20-F 1 elp_form20f.htm FORM 20-F Provided by MZ Data Products
As filed with the Securities and Exchange Comission on June 30, 2006

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549


FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
Commission file number: 001-14668


COMPANHIA PARANAENSE DE ENERGIA - COPEL

(Exact Name of Registrant as Specified in Its Charter)

Energy Company of Paraná
(Translation of Registrant’s Name into English)
The Federative Republic of Brazil
(Jurisdiction of Incorporation or Organization)

Rua Coronel Dulcídio, 800
80420-170 Curitiba, Paraná, Brazil

(Address of Principal Executive Offices)


Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
Class B Shares, without par value*
American Depositary Shares (as evidenced by American Depositary
Receipts), each representing 1,000 Class B Shares
New York Stock Exchange
New York Stock Exchange
_________________
* Not for trading, but only in connection with the listing of American Depositary Shares on the New York Stock Exchange.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the Issuer's classes of capital or common stock as December 31, 2005
:

145,031,080,782 Common Shares, without par value
403,715,012 Class A Preferred Shares, without par value
128,220,580,476 Class B Preferred Shares, without par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes            No  

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes            No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes            No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated             Accelerated filer             Non-accelerated filer   

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17             Item 18   

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes            No  


Table of Contents

Page

Presentation of Information ii
Forward-Looking Statements iii
Item 1. Identity of Directors, Senior Management and Advisers 4
Item 2. Offer Statistics and Expected Timetable 4
Item 3. Key Information 4
    Selected Financial Data 4
    Exchange Rates 7
    Risk Factors 8
Item 4. Information on the Company 19
    The Company 19
Item 5. Operating and Financial Review and Prospects 54
Item 6. Directors, Senior Management and Employees 73
Item 7. Major Shareholders and Related Party Transactions 78
Item 8. Financial Information 81
    Legal Proceedings 81
    Dividend Payments 83
Item 9. The Offer and Listing 86
Item 10. Additional Information 90
    Memorandum and Articles of Association 90
    Material Contracts 94
    Exchange Controls 94
    Taxation 96
    Dividends and Paying Agents 102
    Documents on Display 102
Item 11. Quantitative and Qualitative Disclosures about Market Risk 102
Item 12. Description of Securities Other than Equity Securities 103
Item 13. Defaults, Dividend Arrearages and Delinquencies 103
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 104
Item 15. Controls and Procedures 104
Item 16A. Audit Committee Financial Expert 104
Item 16B. Code of Ethics 105
Item 16C. Principal Accountant Fees and Services 105
Item 16D. Exemption from the Listing Standards for Audit Committees 105
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 105
Item 17. Not applicable 106
Item 18. Financial Statements 106
Item 19. Exhibits 106
Index of Defined Terms 107
Technical Glossary 108
Signatures 110

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PRESENTATION OF INFORMATION

     In this Annual Report, we refer to Companhia Paranaense de Energia – COPEL, and, unless the context otherwise requires, its consolidated subsidiaries as “Copel,” the “Company,” “we” or “us”.

     References to (1) the “real,” “reais” or “R$” are to Brazilian reais (plural) and the Brazilian real (singular) and (2) “U.S. dollars,” “dollars“ or “U.S.$” are to United States dollars.

     The audited consolidated financial statements of Copel as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005 included in this Annual Report (the “Consolidated Financial Statements”) have been prepared in accordance with the accounting practices adopted in Brazil (“Brazilian GAAP”), which are based on:

  • Brazilian Law No. 6,404/76, as amended by Law No. 9,457/97 and Brazilian Law No. 10,303/01, which we refer to collectively as the Brazilian Corporation Law (“Brazilian Corporation Law”);

  • the rules and regulations of the Brazilian Securities Commission, Comissão de Valores Mobiliários (“CVM”);

  • the accounting manual of the Brazilian regulatory agency for the electric sector, Agência Nacional de Energia Elétrica — ANEEL (“ANEEL”); and

  • the accounting standards issued by the Brazilian Institute of Independent Auditors (Instituto dos Auditores Independentes do Brasil).

     Brazilian GAAP differs in certain material respects from accounting principles generally accepted in the United States (“U.S. GAAP”). For more information about the differences between Brazilian GAAP and U.S. GAAP, and a reconciliation of our net income (loss) and shareholders’ equity from Brazilian GAAP to U.S. GAAP, see Note 33 to our Consolidated Financial Statements.

     Financial information in this Annual Report is presented in reais. On June 1, 2006, the commercial selling rate for reais was R$2.2713 per U.S.$1.00.

     Our Consolidated Financial Statements presented in this annual report on Form 20-F restate our provisions for research and development programs and energy efficiency programs for the years ended December 31, 2004 and 2003. For additional information, see “Item 5. Operating and Financial Review and Prospects – Restatement of our Previously Issued Financial Statements” and Note 2(b) to our Consolidated Financial Statements.

     References in this Annual Report to the “Common Shares,” “Class A Shares“ and “Class B Shares” are to our common shares, class A preferred shares and class B preferred shares, respectively. References to “American Depositary Shares” or “ADSs” are to American Depositary Shares, each representing 1,000 Class B Shares. The ADSs are evidenced by American Depositary Receipts (“ADRs”).

     Certain terms are defined the first time they are used in this Annual Report. The “Index of Defined Terms” that begins on page 107 lists those terms and where they are defined. As used herein, all references to “GW” and “GWh” are to gigawatts and gigawatt hours, respectively, references to “kW” and “kWh” are to kilowatts and kilowatt hours, respectively, references to “MW” and “MWh” are to megawatts and megawatt hours, respectively, and references to “kV” are to kilovolts. These and other technical terms are defined in the “Technical Glossary” that begins on page 108.

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FORWARD-LOOKING STATEMENTS

     This Annual Report contains forward-looking statements. We may also make written or oral forward-looking statements in our annual report to shareholders, in our proxy statements, in our offering circulars and prospectuses, in press releases and other written materials and in oral statements made by our officers, directors or employees to third parties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

     Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to:

  • Brazilian political and economic conditions;

  • economic conditions in the State of Paraná;

  • developments in other emerging market countries;

  • our ability to obtain financing;

  • lawsuits;

  • technical and operational difficulties related to the provision of electricity services;

  • changes in, or failure to comply with, governmental regulations;

  • competition;

  • electricity shortages; and

  • other factors discussed below under “Item 3. Key Information—Risk Factors.”

     All forward-looking statements are expressly qualified in their entirety by this cautionary statement, and you should not place reliance on any forward-looking statement contained in this Annual Report.

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Item 1. Identity of Directors, Senior Management and Advisers

     Not Applicable.

Item 2. Offer Statistics and Expected Timetable

     Not Applicable.

Item 3. Key Information

SELECTED FINANCIAL DATA

     You should read the selected financial information presented below in conjunction with the Consolidated Financial Statements and the notes thereto.

     The selected financial data as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003 have been derived from our Consolidated Financial Statements. The selected financial data as of December 31, 2003, 2002 and 2001 and for the years ended December 31, 2002 and 2001 have been derived from our audited financial statements that are not included in this Annual Report.

     As stated above, our Consolidated Financial Statements are prepared in accordance with Brazilian GAAP, which differs in certain material respects from U.S. GAAP. See Note 33 to our Consolidated Financial Statements for a summary of the differences between Brazilian GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of shareholders’ equity as of December 31, 2005 and 2004 and net income for the years ended December 31, 2005, 2004 and 2003.

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    As of and for the year ended December 31, 
   
    2005    2004(2) (6)   2003(1) (6)   2002    2001 
           
    (millions of reais)
Income Statement Data:                     
Brazilian GAAP                     
Net operating revenues    4,854    3,926    3,094    2,668    2,262 
Operating expenses    (4,034)   (3,315)   (2,989)   (2,353)   (1,587)
Operating income    820    611    105    315    675 
Financial income (expenses), net    (101)   (19)   160    (415)   (74)
Equity in results of investees        17    (34)   27 
Other income (expense), net    (11)   (7)   (21)   (22)   (6)
Income taxes    (198)   (196)   (89)   41    (147)
                     
Income (loss) before minority interest and                     
extraordinary item    519    391    172    (115)   475 
Minority interest    (17)   (21)   (14)   ––    –– 
Extraordinary item, net of tax effect    —    ––    ––    (205)   –– 
Net income (loss)   502    370    158    (320)   475 
Dividends declared    123    96    43    ––    170 
 
U.S. GAAP                     
Operating income    884    279    (270)   133    447 
Net income (loss)   556    124    (72)   (454)   335 
 
Balance Sheet Data:                     
Brazilian GAAP                     
Current assets(3)   2,472    1,653    1,382    1,053    964 
Recoverable rate deficit (CRC)(4)   1,182    1,197    1,036    909    737 
Non-current assets(5)   2,062    2,222    2,165    1,662    1,387 
Property, plant and equipment, net    5,991    5,731    5,406    5,334    5,334 
Total assets    10,946    10,018    9,378    8,547    8,129 
Loans and financing and debentures (current)   215    671    273    198    290 
Current liabilities    2,352    2,337    1,305    816    941 
Loans and financing and debentures (long-term)   1,829    1,160    1,736    2,016    1,154 
Long-term liabilities    2,963    2,453    3,210    3,026    2,143 
Shareholders’ equity    5,487    5,108    4,834    4,726    5,045 
Capital stock    3,480    3,480    2,900    2,900    1,620 
                     
U.S. GAAP                     
Total assets    11,137    10,589    10,058    9,617    9,858 
Long-term liabilities    2,818    2,837    2,913    3,454    2,940 
Shareholders’ equity    5,964    5,530    5,475    5,424    6,008 

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    As of and for the year ended December 31, 
   
    2005    2004    2003    2002    2001 
           
    (R$ except numbers of shares)
Share and per share data:                     
Brazilian GAAP                     
Net income (loss) per 1,000 shares at   
1.84 
1.35 
0.58 
(1.17)
1.74 
     year end:   
Dividends per 1,000 shares:(8)  
         Common Shares   
0.43 
0.33 
0.15 
–– 
0.59 
         Preferred Shares—Class A   
1.27 
1.27 
1.06 
–– 
0.65 
         Preferred Shares—Class B   
0.47 
0.37 
0.16 
–– 
0.65 
Number of shares outstanding at year   
   end (in thousands):   
         Common shares   
145,031,081 
145,031,081 
145,031,081 
145,031,081 
145,031,081 
         Preferred shares Class A    403,715
404,332 
405,611 
413,298 
413,298 
         Preferred shares Class B   
128,220,580 
128,219,963 
128,218,684 
128,210,997 
128,210,997 
           
         Total   
273,655,376 
273,655,376 
273,655,376 
273,655,376 
273,655,376 
 
 
U.S. GAAP                     
Basic and Diluted - Earnings (loss)                    
per 1,000 shares:                     
         Common Shares   
1.94 
0.43 
(0.50) 
(1.66) 
1.17 
         Preferred Shares—Class A   
1.27 
1.27 
1.06 
(1.66) 
0.65 
         Preferred Shares—Class B   
2.14 
0.48 
–– 
(1.66) 
1.29 
Shares outstanding (weighted                     
average):                     
         Common Shares    145,031,081    145,031,081    145,031,081    145,031,081    145,031,081 
         Preferred Shares—Class A           404,197           405,254    406,285    413,298    413,298 
         Preferred Shares—Class B    128,220,098    128,219,041    128,218,010    128,210,997    128,210,997 
           
         Total    273,655,376    273,655,376    273,655,376    273,655,376    273,655,376 



(1)     
The 2003 financial information includes the accounts of our subsidiary Companhia Paranaense de Gás – Compagas. As authorized by the CVM, Compagas was not originally included in our consolidated financial statements for 2003, since it did not have a significant impact in our consolidated financial statements. Since 2004, we have consolidated Compagas and for comparative purposes, we have also consolidated Compagas for 2003.
(2)     
The 2004 financial information includes the accounts of our subsidiary Centrais Eléctricas do Rio Jordão S.A.—ELEJOR. As authorized by the CVM, ELEJOR was not originally included in our consolidated financial statements for 2004, since it did not have a significant impact in our consolidated financial statements. Since 2005, we have consolidated ELEJOR and for comparative purposes, we also consolidated ELEJOR for 2004.
(3)     
Including the current balances of recoverable rate deficit (CRC) in the amount of R$32 million in 2005, R$29 million in 2004, R$124 million in 2003, R$43 million in 2002, and R$36 million in 2001.
(4)     
Including both current and non-current CRC accounts receivable.
(5)     
Including the non-current balances of recoverable rate deficit (CRC) in the amount of R$1,150 million in 2005, R$1,168 million in 2004, R$912 million in 2003, R$866 million in 2002, and R$701 million in 2001.
(6)     
The Brazilian GAAP financial information was restated to correct the accounting treatment for provision for research and development (R&D) and energy efficiency programs (EEP) and other adjustments as of December 31, 2004 and 2003 and for the years then ended. See Note 2(b) to our consolidated financial statements.
(7)     
Amounts shown for 2005, 2004, 2003 and 2001 represent interest on equity, which we elected to pay in lieu of dividends.
 

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EXCHANGE RATES

     The Banco Central do Brasil (the “Central Bank”) allows the real/U.S. dollar exchange rate to float freely, and it has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to let the real float freely or will intervene in the exchange rate market through a currency band system or otherwise. The real may depreciate or appreciate against the U.S. dollar substantially in the future. For more information on these risks, see “Risk Factors—Risks Relating to Brazil.”

     The following table provides information on the selling exchange rate, expressed in reais per U.S. dollar (R$/U.S.$), for the periods indicated. Prior to March 14, 2005, under Brazilian regulations, foreign exchange transactions were carried out on either the commercial rate exchange market or the floating rate exchange market. Rates in the two markets were generally the same. The table uses the commercial selling rate prior to March 14, 2005.

       Exchange Rate of Brazilian Currency per U.S.$1.00 
   
Year    Low    High    Average(1)   Year-End 
         
 
2001       1.9357       2.8007    2.3532    2.3204 
2002       2.2709       3.9552    2.9983    3.5333 
2003       2.8219       3.6623    3.0600    2.8892 
2004       2.6544       3.2051    2.9171    2.6544 
2005       2.1633       2.7621    2.4125    2.3407 


_____________
Source:
Central Bank.
(1) Represents the average of the exchange rates on the last day of each month during the relevant period.

         
     
Month    Low    High 
     
   December 2005       2.1800       2.3735 
   January 2006       2.2116       2.3460 
   February 2006       2.1177       2.2217 
   March 2006       2.1067       2.2238 
   April 2006       2.0892       2.1542 
   May 2006       2.0586       2.3711 

_____________
Source: Central Bank

     On June 1, 2006, the Central Bank selling rate was R$2.2713 per U.S.$1.00.

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RISK FACTORS

Risks Relating to Brazil

Brazilian political and economic conditions have a direct impact on our business and the market price of the Class B Shares and ADSs.

     All of our operations and customers are located in Brazil. Accordingly, our financial condition and results of operations are largely dependent on Brazil’s economy, which has been characterized by frequent and occasionally drastic intervention by the Brazilian government and volatile economic cycles in the past.

     In the past, the Brazilian government has often changed monetary, fiscal and other policies to influence the course of Brazil’s economy. The Brazilian government may take similar measures in the future, with adverse effects to our business, financial condition and results of operations. We have no control over, and cannot predict, how such intervention and government policies will affect the Brazilian economy and, both directly and indirectly, our operations and revenues. Our operations, financial condition, prospects and the market price of the Class B Shares and ADSs may be adversely affected by changes in policy involving exchange controls, tax and other matters, as well as factors such as:

  • fluctuations in exchange rates;

  • base interest rate fluctuations;

  • inflation;

  • liquidity of domestic capital and lending markets;

  • structural and investment deficiencies in the energy sector;

  • changes in tax laws, including charges applicable to specific industry sectors;

  • exchange controls and restrictions on remittances abroad; and

  • other political, diplomatic, social and economic developments in or affecting Brazil.

A devaluation of the real would lead to losses on our liabilities denominated in or indexed to foreign currencies, a reduction in our profits, an increase in our operational costs, or a decline in the market price of the Class B Shares and ADSs.

     The exchange rate between the real and the U.S. dollar has fluctuated significantly in recent years. For example, the U.S. dollar/real exchange rate rose from R$2.3204 per U.S. dollar at December 31, 2001 to R$3.5333 per U.S. dollar at December 31, 2002. However, the stability established by the economic policies adopted by the administration of President Lula has restored confidence in the Brazilian market. This has resulted in an appreciation of the real in 2005 of 13.4%, to R$2.3407 per U.S.$1.00 as of December 31, 2005. During the first five months of 2006, the real appreciated by 1.75% to R$2.3005 per U.S. dollar at May 31, 2006.

     A portion of our financial liabilities are denominated in foreign currencies, primarily U.S. dollars. When the Brazilian currency is devalued, we incur losses on our liabilities denominated in or indexed to foreign currencies, such as our U.S. dollar-denominated long-term debt, foreign currency loans, and gains

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on our monetary assets denominated in or indexed to foreign currencies. A devaluation would reduce the U.S. dollar value of distributions and dividends on the ADSs and could materially reduce the market price of the Class B Shares and ADSs.

If Brazil experiences substantial inflation in the future, our margins and the market price of the Class B Shares and ADSs may be reduced.

     Brazil has in the past experienced extremely high rates of inflation. More recently, Brazil’s annual rates of inflation, measured in accordance with the variation of the ¥ndice Geral de Preços — Disponibilidade Interna (“IGP-DI”) index, were 7.7% in 2003, 12.1% in 2004, 1.2% in 2005 and 0.61% for the five months ended May 31, 2006. Inflation, certain governmental measures taken to combat inflation and public speculation about possible future government actions have in the past had significant negative effects on the Brazilian economy. If Brazil experiences substantial inflation in the future, our costs may increase, our operating and net margins may decrease and, if investor confidence lags, the price of the Class B Shares and ADSs may fall. Inflationary pressures may also curtail our ability to access foreign financial markets and may lead to further government intervention in the economy, including the introduction of government policies that may adversely affect the overall performance of the Brazilian economy.

Political instability may adversely affect our results of operations and the price of our Class B Shares and ADSs.

     The performance of the Brazilian economy has historically been influenced by the domestic political situation. Political crises have, in the past, affected the confidence of investors and of the general public and resulted in economic slowdowns, adversely affecting the market price of the shares of listed companies.

     The Brazilian Congress is currently conducting investigations into, among other matters, allegations related to political campaign contributions that were unaccounted for or not publicly disclosed, including contributions made to various important members of the current administration. Such allegations have resulted in the replacement of key ministers and have occupied most of Congress’ agenda this year. If these investigations were to impact the confidence of the general public and/or of investors resulting in an economic slowdown in Brazil, our results of operations and the price of our units would be adversely affected.

     Additionally, presidential elections in Brazil are scheduled to take place in October 2006, and we cannot assure you that the next administration will maintain the economic policies that were adopted by the current administration. Brazil’s GDP growth rate was 0.5% in 2003, 4.9% in 2004 and 2.3% in 2005. The Brazilian economy’s limited growth in the past few years contributed to the uncertainty of whether the economic policies adopted by the current administration will be maintained either by the current administration up to the elections or by the next administration. If the current or the next administration promotes significant changes in economic policies currently adopted, and such changes result in an economic slowdown in Brazil, our results of operations and the market price of our units may be adversely affected.

     In addition, market prices of shares of Brazilian companies have been volatile during presidential elections in the past. Uncertainties about the outcome of the election, and speculation about actions of the future government, may influence investors’ perception of risk in Brazil and have a negative impact on the market price of our Class B Shares and ADSs.

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The market value of securities issued by Brazilian companies is influenced by the perception of risk in Brazil and other emerging economies, which may have a negative effect on the market price of our Class B Shares and ADSs and may restrict our access to international capital markets.

     Economic and market conditions in other emerging market countries, especially those in Latin America, may influence the market for securities issued by Brazilian companies. Although economic conditions in such countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers. In the wake of economic problems in various emerging market countries in recent years (such as the Asian financial crisis of 1997, the Russian financial crisis of 1998 and the Argentine financial crisis that began in 2001), investors viewed investments in emerging markets with heightened caution. These crises produced a significant outflow of U.S. dollars from Brazil, negatively affecting the price of securities issued by Brazilian companies and causing Brazilian companies to face higher costs for raising funds, both domestically and abroad, and impeding access to international capital markets. Crises in other emerging market countries could hamper investor enthusiasm for securities of Brazilian issuers, including ours, which could adversely affect the market price of our Class B Shares and ADSs.

