. INVESTMENTS
PARENT COMPANY CONSOLIDATED
===================== ====================
06/04 03/04 06/04 03/04
========== ========== =========== ========
Equity investments:
Stated on the equity method:
MAGISTRA PARTICIPACOES S.A........................ 916,845 921,158 - -
TV A CABO VITORIA - TVIX S.A...................... (315) (275) - -
ESCELSA PARTICIPACOES S.A. - ESCELSAPAR........... 473 799 - -
========== ========== =========== ========
917,003 921,682 - -
========== ========== =========== ========
Goodwill on investments purchased:
Goodwill............................................ - - 393,618 393,618
Amortization........................................ - - (41,496) (37,881)
========== ========== =========== ========
- - 352,122 355,737
========== ========== =========== ========
Other investments, studies and projects 2,593 2,590 2,653 2,652
========== ========== =========== ========
TOTAL 919,596 924,272 354,775 358,389
21
The goodwill recorded by the wholly-owned subsidiary MAGISTRA, generated by the
difference between the amount paid and the book value of ENERSUL, is based on
the company's future profitability over the period of the ENERSUL concession
(thirty years) and is being amortized proportionally to the company's projected
result, discounted to present value, at the purchase date of the investment.
Additional information on investments stated on the equity method of accounting:
MAGISTRA TVIX ESCELSAPAR
================================ ===================== ====================
06/04 03/04 06/04 03/04 06/04 03/04
================== ============= =========== ========= ========== =========
Class of shares Common Common Common Common Common Common
Total shares 473,203,348 473,203,348 1,540 1,540 1,000 1,000
Total shares of Escelsa 473,203,348 473,203,348 1,500 1,500 1,000 1,000
Participation 100% 100% 97.40% 97.40% 100% 100%
Capital stock 668,483 668,483 1,540 1,540 2,800 2,800
================== ============= =========== ========= = ========== =========
Shareholders' equity 916,845 921,158 (321) (280) 473 799
================== ============= =========== ========= = ========== =========
Results for the year 20,062 17,442 (75) (35) (865) (539)
================== ============= =========== ========= = ========== =========
Investment value 916,845 921,158 (315) (275) 473 799
================== ============= =========== ========= = ========== =========
Equity in the results 20,062 17,442 (75) (34) (865) (539)
================== ============= =========== ========= = ========== =========
22
12. PROPERTY AND EQUIPMENT
PARENT COMPANY Annual average rates CONSOLIDATED
=================== ========================
06/04 03/04 of depreciation 06/04 03/04
=========== ========== ==================== ============ ==========
IN SERVICE:
Generation................... 106,323 106,310 2.40% 257,694 203,778
Transmission................. 15,492 15,495 2.94% 15,492 15,495
Distribution................. 1,091,521 1,081,130 4.30% 2,078,285 2,053,034
Selling...................... 4,301 4,301 8.74% 7,971 7,863
Administration............... 132,610 128,873 8.18% 265,794 261,813
=========== ========== ==================== ============ ==========
1,350,247 1,336,109 4.52% 2,625,236 2,541,983
=========== ========== ==================== ============ ==========
(-) DEPRECIATION
Generation................... (66,548) (65,927) (112,235) (110,090)
Transmission................. (7,496) (7,392) (7,496) (7,392)
Distribution................. (445,089) (435,536) (843,733) (824,057)
Selling...................... (3,147) (3,060) (4,105) (3,931)
Administration............... (69,262) (67,625) (132,251) (128,552)
=========== ============ ============ =========
(591,542) (579,540) (1,099,820) (1,074,022)
=========== ============ ============ =========
758,705 756,569 1,525,416 1,467,961
IN PROGRESS:
Generation................... 4,034 3,841 60,792 108,870
Transmission................. 3,792 3,395 3,792 3,395
Distribution................. 80,147 79,145 120,724 117,010
Selling...................... - - 8 163
Administration............... 4,085 7,778 8,560 11,628
=========== ============ ============ ========
92,058 94,159 193,876 241,066
=========== ============ ============ ==========
TOTAL 850,763 850,728 1,719,292 1,709,027
=========== ============ ============ ==========
Obligations related to the
concession...................... (106,788) (105,782) (216,275) (211,562)
=========== ============ ============ ==========
743,975 744,946 1,503,017 1,497,465
=========== ============ ============ ==========
Obligations related to the concession are as follows:
PARENT COMPANY CONSOLIDATED
================== ================
06/04 03/04 06/04 03/04
======= ======== ======= =======
Consumer contributions............. 75,735 74,730 108,336 106,255
Donations and subsidies............ 25,795 25,795 76,304 73,673
Federal participation.............. 5,258 5,257 31,635 31,634
======== ======== ======= =======
TOTAL 106,788 105,782 216,275 211,562
======== ======== ======= =======
23
The obligations related to the concession of the public service of electric
energy are represented by government amounts, donations not subject to any
return to the donor, and subventions and contributions received from consumers
intended for investments in the distribution activity.
The maturity date of these obligations is determined by the Regulating Agency,
which settlement will occur at the end of the concession. As from January 1,
2002, the balance of this account is being presented as a reduction of property
and equipment.