Changes in Brazilian tax policies may have an adverse effect on us.

     The Brazilian government has changed its tax policies in ways that affect the electricity sector, and it may do so again in the future. These changes include amendments to the tax rates and, occasionally, collection of temporary taxes related to specific governmental purposes. Some of such measures may lead to an increase of taxes and we may be unable to adjust our tariffs accordingly, in which case we may be adversely affected.

Risks Relating to Our Operations

We are controlled by the State of Paraná, and government policy could have a material adverse effect on us and on our business.

     We are controlled by the State of Paraná, which directly and indirectly holds 58.6% of our outstanding common voting shares as of the date of this Annual Report, and whose interests may differ from yours. The State of Paraná has the power to control all our operations, including the power to:

  • elect a majority of the members of our Board of Directors; and

  • determine the outcome of any action requiring common shareholder approval, including transactions with related parties, corporate reorganizations and the timing and payment of any future dividends.

     Brazilian government policy could have a material adverse effect on us and our business, results of operations, financial condition or prospects. In 2003, as a result of the election of a new administration to govern the State of Paraná, significant modifications were made to our Board of Directors and senior management, which led to changes in certain aspects of our strategy and operations. In particular, after ANEEL granted us a tariff increase in June 2003, our Board of Directors established a discount in an equal amount, effectively reversing the tariff increase for all our customers, except those who do not pay their bills on time. Since January 1, 2004, we have reduced the discount to customers who pay their statements on time, although these customers still receive a discount from the tariff increase set by ANEEL. Since August 1, 2005, the average discount afforded to such customers was 6.8% of the tariff approved by ANEEL.

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     In June 2006, ANEEL authorized us to increase tariffs by an average of 5.12% pursuant to the annual tariff readjustment. Our management and our Board of Directors have decided to apply the entire amount of this increase, without offering a discount to certain of our customers as we have done in the past.

We are largely dependent upon the economy of the State of Paraná.

     Our market for the majority of our sales of electricity is located in the State of Paraná. Although a more competitive market involving possible sales to customers outside Paraná might develop in the future, our business depends and is expected to continue to depend to a very large extent on the economic conditions of Paraná. We cannot assure you that economic conditions in Paraná will be favorable to us in the future.

We are involved in several lawsuits that could have a material adverse effect on our business if their outcome is unfavorable to us.

     We are the defendant in several legal actions, mainly relating to civil, administrative, labor and tax claims. The outcome of these proceedings is uncertain and, if determined against us, may result in obligations that could materially adversely affect our business and the value of the Class B Shares and ADSs. See “Item 8. Financial Information—Legal Proceedings”.

The development of power generation projects is subject to substantial risks.

     In connection with the development of a generation project, we generally must obtain feasibility studies, governmental concessions or authorizations, permits and approvals, condemnation agreements, equipment supply agreements, engineering, procurement and construction contracts sufficient equity and debt financing and site agreements, each of which involves third parties over which we have no control. In addition, project development is subject to environmental, engineering and construction risks that can lead to cost overruns, delays and other impediments to timely complete within a project’s budget. We cannot assure you that all required permits and approvals for our projects will be obtained, that we will be able to secure private sector partners for any of our projects, that we or any of our partners will be able to obtain adequate financing for our projects or that financing will be available on a non-recourse basis to us. If we are unable to complete a project, whether at the initial development phase or after construction has commenced, we may not be able to recover our investment in such a project, which may be substantial.

We must comply with rigorous minimum quality standards.

     According to our concession agreement, we must comply with the minimum quality standards determined by the Brazilian government for the distribution of electric energy, as well as meet minimum standards for the improvement of services. If our performance falls below these standards, we may be subject to penalties and fines. In extreme instances, the Brazilian government may force us to forfeit our concession.

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Risks Relating to the Brazilian Electric Sector

The tariffs that we charge for sales of electricity to captive consumers are determined pursuant to a concession agreement with the Brazilian government through ANEEL, and our operating revenues could be adversely affected if ANEEL makes decisions relating to our tariffs that are not favorable to us.

     ANEEL has substantial discretion to establish the tariff rates we charge our customers. Our tariffs are determined pursuant to a concession agreement with ANEEL and in accordance with ANEEL’s regulatory decision-making authority.

     Our concession agreement and Brazilian law establish a price cap mechanism that permits three types of tariff adjustments: (1) annual readjustment (reajuste anual), (2) periodic revision (revisão periódica) and (3) extraordinary revision (revisão extraordinária). We are entitled to apply each year for the annual readjustment, which is designed to offset some effects of inflation on tariffs and pass through to customers certain changes in our cost structure that are beyond our control, such as the cost of electricity we purchase from certain sources and certain other regulatory charges, including charges for the use of transmission facilities. In addition, ANEEL carries out a periodic revision every four years that is aimed at identifying variations in our costs as well as setting a factor based on our operational efficiency that will be applied against the index of our ongoing annual tariff readjustments, the effect of which is to ensure that we share any efficiency gains with our customers. We are also entitled to request an extraordinary revision of our tariffs if unpredictable costs significantly alter our cost structure.

     We cannot assure you that ANEEL will establish tariffs at rates that are favorable to us. In addition, to the extent that any of these adjustments are not granted by ANEEL in a timely manner, our financial condition and results of operations may be adversely affected.

We may face increased competition that could adversely affect our market share and revenues.

     Within our concession area we do not currently face competition in the distribution of electric energy to residential, commercial and industrial customers of low voltage supply. However, as a result of legislation passed in 1995 and 1998, other suppliers are permitted to offer electricity to certain large electricity customers that meet the regulatory requirements to qualify as Free Consumers. Free Consumers are those customers with demand equal to or greater than 3MW that are supplied at a voltage level equal to or greater than 69kV or, in the case of customers that have entered the market since July 1995, customers with demand equal to or greater than 3MW that are supplied at any voltage level. These Free Consumers may be offered electricity at lower prices than those we currently charge. Our distribution business is not able to compete with these suppliers since it has not been allowed to enter into agreements with Free Consumers since December 2004, although our generation business has retained the right to compete with such suppliers.

     The increase in competition from other energy suppliers serving Free Consumers located in our concession area, together with the issuance of additional regulations aimed at fostering competition in the energy sector, could adversely affect our market share and revenues.

Electricity shortages might affect our operating income.

     Due to the dependence of the electric energy sector upon natural and seasonal variables such as rainfall and river flows, deterioration in these conditions could severally hamper the generation of electric energy.

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     During 2001, Brazil experienced a severe shortage of capacity to generate electrical energy. The crisis was largely due to a lack of investment in power generation and to drought conditions throughout much of the country, which caused storage levels at hydroelectric plants (which, at the time, accounted for 88.3% of the country’s generating capacity) to fall to less than one-third of their capacity.

     In order to avoid the possibility of rolling blackouts, the Brazilian government announced measures in June 2001 aimed at the reduction of electricity consumption in the southeastern, central-western and northeastern regions of Brazil by an average of 20.0% . The Brazilian government also announced surcharges for those who did not meet their cutback quotas and incentives for those who did. The State of Paraná, as well as the other southern states in Brazil, were exempted from these measures because the southern region did not experience the drought conditions and the plants in the region were able to maintain their normal operating capacity. The restrictions remained in effect until February 28, 2002.

     In the future, if the generation capacity in Brazil does not increase to meet the growth in demand, or if there are water shortages, which affect the ability of hydroelectric facilities to operate, the Brazilian government may adopt further measures to reduce energy consumption in the country, including the State of Paraná. These measures, if adopted could have a material adverse effect on our financial conditions and results of operations.

We are subject to extensive governmental legislation and regulation and to major regulatory changes that are still being implemented by the Brazilian government, and we cannot be certain of their effect on our business and results of operations.

     We are a major Brazilian power company that generates, transports and distributes electricity to customers in the State of Paraná. In recent years, the Brazilian government has implemented policies that have had a far-reaching impact on the Brazilian power industry and, in particular, the electricity industry. Law No. 10,848, Lei do Novo Modelo do Setor Elétrico (the “New Industry Model Law”), which regulates the operations of companies in the power industry, was enacted on March 15, 2004. The New Industry Model Law remains subject to the implementation resolutions of ANEEL, and its constitutionality is currently being challenged in the Brazilian Supreme Court. The Brazilian Supreme Court has not yet reached a final decision and, therefore, the New Industry Model Law is currently in force. If all or a relevant portion of the New Industry Model Law is found unconstitutional by the Brazilian Supreme Court, the regulatory scheme introduced by the New Industry Model Law may change, thus generating uncertainty as to how and when the Brazilian government will be able to introduce changes to the electricity industry.

     The impact on our business of the regulatory changes introduced by the New Industry Model Law, the above-mentioned legal proceedings and possible future reforms in the power industry are difficult to predict, and could all adversely affect our business and results of operation. For more information, see “Item 4. Information on the Company—The Brazilian Power Industry—Reform of the Electric Energy Industry.”

We may be forced to purchase energy in the spot market to meet customer demand, and the price of spot market energy purchases may be substantially higher than the price of energy under our long-term energy purchase agreements.

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     Under the New Industry Model Law, electric energy distributors, including us, must contract, through public bids conducted by ANEEL, 100.0% of the forecasted electric energy demand for their respective distribution concession areas, up to five years prior to the actual delivery of electric energy. Under the prior regulatory regime, we were required to contract 95.0% of our forecasted electric energy demand. If our forecasts fall significantly short of actual electricity demand, we may be forced to make up the shortfall with short-term electricity purchase agreements. We cannot guarantee that our forecasts for energy demand in our distribution concession area will be accurate, and if they are not, we may face significantly higher prices in the spot market to satisfy our electric energy distribution obligations, as well as penalties imposed by the Electric Energy Trading Chamber (Câmara de Comercialização de Energia Elétrica (“CCEE”)). Additionally, the Federal Government may adopt new procedures for energy trading if these public auctions are not successful and we cannot be certain of the effect of any such new procedures on our financial condition and results of operations.

The New Industry Model Law requires us to change how we sell the energy we generate and how we buy the energy we distribute. This could adversely affect our profitability, our cash flows and expose us to different risks.

     In 2005, approximately 21.6% of the electricity we produced was committed under the initial supply contract between our subsidiaries Copel Geração S.A. (“Copel Geração”) and Copel Distribuição S.A. (“Copel Distribuição”). This initial supply contract terminated in December 2005. Under the New Industry Model Law, since January 2005, Copel Geração has had to sell the remaining electric energy previously committed under our initial supply contracts (the “Initial Supply Contracts”) directly in the regulated market (the “Pool”), in the spot market or to Free Consumers, and Copel Distribuição has had to purchase energy from the Pool. Although we have not encountered significant difficulties selling most of our unsold energy in the Pool, we cannot guarantee that we will be able to do so in the future or that the quantities and prices of such sales will be satisfactory, or at least similar to the term of our initial supply contracts. If we do not succeed in selling such electric energy in the Pool or to Free Consumers, we may be forced to sell it at significantly lower prices in the spot market. Such a situation could adversely affect our revenues and results of operations.

We generate a portion of our operating revenues from Free Consumers who may seek other energy suppliers upon the expiration of their contracts with us.

     During 2005, we provided electricity to 20 Free Consumers, representing approximately 2.0% of our net operating revenues and approximately 6.3% of the total quantity of electricity sold by us to Final Customers. Approximately 17.0% and 15.0% of the megawatts sold under contract to such customers are set to expire in 2006 and 2007, respectively. There can be no assurance that, upon the expiration of these contracts, the Free Consumers will purchase energy from us.

     At December 31, 2005, we had 34 customers that were eligible to qualify as Free Consumers upon the expiration of their agreements with us. There can be no assurance that upon becoming Free Consumers, such customers will continue to purchase energy from us. A loss of business to other energy suppliers serving Free Consumers would lower our cash flow and could adversely affect our market share.

Our equipment, facilities and operations are subject to numerous environmental and health regulations which may become more stringent in the future and may result in increased liabilities and increased capital expenditures.

     Our distribution, transmission and generation activities are subject to comprehensive federal, state and local legislation as well as supervision by Brazilian governmental agencies that are responsible for the implementation of environmental and health laws and policies. These agencies could take enforcement action against us for our failure to comply with their regulations and with requirements established for the maintenance of our environmental licenses. These actions could include, among other things, the imposition of fines and revocation of licenses. It is possible that enhanced environmental and health regulations will force us to allocate capital expenditures towards compliance, and consequently, divert funds away from planned investments. Such a diversion could have a material adverse effect on our financial condition and results of operations.

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Changes in the laws and regulations issued by ANEEL may adversely affect us and other companies that operate in the electricity sector.

     Our main commercial activities are subject to extensive regulation by various Brazilian regulatory authorities, including ANEEL. ANEEL has the authority to regulate and oversee various aspects of our business, including the power to require us to reduce our tariffs or to increase our investments. If we are obliged by ANEEL to make additional and unexpected capital investments and are not allowed to adjust our tariffs accordingly, or if ANEEL modifies the regulations related to such adjustment, we may be adversely affected.

     In addition, our main commercial activities, the implementation of our strategy for growth, as well as the ordinary carrying out of our business may be adversely affected by governmental actions such as:

  • changes to current legislation applicable to our business;

  • changes and/or the termination of federal and state concession programs;

  • creation of more rigid criteria for qualification in future public energy auctions; and

  • delay in the revision and implementation of new annual tariffs.

     If we are required to conduct our business in a manner substantially different from our current operations, as a result of regulatory changes, our results of operations and financial results may be adversely affected.

ANEEL could penalize us for failing to comply with the terms of our concessions, and we may not recover the full value of our investment in the event that any of our concessions are terminated.

     We carry out our distribution, generation and transmission activities pursuant to concession agreements executed by our subsidiaries with the Federal government through ANEEL. Our concessions are for terms of 30 to 35 years and may be renewed if certain conditions are met. In the event that we fail to comply with any term of our concessions or applicable laws, ANEEL may impose penalties on us, which may include the imposition of substantial fines (in some instances, up to two percent of a concessionaire’s revenues in the fiscal year immediately preceding the assessment) and restrictions on our operations. ANEEL may also terminate our concessions prior to the expiration of their terms if we fail to comply with their provisions, if we are declared bankrupt, if we are dissolved or if ANEEL determines, through an expropriation proceeding, that terminating our concession would be in the public interest. If ANEEL terminates any of our concessions before their expiration, we would not be able to operate the segment(s) of our business that had been authorized by the concession. Furthermore, any compensation that we may receive from the Federal Government for the unamortized portion of our investment may not be sufficient for us to recover the full value of our investment. The early termination or non-renewal of any of our concessions or the imposition of severe fines or penalties by ANEEL could have a material adverse effect on our financial condition and results of operations. See “The Brazilian power industry—Concessions.”

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Risks Relating to the Class B Shares and ADSs

As a holder of ADSs you will generally not have voting rights at our shareholders’ meetings.

     In accordance with the Brazilian Corporation Law and our by-laws, holders of the Class B Shares, and thus of the ADSs, are not entitled to vote at our shareholders’ meetings except in limited circumstances. This means, among other things, that you, as a holder of the ADSs, are not entitled to vote on corporate transactions, including any proposed merger with other companies.

     In addition, in the limited circumstances where the holders of Class B Shares are able to vote, holders may exercise voting rights with respect to the Class B Shares represented by ADSs only in accordance with the provisions of the deposit agreement relating to the ADSs. There are no provisions under Brazilian law or under our by-laws that limit ADS holders’ ability to exercise their voting rights through the depositary bank with respect to the underlying Class B Shares. However, there are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with such holders. For example, holders of our Class B Shares will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. In accordance with the deposit agreement, we will provide the notice to the depositary bank, which will in turn, as soon as practicable thereafter, mail to holders of ADSs the notice of such meeting and a statement as to the manner in which instructions may be given by holders. To exercise their voting rights, ADS holders must then instruct the depositary bank how to vote their shares. Because of this extra procedural step involving the depositary bank, the process for exercising voting rights will take longer for ADS holders than for holders of Class B Shares. ADSs for which the depositary bank does not receive timely voting instructions will not be voted at any meeting.

As a holder of ADSs you will have fewer and less well defined shareholders’ rights in Brazil than in the United States and certain other jurisdictions.

     Our corporate affairs are governed by our by-laws and the Brazilian Corporation Law, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in certain other jurisdictions outside Brazil. Under the Brazilian Corporation Law you and the holders of the Class B Shares may have fewer and less well-defined rights to protect your interests relative to actions taken by our Board of Directors or the holders of Common Shares than under the laws of some jurisdictions outside Brazil.

     Although Brazilian law imposes restrictions on insider trading and price manipulation, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or markets in certain other jurisdictions. In addition, rules and policies against self-dealing and regarding the preservation of minority shareholder interests may be less well developed and enforced in Brazil than in the United States, which could potentially disadvantage you as a holder of the preferred shares and ADSs. For example, when compared to Delaware general corporation law, Brazilian Corporation Law and practice has less detailed and well-established rules and judicial precedents relating to the review of management decisions against duty of care and duty of loyalty standards in the context of corporate restructurings, transactions with related parties, and sale-of-business transactions. In addition, shareholders in Brazilian companies must hold 5.0% of the outstanding share capital of a corporation to have standing to bring shareholders’ derivative suits, and shareholders in Brazilian companies ordinarily do not have standing to bring a class action.

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You may be unable to exercise preemptive rights relating to the preferred shares.

     You will not be able to exercise the preemptive rights relating to the Class B Shares underlying your ADSs unless a registration statement under the United States Securities Act of 1933 as amended (“Securities Act”), is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. The depositary bank will not offer rights to you as a holder of the ADSs unless the rights are either registered under provisions of the Securities Act or are subject to an exemption from the registration requirements. We are not obligated to file a registration statement with respect to the shares or other securities relating to these rights, and we cannot assure you that we will file any such registration statement. Accordingly, you may receive only the net proceeds from the sale of your preemptive rights by the depositary bank or, if the preemptive rights cannot be sold, they will be allowed to lapse. If you are unable to participate in rights offerings, your holdings may also be diluted.

If you exchange your ADSs for Class B Shares, you risk losing the ability to remit foreign currency abroad and Brazilian tax advantages.

     Brazilian law requires that parties obtain a certificate of registration from the Central Bank in order to be allowed to remit foreign currencies, including U.S. dollars, abroad. For the ADSs, the Brazilian custodian for the Class B Shares has obtained the necessary certificate from the Central Bank for the payment of dividends or other cash distributions relating to the preferred shares or upon the disposition of the preferred shares. If you exchange your ADSs for the underlying Class B Shares, however, you may only rely on the custodian’s certificate for five business days from the date of exchange. Thereafter, you must obtain your own certificate of registration or register in accordance with Central Bank and CVM rules, in order to obtain and remit U.S. dollars abroad upon the disposition of the Class B Shares or distributions relating to the preferred shares. If you do not obtain a certificate of registration, you may not be able to remit U.S. dollars or other currencies abroad and may be subject to less favorable tax treatment on gains with respect to the preferred shares.

     If you attempt to obtain your own certificate of registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to the preferred shares or the return of your capital in a timely manner. The custodian’s certificate of registration and any certificate of foreign capital registration you obtain may be affected by future legislative changes. Additional restrictions may be imposed in the future on the disposition of the underlying Class B Shares or the repatriation of the proceeds from disposition.

The Brazilian government may impose exchange controls and restrictions on remittances abroad which may adversely affect your ability to convert funds in reais into other currencies and to remit other currencies abroad.

     You may be adversely affected by the imposition of restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil and the conversion of reais into foreign currencies. The Brazilian government last imposed remittance restrictions for a brief period in 1989 and early 1990. Re-imposition of these restrictions would hinder or prevent your ability to convert dividends, distributions or the proceeds from any sale of Class B Shares, as the case may be from reais, into U.S. dollars or other currencies and to remit those funds abroad. We cannot assure you that the Brazilian government will not take similar measures in the future.

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The relative volatility and illiquidity of the Brazilian securities markets may impair your ability to sell the Class B Shares underlying the ADSs.