13. SUPPLIERS
PARENT COMPANY CONSOLIDATED
============== ================
CURRENT 06/04 03/04 06/04 03/04
======================== ====== ====== ======== =======
Electric Energy supply:
FURNAS................. 21,485 23,004 21,485 23,004
ITAIPU................. 28,507 26,475 40,194 37,282
ENERTRADE.............. 8,751 8,825 13,770 17,692
TRACTEBEL.............. - - 7,703 8,370
ELETROSUL.............. - - 1,605 1,381
ONS,MAE and ASMAE...... 9,824 10,124 10,127 13,851
Free energy............ 12,765 22,095 22,929 33,972
Other.................. 320 327 10,745 4,585
====== ====== ======== =======
81,652 90,850 128,558 140,137
Material and service
providers............... 11,877 8,926 22,843 20,484
====== ====== ======== =======
TOTAL 93,529 99,776 151,401 160,621
====== ====== ======== =======
LONG-TERM
==========================
Energy supply:
Free energy............. 60,055 55,362 80,565 78,553
====== ====== ======== =======
60,055 55,362 80,565 78,553
====== ====== ======== =======
24
14. LOANS AND FINANCING
PARENT COMPANY
==========================================================================================================================
AVERAGE AMORTIZATION 06/ 04 03/ 04
ANNUAL ================ =============================== ===============================
DESCRIPTION INTEREST RATE TYPE PERIOD Charges Current Long-term Charges Current Long-term
(*)
============================================================ =============================== ===============================
Local currency:
Brazilian Electricity
Company (ELETROBRAS) 5.0%-7.0% M 05/99 to 08/07 - 1,948 3,613 - 2,017 4,017
National Economic
Development Bank (BNDES) TJLP + 3.8% M 11/99 to 10/10 401 40,470 63,713 462 39,108 73,438
BNDES-Perdas Rac. SELIC+1.0% M 03/02 to 01/06 528 50,069 126,592 618 39,541 127,971
Banco Pactual CDI+1.85% M 12/03 to 12/04 - 34,141 - - 58,685 -
Banco Pactual CDI+1.75% M 02/04 to 02/05 - 11,444 - - 14,098 -
Banco do Brasil 115% CDI U 05/04 - - - - 15,000 -
BRADESCO 110% CDI U 06/04 - - - - 8,207 -
ItauBBA CDI+1.75% M 01/04 to 03/05 - 16,028 - - 15,454 -
ItauBBA CDI+1.75% M 01/04 to 02/05 - 26,757 - - 25,802 -
================================= =================================
929 180,857 193,918 1,080 217,912 205,426
================================= =================================
Foreign currency:
BNDES UM BNDES + 3.5% M 09/01 to 10/10 171 12,285 13,215 183 11,438 15,407
Senior Notes 10.0% U 07/07 61,380 - 1,339,202 26,114 - 1,253,485
================================= =================================
61,551 12,285 1,352,417 26,297 11,438 1,268,892
================================= =================================
TOTAL 62,480 193,142 1,546,335 27,377 229,350 1,474,318
================================= =================================
25
CONSOLIDATED
==========================================================================================================================
AVERAGE AMORTIZATION 06/ 04 03/ 04
ANNUAL ===============================================================================
DESCRIPTION INTEREST RATE TYPE PERIOD Charges Current Long-term Charges Current Long-term
(*)
==========================================================================================================================
Local currency:
ELETROBRAS - ESCELSA 5.0%-7.0% M 05/99 to 07/07 - 1,948 3,613 - 2,017 4,017
ELETROBRAS -ENERSUL 6.0%-12.0% M 12/97 to 05/22 170 12,433 33,209 315 13,621 35,109
BNDES - ESCELSA TJLP + 3.8% M 10/99 to 10/10 401 40,470 63,713 462 39,108 73,438
BNDES - MAGISTRA TJLP + 4.0% S 11/99 to 11/04 246 21,020 - 1,516 41,672 -
BNDES - ENERSUL TJLP + 3.85% M 09/01 to 02/08 200 13,968 37,250 157 13,846 40,386
BNDES - ENERSUL TJLP + 4.00% M 02/00 to 04/04 - - - - 83 -
BNDES-Perdas Rac. SELIC + 1.0% M 02/02 to 06/06 880 62,780 198,010 1,027 40,782 175,070
BNDES-CVA. SELIC + 1.0% M 05/04 to 04/06 193 14,016 13,603 - 23,154 43,618
BNDES-ALFA TJLP + 4.00% M 10/01 to 09/07 94 5,859 17,574 99 3,871 19,356
BNDES-CESA TJLP + 4.5% M 07/04 to 07/12 135 4,058 28,398 143 3,016 29,156