     The Brazilian securities markets are substantially smaller, less liquid, more concentrated and more volatile than major securities markets in the United States and elsewhere, and are not as highly regulated or supervised as some of those other markets. The illiquidity and relatively small market capitalization of the Brazilian equity markets may cause the market price of securities of Brazilian companies, including our ADSs and Class B Shares, to fluctuate in both the domestic and international markets, and may substantially limit your ability to sell the Class B Shares underlying your ADSs at a price and time at which you wish to do so.

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Item 4. Information on the Company

THE COMPANY

     We are a fully integrated electric power company engaged in the generation, transmission and distribution of electricity in the Brazilian State of Paraná, pursuant to concessions granted by the Brazilian regulatory agency for the electric sector, ANEEL. We also provide telecommunications and information technology services and other services through various partnerships that we maintain. At December 31, 2005, we generated electricity at seventeen hydroelectric plants and one thermoelectric plant, with a total installed capacity of 4,549.6 MW (approximately 99.6% of which is hydroelectric). Our electric power business is subject to comprehensive regulation by ANEEL.

     We hold concessions to distribute electricity in approximately 98.0% of the 399 municipalities in the State of Paraná and in the municipality of Porto União in the State of Santa Catarina. At December 31, 2005, we owned and operated 6,996.5 kilometers of transmission lines and 165,576 kilometers of distribution lines, constituting the second-largest distribution network in Brazil. Of the electricity volume we supplied to those of our customers who use the energy for their own needs and do not sell such energy on to other parties (“Final Customers”) during 2005:

  • 40.9% was to industrial customers;

  • 24.9% to residential customers;

  • 17.3% to commercial customers; and

  • 16.9% to rural and other customers.

     In 2005, residential consumption, which accounts for 24.9% of our market sales to Final Customers, grew by 4.2% in 2005, as evidenced by the rate of consumption per residential customer, which reached 151.4 kWh/month in 2005, 1.5% higher than 2004 (149.2 kWh/month). Such growth has resulted mostly from higher sales of electronics, particularly DVD players, TV sets, and personal computers, following a credit expansion which began in early 2004.

     Commercial consumption, which accounts for 17.3% of our market sales to Final Customers, recorded the best performance among major customer categories, with a 6.8% rate of growth. The retail business benefited from the greater availability of credit to individual customers, from the overall increase in the number of customers (2.5% over 2004), and from the opening of new business, particularly malls, which have recorded high sales figures.

     The 5.2% rate of growth in rural consumption was due mainly to the increase in average consumption, which resulted from the increase in producers’ income from good harvests in 2002/2003 and 2003/2004, enabling them to invest in electric machinery.

     Consumption by the industrial segment (taking into account only Copel Distribuição’s captive market) dropped by 9.3%, due to the transfer of Free Consumers to Copel Geração in April 2005. The total industrial consumption, however, grew by 1.8% with the addition of these Free Consumers. The business segments which recorded greater expansion in 2005 were paper, cardboard, and pulp, with 27.4% growth, and rubber and plastics, with a 5.4% rate of growth.

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     The 2002 elections in Brazil also resulted in major changes in the Brazilian government and in the state government of Paraná. Luiz Inácio Lula da Silva took office in January 2003 and part of his program of reforms led to the enactment of the New Industry Model Law, which modifies several important aspects of the regulations governing the electric energy industry. (See “—The Brazilian Power Industry — Reform of the Electric Energy Industry”). In the State of Paraná, a new governor, Roberto Requião, was elected from a different political party than the old administration, and, as a result, all the members of our board of directors and all of our executive officers were replaced in January 2003.

     Key elements of our strategy include the following:

  • Changing our capital expenditure priorities to emphasize modernizing our transmission network and improving the reliability of our transmission and distribution systems;

  • Investing in new generation projects;

  • Reviewing our investments in affiliates with the objectives of exiting those that are not consistent with our core objectives, and limiting future investments to those we control; and

  • Strengthening corporate governance by a variety of measures, including increasing oversight by the board of directors and the fiscal council.

     Our head offices are located at Rua Coronel Dulcídio, 800, CEP 80420-170 Curitiba, Paraná, Brazil. Our telephone number at the head office is (55-41) 3322-3535.

     Historical Background

     We were formed in 1954 by the State of Paraná to engage in the generation, transmission and distribution of electricity, as part of a plan to bring the electric power sector under state control. We acquired the principal private power companies located in the State of Paraná in the early 1970s. During the period from 1970 to 1977, we significantly expanded our transmission and distribution network and the connection of our network to networks in other Brazilian states. In 1979, a change in state law permitted us to extend our generating activities to include production from sources other than hydroelectric plants.

     Relationship with the State of Paraná

     The State of Paraná owns (directly and indirectly) 58.6% of our Common Shares and, consequently, has the ability to control the election of the majority of the members of our Board of Directors, the appointment of senior management and our direction, future operations and business strategy.

     Corporate Structure

     Prior to 2001, we were a single corporation engaged in the generation, transmission and distribution of electricity and in certain related activities. In order to facilitate our proposed privatization and compliance with the changed regulatory regime, we transferred our operations to four wholly-owned subsidiaries—one each for generation, transmission, distribution and telecommunications—and our investments in other companies to a fifth wholly-owned subsidiary. This corporate restructuring was completed in July 2001.

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     Business

     During 2005, we produced 47.0% of the electricity we delivered. In addition to the energy we produce, we are required, like certain other Brazilian distribution companies, to purchase energy from Itaipu Binacional (“Itaipu”) in an amount determined by the Brazilian government based on our sales of electricity. Itaipu is the largest operating hydroelectric power plant in the world, with an installed capacity of 12,600 MW. Pursuant to a 1973 treaty between Brazil and Paraguay, Brazil purchases a substantial majority of the electricity generated by Itaipu. The following chart sets forth the sources and uses of electricity we delivered during 2005. Amounts other than percentages are in GWh. The classification of our energy sales is based on the regulatory structure discussed in “—The Brazilian Power Industry.”


The following table sets forth the total electricity we generated, purchased from Itaipu and purchased from others in the last five years.

    Year ended December 31, 
   
    2005    2004    2003    2002    2001 
           
            (GWh)        
                     
Electricity we generated    18,436    19,121    16,598    19,100    24,380 
Electricity we purchased from Itaipu    4,683    4,609    5,678    4,845    4,640 
Auction—CCEAR    8,229           0     
Electricity we purchased from others(1)   7,839    5,805    7,286    4,587    419 
           
        Total    39,187    29,535    29,562    28,532    29,439 
           

____________
(1) Includes capacity made available but not fully delivered.

     The following table sets forth the total electricity we sold to Final Customers, distributors, and other utilities in the south of Brazil through a transmission network known as the Interconnected Power System—South/Southeast (“Interconnected Power System”) that links the states in the south and southeast of Brazil.

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    Year ended December 31, 
   
    2005    2004    2003    2002    2001 
           
    (GWh)
 
Electricity delivered to Final Customers (retail                     
   and unregulated) (2)   18,697    18,736    18,782    18,551    18,037 
Electricity delivered to distributors in the State                     
   of Paraná    450    484    468    411    449 
Electricity delivered to out of state distributors                     
   under Initial Supply Contracts    35    70    105    140    140 
Bilateral Agreements    3,778    4,134    2,410    679    516 
Auction—CCEAR    8,488         
Electricity delivered to the Wholesale Energy                     
   Market and the Interconnected Power                     
   System (1)   4,470    4,101    6,199    7,119    8,609 
           
Subtotal    35,917    27,525    27,964    26,900    27,751 
           
 
Losses—Distribution System    3,269    2,010    1,598    1,632    1,688 
           
 
Total    39,187    29,535    29,562    28,532    29,439 
           
_____________
(1)      Includes capacity made available but not fully delivered.
(2)      Includes the Free Customers that terminated their agreements by the end of 2004.
 

Generation and Purchases of Energy

Generation Facilities

     At December 31, 2005, we operated seventeen hydroelectric plants and one thermoelectric plant, with a total installed capacity of 4,549.6 MW. We produce electricity almost exclusively through our hydroelectric plants. Our assured energy, which represents our minimum potential total output, totaled 17,175 GWh in 2005. The actual generation in any year differs from assured energy, depending on hydrological conditions and other factors. We generated 18,436 GWh in 2005, 19,121 GWh in 2004, and 16,598 GWh in 2003. The generation of electrical energy at our hydroelectric plants is supervised and coordinated by our generation operation center in the city of Curitiba, which is presently responsible for the operation of approximately 98.8% of our total installed capacity.

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     The following table sets forth certain information relating to our plants in operation at December 31, 2005.

   
Installed 
Assured 
Placed In 
Concession 
Type 
 
Plant 
Capacity 
Energy (1)
Service 
Expires 
           
        (MW)   (GWh/yr)        
Hydroelectric    Gov. Bento Munhoz da Rocha Netto   
1,676 
5,059 
1980 
2023 
Hydroelectric    Gov. Ney Aminthas de Barros Braga   
1,260 
5,297 
1992 
2009 
Hydroelectric    Gov. Jose Richa   
1,240 
5,314 
1999 
2010 
Hydroelectric    Gov. Pedro Viriato Parigot de Souza   
260 
957 
1970 
2015 
Hydroelectric    Guaricana   
36 
119 
1957 
2026 
Hydroelectric    Chaminé   
18 
102 
1930 
2026 
Thermoelectric    Figueira   
20 
123 
1963 
2019 

______________________
(1) Values used to determine volumes committed for sale.

     Governador Bento Munhoz da Rocha Netto (Foz do Areia). The Gov. Bento Munhoz de Rocha Netto hydroelectric plant is located on the Iguaçu River, approximately 350 kilometers southwest of the city of Curitiba. The plant began full operations in 1981.

     Governador Ney Aminthas de Barros Braga (Segredo). The Gov. Ney Aminthas de Barros Braga hydroelectric plant is located on the Iguaçu River, approximately 370 kilometers southwest of the city of Curitiba. The plant began full operations in 1993.

     Governador José Richa (Salto Caxias). The Gov. José Richa hydroelectric plant is located on the Iguaçu River, approximately 600 kilometers southwest of the city of Curitiba. We began constructing the plant in 1994 and placed the final generating unit in service in October 1999.

     Governador Pedro Viriato Parigot de Souza (Capivari Cachoeira). The Gov. Pedro Viriato Parigot de Souza hydroelectric plant is the largest underground hydroelectric plant in Brazil. The reservoir is located on the Capivari River, approximately 50 kilometers north of the city of Curitiba, and the power station is located on the Cachoeira River, approximately 110 kilometers northeast of the city of Curitiba. The plant began full operations in 1972.

     Guaricana, Chaminé and Figueira, together with our eleven other hydroelectric plants (Marumbi, Apucaraninha, Mourão, Derivação do Rio Jordão, São Jorge, Chopim I, Rio dos Patos, Cavernoso, Pitangui, Salto do Vau and Melissa) have a total installed capacity of 113.6 MW.

Expansion of Generating Capacity

     In 2006, we expect to spend R$21.6 million on generation capacity on our wholly owned facilities and R$66.0 million on ELEJOR.

     We have participation interests in several generation projects, and approximately 100.0% of the energy that these projects will generate will be available for our use, substantially enhancing our generation capacity in the future. The following table sets forth information regarding our planned major generation projects for the period from 2006 to 2009.

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Estimated 
Estimated 
Estimated 
Budgeted 
(Expected)
Our 
Energy 
Installed 
Assured 
Completion 
Beginning of 
Ownership 
Available 
Facility 
Capacity 
Energy(1)
Cost 
Operation 
Percentage 
to Copel 
Status 
 
 
 
 
 
 
 
 
(MW)
(GWh/year)
(R$ million)
                             
ELEJOR - Santa Clara and Fundão   
240 
1,186 
521.5 
July 2005 and July 2006 
70.0% 
100.0% 
  Santa Clara is operating; Fundão is expected to begin operating in July 2006 
   
   
   
   
 
São Jerônimo   
331 
1,450 
510.0(2)
July 2009 
21.0% 
100.0% 
  Concession Awarded 
                             
   
  The plant has been completed, but it is not yet in operation 
Araucária   
484.3 
 
3,903.0 
697.4 
Sept. 2006 
80.0% 
100.0% 
 
____________________
(1)      Values used to determine volumes committed for sale.
 
(2)      As of October 2002.
 

     Santa Clara and Fundão. The Santa Clara and Fundão hydroelectric plants will consist of two hydroelectric power generation units on the Jordão River in the State of Paraná. The units are expected to have an aggregate total installed capacity of 240 MW. Two smaller hydroelectric generation units will also be installed in the same location, which are expected to have additional installed capacity of 5.6 MW. Centrais Elétricas Rio Jordão (“ELEJOR”) signed a concession agreement with a term of thirty-five years for the Santa Clara and Fundão plants in October 2001. The construction of the plants began, respectively, in December 2002 and in April 2004. The Santa Clara plant began operations in July 2005 and added an additional 60MW to the total energy made available by us. In September 2005, the installed capacity of the Santa Clara plant increased to 120 MW and the plant gained the capability to furnish energy to 30,000 individuals. The Fundão plant is expected to begin operations in July 2006. In September 2004, after obtaining all of the required governmental authorizations, we acquired 30.0% of the voting capital of ELEJOR, which had previously been held by Triunfo Participações, for a total amount of approximately R$40 million. As of December 31, 2005, we own 70.0% of the common shares of ELEJOR and PaineraPar owns the remaining 30.0% .

     ELEJOR will pay the Federal Government for the use of hydroelectric resources, from the sixth through the end of the thirty-fifth year, with total annual payments of R$19 million, payable on a monthly basis, beginning on October 25, 2006. This amount is monetarily adjusted, on an annual basis, by the IGP-M. As of December 31, 2005, the contractual obligation for the concession payments totaled R$945.6 million.

     In September 2002, Centrais Elétricas Brasileiras S.A.—Eletrobrás (“Eletrobrás”), a company controlled by the Brazilian government, executed a shareholders’ agreement with ELEJOR, under which Eletrobrás has the obligation to subscribe for 59,900,000 preferred class B shares to be issued by ELEJOR. By December 31, 2005, Eletrobrás had subscribed for the equivalent of 53,500,000 preferred class B shares, in an amount of R$65.11 million. ELEJOR is required to acquire Eletrobrás’ preferred class B shares in thirty-two quarterly installments (adjusted by IGP-M plus interest of 12.0% per year), starting twenty-four months after the commercial start-up of the project.

     The total estimated construction cost of the Santa Clara and Fundão plants is R$521.5 million, which was funded as follows (1) R$255.6 million was obtained through a loan agreement signed on April 28, 2005 with Banco Nacional de Desenvolvimento Econômico e Social (“BNDES”), a Brazilian development bank wholly owned by the Brazilian government; (2) R$72.9 million was funded by Eletrobrás through the acquisition of approximately 59,900,000 preferred class B shares of ELEJOR, as described above; (3) R$49.08 million was funded by ourselves; and (4) R$21.05 million was funded by PaineraPar. The remaining amount will be financed by the cash flow generated by such facilities.

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     We have entered into a power purchase agreement with ELEJOR, which provides that we will purchase all the energy produced by the Santa Clara and Fundão facilities at a set tariff, to be adjusted annually in accordance with the IGP-M.

     São Jerônimo. The São Jerônimo hydroelectric plant will be located between the municipalities of Tamarana and São Jerônimo de Serra on the Tibagi River in the State of Paraná. The plant, whose future structure will include a 105-meter dam, is projected to have two generation units with a total installed capacity of 331 MW. It is unclear when the construction of such plant will begin. There are a number of issues that must be resolved before the construction can begin, the most significant being that we must obtain permission from the Brazilian Congress to start the construction, since the plant will be located in an indigenous area.

     Araucária. Araucária was formed in April 1998 to construct the Araucária Thermoelectric Power Plant in the municipality of Araucária (located in the Curitiba metropolitan area). The plant was completed in September 2002, with a net capacity of 484.3 MW, but it has not begun operating. The plant is fueled by natural gas imported from Bolivia through the Brazil-Bolivia pipeline. ANEEL granted Araucária a license to operate as an independent power producer. An entity, El Paso Empreendimentos e Participações Ltda, managed by a subsidiary of El Paso Corporation owned 60% of the equity of Araucária, Petrobras owned 20% and we owned 20%. On May 30, 2006, we entered into an agreement with Araucária to settle certain outstanding legal disputes between us relating to the Araucária facility. Pursuant to this settlement agreement, we agreed to acquire all of the interests held by El Paso Empreendimentos e Participações Ltda. in UEG Araucária Ltda. for U.S.$190 million.

     The following table sets forth information regarding certain generation projects in which we have a minority interest.

Estimated 
Our 
Energy 
Installed 
Assured 
Ownership 
Available 
Concession 
Type 
Plant 
Capacity 
Energy (1)
Placed in Service 
Percentage 
to COPEL 
Expires 
 
 
 
 
 
 
 
 
(MW)
(GWh/yr)
 
Hydroelectric    Dona   
125.0 
700.8 
  February 2001   
23.03% 
100.0% 
2034 
    Francisca   
     
 
Hydroelectric    Foz do Chopim   
29.1 
175.0 
  October 2001   
35.77% 
100.0% 
2034 
       
     
       
     
Wind    Centrais Eólicas   
2.5 
4.84 
  February 1999   
30.0% 
100.0% 
2019 
    do Paraná   
     
       
     

________________
(1) Values used to determine volumes committed for sale under Initial Supply Contracts.

     Dona Francisca. We own 23.0% of the total issued and outstanding common shares of the Dona Francisca Energética S.A. hydroelectric power plant (“Dona Francisca”), which is located on the Jacuí River in the State of Rio Grande do Sul. Construction on Dona Francisca began in August 1998 and commercial operations started in February 2001. The plant has an installed capacity of 125MW and 80MW of assured energy. The plant cost R$218.6 million to construct, of which R$66 million was funded by us. The remaining amount of R$168 million was financed by BNDES and the Inter-American Development Bank (the “IDB”). Dona Francisca signed a power purchase agreement with Copel Geração, which was supposed to finish in March 2015 and which obligated Copel Geração to purchase 100.0% of the energy generated at Dona Francisca. This agreement was ratified by ANEEL on December 29, 2004.

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     Foz do Chopim. The Foz do Chopim hydroelectric plant is located on the Chopim River in the State of Paraná and was built on the already existing structure of the Julio de Mesquita plant, which is no longer active. We own 35.77% of the total issued and outstanding share capital of the Foz do Chopim hydroelectric plant and the remaining 64.23% is owned by DM Planejamento Administração e Participações Ltda. The plant has an installed capacity of 29.07 MW. The investment necessary to construct the plant was R$51.4 million, of which R$28.5 million was funded by us. The first generation unit started operating on October 25, 2001, and the second-generation unit started operating on December 8, 2001.

     Centrais Eólicas do Paraná. We own 30.0% of the total issued and outstanding share capital of Centrais Eólicas do Paraná Ltda., a company formed in December 1998 to install and operate the first wind power plant in southern Brazil. The wind power plant comprises five 500 KW wind power generators amounting to an installed capacity of 2.5 MW. The facility generates 4.84 GWh annually. The plant has been in operation since February 1999. We invested R$1.2 million in the construction of the plant and the total cost of constructing the plant was R$4 million.

     Proposed Projects

     We are involved in various private initiatives formed to study the technical, economic and environmental feasibility of certain generation projects. These proposed generation projects would have a total of 153 MW of installed capacity. The following table sets forth information regarding our proposed generation projects.

                        Estimated 
        Estimated    Estimated            Energy Available 
        Installed    Assured        Our Ownership    to 
Type             Project    Capacity    Energy    Estimated Cost(1)   Percentage    Copel 
             
        (MW)   (GWh/yr)   (R$) in millions         
Hydroelectric 
Rio Areia 
 
30 
149 
69 
30.0% 
100.0% 
Hydroelectric 
Rio Chopim 
 
123 
598 
184 
15.0% 
100.0% 

(1) Cost is estimated as of April 2002.

     Purchases

     We purchased 4,683 GWh of electricity from Itaipu in 2005, which constituted 22.6% of the total electricity we purchased in 2005 and 12.0% of our available energy. In 2005, our purchases represented approximately 6.5% of Itaipu’s supply to Brazil and 35.0% of the energy purchased from Itaipu by the southern region of Brazil. Electric utilities operating under concessions in the midwest, south and southeast regions of Brazil are required by law to purchase Brazil’s portion of the energy generated by Itaipu in a proportion correlates with the volume of electricity that they historically have provided to customers. The rates at which these companies are required to purchase Itaipu’s energy are fixed to cover Itaipu’s operating expenses and payments of principal and interest on Itaipu’s U.S. dollar-denominated borrowings, as well as the cost of transmitting the power to their concession areas. These rates are denominated in U.S. dollars and have been above the national average cost for bulk supply of power.

     In 2005, we paid an average tariff of R$99.1 per MWh for purchases of energy from Itaipu, compared to R$95.3 per MWh during 2004. These figures do not include the transmission tariff that distribution companies must pay for the transmission of energy from Itaipu.

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Cien

     We entered into two agreements on December 13, 1999 to purchase firm capacity and associated energy from Cien (the “Cien Agreements”). Cien is controlled by the Spanish-based international energy company Endesa. It was established in 1999 to build two transmission lines between Argentina and Brazil, and it obtained financing from a bank syndicate. One transmission line began operating in May 2002 and the other in August of 2002. Beginning on those respective dates, the Cien Agreements originally required us to purchase an aggregate of 800 MW on a “take or pay” basis, but we renegotiated them in 2003. The Cien Agreements now provide that we will purchase an aggregate capacity of 400 MW through 2015 at prices determined on the basis of the reference price set forth in the contract with adjustments for inflation and exchange rate variations. Based on the price initially in effect, the aggregate annual amount payable before indexation would be R$332 million per year from 2003 through 2015. During 2005, we recognized R$309.3 million for energy purchased from Cien. The renegotiated agreement also provides for the deferral of parts of the amounts which were due in 2003 and 2004, and which we will pay during the 2005-2007 period. We provisioned the sums due in subsequent years (R$252 million) in our 2003 financial statements. We paid R$63 million of this provisioned sum in 2004 and R$63 million in 2005.

Public Auction

     In accordance with the New Industry Model Law, we participated in the first auction of electricity from existing power plants, which took place on December 7, 2004. At this auction, Copel Geração sold 980 MW for the 2005-2012 period for R$57.50/MWh, 368 MW for the 2006-2013 period for R$67.62/MWh, and 81 MW for the 2007-2014 period for R$75.44MWh. In addition, Copel Distribuição bought 992 MW for the 2005-2012 period for R$57.51/MWh and 402 MW for the 2006-2013 period for R$67.33/MWh at the auction.

     A second auction of electricity from existing power plants was held on April 2, 2005. At this auction, Copel Geração sold 80 MW for the 2008-2015 period for R$82.32/MWh and Copel Distribuição bought 53.7 MW for the 2008-2015 period for a price of R$83.13/MWh.

     We did not buy or sell any energy at the third auction held in October 11, 2005.

     At a fourth auction, which was also held on October 11, 2005, Copel Geração sold 245 MW for the 2009-2016 period for R$ 95.95/MWh. Copel Distribuição did not buy energy at this auction.

     On December 16, 2005, the first auction of electric energy from new power plants was carried out. Copel Distribuição bought energy from hydroelectric power plants (3.61 MW for the 2008-2037 period for R$106.95/MWh, 3.26 MW for the 2009-2038 period for R$114.28/MWh and 66.30 MW for the 2010-2039 period for R$115.04/MWh) and from thermoelectric power plants (28.56 MW for the 2008-2022 period for R$132.26/MWh, 60.56 MW for the 2009-2023 period for R$129.26/MWh and 64.30 MW for the 2010-2024 period for R$121.81/MWh) . Copel Geração did not sell any energy at this auction.

     We submitted an amendment to the Initial Supply Contract between Copel Geração and Copel Distribuição (the “Copel Agreement”) for ANEEL’s approval in 2003. The amendment extends the final term of the Copel Agreement to 2015. When ANEEL failed to approve such amendment, we filed a lawsuit in which we requested judicial approval of the amendment. We have obtained a temporary decision, which recognizes the effectiveness of the Copel Agreement through 2005, but there has not been a final decision on the merits of the lawsuit. We do not believe that the outcome of this lawsuit will adversely affect the effectiveness of the Copel Agreement or otherwise have a material adverse effect on us.

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Transmission and Distribution

     General

     Electricity is transferred from power plants to customers through transmission and distribution systems. Transmission is the bulk transfer of electricity from generating facilities to the distribution system by means of the main national transmission grid (the “Main Transmission Grid”). Distribution is the transfer of electricity from the transmission system to Final Customers. Residential customers, representing 24.9% of our market for electricity, used 4,653 GWh of electricity during 2005, an increase of 4.2% from residential use over 2004. Industrial customers, representing 40.9% of our market for electricity, used 7,639 GWh of electricity during 2005, an increase of 1.8% from industrial use during 2004.

     The following table sets forth certain information concerning our transmission and distribution systems at the dates presented.

   
At December 31, 
   
   
2005 
2004 
2003 
2002 
2001 
           
Transmission and subtransmission lines                     
   (km)                    
         230 kV and 525 kV   
1,737.0 
1,736.9 
1,736.9 
1,599.0 
1,599.0 
         l38 kV   
4,064.1 
4,063.9 
4,044.7 
3,999.1 
3,996.1 
         88 kV   
58.2 
58.2 
58.2 
58.2 
58.2 
         69 kV   
1,137.2 
1,137.2 
1,137.2 
1,115.8 
1,110.0 
Distribution lines (km):   
         23 kV to 44 kV   
74,156.69 
74,156.69 
85,870.5 
82,693.2 
79,018.7 
Overhead distribution lines (km):   
         13.8 kV to 23 kV   
91,419.31 
91,419.31 
79,296.5 
78,343.8 
76,054.3 
Transformer capacity (MVA)  
         Transmission substations(1)  
15,168.9 
15,085.6 
15,043.9 
14,727.3 
14,644.0 
         Generation (step up) substations   
5,004.1 
5,004.1 
5,004.1 
5,004.1 
5,004.1 
         Distribution substations   
1,434 
1,467 
1,420 
1,338.0 
1,305.0 
         Distribution transformers (MVA)  
6,651 
6,65 
6,629 
6,361.0 
6,041.0 
Total energy losses   
8.3% 
6.8% 
5.4% 
5.7% 
5.7% 
______________________
(1)     
During the 2001-2005 period, our operations were divided among five wholly-owned subsidiaries and the transformer assets were divided between Copel Geração and Copel Transmissão S.A. Transformer capacity is presented separately for generation transformers and transmission substations.
 

Transmission

     We operate transmission facilities which are used to transmit the electricity we generate and the energy we receive from other sources. In addition to using our transmission lines to provide energy to customers in the State of Paraná, we also transmit energy through the Interconnected Power System. Two federal companies, Centrais Elétricas do Sul do Brasil S.A. — Eletrosul (“Eletrosul”) and Furnas Centrais Elétricas S.A. – Furnas (“Furnas”), also maintain significant transmission systems in the State of Paraná. Furnas is responsible for the transmission of electricity from Itaipu, while Eletrosul’s transmission system links the states in the south of Brazil. Copel and the other utilities that own transmission facilities are required to allow other parties to access our respective transmission facilities. ANEEL sets the charges for the use of the Main Transmission Grid.

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Table of Contents

     We have thirty-four customers who are directly supplied with energy at a high voltage (69 kV and above) through connections to our transmission lines. These customers accounted for approximately 13.4% of our total volume of electricity sold in 2005.

     We are responsible for expanding the 138 kV and 69 kV transmission grid within our concession area. The construction of new transmission facilities of 230 kV and higher will be auctioned or authorized by ANEEL. The winners of such auctions or those authorized by ANEEL must build, operate and maintain the new facilities, receiving an annual fee from users in accordance with regulations set by ANEEL. We are permitted by ANEEL to make minor improvements to some of the existing 230 kV and 525 kV facilities. In 2005, we reinforced our transmission system by:

  • building one new substation with a voltage of 230 kV and two new substations each with a voltage of 138kV; and

  • upgrading fourteen existing substations.

Distribution

     Our distribution system consists of a widespread network of overhead lines and substations with voltages up to 34.5 kV. Electricity is supplied to smaller industrial customers at the higher end of the voltage range and is supplied to residential, commercial and other customers at the lower end of the range. At December 31, 2005, we provided electricity in a geographic area encompassing approximately 98.0% of the State of Paraná and served over 3.2 million customers.

     Our distribution network includes 165,576 kilometers of distribution lines, 315,289 distribution transformers and 231 distribution substations of 34.5 kV each. During 2005, 76,507 new customers were connected to our network, including customers connected through the rural and urban electrification programs. We are continuing to implement compact grid design distribution lines in urban areas where there is a large concentration of trees in the vicinity of the distribution grid.

System Performance

     We determine the energy losses of our distribution system separately from those of our transmission system. The rate of distribution losses is generally greater than the rate of transmission losses for most Brazilian electricity companies. Some Brazilian utilities calculate losses as a percentage of electricity carried through both the transmission network and the distribution network, which has the effect of reducing a company’s stated rate of losses. We exclude the Interconnected Power System and transmission lines operated by affiliates of Eletrobrás in calculating the rate of losses. We believe that our approach to determining energy losses provides a more accurate measure of our system performance.

     Our energy losses totaled 8.3% of available energy in 2005. The methodology used to determine energy losses changed in 2005 to include additional losses on energy from Cien and Itaipu. In 2004, considering the different methodology used at that time, they totaled 6.8% . The same methodology applied in 2005, if used in 2004, would give losses of 10.2% . Of our energy losses in 2005, 55.2% occurred during the distribution of energy, and 44.8% occurred during its transmission.

     In 2005, the two indices by which we measure the quality of our performance – the duration and frequency of outages per customer - improved compared to 2004, due to an increase in our preventive maintenance measures, as well as milder weather conditions in 2005.

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     Information regarding the duration and frequency of outages for our customers is set forth in the following chart for the years indicated.

   
Year ended December 31, 
   
Quality of Supply Indicator  
2005 
2004 
2003 
2002 
2001 
           
                     
Duration of outages per customer per year (in hours)  
13h 28 min
 
14h 02 min
 
18h 53min
 
16h 19min
 
13h 02 min
                     
Frequency of outages per customer per year (number of outages)  
13.51
 
14.18
 
16.54
 
15.70
 
12.46

Sales to Final Customers

     During 2005, we supplied approximately 97.3% of the energy distributed directly to customers in the State of Paraná. Our concession area includes over 3.2 million customers located in the State of Paraná and in one municipality in the State of Santa Catarina, to the south of the State of Paraná. We also sell energy to six Free Consumers outside of our concession area. During 2005, the total power consumption throughout our concession area plus those Free Consumers outside our concession area, was 18,696 GWh as compared to 18,040 GWh during 2004. Residential customers, representing 24.9% of our market for electricity, used 4,653 GWh during 2005 – an increase of 4.2% from residential use during 2004. Industrial customers, representing 40.9% of our market for electricity, used 7,639 GWh during 2005 – an increase of 1.8% over industrial use during 2004.

     The following table sets forth certain information regarding our volumes of energy sold to, and revenues (in millions of reais) from sales of energy to, different categories of purchasers for the periods indicated.

   
Year ended December 31, 
   
Categories of                                         
Purchaser   
2005 
 
2004 
  2003   
2002 
 
2001 
           
         (R$ in        (R$ in        (R$ in        (R$ in        (R$ in 
    (GWh)(3)   millions)   (GWh)(3)   millions)   (GWh)(3)   millions)   (GWh)(3)   millions)   (GWh)(3)   millions)
Industrial Customers   
7,639 
1,649.2 
8,197 
1,456.3 
8,599 
1,172.1 
8,655 
1,053.6 
8,317 
849.3 
Residential   
4,653 
1,857.0 
4,467 
1,651.4 
4,382 
1,365.3 
4,307 
1,221.1 
4,312 
1,033.9 
Commercial   
3,231 
1,092.9 
3,024 
912.2 
2,864 
724.7 
2,726 
634.9 
2,639 
519.2 
Rural and others(1)  
2,609 
554.4 
2,497 
481.2 
2,396 
389.5 
2,338 
342.6 
2,251 
277.4 
Public services   
565 
122.4 
551 
104.4 
542 
84.9 
525 
76.2 
519 
60.7 
Auction—CCEAR   
8,488 
435.6 
Wholesale Energy Market   
     and Interconnected   
     Power System(4)  
4,470 
85.1 
4,101 
38.6 
6,199 
88.7 
7,119 
116.6 
8,609 
117.5 
Other distributors   
4,263 
429.2 
4,688 
407.2 
2,982 
245.4 
1,230 
77.0 
1,104 
62.4 
 
 
 
 
 
 
 
 
 
 
 
     Total(2)
 
35,917 
6,225.8 
27,525 
5,051.3 
27,964 
4,070.6 
26,900 
3,522.1 
27,751 
2,920.3 
 
 
 
 
 
 
 
 
 
 
 
________________
(1)      Includes street lighting, municipalities and government agencies.
(2)      Total GWh includes our own consumption but does not include our energy losses.
(3)      Includes capacity made available but not fully delivered.
(4)      Includes the CCEE commercial agreements (Electric Power Trade Chamber – Pool) and the Energy Reallocation Mechanism.

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     The following table sets forth the number of our Final Customers in each category at December 31, 2005.

    Number of Final 
Category   
Customers 
   
Industrial    53,276 
Residential    2,561,066 
Commercial    273,124 
Rural and others(1)   369,118 
   
     Total 
  3,256,584 
   

_____________
(1) Includes public services

     Approximately 40.9% of the electricity we sold to Final Customers in 2005 was sold to industrial customers. Our primary industrial customers are involved in the lumber and food industries, accounting for 12.6% and 28.7%, respectively, of industrial consumption.

     Industrial and commercial customers accounted for approximately 31.26% and 20.72%, respectively, of our revenues from sales to Final Customers during 2005. In 2005, 35.20% of our revenues from sales to Final Customers were from sales to residential customers, the category with the largest participation in the revenues from sales to Final Customers, with an average tariff of R$ 399.12 per MWh.

     Tariffs

     Retail tariffs. We classify our customers into two groups (“Group A Customers” and “Group B Customers”), based on the voltage level at which electricity is supplied to them and on whether they are considered as industrial, commercial, residential or rural customers. Each customer falls within a certain tariff level defined by law and based on the customer’s classification, although some flexibility is available according to the nature of each customer’s demand. Under Brazilian regulation, residential customers (other than Low Income Residential Customers (as defined below)) pay the highest tariff rates, followed by commercial and rural customers and then industrial customers, which pay the lowest rates.

     Group A Customers receive electricity at 2.3 kV or higher and the tariffs applied to them are based on the actual voltage level at which energy is supplied and the time of year and the time of day energy is supplied. Tariffs are comprised of two components: a “capacity charge” and an “energy charge.” The capacity charge, expressed in reais per KW, is based on the higher of (1) contracted firm capacity and (2) power capacity actually used. The energy charge, expressed in reais per MWh, is based on the amount of electricity actually consumed and evidenced by our metering.

     Group B Customers receive electricity at less than 2.3 kV and the tariffs applied to them are comprised solely of an energy charge and are based on the classification of the customer.

     Effective June 24, 2003, we were granted an increase in the rates we may charge for sales to Final Customers. These increases averaged 25.3% . However, we granted a discount, which was equivalent to the rate increase, to those of our Final Customers who paid their electricity bills when due. As of January 1, 2004, such discount was reduced so that a power rate readjustment of 15.0% could be passed on to customers. Overdue customers were required to pay the 25.3% rate increase in full.

     On June 24, 2004, we were granted a total tariff increase of 14.43% by ANEEL. This increase consisted of a 9.17% increase in our retail tariffs and a 5.26% increase for deferred regulatory asset recovery. We continued our policy of granting a discount to our customers who pay their bills when due

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and instead of applying the full 14.43% rate increase, in June, 2004 we applied only a 9.0% rate increase for customers who pay on time. In February 2005, we increased the tariff by 5.0% . In June 2005, ANEEL authorized us to increase tariffs by an average of 7.8% pursuant to the annual tariff readjustment, but we elected to apply a tariff increase of only 4.4% to those customers. As of August 1, 2005, the average discount we grant our customers who pay their bills when due was 6.8% of the tariffs approved by ANEEL.

     In addition, pursuant to an ANEEL authorization of June 2005, we began to include PIS/PASEP and COFINS taxes in the amounts billed to customers, as we had previously done with value-added tax (ICMS). As a result, amounts billed to customers increased by 5.0% to 5.5%, and these taxes will no longer be included in the basis for determining electricity rates.

     The following table sets forth the average tariffs (without a deduction for value-added taxes) for each category of Final Customer in effect in 2005 and 2004.

    2005   
2004 
     
    (R$/MWh)  
(R$/MWh)
Tariffs         
     
Industrial   
215.91 
177.67 
Residential   
399.12 
369.70 
Commercial   
338.23 
301.59 
Rural and others   
214.31 
192.69 
Public services   
216.61 
189.47 
All Final Customers   
282.19 
245.81 

     Low Income Residential Customers. Under Brazilian law we are required to provide discounted rates to certain low income residential customers (“Low Income Residential Customers”). In 2005, we served 750,619 Low Income Residential Customers.

     The following table sets forth the current minimum discount rates approved by ANEEL for each category of Low Income Residential Customer.

    Discount From 
Consumption    Base Tariff 
   
Up to 30 kWh per month    65% 
From 31 to 100 kWh per month    40% 
From 101 to 160 kWh per month    10% 

     Non-retail Tariffs. In 2005, we were granted an increase of approximately 8.02% in the average tariffs for Initial Supply Contracts with distributors in the State of Paraná. During 2005, the average tariff for sales of energy pursuant to these Initial Supply Contracts was R$82.44 per MWh. We were also granted an increase of 10.70% in the average tariffs for Initial Supply Contracts with out-of-state distributors. During 2005, the average tariff for sales of energy pursuant to these Initial Supply Contracts was R$ 60.42 per MWh.

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The following table sets forth average tariffs in effect in 2005 and 2004.

    2005   
2004 
     
    (R$/MWh)  
(R$/MWh)
Tariffs         
     
         
Initial Supply Contracts with distributors in the State of Paraná   82.44  
76.32
         
Initial Supply Contracts with out-of-state distributors   60.42  
54.58

     Transmission Tariffs. In June 2004, ANEEL set R$7,684.61/MW as the monthly tariff for the use of the Main Transmission Grid. In June 2005, ANEEL revised the monthly tariff for the use of the Main Transmission Grid to R$8,589.85/MW. In 2005, we recognized R$530.8 million for the use of the Main Transmission Grid and received R$268.0 million in revenues for the use of our transmission network by other parties.

     In June 2004, ANEEL also set R$2,971.18/MW as the tariff that we and the other distribution companies pay to Furnas for the transportation of high-voltage energy from Itaipu. In June 2005, ANEEL raised this tariff to R$3,456.90/MW.

Other Businesses

Telecommunications and Information Technology

     Copel Telecomunicações S.A. In March 1998, we became the first power company in Brazil to obtain an authorization from the Brazilian National Telecommunication Agency (ANATEL) to provide corporate telecommunication services within the State of Paraná and international long-distance services. We have been offering these services since August 1998 through the use of our extensive transmission and distribution network. The ownership of the network assets and our broad experience in the operation and maintenance of complex telecommunication networks have contributed to the success of this program. In 2002, we obtained an authorization from ANATEL to provide multimedia services. In 2005, we served 146 of the 399 municipalities in the State of Paraná, which represents 78.9% of the total population of such state. In addition to the our commercial services, we have also been involved in an educational project aimed at providing lower and middle public school students in the State of Paraná with broadband Internet access in their schools.

     We also provide services to most of the major Brazilian telecommunication companies that operate in the State of Paraná. We have 242 clients, and our services are also provided to supermarkets, universities, banks, Internet Service Providers and television networks. Besides, a number of different telecommunication services are provided to the company’s subsidiaries for generation, transmission and distribution of electric power.