BCO BRASIL-FCO 11.20% M 11/04 to 11/13 572 1,944 28,056 569 1,111 28,889
BCO Pactual CDI + 1.85% M 12/03 to 12/04 - 34,141 - - 58,685 -
BCO Pactual CDI + 1.75% M 02/04 to 02/05 - 11,444 - - 14,098 -
BCO BRASIL 115% CDI U 05/04 - - - - 15,000 -
BRADESCO 110% CDI U 06/04 - - - - 8,207 -
Itai BBA CDI + 1.75% M 01/04 to 03/05 - 16,028 - - 15,454 -
Itai BBA CDI + 1.75% M 01/04 to 02/05 - 26,757 - - 25,802 -
BCO BRASIL 115% CDI U 05/04 - 10,000 - - 10,000 -
BCO HSBC 110% CDI M 02/01 to 07/04 23 - - 25 - -
BCO SAFRA 115% CDI M 05/04 27 10,000 - 27 10,000 -
FUNDACAO ENERSUL 10% M 07/98 to 11/13 112 3,458 15,534 116 3,206 16,187
OTHER 1.35% M 05/00 to 06/09 - - 1,225 - - 1,183
============================ ===========================
TOTAL 3,053 290,324 440,185 4,456 342,733 466,409
============================ ===========================
Foreign currency:
SENIOR NOTES 10.0% U 07/07 61,380 - 1,339,202 26,114 - 1,253,485
BNDES UMBNDES +3.5% M 09/01 to 10/10 171 12,285 13,215 183 11,438 15,407
BNDES-CESA UMBNDES M 07/04 to 07/12 198 964 7,459 189 662 7,281
BNDES-ALFA TJLP +4.00% M 11/04 to 10/07 140 1,395 4,881 128 822 5,096
BRADESCO(**) 6.50%-6.90% M 11/02 to 11/04 426 6,828 - 482 10,620 -
UNIBANCO(**) 2.40% to 5.0% M 03/06 73 7,523 5,642 12 7,283 7,238
EUROPEAN INVEST BANK LIBORtri +
4.0%-5.0% S 12/02 to 03/09 141 9,153 28,137 667 8,568 30,302
STN-DM LP LIBORsem
+ 4.5%-8.2% S 10/96 to 04/24 406 3,461 37,777 869 3,238 36,979
BBA FMO(**) 8.90% S 03/02 to 09/07 290 5,448 6,056 67 5,455 5,829
ITAU BBA(**) 4.0% U 03/05 378 41,367 - 25 14,088 -
BRADESCO(**) 11.55% M 12/03 to 11/05 559 7,743 3,226 306 7,662 5,108
==========================================================
64,162 96,167 1,445,595 29,042 69,836 1,366,725
==========================================================
----------------------------- ---------------------------
67,215 386,491 1,885,780 33,498 412,569 1,833,134
----------------------------------------------------------
Long-term charges
BRADESCO(*) 11.55% M 12/03 TO 11/05 233 - - 217 - -
UNBANCO(*) 2.40% to 5.0% M 03/06 55 - - - - -
============================= ===========================
288 - - 217 - -
============================= ===========================
67,503 386,591 1,885,780 33,715 412,569 1,833,134
============================= ===========================
(*) principal amortization type
U = Single
M = Monthly
S = Half-yearly
(**) Loans protected by swap contracts against foreign exchange variations.
14.1) The issuance of bonds abroad refers to the funding obtained through Senior
Notes, in a total equivalent to US$ 430,958 thousand, falling due in a single
installment in 2007, with interest of 10% p.a., payable on a semiannual basis,
on January 15 and July 15 of each year. On May 21, 1998, these Notes were
registered with the Securities and Exchange Commission (SEC), in the United
States of America, in accordance with the Securities Act of 1933.
The indirect controlling shareholder EDP - Electricidade de Portugal S.A. made a
public offer for the acquisition and request of waiver related to the Notes,
having acquired the principal of US$ 205,796 thousand, with settlement on
December 23, 2002. Before making such offer, EDP held a total of US$ 151,575
thousand in Notes, representing, approximately, 35% of the total issue. Thus EDP
became the holder of a total of US$ 357,371 thousand in Notes, representing
26
approximately 83% of the total issue, and the main covenants relating to these
Senior Notes were removed. ESCELSA eliminated all obligations inherent to this
issuance.
14.2) ESCELSA and ENERSUL loans due to ELETROBRAS, BNDES and Banco do Brasil -
FCO are guaranteed by accounts receivable. The ENERSUL loans from the
Secretariat of the National Treasury (STN) are guaranteed by direct debit, of
receivables, of the government of the State of Mato Grosso do Sul and part by
cash deposit. Other loans are guaranteed by promissory notes. The MAGISTRA loan
payable to the BNDES is guaranteed by ENERSUL shares in escrow.