     Sercomtel. We own 45.0% of the voting stock of Sercomtel Telecomunicações S.A. (“Sercomtel Telecomunicações”) and 45.0% of Sercomtel Celular S.A. (individually, “Sercomtel Celular” and, jointly with Sercomtel Telecomunicações, “Sercomtel”). Sercomtel holds concessions to provide fixed and mobile telephone services in the municipalities of Londrina, Cambé, Ibipora and Tamarana in the State of Paraná and has obtained ANATEL’s authorization to make national and international telephone calls. We are seeking operating synergies with Sercomtel between our respective telecommunications and electric power operations. Sercomtel Telecomunicações, the fixed-line operator, has approximately 169,728

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installed phone lines, 152,248 of which are in service, eleven telephone stations, two public switches, seventy-two remote stations and 4,080 public telephones. Sercomtel has concessions from ANATEL to provide cable television in São José (State of Santa Catarina) and Osasco (State of São Paulo) and radio-wave transmission television in Maringá and Londrina (State of Paraná). As of December 31, 2005, Sercomtel Celular S.A. had an installed TDMA capacity of 87,440 terminals, an installed GSM capacity of 58,203 terminals and 84 radio stations covering 100.0% of Londrina’s urban and rural areas. Sercomtel’s gross revenues during 2005 were R$284.2 million and it had a net loss of R$5.3 million.

Water and Sewage

     We own 15.0% of the total outstanding share capital of Dominó Holdings S.A. (“Dominó Holding”), which in its turn owns 39.71% of the voting stock of Companhia de Saneamento do Paraná – Sanepar (“Sanepar”), a public utility company that services 343 urban and rural municipalities and approximately 8.1 million people in the State of Paraná with water distribution and 3.9 million with sanitation services. The State of Paraná owns 60.0% of the outstanding share capital of Sanepar. Dominó Holdings’ net income in 2005 was R$63.9 million. The total outstanding share capital of Dominó Holdings are as follows: (1) 15.0% held by ourselves; (2) 27.5% held by Construtora Andrade Gutierrez S/A; (3) 27.5% held by Opportunity Daleth S.A.; and (4) 30.0% held by Sanedo Ltda., a wholly-owned subsidiary of Grupo Vivendi.

     In February 2003, the Government of the State of Paraná issued a decree canceling the Sanepar shareholders’ agreement and dismissing the board members appointed by Dominó Holdings. Dominó Holdings is currently engaged in a litigation proceeding with the Government of the State of the Paraná in connection with this issue.

Gas

     We are engaged in the distribution of natural gas through Compagas, the company that holds the exclusive rights to supply piped gas in the State of Paraná. Compagas’ customers include industries, thermoelectric plants, a cogeneration plant, businesses, gas stations, residences, and fuel cells. Compagas is focusing its marketing efforts on substituting gas for fuel oil and other fuels as a means of achieving greater energy efficiency.

     As of December 31, 2005, we owned 51.0% of the capital stock of Compagas and accounted for this interest using the equity method. The minority shareholders of Compagas are Petrobras and Dutopar Participações Ltda. that is controlled by Gaspart Participações Ltda, each of which owns 24.5% of the capital stock of Compagas.

     Compagas distributes natural gas from Bolivia supplied through the Bolivia-Brazil gas pipeline. Compagas owns a gas distribution network in the State of Paraná consisting of 448 kilometers of pipelines. During 2005, Compagas recorded a daily average sales volume of 680,159 cubic meters of natural gas to 1,415 customers. In March 2001, Compagas began regular distribution through the Bolivia-Brazil pipeline. During 2005, Compagas’ gross revenues were R$253.6 million, and its net income was R$32.7 million.

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Natural Gas Sales in 2005

       
Number of 
Consumption 
Participation 
Segment 
 
Customers 
(m3)
(%)
       
 
Industrial        90    420,647    61.8 
Cogeneration          125,626    18.5 
Vehicular (gas stations)       19    64,679    9.5 
Thermoelectric(1)         75   
Commercial          2,998    0.4 
Residential (building)       1,228    1,069    0.2 
Raw Material          65,065    9.6 
Total        1,415    680,159    100.0 

(1) This Agreement was terminated in 2005.

Services

     We own 40.0% of the share capital of ESCO Electric Ltda. (“ESCO”), a company that assists customers with their electricity needs through the provision of consulting services, planning and project implementation, automation services, operation, maintenance, training and technical assistance. ESCO also markets products and services aimed at obtaining greater energy efficiency and energy conservation. During 2005, ESCO’s net revenues were R$23.9 million, and it had a net loss of R$2.5 million.

     Copel-Agra S/C Ltda (“Copel-Agra”) was incorporated in November 2000 to provide engineering services, ranging from the preparation of feasibility studies and environmental reports, to full engineering, procurement and construction projects. We own 48.0% of the total issued and outstanding share capital of Copel-Agra, which started its operations in the first quarter of 2001. Our partners are Agra-Monenco, a Canadian company, and LACTEC, a Brazilian technology institute. In December 2001, as a result of the acquisition of Agra-Monenco by AMEC, an English company, the corporate name was changed to Copel-Amec S/C Ltda (“Copel-Amec”). The shareholders of Copel-Amec have decided to wind-up the company pursuant to a shareholder’s meeting dated as of August 2004. Copel-Amec is still in the process of being wound-up.

     In September 1999, we formed a partnership with Engevix Engenharia and Intertechne Consultores called Braspower International Engineering S/C Ltda. (“Braspower”) to offer technology services relating to energy and infrastructure projects in the international market. Braspower has entered into various agreements for the provision of consulting services for projects in China and Nepal. We own 49.0% of the total outstanding share capital of Braspower and Engevix Engenharia held the remaining 51.0% .

Concessions

     We operate under concessions granted by the Brazilian government for our generation, transmission and distribution businesses. Currently our distribution and our transmission concessions will expire in July 2015, but our concessions provide for possible extensions.

     In June 1999, Brazilian authorities extended our concessions for our generation plants as follows:

  • for plants whose concessions had officially expired, the concessions were extended for 20 years beginning in July 1995; and

  • for other plants whose concessions have not yet expired, we will have the option to extend such concessions for additional twenty year terms when they expire.

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Seasonality

     We believe that seasonality does not materially affect our businesses.

Competition

     We have been granted concessions to distribute electricity in an area comprising substantially all of the area of the State of Paraná and do not face competition from the three small utilities that have been granted concessions for the remainder of the state. As a result of legislation passed in 2004, however, other suppliers are able to offer electricity to our existing Free Consumers at prices lower than those we currently charge. Distribution and transmission companies are required to permit the use of their lines and ancillary facilities for the distribution and transmission of electricity by other parties upon payment of a tariff.

     Customers that may contract with other suppliers for electricity (“Free Consumers”) are limited to:

  • existing customers (those participating in the electric system before July 1995) with demand of at least 3 MW and supplied at voltage levels equal to or greater than 69 kV;

  • new customers with demand of at least 3 MW at any voltage; and

  • customers with demand of at least 500 kW and who opt to be supplied energy by means of alternative sources, such as wind power projects, small hydroelectric power plants or biomass projects.

     During 2005, we provided electricity to 20 Free Consumers, representing approximately 2.0% of our net operating revenues and approximately 6.3% of the total quantity of electricity sold by us to Final Customers. Approximately 17.0% and 15.0% of the megawatts sold under contract to such customers are set to expire in 2006 and 2007, respectively. There can be no assurance that, upon the expiration of these contracts, the Free Consumers will purchase energy from us.

     At December 31, 2005, we had thirty-four customers that were eligible to qualify as Free Consumers upon the expiration of their agreements with us. Such customers represented approximately 4.7% of our total volume of electricity sold in 2005, and approximately 5.4% of our total gross operating revenues for that year.

     In the generation business, any producer may be granted a concession to build or manage generating facilities in the State of Paraná.

     In the transmission business, Brazilian law provides for competitive bidding for transmission concessions for facilities with voltage of 230 kV or greater that will form part of the Main Transmission Grid.

     Brazilian law requires that all of our concessions be subject to a competitive bidding process upon their expiration. We intend to apply for the extension of each concession upon its expiration. We may face significant competition from third parties in bidding for renewal of such concessions or for any new concessions. The loss of certain concessions could adversely affect our results of operations.

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Environment

     Our construction and operation activities for the generation, transmission and distribution of electric energy, distribution of natural gas and our telecommunications operations are subject to federal, state and municipal environmental regulations. We have a consulting committee that is responsible for the implementation of our sustainability and good corporate citizen policies that take into account environmental and social impacts when evaluating our proposed projects.

     In September 2001, we formed the Environmental Policy Committee, which is responsible for planning and revising our environmental policies. In September 2003, the Environmental Policy Committee was reformulated in order to better implement its mandate, and to comply with elements of our broader corporate reorganization plan that is aimed at eliminating administrative inefficiencies and improving our fiscal results.

     In 2002, we implemented the Environmental Management System (“EMS”) in accordance with ISO 14000 rules, which manage the regulation of the environmental aspects of our generation activities. In 2004, as a consequence of our reorganization plan, EMS was initiated in our distribution, transmission and telecommunications areas.

     We are in compliance with all material environmental regulations and our most recent generation, transmission and distribution projects are in compliance with federal and state regulations. We are currently applying for the renewal of our environmental licenses for our respective generation and transmission activities. We must apply for these renewals from the Environment Institute of the State of Paraná every four years.

     Among the environmental and social programs we are involved with is the “Tributo ao Iguaçu”, program whose objective is to facilitate and promote sustainable social, economic and environmental development of the communities located on the Iguaçu River basin.

The Condemnation Process

     Our principal properties consist of the generation, transmission and distribution facilities described in “—Business—Generation and Purchasers of Energy” and “—Business—Transmission and Distribution.” Of the net book value of our total property, plant and equipment at December 31, 2005 (including construction in progress), generation facilities represented 48.8%, transmission and distribution facilities represented 37.0%, administrative property and equipment represented 3.0%, supply of gas represented 2.0% and ELEJOR represented 9.2% . We believe that our facilities generally are adequate for our present needs and suitable for their intended purposes.

     Although we receive concessions from the Brazilian government to construct hydroelectric projects, we do not receive title to the land on which the projects are located. Land required for the implementation of our projects may only be condemned pursuant to specific legislation. We generally negotiate with communities and individual owners occupying the land so as to resettle such communities in other areas and to compensate individual owners. Our policy of resettlement and compensation generally has resulted in the settlement of condemnation disputes. At December 31, 2005, we estimated our reimbursement liability with respect to condemned properties to be approximately R$13.4 million. This amount does not include the projections for land condemnation included in the budgets for each of our projects.

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Insurance

     We maintain insurance for fire, natural disasters, accidents involving third parties and certain other risks associated with the transportation and assembly of equipment. We do not have insurance coverage for business interruption risk because we do not believe that the high premiums are justified by the low risk of major interruption, considering the energy available in the Interconnected Power System. We believe that we maintain insurance that is both customary in Brazil and adequate for the businesses in which we are engaged.

THE BRAZILIAN POWER INDUSTRY

General

     In 2006, the Ministry of Mines and Energy, Ministério de Minas e Energia (“MME”) approved a ten-year expansion plan under which Brazil’s installed power generation capacity is projected to increase to 134.7 GW by 2015, of which 73.0% is projected to be hydroelectric, 14.0% is projected to be thermoelectric, 6.0% is projected to be imported through the Interconnected Power System, 2.0% is projected to be nuclear and 5.0% is projected to be from alternative energy sources such as wind, small hydro and biomass.

     Approximately 39.0% of the installed power generating capacity of Brazil is currently owned by Eletrobrás (including its wholly-owned subsidiary Eletronuclear and its 50.0% participation interest in Itaipu). Through its subsidiaries, Eletrobrás is also responsible for 62.0% of the installed transmission capacity above 230 kV within Brazil. In addition, some Brazilian states control entities involved in the generation, transmission and distribution of electricity. They include Companhia Energética de São Paulo – CESP, Companhia Energética de Minas Gerais – CEMIG and us, among others.

Principal Regulatory Authorities

Ministry of Mines and Energy – MME

     The MME is the Brazilian government’s primary regulator of the power industry. Following the adoption of the New Industry Model Law, the Brazilian government, acting primarily through the MME, has undertaken certain duties that were previously the responsibility of ANEEL, including the drafting of the guidelines governing the granting of concessions and the issuance of directives governing the bidding process for concessions relating to public services and public assets.

National Energy Policy Council—CNPE

     The National Energy Policy Council, Conselho Nacional de Política Energética (“CNPE”), is a committee created in August 1997 to advise the Brazilian President with respect to the development of national energy policy. The CNPE is presided over by the Minister of Mines and Energy, and the majority of its members are ministers of the Brazilian government. The CNPE was created to optimize the use of Brazil’s energy resources and to ensure the supply of energy to the country.

National Electric Energy Agency—ANEEL

     The Brazilian power industry is regulated by ANEEL, an independent federal regulatory agency. After the enactment of the New Industry Model Law, ANEEL’s primary responsibility is to regulate and supervise the power industry in accordance with the policies set forth by the MME and to respond to matters which are delegated to it by the Brazilian government and the MME. ANEEL’s current responsibilities include, among others, (i) administering concessions for electric energy generation, transmission and distribution, including the approval of electricity tariffs, (ii) enacting regulations for the electric energy industry, (iii) implementing and regulating the exploitation of energy sources, including the use of hydroelectric power, (iv) promoting the public bidding process for new concessions, (v) settling administrative disputes among electricity sector entities and electricity purchasers and (vi) defining the criteria and methodology for the determination of transmission tariffs.

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National Electric System Operator—ONS

     The National Electric System Operator, Operador Nacional do Sistema Elétrico (“ONS”) was created in 1998. The ONS is a non-profit, private entity comprised of electric utilities engaged in the generation, transmission and distribution of electric energy, in addition to other private participants such as importers, exporters and Free Consumers. The New Industry Model Law granted the Brazilian government the power to nominate three executive officers to ONS’ board of executive officers. The primary role of the ONS is to coordinate and control the generation and transmission operations in the Interconnected Power System, subject to the ANEEL’s regulation and supervision. The objectives and principal responsibilities of the ONS include, among others, operational planning for the generation industry, organizing the use of the domestic Interconnected Power System and international interconnections, guaranteeing that all parties in the industry have access to the transmission network in a non-discriminatory manner, assisting in the expansion of the electric energy system, proposing plans to the MME for extensions of the Basic Grid, and submitting rules for the operation of the transmission system for ANEEL’s approval.

Electric Energy Trading Chamber - CCEE

     The Electric Energy Trading Chamber, Câmara de Comercialização de Energia Elétrica (“CCEE”), is a not-for-profit organization subject to authorization, inspection and regulation by ANEEL. The CCEE replaced the Wholesale Energy Market pursuant to the new rules set forth under the New Industry Model Law.

     The CCEE is responsible, among other things, for (i) registering all the energy purchase agreements (Contratos de Comercialização de Energia no Ambiente Regulado) (“CCEAR”) in the Regulated Market, and registering the agreements resulting from market adjustments and the volume of electricity contracted in the Free Market, and (ii) the accounting for and clearing of short-term transactions. The CCEE is comprised of holders of concessions and permissions and authorized entities of the electricity industry and Free Consumers and its board of directors is comprised of four members appointed by these agents and one by the MME, which will be the Chairman of the board of directors.

Historical Background of the Industry Legislation

     The Brazilian constitution provides that the development, use and sale of electric energy may be undertaken directly by the Brazilian government or indirectly through the granting of concessions, permissions or authorizations. Historically, the Brazilian electric energy industry has been dominated by generation, transmission and distribution concessionaires controlled by the Federal or State governments. Since 1995, the Brazilian government has taken a number of measures to reform the Brazilian electric energy industry. In general, these measures were aimed at increasing the role of private investment and eliminating foreign investment restrictions, thus increasing overall competition in the industry.

     The following is a summary of the principal reform measures undertaken by the Brazilian government to date:

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•   
The Brazilian constitution was amended in 1995 to authorize foreign investment in power generation. Prior to this amendment, all generation concessions were held either by a Brazilian individual or an entity controlled by Brazilian individuals or by the Brazilian government.
 
•   
The Brazilian government enacted Law No. 8,987 on February 13, 1995 (the “Concessions Law”) and Law No. 9,074 on July 7, 1995 (the “Power Concessions Law”), that together (i) required that all concessions for the provision of energy related services be granted through public bidding processes, (ii) provided for the creation of generation entities, known as Independent Power Producers (“IPPs”), which, by means of a concession, permission or authorization, may generate and sell the totality or part of their electricity to Free Consumers, distribution concessionaires and trading agents, among others, (iii) gradually allowed certain electricity consumers with significant demand (demand equal to or greater than 3MW that are supplied at a voltage level equal to or greater than 69kV or, in the case of new customers that have entered the market since July 1995, customers with demand equal to or greater than 3MW that are supplied at any voltage level), known as Free Consumers, to purchase electricity directly from suppliers holding a concession, permission or authorization, (iv) granted electricity suppliers and Free Consumers open access to all distribution and transmission systems and (v) eliminated the need for a concession to construct and operate power projects with a capacity from 1 MW to 30 MW.
 
•   
Beginning in 1995, a portion of the controlling interests held by Eletrobrás and various states in generation and distribution companies were sold to private investors. At the same time, certain state governments also sold their stakes in major distribution companies.
 
•   
In 1998, the Brazilian government enacted Law No. 9,648 (the “Power Industry Law”), to overhaul the basic structure of the electricity industry. The Power Industry Law provides for the following:
 
 •   
the establishment of a self-regulated body responsible for the operation of the short- term electricity market, or the Wholesale Energy Market, which replaced the prior system of regulated generation prices and supply contracts;
 
 •   
a requirement that distribution and generation companies enter into initial energy supply agreements, known as Initial Supply Contracts, generally “take or pay” commitments, at prices and volumes approved by ANEEL. The main purpose of the Initial Supply Contracts is to ensure distribution companies have access to a stable electricity supply at prices that guarantee a fixed rate of return for the electricity generation companies during the transition period leading to the establishment of a free and competitive electricity market;
 
 •   
the creation of the ONS, a non-profit private entity responsible for the operational management of the generation and transmission activities of the Interconnected Power System; and
 
 •   
the establishment of public bidding processes for concessions for the construction and operation of power plants and transmission facilities.
 
•   
In 2001, Brazil faced a serious energy crisis that lasted until the end of February 2002. As a result, the Brazilian government implemented measures that included:
 

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 •   
a program for the rationing of electric energy consumption in the most adversely affected regions, namely the southeast, central-west and northeast regions of Brazil; and
 
 •   
the creation of the Energy Crisis Management Chamber, Câmara de Gestão da Crise de Energia Elétrica (“CGE”), which passed a series of emergency measures that provided for reduced energy consumption targets for residential, commercial and industrial consumers in the affected regions by introducing special tariff regimes that encouraged the reduction of electricity consumption.
 
•   
In March 2002, the CGE suspended the emergency measures and electricity rationing as a result of large increases in supply (due to a significant rise in reservoir levels) and a moderate reduction in demand, and, accordingly, the Brazilian government enacted new measures in April 2002 that, among other things, established an extraordinary tariff readjustment to compensate financial losses incurred by the electricity suppliers as a result of the mandatory electricity rationing.
 
•   
On March 15, 2004, the Brazilian government enacted the New Industry Model Law, in an effort to further restructure the power industry with the ultimate goal of providing consumers with a secure electricity supply at a low tariff.

Concessions

     The companies or consortia that wish to build or operate facilities for generation, transmission or distribution of electricity in Brazil must apply to the MME or to ANEEL for a concession, permission or authorization, as the case may be. Concessions grant rights to generate, transmit or distribute electricity in the relevant concession area for a specified period, as opposed to permissions and authorizations which are granted for an undetermined period of time by ANEEL, without a public bidding process. This period is usually thirty-five years for new generation concessions, and thirty years for new transmission or distribution concessions. An existing concession may be renewed at the granting authority’s discretion, except in some specific cases provided by law.

     The Concessions Law establishes, among other things, the conditions that the concessionaire must comply with when providing electricity services, consumers’ rights, and the obligations of the concessionaire and the granting authority. In addition to the Concession Law, the concessionaire must also comply with the general regulations, which govern the electricity sector. The main provisions of the Concessions Law are summarized as follows:

     Adequate service. The concessionaire must render adequate service to all customers in its concession and must maintain certain standards with respect to regularity, continuity, efficiency, safety and accessibility.

     Use of land. The concessionaire may use public land or request that the granting authority expropriate necessary private land for the benefit of the concessionaire. In the latter case, the concessionaire must compensate the affected private landowners.

     Strict liability. The concessionaire is strictly liable for all damages arising from the provision of its services.

     Changes in controlling interest. The granting authority must approve any direct or indirect change in the concessionaire’s controlling interest.

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     Intervention by the granting authority. The granting authority may intervene in the concession, by means of a presidential decree, to ensure the adequate performance of services, as well as the full compliance with applicable contractual and regulatory provisions. Within thirty days of such a decree, the granting authority’s representative must commence an administrative proceeding in which the concessionaire is entitled to contest the intervention. During the term of the administrative proceeding, the granting authority shall appoint an individual to manage the concession. If the administrative proceeding is not completed within 180 days of the issuance of the decree, the intervention will be stopped and the concession will be returned to the concessionaire. The concession is also returned to the concessionaire if the granting authority’s representative decides not to terminate the concession and the concession has not yet expired.

     Termination of the concession. The termination of the concession agreement may be accelerated by means of expropriation and/or forfeiture. Expropriation is the early termination of a concession for reasons related to the public interest, which has to be approved by law. Forfeiture must be declared by the granting authority after ANEEL or the MME has made a final administrative ruling that the concessionaire, among other things, (1) has failed to render adequate service or to comply with applicable law or regulation, (2) no longer has the technical, financial or economic capacity to provide adequate service, or (3) has not complied with penalties assessed by the granting authority. The concessionaire may contest any expropriation or forfeiture in the courts. The concessionaire is entitled to indemnification for its investments in expropriated assets that have not been fully amortized or depreciated, after deduction of any amounts for fines and damages due by the concessionaire.

     Expiration. When the concession expires, all assets, rights and privileges that are materially related to the rendering of the electricity services revert to the Brazilian government. Following the expiration, the concessionaire is entitled to indemnification for its investments in assets which have not been fully amortized or depreciated as of the expiration.

     Penalties. ANEEL’s regulation governs the imposition of sanctions against agents in the electricity sector and classifies the appropriate penalties based on the nature and importance of the breach (including warnings, fines, temporary suspension from the right to participate in bidding procedures for new concessions, licenses or authorizations and forfeiture). For each infraction, the fines can be up to 2.0% of the revenue (net of value-added tax and services tax) of the concessionaire in the 12-month period preceding any penalty notice. Some infractions that may result in fines relate to the failure of the agent to request ANEEL’s approval for certain actions, including the following: (1) execution of contracts between related parties in the cases provided by regulation; (2) sale or assignment of the assets related to services rendered as well as the imposition of any encumbrance (including any security, bond, guarantee, pledge and mortgage) on them or any other assets related to the concession or the revenues of the electricity services; and (3) changes in controlling interest of the holder of the authorization or concession. In the case of contracts executed between related parties that are submitted for ANEEL’s approval, ANEEL may seek to impose restrictions on the terms and conditions of these contracts and, in extreme circumstances, determine that the contract be rescinded.

The New Industry Model Law

     The New Industry Model Law introduced material changes to the regulation of the power industry, in order to (i) provide incentives to private and public entities to build and maintain generation capacity and (ii) assure the supply of electricity in Brazil at low tariffs through competitive electricity public bidding processes. The key elements of the New Industry Model Law include:

  • Creation of a parallel environment for the trading of electricity, including: (1) the regulated market, a more stable market in terms of supply of electricity; and (2) a market specifically

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addressed to certain participants (i.e., Free Consumers and energy trading companies), called the free market, that will permit a certain degree of competition vis-à-vis the regulated market.

  • Restrictions on certain activities of distributors, so as to require them to focus on their core business of distribution activities, to promote more efficient and reliable services to captive consumers.

  • Elimination of self-dealing, in order to provide an incentive to distributors to purchase electricity at the lowest available prices rather then buying electricity from related parties.

  • Respect for contracts executed prior to the New Industry Model Law, in order to provide regulatory stability for transactions carried out before its enactment.

     The New Industry Model Law excludes Eletrobrás and its subsidiaries from the National Privatization Program, which is a program originally created by the Brazilian government in 1990 to promote the privatization process of state-owned companies.

Parallel Environment for the Trading of Electric Energy

     Under the New Industry Model Law, electricity purchase and sale transactions are carried out in two different segments: (1) the Pool, which contemplates that distribution companies will purchase all the electricity they need to supply their customers though a public auction and (2) the free market, which provides for the purchase of electricity by non-regulated entities (such as the Free Consumers and energy traders).

     The electricity arising from (1) low capacity generation projects located near consumption points (such as certain co-generation plants and the small hydroelectric power plants), (2) plants qualified under the Proinfa Program, an initiative established by the Brazilian government to create incentives for the development of alternative energy sources, such as wind power projects, small hydroelectric power plants and biomass projects and (3) Itaipu, will not be subject to the public bidding process for the supply of electricity to the Pool. The electricity generated by Itaipu will continue to be sold by Eletrobrás to the distribution concessionaires operating in the south, southeast and center-western Interconnected Power System, although no specific contract was entered into by such concessionaires. The rates at which Itaipu-generated electricity is traded are denominated in U.S. dollars and established pursuant to a treaty between Brazil and Paraguay. As a consequence, Itaipu rates rise or fall in accordance with the variation of the U.S. dollar/real exchange rate. Changes in the price of Itaipu-generated electricity are, however, subject to the Parcel A cost recovery mechanism discussed below under “—Distribution Tariffs.”

     The Regulated Market (the “Pool”)

     In the regulated market, distribution companies must purchase their expected electricity requirements for their captive customers in the Pool, through a public auction process. The auction is administered by ANEEL, under certain guidelines provided by the MME.

     Electricity purchases are made through two types of bilateral agreements: Energy Agreements (Contratos de Quantidade de Energia) and Capacity Agreements (Contratos de Disponibilidade de Energia). Under an Energy Agreement, a generator commits to supply a certain amount of electricity and assumes the risk that its electricity supply could be adversely affected by hydrological conditions and low reservoir levels, among other conditions, which could interrupt the supply of electricity. In such a case, the generator would be required to purchase electricity elsewhere in order to comply with its supply commitments. Under a Capacity Agreement, a generator commits to make a certain amount of capacity available to the Pool. In such a case, the generator’s revenue is guaranteed and the distributors must bear the risk of a supply shortage.

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     Under the New Industry Model Law, the estimate of demand from distributors is the principal factor in determining how much electricity the system as a whole will contract. Under the new system, distributors are obligated to contract 100.0% of their projected electricity needs, as opposed to 95.0% under the previous regime. A deviation in actual demand from projected demand could result in penalties to distributors, but this remains subject to implementation.

     According to the New Industry Model Law, electricity distribution entities will be entitled to pass-through to their respective customers, in the form of higher tariffs, all costs related to electricity they purchased through public auction as well as any taxes and industry charges.

     With respect to the granting of new concessions, the newly enacted regulations provide that bids for new hydroelectric generation facilities may include, among other things, the minimum percentage of electricity to be supplied to the Pool.

     The Free Market

     The free market covers transactions between generation concessionaires, IPPs, self-generators, energy traders, importers of electric energy and Free Consumers. The free market will also include existing bilateral contracts between generators and distributors until they expire. Upon expiration, such contracts must be executed under the New Industry Model Law guidelines.

     A consumer that is eligible to choose its supplier may only be able to terminate its contract with the local distributor by notifying such distributor, up to three years in advance, of the date the distributor has to inform MME about its estimated electricity demand. Once a consumer has chosen the free market, it may only return to the regulated system once it has given the distributor of its region five years notice, provided that the distributor may reduce such term at its discretion. Such an extended period of notice seeks to assure that, if necessary, the distributor can buy additional energy in the Pool without imposing extra costs on the captive market.

     State-owned generators may sell electricity to free consumers, however, as opposed to private generators, they are obligated to do so through an auction process.

Regulation under the New Industry Model Law

     On July 30, 2004, the Brazilian government enacted a decree governing the purchase and sale of electricity in the Regulated Market and the Free Market, as well as the granting of authorizations and concessions for electricity generation projects. The regulations in this decree include, among other items, rules relating to auction procedures, the form of power purchase agreements and the mechanism for passing costs through to final consumers.

     Under these regulations, all electricity-purchasing agents must contract all of their electricity demand in accordance with established guidelines. Electricity-selling agents must provide evidentiary support linking the energy to be sold to existing or planned power generation facilities. Agents that do not comply with such requirements are subject to penalties imposed by ANEEL.

     These regulations also require for electricity distribution companies to fulfill their electricity supply obligations primarily through public auctions. In addition to these auctions, distribution companies can purchase electricity from: (1) generation companies that are connected directly to the distribution company (except for hydroelectric power plants with capacity higher than 30 MW and certain thermoelectric power plants), (2) electricity generation projects participating in the initial phase of the Proinfa Program, (3) power purchase agreements entered into before the New Industry Model Law was enacted and (4) the Itaipu power plant.

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     The MME will from time to time establish the total amount of energy that will be contracted in the Regulated Market, and the list of generation projects that will be allowed to participate in the auctions in each year.

     Beginning in 2005, all electricity generation, distribution and trading companies, independent power producers and Free Consumers are required to notify ANEEL, by August 1 of each year, of their estimated electricity demand or estimated electricity generation, as the case may be, for each of the subsequent five years. Each distribution company is also required to notify ANEEL, within the 60-day period preceding each electricity auction, of the amounts of electricity that it intends to contract in the auction. In addition, distribution companies will be required to specify the portion of the contracted amount they intend to use to supply potentially Free Consumers.

Auctions on the Regulated Market

     Electricity auctions for new generation projects will be held (1) five years before the initial delivery date of electricity (referred to as “A-5” auctions), and (2) three years before the commencement of commercial operation (referred to as “A-3” auctions). Existing power generators will hold auctions (1) one year before the initial delivery date (referred to as “A-1” auctions) and (2) four months before the delivery date (referred to as “market adjustments”). Invitations to bid in the auctions will be prepared by ANEEL, in accordance with guidelines established by the MME, including the requirement that the lowest bid shall be the winner of the auction.

     Each generation company that participates in the auction will execute a contract for purchase and sale of electricity with each distribution company, in proportion to the distribution companies’ respective estimated demand for electricity. The only exception to these rules relate to the market adjustment auction, where the contracts will be between specific selling and distribution companies. The contracts for both A-5 and A-3 auctions will have a term of between fifteen and thirty years, and the contracts for A-1 auctions will have a term between five and fifteen years. The contracts for A-1 auctions, carried out in 2005, were allowed to have a three-year term with initial supply in 2006. Contracts arising from market adjustment auctions will be limited to a two-year term.

     In respect of contracts related to electricity generated by existing generation facilities, there are three reasons for the reduction of contracted electricity: (1) compensation for the exit of potentially Free Consumers from the Regulated Market, (2) reduction, at the discretion of the distribution companies, of up to 4.0% per year of the annual contracted amount due to market deviations from the estimated market projections, beginning two years after the initial electricity demand was declared and (3) adjustments to the amount of electricity established in the energy acquisition contracts entered into before March 17, 2004.

Auctions

     On December 7, 2004, CCEE conducted the first auction of electricity from existing power generators under the procedures established by the New Industry Model Law. Generators and distributors provided ANEEL with information setting forth their estimated electricity generation or estimated electricity demand for the following 5-year period. Based on such information, the MME established the total amount of electricity to be traded in the auction and selected the generation companies that would participate in the auction.

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     After the completion of the auction, generators and distributors executed the relevant contract setting forth the price and amount of the energy contracted in the auction. The executed contracts have 8-year-terms, with initial delivery dates of energy beginning in 2005, 2006 and 2007. The contracts also provide that the price will be annually adjusted upon the variation of the IPCA (¥ndice Nacional de Preços ao Consumidor Amplo, calculated and published by Fundação Instituto Brasileiro de Geografia e Estatística – IBGE, a governmental institute). The distributors have granted financial guaranties to the generators (mainly receivables from the distribution service) to secure their payment obligations under the contracts.

     The second auction of electricity from existing power plants was conducted by the CCEE on April 2, 2005. Thirty-four buyers and sixteen sellers participated in this auction, which intended to negotiate 8-year-term contracts, with initial delivery dates beginning in 2008 and 2009. Notwithstanding the foregoing, only the contracts with initial delivery dates beginning in 2008 were negotiated.

     The third action of electricity from existing power plants was conducted by the CCEE on October 11, 2005. 3-year-term contracts were traded, with initial delivery dates beginning in 2006.

     Also on October 11, 2005, CCEE conducted the fourth auction of electricity from existing power plants. The executed contracts have 8-year-terms, with initial delivery dates beginning in 2009.

     On December 16, 2005, ANEEL conducted the first auction of electricity from new power plants. Energy from seven new hydroelectric power plants, totaling 451 MW, and from six new thermoelectric power plants, totaling 404 MW, was negotiated. Besides this, electricity from other existing power plants and plants which have not yet been constructed was traded. The contracts had their initial delivery dates beginning in 2008, 2009 and 2010. Contracts of hydroelectric power plants have 30-year terms and the ones from thermoelectric power plants, 15-year terms.

The Annual Reference Value

     The July 30, 2004 decree also established a mechanism (the “Annual Reference Value”), which limits the costs that can be passed through to final consumers. The Annual Reference Value corresponds to the weighted average of the electricity prices in the A-5 and A-3 auctions, calculated for all distribution companies.

     The Annual Reference Value creates an incentive for distribution companies to contract their expected electricity needs in the A-5 auctions, where the prices are expected to be lower than in A-3 auctions. The Annual Reference Value will be applied during the first three years of the power purchase agreements for new power generation projects. Beginning in the fourth year, 100.0% of the electricity acquisition costs from these projects will be passed through to consumers. The decree establishes the following permanent limitations on the ability of distribution companies to pass-through costs to consumers: (1) No pass-through of costs for electricity purchases that exceed 103.0% of actual demand; (2) Limited pass-through of costs for electricity purchases made in an A-3 auction, if the volume of the acquired electricity exceeds 2.0% of the demand for electricity purchased in the A-5 auctions; (3) Limited pass-through of electricity acquisition costs from new electricity generation projects if the volume contracted under the new contracts related to existing generation facilities is lower than 96.0% of the volume of electricity provided for in the expiring contract; (4) From 2005-2008, electricity purchases from existing facilities in the A-1 auction are limited to 1.0% of a distribution company’s demand. If the acquired electricity in the A-1 auction exceeds 1.0%, pass-through of costs to final consumers is limited to 70.0% of the average value of such acquisition costs of electricity generated by existing generation facilities for delivery between 2005 and 2008. The MME will establish the maximum acquisition price for electricity generated by existing projects. If distributors do not comply with the obligation to fully contract their demand, the pass-through of the costs from energy acquired in the short-term market will be the lower of the spot price and the Annual Reference Value.

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Electric Energy Trading Convention

     On October 26, 2004, ANEEL enacted Resolution 109, which establishes the Electric Energy Trading Convention (Convenção de Comercialização de Energia Elétrica). The Electric Energy Trading Convention regulates the organization and functioning of the CCEE and defines, among other things, (1) the rights and obligations of the CCEE agents, (2) the penalties to be imposed on defaulting agents, (3) the means of dispute resolution, (4) trading rules in the Regulated and Free Markets and (5) the accounting and clearing process for short-term transactions.

Restricted Activities of Distributors

     Distributors in the Interconnected Power System are not permitted to (i) develop activities related to the generation or transmission of electric energy, (ii) sell electric energy to Free Consumers, except for those in their concession area, and under the same conditions and tariffs maintained with respect to captive consumers, (iii) hold, directly or indirectly, any interest in any other company, corporation or partnership or (iv) develop activities that are unrelated to their respective concessions, except for those permitted by law or in the relevant concession agreement. Generators will not be allowed to hold more than a 10.0% equity interest in any distributor. The New Industry Model Law has granted a transition period of eighteen months for companies to adjust to these rules, and ANEEL can extend such term for another eighteen months in the event that companies are unable to comply with such requirements within the prescribed timeframe.

Elimination of Self-Dealing

     Since the purchase of electricity for captive customers is now performed through the Pool, so-called “self-dealing” (under which distributors were permitted to purchase up to 30.0% of their energy needs through energy that was either self-produced or acquired from affiliated companies) is no longer permitted, except in the context of agreements that were approved by ANEEL before the enactment of the New Industry Model Law.

Contracts Executed prior to the New Industry Model Law

     The New Industry Model Law provides that contracts executed by electricity distribution companies and approved by ANEEL before the enactment of the New Industry Model Law may not be amended to reflect any extension or modification of their terms (other than reductions in volumes and prices), with the exception of Initial Supply Contracts, as described below.

     According to the Power Industry Law, during the transition period (1998-2005) to a free and competitive energy market, purchases and sales of electric energy between generation and distribution concessionaires should occur pursuant to Initial Supply Contracts. The purpose of the transition period was to permit the gradual introduction of competition in the industry.

     Electricity committed to Initial Supply Contracts was reduced by 25.0% each year from 2003 to 2005. Under the New Industry Model Law generation companies may purchase and sell electricity in the free market or in the regulated market. Generation companies will be allowed to trade their excess uncontracted electricity upon the termination of the Initial Contracts.

     However, the New Industry Model Law allowed public generation companies to amend the Initial Supply Contracts that were in full force and effect on March 2004. Generation companies that amended their Initial Supply Contracts were not required to comply with the requirement to reduce the amount of electric energy committed under such contracts by 25.0% each year from 2003 to 2005 period.

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Challenges to the Constitutionality of the New Industry Model Law

     The New Industry Model Law is currently being challenged on constitutional grounds before the Brazilian Supreme Court. The Brazilian government moved to dismiss the actions arguing that the constitutional challenges were moot because they related to a provisional measure that had already been converted into law. A final decision on this matter is subject to majority vote of the Justices. To date, the Supreme Court has not reached a final decision and we do not know when such a decision may be reached. While the Supreme Court is reviewing the law, its provisions have remained in effect. Regardless of the Supreme Court’s final decision, certain portions of the New Industry Model Law relating to restrictions on distributors performing activities unrelated to the distribution of electricity, including sales of energy by distributors to free consumers and the elimination of self-dealing, are expected to remain in full force and effect.

Ownership Limitations

     ANEEL established new limits on the concentration of certain services and activities within the electric energy industry in 2000. Under these limits, with the exception of companies participating in the National Privatization Program (which only need to comply with such limits once their final corporate restructuring has been accomplished), no electric industry company (including both its affiliates) may (i) own more than 20.0% of Brazil’s installed capacity, 25.0% of the installed capacity of the south, southeast and central-West region or 35.0% of the installed capacity of the north and northeast region, except if such percentage corresponds to the installed capacity of a single generation plant, (ii) own more than 20.0% of Brazil’s distribution market, 25.0% of the south, southeast and central-West distribution market or 35.0% of the north and northeast distribution market, except in the event of an increase in the distribution of energy exceeding the national or regional growth rates or (iii) own more than 20.0% of Brazil’s trading market with final consumers, 20.0% of Brazil’s trading market with non final consumers or 25.0% of the sum of these two categories.

Tariffs for the Use of the Distribution and Transmission Systems

     ANEEL oversees tariff regulations that govern access to the distribution and transmission systems and establish tariffs for these systems. The tariffs are (i) network usage charges, which are charges for the use of the proprietary local grid of distribution companies (“TUSD”) and (ii) tariffs for the use of the transmission system, which is the Basic Grid and its ancillary facilities (“TUST”).

     TUSD

     The TUSD is paid by generators and Free Consumers for the use of the distribution system of the distribution concessionaire to which the generator or Free Consumer is connected. The amount to be paid by the agent connected to the distribution system is calculated by multiplying the amount of electricity contracted with the distribution concessionaire for each connection point, in kW, by the tariff in R$/kW per month which is set by ANEEL.

     TUST

     The TUST is paid by distribution companies, generators and Free Consumers for the use of the Basic Grid and is revised annually according to (i) an inflation index and (ii) the annual revenue of the transmission companies, as determined by ANEEL. According to criteria established by ANEEL, owners of the different parts of the transmission grid were required to transfer the coordination of their facilities to the ONS, in return for receiving regulated payments from the transmission system users. Network users, including generation companies, distribution companies and Free Consumers have signed contracts with the ONS entitling them to the use of the transmission grid in return for the payment of certain tariffs. Other parts of the grid that are owned by transmission companies but which are not considered part of the Main Transmission Grid, are made directly available to the interested users for a specified fee.