14.3) The breakdown of loans and financing by currency is as follows:
PARENT COMPANY CONSOLIDATED
======================= =======================
06/04 03/04 06/04 03/04
========== =========== ========== ===========
Local currency.............. 374,775 423,338 730,509 809,142
Foreign currency............ 1,364,702 1,280,330 1,541,762 1,436,561
========= ========= ========== =========
TOTAL...................... 1,739,477 1,703,668 2,272,271 2,245,703
========= ========= ========== =========
27
14.4) The percentage variation of the main indicators used for updating
the loans and financing are as follows:
Currency/Indicators 06/04 06/03
======================================================= ========= ==========
US$ x R$............................................... 7.56% -18.72%
IGP-M.................................................. 6.78% 5.90%
Consumer Price Index (INPC)............................ 3.14% 7.84%
Long-term Interest Rate (TJLP)......................... 9.75% 12.00%
SELIC.................................................. 7.60% 11.82%
Monetary Unit of BNDES (UMBNDES)....................... 7.27% -18.27%
Interbank Deposit Certificate (CDI).................... 7.57% 11.78%
14.5) Maturity of short and long-term installments is as follows:
Maturity Parent Company Consolidated
======================= =========================== =======================================
Type of currency
======================================================================
CURRENT Local Foreign Total Local Foreign Total
======== ======== ========= ======== ========= ==========
2004................. 77,929 6,038 83,967 141,391 30,586 171,977
2005................. 102,928 6,247 109,175 148,933 65,581 214,514
======== ======== ========= ======== ========= ==========
180,857 12,285 193,142 290,324 96,167 386,491
======== ======== ========= ======== ========= ==========
LONG-TERM
2005................. 48,706 6,246 54,952 83,153 23,648 106,801
2006................. 75,309 4,580 79,889 134,761 23,484 158,245
2007................. 58,682 1,339,825 1,398,507 115,623 1,356,131 1,471,754
2008................. 4,106 623 4,729 49,023 9,146 58,169
2009................. 4,066 623 4,689 15,252 4,289 19,541
2010................. 3,048 521 3,569 14,234 3,568 17,802
2011................. - - - 11,186 3,047 14,233
2012................. - - - 8,099 2,080 10,179
2013................. - - - 4,315 941 5,256
After 2013........... - - - 4,539 19,261 23,800
======== ========== ========= ========= ========= ==========
193,917 1,352,418 1,546,335 440,185 1,445,595 1,885,780
======== ========== ========= ========= ========= ==========
TOTAL 374,774 1,364,703 1,739,477 730,509 1,541,762 2,272,271
======== ========== ========= ========= ========= ==========
28
15. PROVISION FOR CONTINGENCIES
Contingency CONSOLIDATED
===============================================================================
06/04 03/04
====================================== =======================================
Provision Provision
============================ Judicial ============================ Judicial
In the quarter Accumulated deposit In the quarter Accumulated deposit
============== ============ ========= =============== =========== =========
Long-term:
Labor.............. 277 27,598 18,815 155 27,321 17,644
Civil.............. 167 16,942 16,650 762 16,775 15,924
Tax................ 6,098 169,521 113,239 8,508 161,990 108,595
============== ============ ========= =============== =========== =========
Total 6,542 214,061 148,704 9,425 206,086 142,163
============== ============ ========= =============== =========== =========
Contingency CONSOLIDATED
===============================================================================
06/04 03/04
====================================== =======================================
Provision Provision
============================ Judicial ============================ Judicial
In the quarter Accumulated deposit In the quarter Accumulated deposit
============== =========== ======== ============== =========== ========
Long-term:
Labor............... 277 27,598 18,815 155 27,321 17,644
Civil................ 167 16,942 16,650 762 16,775 15,924
Tax................ 6,098 169,521 113,239 8,508 161,990 108,595
============== ============ ========= =============== =========== =========
Total 6,542 214,061 148,704 9,425 206,086 142,163
============== ============ ========= =============== =========== =========
It is management's understanding that the provisions recorded are sufficient to
cover probable losses from ongoing lawsuits. Based on the opinion of the
Company's legal advisors, all lawsuits for which the probability of a favorable
outcome was considered to be remote were provided for.
Furthermore, there are labor, civil and fiscal claims pending decision, in the
total amount of R$ 36,639 (R$ 29,027 at March 31, 2004), for which the chances
of a favorable outcome were considered to be possible and for which no
provisions were recorded in the financial statements.
16. CAPITAL AND RESERVES
In accordance with its by-laws, the Company is authorized to operate with up to
R$ 1,000,000 in capital, of which R$ 153,947 is subscribed and paid up.
29
At June 30, 2004, capital was represented by 4,550,833 nominative common shares,
with no par value, held as follows:
Quantity of %
============================= ==========
Shareholders shares shareholders holding
================================= ============================= ==========
IVEN S.A 2,378,671 1 52.27
GTD PARTICIPACOES S.A 1,137,709 1 25.00
Fundacao Banco Central - CENTRUS 275,678 1 6.06
CINVES 66,366 1 1.46
Other 692,409 201 15.21
=========== ========== ==========
TOTAL 4,550,833 205 100.00
=========== ========== ==========
Composition of reserves:
06/04 03/04
========= =========
CAPITAL RESERVE
Interest on construction in progress 65,687 65,687
========= =========
TOTAL 65,687 65,687
========= =========
REVENUE RESERVES