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Distribution Tariffs

     Distribution tariff rates (including the TUSD) are subject to review by ANEEL, which has the authority to adjust and review these tariffs in response to changes in energy purchase costs and market conditions. When adjusting distribution tariffs, ANEEL divides the costs of distribution companies between (i) costs that are beyond the control of the distributor, or Parcel A costs, and (ii) costs that are under control of distributors, or Parcel B costs. The readjustment of tariffs is based on a formula that takes into account the division of costs between the two categories.

     Parcel A costs include, among others, the following factors:

  • costs of electricity purchased for resale pursuant to the remaining Initial Supply Contracts (ones which have been amended);

  • costs of electricity purchased in the Pool, under certain conditions;

  • costs of electricity purchased from Itaipu and from Proinfa;

  • costs of electricity purchased pursuant to bilateral agreements by small distribution companies; and

  • certain other charges for connection to the transmission and distribution systems.

     Parcel B costs are determined by subtracting all of the Parcel A costs from the distribution company’s revenues.

     Each distribution company’s concession agreement provides for an annual readjustment (reajuste anual). In general, Parcel A costs are fully passed through to consumers. Parcel B costs, however, are restated for inflation in accordance with the IGP-M index.

     Electricity distribution concessionaires are also entitled to periodic revisions (revisão periódica) every four or five years. These revisions are aimed at (1) assuring necessary revenues to cover efficient Parcel B operational costs and adequate compensation for investments deemed essential for the services within the scope of each such company’s concession and (2) determining the “X factor,” which is based on three components: (a) expected gains of productivity from increase in scale, (b) evaluations by consumers (verified by ANEEL) and (c) labor costs.

     The X factor is used to adjust the proportion of the change in the IGP-M index that is used in the annual adjustments. Accordingly, upon the completion of each periodic revision, application of the X factor requires distribution companies to share their productivity gains with final consumers.

     In addition, electricity distribution concessionaires are entitled to an extraordinary tariff review (revisão extraordinária) on a case-by-case basis, to ensure their financial stability and compensate them for unpredictable costs, including taxes, that significantly change their cost structure.

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     Since October 2004, on the date of their subsequent tariff readjustment or tariff revision, whichever occurs earlier, distribution companies have been required to execute separate contracts for the connection and use of the distribution system and for the sale of electricity to their potentially free consumers.

Incentives

     In 2000, a Federal decree created the Thermoelectric Priority Program, Programa Prioritário de Termeletricidade (“PPT”), for purposes of diversifying the Brazilian energy matrix and decreasing its strong dependency on hydroelectric plants. The prerogatives granted to the thermoelectric plants included in the PPT are: (i) guaranty of gas supply for twenty years, according to regulation from the MME, (ii) assurance of the costs related to the acquisition of the electric energy produced by thermoelectric plants will be transferred to tariffs up to the normative value established by ANEEL and (iii) guaranty of access to a BNDES special financing program for the electric energy industry.

     In 2002, the Brazilian government established the Proinfa Program to encourage the creation of alternative energy sources. Under the Proinfa Program, Eletrobrás shall purchase the energy generated by alternative sources for a period of up to twenty years. In its initial phase, the Proinfa Program is limited to a total contracted capacity of 3,300 MW. Projects seeking to qualify for the benefits offered by the Proinfa Program must be fully operational by December 30, 2006. In its second phase, which will start after the 3,300MW cap has been reached, the Proinfa Program intends to purchase energy from alternative sources up 10.0% of the electric energy annual consumption of Brazil. The energy produced for sale to the Proinfa Program cannot be produced by generation concessionaires, like us, nor by IPPs; such production may only be done by autonomous independent producers, who may not be controlled by, or affiliated with, a generation concessionaire or an IPP, or affiliated with any of their controlling entities. The first phase of the Proinfa program commenced in 2004.

Regulatory Charges

RGR Fund and UBP

     In certain circumstances, electric energy companies are compensated for certain assets used in connection with a concession if the concession is revoked or is not renewed. In 1971, the Brazilian Congress created a reserve fund designed to provide funds for such compensation (“RGR Fund”). In February 1999, ANEEL revised the assessment of a fee requiring public-industry electric companies to make monthly contributions to the RGR Fund at an annual rate equal to 2.5% of the company’s fixed assets in service, not to exceed 3.0% of total operating revenues in any year. In recent years, no concessions have been revoked or have failed to be renewed, and the RGR Fund has been used principally to finance generation and distribution projects. The RGR Fund is scheduled to be phased out by 2010 and ANEEL shall revise the applicable tariffs so that the consumer will receive some benefit from the termination of the RGR Fund.

     The Brazilian government has imposed a fee on IPPs similar to the fee levied on public-industry generation companies in connection with the RGR Fund. IPPs are required to make contributions for using a public good, Uso de Bem Público (“UBP”) according to the rules of the corresponding public bidding process for the granting of concessions. Eletrobrás received the UBP payments until December 31, 2002. All payments related to the UBP since December 31, 2002 are paid directly to the Brazilian government.

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CCC

     Distribution companies (and also some transmission companies responsible for Free Consumers) must contribute to the Conta de Consumo de Combustível (“CCC Account”). The CCC Account was created in 1973 to generate financial reserves to cover fossil fuel costs in order to reduce tariffs to be paid by consumers supplied by thermoelectric power plants. The annual CCC Account contributions are calculated on the basis of estimates of the cost of fuel needed by the thermoelectric power plants in the succeeding year. The CCC Account is administered by Eletrobrás. The CCC Account, in turn, reimburses electric companies for a substantial portion of the fuel costs of their thermoelectric power plants.

     In February 1998, the Brazilian government provided for the phasing out of the CCC Account. During the 2003-2006 period, subsidies from the CCC Account will be phased out for thermal power plants constructed prior to February 1998 and belonging to the Interconnected Power System. Thermal power plants constructed after that date will not be entitled to subsidies from the CCC Account. In April 2002, the Brazilian government established that subsidies from the CCC Account would continue to be paid, for a period of twenty years, to thermoelectric plants located in isolated systems.

CDE

     In 2002, the Brazilian government instituted the Electric Energy Development Account, Conta de Desenvolvimento Energético (“CDE Account”), which is funded with annual payments made by concessionaires for the use of public assets, penalties and fines imposed by ANEEL and the annual fees paid by agents offering electric energy to final consumers, by means of an additional charge added to the tariffs for the use of the transmission and distribution systems. These fees are adjusted annually. The CDE Account was created to support (i) the development of energy production throughout Brazil, (ii) the production of energy by alternative energy sources and (iii) the universalization of electric energy services throughout Brazil. The CDE will be in effect for twenty-five years and be regulated by the executive branch and managed by Eletrobrás.

Itaipu Transportation Charge

     The Itaipu hydroelectric plant has an exclusive transmission grid and is not part of the Main Transmission Grid or the intermediary connection system. Companies which are entitled to receive electricity from Itaipu pay a transportation charge, in an amount equal to their proportional quota of Itaipu generated electricity for the use of the grid.

Charge for the Use of Water Resources

     The Power Industry Law requires that holders of concessions and authorizations, which allow for the exploitation of water resources, must pay a total charge of 6.75% of the value of the energy they generate. This charge is shared among the states and municipalities where the plant or the plant’s reservoir is located and certain federal agencies.

ANEEL Inspection Fee

     The ANEEL Inspection Fee is an annual fee due by the holders of concessions, permissions or authorizations equal to a proportion of their revenues. The ANEEL Inspection Fee requires affected parties to pay up to 0.5% of their annual revenues to ANEEL in twelve monthly installments.

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Default on the Payment of Regulatory Charges

     The New Industry Model Law provides that the failure to pay required contributions to the RGR Fund, Proinfa Program, CDE Account, CCC Account, or certain payments, such as those due from the purchase of electric energy in the regulated market or from Itaipu, will prevent the defaulting party from receiving readjustments or reviews of their tariffs (except for an extraordinary review) and will also prevent the defaulting party from receiving funds from the RGR Fund, CDE Account or CCC Account.

     CRC

     During the concession regime that existed prior to the enactment of the Concessions Law in 1995, the Brazilian government decided that electric concessionaires should maintain a guaranteed rate of return between 10.0% and 12.0% . In order to ensure this rate of return, a netting account was created in 1971, Conta de Resultados a Compensar (“CRC Account”), whereby the difference between (i) the rate of return defined by the Brazilian government and (ii) the actual rate of return of a concessionaire in any given year would be registered in the CRC Account of each concessionaire in order to compensate excesses and shortfalls.

     The guaranteed rate of return regime was discontinued in 1993. The balance of each CRC Account was used to offset certain debts of concessionaires relating, among other things, to the supply of energy by Itaipu and the supply of fossil fuel.

     In 1994, the Brazilian government recognized the remaining balance of the CRC Account as an asset belonging to the respective concessionaires. In the same year, the Brazilian government authorized the exchange of such assets for an equivalent amount of Elets, a Brazilian government bond.

     According to an agreement dated August 4, 1994, the State of Paraná agreed to reimburse us for the remaining balance in the CRC Account in 240 monthly installments, adjusted based upon the IGP-DI plus interest of 6.65% per year.

     For developments after 1994 and the impact of the CRC Account on our financial condition, see “Item 5. Operating and Financial Review and Prospects—Overview—Impact of CRC Account.”

Energy Reallocation Mechanism

     The Energy Reallocation Mechanism (“MRE”) attempts to mitigate the risks borne by hydrogenerators due to the variation in time of river flows (hydrologic risk).

     Under Brazilian law, each hydroelectric plant is assigned a determined amount of “assured energy”, according to an energy supply risk criteria defined by MME, based on the historical river flow records available. The assured energy also represents the maximum energy that can be sold by the generator which is set forth in each concession agreement, irrespective of the volume of electricity generated by the facility.

     The MRE tries to guarantee that all participating plants receive the revenue related to their assured energy, irrespective of the volume of electricity generated by them. In other words, the MRE effectively reallocates the electricity, transferring the surplus from those who have produced in excess of their assured energy to those that have produced less than their assured energy. The relocation, which occurs in the Interconnected Power System, is determined by the ONS, considering the nationwide electricity demand and hydrological conditions, regardless of the power purchase agreement of each individual generator. The volume of electricity actually generated by the plant, whether more or less than their assigned assured energy quotient, is priced pursuant to a tariff known as the “Energy Optimization Tariff”, designed to cover only the variable operation and maintenance costs of the plant, so that generators are largely unaffected by the actual dispatch of their plants.

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Research and Development

     The companies holding concessions, permissions and authorizations for distribution, generation and transmission of electricity must invest a minimum of 1.0% of their annual net operational revenues in research and development. Small hydroelectric power plants and alternative energy projects are not subject to this requirement.

Environmental Regulations

     The Brazilian constitution gives both the Brazilian government and State governments the power to enact laws designed to protect the environment. A similar power is given to municipalities whose local interests may be affected. Municipal laws are considered a supplement to federal and state laws. A violator of applicable environmental laws may be subject to administrative and criminal sanctions, and they will have an obligation to repair or provide compensation for environmental damages. Administrative sanctions may include substantial fines and suspension of activities, while criminal sanctions may include fines and, for individuals, possible imprisonment. Criminal sanctions, including the imposition of fines or possible imprisonment, can be imposed against executive officers and employees of companies who commit environmental crimes.

     Our energy distribution and generation facilities are subject to environmental licensing procedures, which include the preparation of environmental impact assessments before such facilities are constructed. Once the respective environmental licenses are obtained, their maintenance is still subject to the compliance with various specific requirements. We were one of the first energy concessionaires in Brazil to provide an environmental impact assessment and report (Segredo Power Plant, 1987) in connection with the construction of a power plant. More recently, the Salto Caxias Power Plant (1995-1999) was constructed in accordance with one of the most comprehensive environmental impact mitigation programs ever implemented in Brazil.

     In recent years, several important pieces of environmental regulation have been enacted. The Law of Environmental Crimes, which took effect in 1998, establishes a general framework of liability for environmental crimes. Recent federal laws and statutes have established the National System for Management of Hydro Resources and the National Council of Hydro Resources to address the major environmental issues facing the hydroelectric sector and users of water resources. In July 2000, the Brazilian government created an independent agency, the National Water Agency, to regulate and supervise the use of water resources.

     Since May 2002, three new federal resolutions have been passed which implement certain aspects of the Brazilian Forestry Code and deal with the maintenance and acquisition of areas affected by hydroelectric plant reservoirs. These regulations may result in increased maintenance, reforestation and condemnation costs to energy industry concessionaires. Another federal resolution provides standards for an environmental audit process of hydroelectric facilities. Finally, a new state law requires a mandatory environmental audit of all companies in the State of Paraná, like us, whose activities may impact the environment. We are required to present a copy of our environmental audit process when we apply for the renewal of our environmental operation licenses for our power plants and electric energy transmission substations.

 

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     Unresolved Staff Comments

     In a letter dated September 28, 2005 (the “Comment Letter”), the staff of the Securities and Exchange Commission provided certain comments to our annual report on Form 20-F for the fiscal year ended December 31, 2004 as filed on June 29, 2005. We believe that we have resolved all of the comments set forth in the Comment Letter.

Item 5. Operating and Financial Review and Prospects

     The discussion in this Item 5 is based on our financial information which has been prepared in accordance with Brazilian GAAP, unless otherwise noted. You should read this discussion in conjunction with our Consolidated Financial Statements, which have been prepared in accordance with Brazilian GAAP with a reconciliation to U.S. GAAP, and the notes thereto and the other financial information included elsewhere in this Annual Report.

Overview

Brazilian Economic Conditions

     After a period in which Brazil’s economy suffered from the combined effects of regional economic crises and political uncertainty relating the Brazilian presidential elections in 2002, the Brazilian economy began to improve. In 2003, investor confidence increased as the new administration largely followed the macroeconomic policies of the previous government, including its focus on fiscal responsibility, and the real appreciated 22.3% against the U.S. dollar. However, GDP increased by 0.5% during 2003, compared to an increase of 1.9% in 2002. High interest rates, especially during the first half of the year, acted to constrain economic growth. The Central Bank increased the basic interest rate from 25.0% to 26.5% on February 19, 2003 and maintained it at that level until June 18, 2003. Beginning on June 18, 2003, the Central Bank gradually decreased the base interest rate to 16.5% as of December 31, 2003.

     The Brazilian economy grew 4.9% in 2004 as a result of increased exports and the recovery of domestic consumption. While all the sectors of the economy experienced impressive growth rates in 2004, the industrial sector grew the fastest, by 6.2% . Although strong growth of the export economy has played an important role in Brazil’s economy, the recovery of internal demand is largely responsible for the overall turn around of the Brazilian economy. The real/U.S. dollar selling exchange rate was R$2.6544/U. S.$1 at December 31, 2004, an appreciation of 8.8% as compared to December 31, 2003. In addition to the strengthening domestic economy, the appreciation of the real was partially due to the world-wide depreciation of the U.S. dollar. In September 2004, the Central Bank began to implement a series of interest rate increases in a bid to meet inflation targets for 2005 and base interest rates were increased from 16.5% at the end of 2003 to 17.75% by the end of 2004. This increase was effected largely to control inflationary pressures.

     The increase in interest rates adversely affected economic activity, resulting in lower economic growth, with an increase in GDP of approximately 2.3% in 2005. In September 2005, the Central Bank implemented measures designed to lower the SELIC rate as inflation estimates for 2005 and for the following 12 months began to approach the government’s inflation targets, and the SELIC rate at December 31, 2005 was 18.0% . Inflation during 2005, as measured by IPCA, was 5.7%, slightly above the 5.1% target established for the year by the Central Bank. The real appreciated 13.4% against the U.S. dollar, closing at R$2.34 per U.S.$1.00 on December 31, 2005.

     The economy grew 3.4% during the first quarter of 2006. The value of the real appreciated to R$2.3005 per U.S. dollar at May 31, 2006, as compared with R$2.3407 at December 31, 2005. The Central Bank lowered the base interest rate from 18.00% to 15.25% during the first five months of 2006.

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     The following table shows selected economic data for the periods indicated:

    Year ended December 31, 
   
    2005    2004    2003 
       
 
Inflation (IGP-DI)   1.2%    12.1%    7.7% 
Appreciation of the real vs. U.S. dollar    13.4%    8.9%    22.3% 
Period-end exchange rate—U.S.$1.00(1)   2.3407    2.6544    2.8892 
Average exchange rate--U.S.$1.00(2)   2.4125    2.9171    3.0600 
Change in real GDP    2.3%    4.9%    (0.2%)
Average interbank interest rates(3)   19.0%    16.1%    23.2% 

_______________
(1)      The real/U.S. dollar exchange rate at June 1, 2006 was R$2.2713 per U.S.$1.00.
(2)      Average of the closing exchange rates on the last day of each month in the period.
(3)      Calculated in accordance with Central Clearing and Custody House (“CETIP”) methodology (based on nominal rates).
Sources
: FGV-Fundação Getúlio Vargas, the Central Bank, the Brazilian Geography and Statistics Institute (“IBGE”) and CETIP.

Rates and Prices

     Our results of operations are significantly affected by changes in the prices we charge for electricity. Most of our revenues come from sales at regulated rates, and even those prices that are not directly regulated are heavily influenced by energy regulatory policy. The price of electricity sold at auction is highly affected by the electricity balance in the Interconnected Power System. In the auctions held during 2004 and 2005, the electricity prices of the agreements with delivery dates beginning in 2005, 2006 and 2007 reflected the electricity surplus and the electricity prices of the agreements with delivery dates beginning in 2008 and 2009 were more reflective of the system expansion costs.

     Sales to Final Customers represented about 52.1% of the volume of electricity we delivered in 2005, and accounted for 77.4% of our gross revenues, and almost all of such sales were to captive customers. The rates we charge to our captive customers are set by ANEEL based on considerations established by law and regulations. For more information, see “Item 4. Information on the Company—The Brazilian Electric Power Industry—Distribution Tariffs”. In addition to these considerations, the rate-setting process is influenced by political and economic objectives, including government attempts to control inflation. In general, if our costs for energy increase, the tariff process permits us to recover these costs from our customers through higher rates in future periods. However, if we do not receive tariff increases to cover our costs, if the recovery is delayed, or if our Board of Directors elects to reduce the tariff increase awarded by ANEEL, our profits and cash flows may be adversely affected.

     In recent years, ANEEL has granted us a rate increase each June. In June 2003, ANEEL granted us rate increases for sales to captive Final Customers averaging 25.3%, and we decided to provide a discount that was effectively equivalent to the rate increase to those customers who paid their electricity bills when due. On January 1, 2004, we reduced this discount in order to pass along to our customers a 15.0% rate readjustment. Since June 24, 2003, customers with overdue bills have had to pay tariffs that include the full tariff amount.

     On June 24, 2004, we were granted a total tariff increase of 14.43% by ANEEL. This increase consisted of a 9.17% increase in our retail tariffs and a 5.26% increase for deferred regulatory asset recovery. We continued our policy of granting a discount to our customers who pay their bills when due and instead of applying the full 14.43% rate increase, we applied only a 9.0% rate increase to the tariffs we charge our customers who pay their bills on time. In February 2005, we increased the tariff by 5.0% .

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     On June 24, 2005, ANEEL granted us a total tariff increase of 7.8% . This increase consisted of a 1.25% decrease in our retail tariffs and a 9.05% increase for deferred regulatory asset recovery (CVA). We decided to continue our policy of granting a discount to our customers who pay their bills in a timely manner and only applied a 4.4% rate increase to the tariffs we charge such customers.

     In June 2006, ANEEL authorized us to increase our tariffs by an average of 5.12% pursuant to the annual tariff readjustment. We have decided to apply the entire readjustment and will not grant a discount to our customers.

Long-Term Energy Contracts

     Our distribution business purchases energy from generators (including our generation business) and resells it to customers, primarily at regulated rates. In 2005, we purchased 47.4% of our total available energy under long-term contracts and from Itaipu. For more information, see “Item 4. Information on the Company—Business—Generation and Purchases of Energy.” Our major long-term contracts or purchase obligations are described below.

  • We entered into the Cien Agreements in 1999 and renegotiated them in 2003 to reduce the volumes and improve the pricing. In 2005, we recognized R$309.3 million for electricity purchased from Cien. For more information, see “Item 4—Business—Generation and Purchases of Energy—Purchases.”