Legal 8,847 8,847
Retention of profits 126,061 126,061
--------- ---------
TOTAL 134,908 134,908
========= =========
17. CHANGES IN SHAREHOLDERS' EQUITY - PARENT COMPANY AND CONSOLIDATED
FUNDS
FOR
CAPITAL REVENUE RETAINED CAPITAL
CAPITAL RESERVE RESERVES EARNINGS INCREASE TOTAL
========= ========== ============ ============ =========== =============
AT MARCH 31, 2004 153,947 65,687 134,908 12,057 3,387 369,986
Loss for the quarter - - - ( 45,541) - (45,541)
========= ========== ============ ============ =========== ============
AT JUNE 30, 2004 153,947 65,687 134,908 ( 33,484) 3,387 324,445
========= ========== ============ ============ =========== =============
30
18. COST OF ASSETS AND/OR SERVICES AND OPERATING EXPENSES
PARENT COMPANY
===============================================================================================================
COST OF SERVICE OPERATING EXPENSES
===================================== =======================
WITH OTHER GENERAL TOTAL
ELECTRIC OPERATING AND ==================
DESCRIPTION ENERGY OPERATION EXPENSES SELLING ADMINISTRATIVE 06/04 06/03
============================== ========== ============ ============= ======================= ======= ==========
Electric energy purchased
for resale 216,952 - - - - 216,952 204,002
Charges for the use of
transmission and
distribution system 48,893 - - - - 48,893 40,849
Personnel and management - 24,920 - 99 10,685 35,704 32,420
Pension plan - 967 - - 495 1,462 823
Material - 2,519 - - 2,288 4,807 3,603
Third-party services - 14,839 - 1 4,186 19,026 15,181
Depreciation and amortization - 25,032 1 - 5,234 30,267 29,332
Allowance for doubtful
accounts - 5,949 - - - 5,949 9,038
Provisions for contingencies - - - - 3,854 3,854 14,001
CDE - - 13,744 - - 13,744 -
CCC - - 21,387 - - 21,387 21,070
Other - 3,134 5,798 82 3,356 12,370 13,935
============================== ============= ============ ========== =========== =========== ======== =========
TOTAL 265,845 77,360 40,930 182 30,098 414,415 384,254
============================== ============= ============ ========== =========== =========== ======== =========
CONSOLIDATED
===============================================================================================================
COST OF SERVICE EXPENSES
===================================== =======================
WITH OTHER GENERAL TOTAL
ELECTRIC OPERATING AND ==================
DESCRIPTION ENERGY OPERATION EXPENSES SELLING ADMINISTRATIVE 06/04 06/03
============================== ========== ============ ============= ======================= ======= ==========
Electric energy purchased for
resale 330,351 - - - - 330,351 297,288
Charges for the use of
transmission and
distribution system 75,834 - - - - 75,834 61,726
Personnel and management - 44,812 826 99 19,713 65,450 58,144
Pension plan - 1,601 - - 749 2,350 1,535
Material - 4,739 11 - 4,341 9,091 7,713
Third-party services - 26,799 186 1 7,554 34,540 30,520
Raw materials/inputs for
electric energy generation - 1,916 - - - 1,916 2,033
Depreciation and amortization - 48,936 7,764 - 10,130 66,830 58,144
Provisions - 10,415 - - - 10,415 13,006
Provisions for contingencies - - 1,454 - 5,340 6,794 19,877
CDE - - 21,417 - - 21,417 -
CCC - - 32,020 - - 32,020 32,916
Other - 6,284 7,802 130 5,177 19,393 22,130
============================ ========== ========= ========== ======== ========== ======== ========
TOTAL 406,185 145,502 71,480 230 53,004 676,401 605,032
============================ ========== ========= ========== ======== ========== ======== ========
31
19. INCOME TAX AND SOCIAL CONTRIBUTION
PARENT COMPANY CONSOLIDATED
========================================== ============================================
06/04 06/03 06/04 06/03
==================== ==================== ====================== ====================
IR CS IR CS IR CS IR CS
======== ========== ========== ======== ========== ========== ========= =========
Net income (loss) before income tax
and social contribution...... (52,317) (52,317) 286,675 286,675 (21,284) (21,284) 300,231 300,23
Tax rate............................... 25% 9% 25% 9% 25% 9% 25% 9%
========= ========== ========== ========= ========== ========== ========== =========
(13,079) (4,709) 71,669 25,801 (5,321) (1,916) 75,058 27,021
========= ========== ========== ========= ========== ========== ========== =========
ADDITIONS (EXCLUSIONS).................
Equity in the results.................. (19,122) (19,122) (3,787) (3,787) (19,122) (19,122) (3,787) (3,787)
Interest on constructions.............. - - - - - - 860 860
Other additions........................ 17,818 11,126 25,222 20,409 23,128 38,444 59,648 52,566
========= ========== ========== ========= ========== ========== ========== =========
(1,304) (7,996) 21,435 16,622 4,006 19,322 56,721 49,639
========= ========== ========== ========= ========== ========== ========== =========
Tax rate............................... 25% 9% 25% 9% 25% 9% 25% 9%
========= ========== ========== ========= ========== ========== ========== =========
(326) (720) 5,359 1,496 1,002 1,739 14,180 4,468
========= ========== ========== ========= ========== ========== ========== =========
Unrecorded tax credits - - - (910) - - - (910)
========= ========== ========== ========= ========== ========== ========== =========
Effect on results (13,405) (5,428) 77,028 26,387 (4,320) (177) 89,238 30,578
========= ========== ========== ========= ========== ========== ========== =========
20. PENSION PLAN
The Company is the sponsor of FUNDACAO ESCELSA DE SEGURIDADE SOCIAL - ESCELSOS,
a nonprofit organization, the main purpose of which is to complement the
benefits granted by the official social security to the Company's employees,
through two benefit plans: a Defined Benefit Plan (Plan I) and a Defined
Contribution Plan (Plan II).
The mathematical reserves of these plans are calculated actuarially according to
the capitalization method, and revised annually.
The table below shows the number of participants in each plan:
PLAN I PLAN II TOTAL
======= ======== =======
Active participants 30 1,369 1,399
======= ======== =======
Assisted participants:
Retirees 622 147 769
Pension beneficiaries 113 8 121
======= ======== =======
735 155 890
======= ======== =======
Total 765 1,524 2,289
======= ======== =======
32
As sponsor, ESCELSA contributes with a monthly amount proportional to the
contribution of the participants in the ESCELSOS Foundation, in accordance with
that established in each plan, limited to 7% of the total payroll. Up to the
second quarter of 2004, ESCELSA contributed R$ 1,462 (R$ 1,281 in 2003).
As established in CVM Deliberation 371/00, as from January 1, 2002, publicly
listed companies are required to record liabilities related to post-employment
benefits, based on rules set forth by NPC (Accounts Procedure Rule)
Pronouncement 26 issued by the Institute of Independent Auditors of Brazil
(IBRACON).
To meet this requirement, ESCELSA commissioned independent actuaries to evaluate
such benefits, based on the Projected Unit Credit Method.
Taking into consideration article 84, of such Deliberation, the present value of
the actuarial liabilities (health care, retirement incentive and life insurance)
of ESCELSA not covered at December 31, 2002 was recalculated. The balance
activity up to the first quarter of 2004 is as follows:
CONSOLIDATED
============
Present value of actuarial obligations
not covered................................. (53,575)
Net unrecognized losses....................... 19,751
=========
Liabilities recognized on December 31, 2003... (33,824)
Realized during the period.................... 1,481
=========
Liabilities recognized on June 30, 2004....... (32,343)
Current....................................... 2,090
=========
Long-term..................................... (30,253)
=========
The net amount of unrecognized losses corresponds to the net amount of the
actuarial losses exceeding 10% of the present value of the actuarial obligations
at December 31, 2003, which will be appropriated annually, during the period
corresponding to the average remaining work period estimated for the employees
who adhered to the Plan.
The actuarial assessments of ESCELSA and ENERSUL showed also that in the Plans
the fair value of assets exceeds the present value of the fully or partially
covered actuarial obligations, which, at December 31, 2003, amounted to R$
28,079 (consolidated R$ 44,051).
33
However, the Companies' management, on a conservative basis, decided not to
record these assets.
The fair value of assets used to calculate the actuarial assessment of ENERSUL
does not include the amounts receivable from the sponsor, arising from the debt
confession, in the amount of R$ 19,250 (12/31/2002). Taking into account this
right in the calculation, the unrecognized asset at December 31, 2002, would
increase to R$ 35,222 (R$ 64,301 in consolidated).
21. INSURANCE (Unaudited)
The following is a breakdown by risk type and by validity period of the main
insurance policies:
INSURED PREMIUM
RISKS VALIDITY AMOUNT AMOUNT
====================== ======================== ========= =========
Specific equipment 06/24/2004 to 06/23/2005 283,823 265
Third-party liability 06/24/2004 to 06/23/2005 4,770 76
Specific equipment
The policy covers the generating stations and the substations, specifying the
principal items of equipment, with the respective insured amounts and maximum
reimbursement. Basic insurance coverage includes events such as fire, lightning
and any kind of explosion, plus additional coverage against possible electrical
damage, sundry risks and risks for electronic and information technology
equipment.
Third-party liability
This policy covers involuntary personal or material damage suffered by third
parties as a consequence of the Company's productive and/or commercial
activities.
34
22. FINANCIAL INSTRUMENTS
The Company's business comprises the distribution and sale of electric energy to
customers within its concession area - the state of Espirito Santo - and,
therefore, significant financial instruments are related to the following
transactions:
(o) Balances of long-term accounts receivable and accounts payable are related
to the extraordinary tariff recomposition and, therefore, are not subject
to adjustments to market values.
(o) Investments in short-term mutual funds and/or fixed income investments are
recorded at approximate market values as they are adjusted for accrued
interest on a pro-rata basis, and for a provision for losses when
applicable.
(o) Equity interests in other companies are in most cases through shares that
are not publicly traded.
(o) Loans and financing of the Company are mainly long term, since most of them
are from specific funding sources.
22.1 Foreign exchange and interest rate risks
The book values of the main financial instruments in foreign currency are as
follows:
PARENT COMPANY CONSOLIDATED
==================== ======================
06/04 03/04 06/04 03/04
========= ========= ========= =========
Marketable securities 201,974 195,035 201,974 195,035
Long-term loans and financing 1,352,417 1,268,892 1,445,595 1,366,725
A portion of the loans and financing in local currency is comprised of financing
from the government entities, ELETROBRAS and BNDES.
35
As the market rate (or opportunity cost of capital) is set by these government
entities, taking into consideration the risk premium relative to the sector's
activities and the fact that there are no other financing sources or market
options and/or means to estimate the market value thereof in light of the
Company's business or sector specific circumstances, the market value for the
portion comprised of domestic loans approximates book value, as do other
financial assets and liabilities.
As mentioned in Note 14, foreign currency financing obtained (in U.S. dollars),
and the indebtedness and earnings were significantly impacted by this foreign
exchange risk.
Such risk may cause the Company to incur losses due to foreign exchange
fluctuations, which may increase liabilities denominated in foreign currency.
The net exposure to foreign currency risks of the parent company's financial
instruments is as follows:
BOOK VALUE MARKET VALUE
===================== ===========================
06/04 03/04 06/04 3/4
========== ========= ============ ============
Senior Notes 1,339,202 1,253,485 1,276,183 1,240,950
US Dollar assets (201,974) (195,035) (221,038) (221,454)
========== ========= ============ ============
Net exposure 1,137,228 1,058,450 1,055,145 1,019,496
========== ========= ============ ============
The method used to determine the fair value of the Senior Notes obligation was
the average market price, as of June 30, 2004, of the Senior Notes operations
(Source: Sherman & Sterling), in New York, USA, and, for the U.S. dollar assets,
the contract market price at the end of the period was used, which is equivalent
to book value.
In addition, the Company had derivative contracts aimed at reducing the above
mentioned net exposure, which resulted in monetary variations being recorded in
the financial statements for realized and unrealized losses of R$ 3,660, as
follows:
PARAMETERS
DATE (RATES %)
FINANCIAL ========================== INITIAL ===================================================
INSTITUTION OPERATION MATURITY AMOUNT BANKS ESCELSA (Losses)
============= ========== ========== ========= ================================== ==============
ITAU/BBA 7/10/2003 7/14/2004 24,112 Exchange variation +3,50 100% CDI (1,484)
ITAU/BBA 7/29/2003 7/14/2004 11,054 Exchange variation +4,50 100% CDI (662)
PACTUAL 7/18/2003 7/14/2004 31,664 Exchange variation +1,70 100% CDI (1,514)
==============
(3,660)
==============
In the consolidated information, the loans and financing contracted by companies
of the ESCELSA System were raised based on rates and charges usually practiced
in the domestic and foreign markets for investment funding, for the electric
energy sector in their concession areas.
The subsidiary MAGISTRA consolidates the foreign currency (US$) financial
liabilities of its subsidiaries ENERSUL and CESA. In order to reduce foreign
exchange and interest rate risk, swap instruments were used to hedge a portion
of these liabilities, with changes of indices, as described in Note 14.
36
These swap indices are CDI, plus interest between 0.95% p.a. and 3.35% p.a.
Considering the appreciation of the real against the U.S. dollar, these hedge
transactions yielded losses of R$ 173, recognized in the financial statements,
in monetary variations.
At June 30, 2004, the position of this debt was as follows:
AMOUNT
========================= UNREALIZED
LIABILITIES BOOK VALUE SWAP LOSSES
================================================= ========= ================
Loans and financing 85,674 85,847 173
In the consolidated information, foreign currency debt totals R$ 83,833, the
terms and conditions of which constitute a natural hedge, thus reducing the
foreign exchange and interest rate risks to a minimum.
37
For the remaining contracts, given the specific nature of these transactions and
the impossibility of determining a market value for this type of financial
instrument, management estimates that the market values of these instruments are
equal or similar to their book values.
To reach this estimate, the companies' management considered the evidences of
risks inherent to the business, strategy and measures taken to manage the debt
service.
22.2 Credit risk
There is a possibility that the Company will incur losses due to default of its
customers.
To reduce this risk, the Company has the right to cut off the supply of electric
energy if a customer fails to make payment within the parameters and periods
defined by legislation and specific regulations. An allowance for doubtful
accounts is set up in an amount considered sufficient by management to cover
possible accounts receivable risks.
23. PROGRAMA NACIONAL DE UNIVERSALIZACAO
Through Decree 4873/03, the Federal government created the Programa Nacional de
Universalizacao - Luz para Todos (National Program of Universalization -
Electricity for All) in order to provide access to electric energy services for
the entire Brazilian rural population up to 2008. The amounts of the
concessionaires' participations, as the executing agents of the projects, are
not defined, being subject to a partnership to be formed with the Ministry of
Mines and Energy and State Government, with the intervention of ANEEL and
ELETROBRAS. Accordingly, it is not possible at this time to evaluate how the
Program may effect the Company's business.
24. NEW MODEL OF THE ELECTRIC SECTOR
The Federal Government, through the Ministry of Mines and Energy (MME),
presented an outline of its project for the national electric sector reform,
especially as it relates to the institutional model, culminating with issue of
Provisional Measures 144 and 145/03, converted into Laws 10848 and 10847/04,
respectively.
The relevant points are:
o Transfer of responsibilities of ANEEL to MME.
o Creation of the Energy Research Company (EPE), of the Committee of Electric
Sector Monitoring (CMSE) and the Chamber of Electric Energy Commerce
(CCEE). These entities will promote the planning and monitoring of the
generation and transmission expansion, in addition to market management.
o Definition of rules for electric energy sales, with emphasis on: (i) offer
expansion (new projects for energy production) through auctions; (ii) free
(ACL) and regulated (ACR) contracts; (iii) distribution activities focused
on line service and networks, and energy sales to captive customers; (iv)
restrictions on contracts between related parties; and (v) new rules for
free consumer classes.
38
It is necessary to wait for the regulamentation that will follow in order to
assess the new energy sector operating environment and risks and opportunities
that will arise for the Company's business.
25 - CORPORATE RESTRUCTURING
On April 20 and 21, 2004, ESCELSA and its subsidiary ENERSUL published a
Significant Event Notice concerning the request for prior approval of ANEEL in
order to carry out a corporate reorganization, under the terms of current
legislation.
The notice was as follows:
SIGNIFICANT EVENT NOTICE
EDP BRASIL S.A. ("EDP Brasil"), BANDEIRANTE ENERGIA S.A. ("Bandeirante"), IVEN
S.A. ("Iven"), ESPIRITO SANTO CENTRAIS ELETRICAS S.A. - ESCELSA ("Escelsa") and
EMPRESA ENERGETICA DE MATO GROSSO DO SUL S.A. - ENERSUL ("Enersul") managements
(EDP Brasil, Bandeirante, Iven, Escelsa and Enersul, collectively referred to as
the "Companies"), under the terms and for CVM Instruction 358/02 purposes,
publicly inform that, on this date, they filed with the Brazilian Electricity
Regulatory Agency ("ANEEL") a request for prior approval of the corporate
reorganization (the "Reorganization"), the main objective of which is to
simplify the Companies' corporate structure, obtain synergies and consolidate,
exclusively in EDP Brasil, the liquidity and dispersion of the securities issued
by the Companies. EDP Brasil intends to, in the future, adhere to the segment of
the New Market of the Sao Paulo Stock Exchange. The Reorganization is part of an
ongoing process aiming at the self-sustainable growth of the EDP companies in
Brazil. The Reorganization does not change the Companies' indirect control,
currently held by the EDP Group.
39
The Reorganization will include the stages described below, which, subject to
the prior approval of ANEEL, are expected to occur on the same date, but in
sequence and in the following order:
(i) merger into Enersul of the investment and goodwill recorded in its
direct parent company;
(ii) merger of Iven into Escelsa;
(iii) merger into Escelsa of the Enersul shares not held by the merging
company; and
(iv) merger into EDP Brasil of the Escelsa and Bandeirante shares not held
by the merging company.
EDP Brasil had already started to prepare the necessary documentation for
registration as an open capital company and be able to trade its shares in the
New Market segment. According to applicable legislation, specialized companies
will be contracted to calculate the Companies' economical values, which will be
the basis to determine the exchange ratio for substitution of the shares of the
non-controlling shareholders, as well as to prepare the appraisal reports of the
accounting net equities and the market values of the Companies.
Subject to the prior approval of ANEEL, the Reorganization is expected to be
implemented and concluded in the second six-month period of 2004, when a
significant event notice will be published for CVM Instruction 319/99 purposes.
40
Report of Independent Accountants on
Limited Reviews
To the Board of Directors and Stockholders
Espirito Santo Centrais Eletricas S.A.
1 We have carried out limited reviews of the Quarterly Information (ITR) of
Espirito Santo Centrais Eletricas S.A. - ESCELSA and Espirito Santo
Centrais Eletricas - ESCELSA and its subsidiaries for the quarters and
six-month periods ended June 30, 2004 and March 31, 2004 and June 30,
2003. This information is the responsibility of the Company's management.
2 Our reviews were carried out in conformity with specific standards
established by the Institute of Independent Auditors of Brazil (IBRACON),
in conjunction with the Federal Accounting Council (CFC), and mainly
consisted of: (a) inquiries of and discussions with management responsible
for the accounting, financial and operating areas of the Company with
regard to the main criteria adopted for the preparation of the quarterly
information and (b) a review of the significant information and of the
subsequent events which have, or could have, significant effects on the
Company's financial position and operations.
3 Based on our limited reviews, we are not aware of any material
modifications that should be made to the quarterly information referred to
above in order that such information be stated in conformity with the
accounting practices adopted in Brazil applicable to the preparation of
quarterly information, consistent with the Brazilian Securities Commission
(CVM) regulations.
4 The Quarterly Information (ITR) also includes accounting information for
the quarter ended June 30, 2003. This information was reviewed by other
independent accountants, who issued an unqualified report thereon dated
July 17, 2003.
5 As mentioned in Note 4.1, the Quarterly Information (ITR) of Espirito
Santo Centrais Eletricas S.A. - ESCELSA and of Espirito Santo Centrais
Eletricas S.A. - ESCELSA and its subsidiaries includes amounts for
electric energy traded in the Wholesale Energy Market (MAE), with a
balance payable by the parent company of R$ 309 thousand at June 30, 2004
(R$ 722 thousand at March 31, 2004), and a balance receivable in the
consolidated quarterly information of R$ 2,824 thousand at June 30, 2004
(R$ 2,072 thousand at March 31, 2004), respectively, which were recorded
based on amounts informed by MAE. The liquidation of these amounts is
dependent on the receipts from companies which did not effect net
financial settlement as determined by ANEEL and the conclusion of the
judicial discussion about the interpretation of market rules, which will
define the amounts involved.
Vitoria, July 16, 2004
41
PricewaterhouseCoopers
Auditores Independentes
CRC 2SP000160/O-5
Luiz Marcio Malzone Ronaldo Matos Valino
Contador CRC 1RJ031376/O-2 "S" ES Contador CRC 1RJ069958/O "S" ES
42