  • We purchase energy from Itaipu at prices that are determined based on the Itaipu project’s costs, including servicing its U.S. dollar denominated debt. In 2005, our electricity purchases from Itaipu amounted to R$464.4 million.

  • Under the New Industry Model Law, our generation business is required to offer the energy it generates in auction sales into the Pool, and our distribution business is required to purchase part of its energy needs from the Pool. For more information, see “Item 4. Information on the Company – The Company – Public Auction.”

     One of the principal components of our results is the profit we realize reselling energy purchased under long-term contracts. In general, we are entitled to pass on to customers increased costs for purchasing energy from Itaipu, Cien and the Pool. Our commitments relating to the Cien project had a significant adverse impact on our operating expenses in 2003.

Impact of the CRC Account

     In 1993, the Brazilian government eliminated the system of guaranteed rates of return for utilities. As a result, utilities were no longer permitted to add credits to the CRC Account. Amounts that had been accumulated in each utility’s CRC Account up to 1993 were recognized by the Brazilian government as credits. After offsetting all amounts owed to the Brazilian government and to federal financial institutions to the extent permitted by law, in August 1994 we assigned the remainder of our CRC Account balance, equal to R$808.1 million, to the State of Paraná, pursuant to an assignment agreement (the “CRC Account Agreement”), which has subsequently been renegotiated on several occasions. In October 1997, we agreed with the State of Paraná to extend the term of the CRC Account Agreement to 330 equal monthly installments, which include interest and principal amortization, with the last monthly installment due on March 30, 2025. Pursuant to the terms of the CRC Account Agreement, if the State of Paraná fails to make payments on a timely basis, we may, after notifying the State of Paraná, apply dividends payable by us to the State of Paraná against amounts due to us under the CRC Account Agreement.

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     On March 19, 2003, the State of Paraná filed a request with the Federal Ministry of Finance to convert our CRC receivables into an obligation of the Brazilian Government rather than an obligation of the State of Paraná. This request was sent to the National Treasury Secretariat for assessment and we are still awaiting a decision.

     In January 2004, the State of Paraná paid the monthly amounts due under the CRC Account Agreement from September 2002 through January 2003, plus a portion of the installment due in February 2003. In January 2005, we concluded a fourth amendment to the CRC Account Agreement in connection with our CRC receivables outstanding at December 31, 2004. The balance of these receivables, which amounts to R$1,197 million, will be paid to us by the State of Paraná in 244 monthly installments, beginning on January 30, 2005 and adjusted at IGP-DI plus 6.65% per year. The renegotiated amount, in addition to the installments not yet due, includes part of the installment due in February 2003, and the installments due from March 2003 to December 2004. The State of Paraná has been complying with the payments of the renegotiated installments in accordance to the terms established in the fourth amendment. As of December 31, 2005, the total outstanding balance under the CRC Account Agreement was R$1,182 million.

Special Obligations

     We record a liability for contributions received from the Federal Government and our customers exclusively for investment in the electric energy distribution network. We record the amount of these contributions on our balance sheet as a reduction of our fixed assets, under the caption “special obligations”, and, upon the conclusion or termination of the operating concession granted to us, the amount of these contributions will be offset against our assets, including those purchased with the contributions received from the Federal Government and our customers. The amount we recorded as special obligations as of December 31, 2005 was R$765.1 million. For more information, see Note 13 to the Consolidated Financial Statements.

Critical Accounting Policies

     In preparing our financial statements, we make estimates concerning a variety of matters. Some of these matters are highly uncertain, and our estimates involve judgments we make based on the information available to us. We have discussed in “—Overview” above certain accounting policies relating to regulatory matters. In the discussion below, we have identified several other matters for which our financial presentation would be materially affected if either (a) we used different estimates that we could reasonably have used or (b) in the future we change our estimates in response to changes that are reasonably likely to occur.

     The discussion addresses only those estimates that we consider most important based on the degree of uncertainty and the likelihood of a material impact if we used a different estimate. There are many other areas in which we use estimates about uncertain matters, but the reasonably likely effect of changed or different estimates is not material to our financial presentation. Please see the notes to our Consolidated Financial Statements included herein for a more detailed discussion of the application of these and other accounting policies.

     Revenue Recognition

     We recognize our revenues on an accrual basis (i.e., when persuasive evidence of an arrangement exists, delivery of goods has occurred or services have been rendered, our price to the customer has been fixed or is determinable, and collectibility is reasonably assured, regardless of when the cash is received).

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     We bill our residential, industrial and commercial customers monthly. Unbilled revenues from the billing date to month-end are estimated based on the prior month’s billing and recognized as revenue at the end of the month in which the service was provided. We read our individual customers’ meters on a systematic basis throughout the month in order to determine how much energy we have sold to them. At the end of each month, the amount of energy delivered to each customer since their last meter reading date is estimated and the corresponding unbilled revenue is determined based upon a customer’s daily estimated usage by class and applicable customer rates reflecting significant historical trends and experience. Differences between estimated and actual unbilled revenues, which have historically been insignificant, are recognized in the following month.

Deferred Regulatory Asset

     In accordance with Brazilian GAAP, we have deferred and capitalized certain costs that we expect to recover through rate increases. This approach is similar to SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation” (SFAS No. 71), which provides that rate-regulated entities account for their assets and liabilities in a manner consistent with the recovery of those costs in their rates, if the rates are designed to recover the costs of providing the regulated service and if the competitive environment makes it likely that such rates can be charged and collected. Certain expenses and revenues subject to utility regulation or rate determination normally reflected in income are deferred on the balance sheet and are recognized in income as the related amounts are included in service rates and recovered from or refunded to customers. We are entitled to recover these costs according to Brazilian regulations. ANEEL performs a rate review on an annual basis. If ANEEL excludes all or part of a cost from recovery, that portion of the deferred regulatory asset is impaired and is accordingly reduced to the extent of the excluded cost. For more information, see Note 9 to the Consolidated Financial Statements. The deferred regulatory assets reflected in the consolidated balance sheet under Brazilian GAAP totaled R$136.7 million and the deferred regulatory liabilities totaled R$90.6 million at December 31, 2005.

     Impairment of Long-lived Assets

     Long-lived assets, primarily property, plants and equipment, comprise a significant amount of our total assets. We evaluate our long-lived assets and make judgments and estimates concerning the carrying value of these assets, including amounts to be capitalized, depreciation and useful lives. The carrying values of these assets are reviewed for impairment periodically or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable. This requires us to make long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts require assumptions about demand for our products and services, future market conditions and regulatory developments. Significant and unanticipated changes to these assumptions could require a provision for impairment in a future period. No impairment test was necessary for 2003, 2004 and 2005. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.

     The Wholesale Energy Market (“MAE”)

     The Brazilian government established the MAE in 1998 for the short-term purchase and sale of energy in accordance with the terms and criteria set forth in the Market Agreement. The MAE provided estimates of the energy we made available and acquired at the MAE on a quarterly basis. For accounting purposes, we reviewed MAE computations in relation to the volumes and prices applied in accordance with the Market Agreement and accrued the related revenue and/or cost balances in our financial statements. In November 2004, all MAE activities were transferred to the CCEE.

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     Our accruals are based on estimates made by us and by the MAE. Our claim to a credit involves the partial sale of energy from Itaipu in the Southern and Southeastern sub-markets which was done to comply with the bilateral agreements of electricity sales to distributors and industrial customers during the rationing period in 2001, when there was a significant difference in the prices of spot market energy. There are legal challenges pending which could affect the accounting of our transactions in 2001 and 2002. As of December 31, 2005, the estimated amount of calculation differences is R$610 million, which we have not recognized as a liability, based on the opinion of our legal counsel. For more information, see Note 20(b) to our Consolidated Financial Statements and “Item 8–Financial Information–Legal Proceedings.”

     Provision for Contingencies

     We and our subsidiaries are party to certain legal proceedings in Brazil arising in the normal course of business regarding tax, labor, civil and other issues.

     We account for contingencies in accordance with Brazilian GAAP, which are similar to SFAS No. 5, “Accounting for Contingencies.” Such accruals are estimated based on the determination that it is probable that a future event will confirm that an asset has been impaired or a liability has been incurred at the date of the financial statements, and the amount of loss can be reasonably estimated. By their nature, contingencies will only be resolved when a future event or events occur or fail to occur; typically such events will occur a number of years in the future. The evaluation of these contingencies is performed by our internal and external legal counsel. Accounting for contingencies requires significant judgment by management concerning the estimated probabilities and ranges of exposure to potential liability. Management’s assessment of our exposure to contingencies could change as new developments occur or more information becomes available. The outcome of the contingencies could vary significantly and could materially impact our consolidated results of operations, cash flows and financial position.

     Valuation of Derivative Instruments

     We have used swap instruments to manage risks from changes in foreign exchange and interest rates. We record these instruments at their estimated fair market value based on market quotations for similar instruments and assumptions as to future foreign exchange and interest rates. During the periods presented, we did not designate any derivative financial instruments as hedges and the fair value adjustments to our derivatives were thus recorded in our net income. We recorded losses from cross-currency interest rate swap contracts, in the amount of R$42.0 million in 2005, R$90.9 million in 2004 and R$33.7 million in 2003.

     Employee Retirement Benefits

     We sponsor a defined-benefit pension plan and defined-contribution pension plan covering substantially all of our employees. We have also established retirement health care plans. We calculate our funding obligations based on calculations performed by independent actuaries using assumptions that we provide about interest rates, investment returns, rates of inflation, mortality rates and future employment levels. These assumptions directly affect our liability for accrued pensions costs and the amounts we record as pension costs.

     Deferred Taxes

     We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using prevailing rates. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. If we are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to establish a valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.

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Operating Segments

     Our reportable segments correspond to Copel S.A. (Holding) and each of our wholly owned subsidiaries, namely, Copel Geração S.A., which is engaged in electricity generation activities (“Copel Geração”), Copel Transmissão S.A., which is engaged in electricity transmission activities (“Copel Transmissão”) and Copel Distribuição S.A., which is engaged in electricity distribution activities (“Copel Distribuição”). Our other operating activities are not significant. For more information, see Note 30 to our audited Consolidated Financial Statements.

     Our largest operating segment is distribution. Revenues from our external distribution business represented 77.9%, 87.3% and 89.9% of our total net operating revenues in 2005, 2004 and 2003, respectively. Revenues from our external transmission business represented 2.0%, 2.8% and 2.6% of our total net operating revenues in 2005, 2004 and 2003, respectively. Revenues from our external generation business represented 16.3%, 6.0% and 3.4% of our total operating revenues in 2005, 2004 and 2003, respectively. Copel Geração derives some of its revenues from sales to other segments of the Company, and during the period from 2003 - 2005, the vast majority of the energy generated by Copel Geração was sold to Copel Distribuição. Since January 2006, all of the energy generated by Copel Geração is either being sold directly to the Pool or to Free Customers. We expect our generation business will continue to grow, primarily as a result of our increased sales to Free Customers, energy sales in the Pool and increased production as our new generation projects, particularly Santa Clara and Fundão, come on line through 2007. For more information, see “Item 4. Information on the Company – Generation and Purchases of Energy – Expansion of Generation Capacity.”

     The profitability of our segments differs. Although our distribution segment is the largest contributor to our net operating revenues, it has the lowest operating margin of our segments, because its profit margins are limited by tariff regulation and are subject to our discounted tariff policies.

Analysis of Electricity Sales and Cost of Electricity Purchased

     We bill for the electricity we sell and pay for the electricity we purchase on the basis of an “energy charge” and, in the case of our Group A Customers (industrial customers that receive energy at higher voltages), a “capacity charge”. The energy charge, expressed in reais per MWh, is based on the amount of electricity actually consumed. The capacity charge, expressed in reais per kW, is based on the higher of (1) contracted firm capacity and (2) power capacity actually used.

     The following table sets forth the volume and average rate components of electricity sales and purchases for the years 2003 to 2005.

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    Year ended December 31, 
   
    2005    2004    2003 
       
Electricity Sales:             
Sales to Final Customers:             
 Average price (R$/MWh):(1)            
     Industrial customers    215.91    177.67    136.32 
     Residential customers    399.12    369.70    311.61 
     Commercial customers    338.23    301.59    253.06 
     Rural and other customers(2)   214.31    192.69    162.54 
     Public service customers    216.61    189.47    156.59 
     All customers    282.19    245.81    198.94 
 Volume (GWh):             
     Industrial customers(5)   7,639    8,197    8,598 
     Residential customers    4,653    4,467    4,382 
     Commercial customers    3,231    3,024    2,864 
     Rural and other customers(2)   2,608    2,497    2,396 
     Public service customers    565    551    542 
     All customers(5)   18,696    18,736    18,782 
 Total revenues (millions of R$)   5,276    4,605    3,736 
Sales to distributors and others:             
     Average price (R$/MWh)(1)   67.52    50.75    36.36 
     Volume (GWh)   14,069    8,789    9,182 
     Total revenues (millions of R$)   950    446    334 
Electricity Purchases:             
Purchases from Itaipu:             
     Average cost (R$/MWh)(3)   99.08    95.25    69.74 
     Volume (GWh)   4,682    4,609    5,678 
     Percentage of total Itaipu production purchased    6.5    6.5    6.4 
     Total cost (millions of R$)(4)   464    439    396 
Purchases from others:             
   Average cost (R$/MWh)(3)   68.76    90.44    95.25 
   Volume (GWh)   14,136    5,805    7,286 
   Total cost (millions of R$)(4)   972    525    694 
___________________________
(1)     
Rates for electricity sales and purchases are stated in reais and have been computed by dividing (1) the corresponding sales or purchases without deduction of ICMS Tax by (2) MWh of electricity sold or purchased.
(2)     
Includes rural customers, street lighting, government agencies, Free Consumers and our own consumption.
(3)     
Our purchases of electricity generated by Itaipu are stated in reais and paid for on the basis of a capacity charge expressed in U.S. dollars per kW plus a “wheeling” (or transportation) charge expressed in reais per kWh.
(4)     
See “Item 4. Information on the Company—Business—Generation and Purchases of Energy” for an explanation of our expenses relating to electricity purchases.
(5)     
Includes Free Consumers from outside Paraná.

Restatement of Previously Issued Financial Statements

     According to Brazilian law, we are required to devote an aggregate amount equal to 1% of our net revenues to research and development programs (R&D) and energy efficiency programs (EEP). In November 2005, ANEEL issued a resolution clarifying how energy companies must account for this obligation. The resolution requires us to establish a provision for the amounts required to be spent and to recognize interest on the outstanding balance using the SELIC interest rate. As a result, we have restated our financial statements for 2004 and 2003 to recognize a provision each year for the amount required to

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be devoted to R&D and EEP that was not actually expended, and to recognize interest on that provision. Previously, we recognized R&D and EEP expenditures only when we actually made such expenditures. The restatement also reflects other adjustments related to the timing of recognition of expenses for pension plan and capitalized interest in 2003 and 2004, and for indexation of the deferred regulatory assets in 2003, which were not considered material prior to the restatement to recognize R&D and EEP provisions.

     The following table shows the components of the restatement and the effects of the restatement on our net income and earnings per thousand shares for 2004 and 2003 and on our shareholders’ equity as of December 31, 2004 and 2003, each under Brazilian GAAP.

    Shareholders’ equity    Net income for the year ended 
(Amounts in millions of reais)   as of December 31, 2004    December 31, 2004 
     
                         
    Before    Tax    Net of    Before    Tax    Net of 
Description    tax effects    effects    tax effects    tax effects    effects    tax effects 
             
Provision for R&D and EEP programs    (43.2)   14.7    (28.5)   (27.8)   9.4    (18.3)
Other          20.9    (7.1)   13.8 
             
    (43.2)   14.7    (28.5)   (6.8)   2.3    (4.5)
             
         
    Shareholders’ equity    Net income for the year ended 
    as of December 31, 2003    December 31, 2003 
     
                         
    Before    Tax    Net of    Before    Tax    Net of 
Description    tax effects    effects    tax effects    tax effects    effects    tax effects 
             
Provision for R&D and EEP programs    (15.4)   5.2    (10.2)   (15.5)   5.2    (10.2)
Other    (21.0)   7.2    (13.8)   (3.8)   1.3    (2.5)
             
    (36.4)   12.4    (24.0)   (19.3)   6.5    (12.7)
             

    As previously         
(Amounts in millions of reais, except per thousand shares)   reported    Adjustment    As restated 
       
 
Shareholders’ equity as of December 31, 2004    5,136.3    (28.5)   5,107.8 
Net income for the year ended December 31, 2004    374.1    (4.5)   369.6 
Net income per thousand shares at year end    1.37    (0.02)   1.35 
 
Shareholders’ equity as of December 31, 2003    4,858.2    (24.0)   4,834.2 
Net income for the year ended December 31, 2003    171.1    (12.7)   158.4 
Net income per thousand shares at year end    0.63    (0.05)   0.58 

     In addition to the restatement under Brazilian GAAP described above, we have also restated our previously published financial statements under U.S. GAAP for 2004 and 2003 to correct our failure to write off portions of our deferred regulatory assets related to PIS and COFINS.

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     The following table shows the effects of the restatements on our net income and earnings per thousand shares for 2004 and 2003 and on our shareholders’ equity as of December 31, 2004 and 2003, each under U.S. GAAP:

    Shareholders’ equity    Net income for the year ended 
    as of December 31, 2004    December 31, 2004 
                 
    Before    Tax    Net of    Before    Tax    Net of 
Description    tax effects    effects    tax effects    tax effects    effects    tax effects 
             
 
Restatements under Brazilian GAAP(1)   (43.2)   14.7    (28.5)   (6.8)   2.3    (4.5)
Regulatory assets – PIS and Cofins    (80.4)   27.3    (53.1)   (80.4)   27.3    (53.1)
Other          (8.7)   3.0    (5.7)
             
 
    (123.6)   42.0    (81.6)   (95.9)   32.6    (63.3)
             

                Net income for the year ended 
                December 31, 2003 
               
 
                Before    Tax    Net of 
Description                tax effects    effects    tax effects 
       
 
Restatements under Brazilian GAAP(1)               (19.3)   6.5    (12.7)
Other                8.7    (2.9)   5.7 
                   
 
                (10.6)   3.6    (7.0)
                   
(1) See Note 2(b) to our Consolidated Financial Statements.                         

    As previously         
    reported    Adjustment    As restated 
       
    (in millions of reais)
 
Shareholders’ equity as of December 31, 2004    5,612.1    (82.6)   5,530.5 
Net income for the year ended December 31, 2004    187.4    (63.3)   124.1 
Earnings per thousand shares             
       Common shares - basic and diluted    0.65    (0.22)   0.43 
       Preferred shares Class A – basic and diluted    1.27      1.27 
       Preferred shares Class B – basic and diluted    0.72    (0.24)   0.48 
 
Net income for the year ended December 31, 2003    (65.0)   (7.0)   (72.0)
Earnings per thousand shares             
       Common shares - basic and diluted    (0.45)   (0.05)   (0.50)
       Preferred shares Class A – basic and diluted    1.06     1.06
       Preferred shares Class B – basic and diluted       

Results of Operations for the Years Ended December 31, 2005 and December 31, 2004

     The following table summarizes our results of operations for the years ended December 31, 2003, 2004 and 2005:

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    Year ended December 31, 
     
    2005    2004(1)   2003(1)
       
    (in millions of reais)
Net operating revenues:             
Energy sales to final customers    R$ 5,275.9    R$ 4,605.5    R$ 3,736.5 
Electricity sales to distributors    949.9    445.9    334.2 
Use of main transmission grid    268.0    209.8    112.1 
Other revenues    322.3    283.2    237.4 
Value-added taxes on sales and charges    (1,962.6)   (1,618.6)   (1,325.9)
       
    4,853.5    3,925.8    3,094.3 
       
Operating expenses:             
Electricity purchased for resale    (1,436.3)   (963.9)   (1,090.4)
Use of main transmission grid    (530.8)   (311.2)   (237.6)
Other operating expenses    (2,066.8)   (2,039.6)   (1,660.8)
       
    (4,033.9)   (3,314.7)   (2,988.8)
       
 
Operating income    819.6    611.1    105.5 
 
Equity in results of investees    9.0    1.6    16.7 
Financial income (expenses), net    (101.0)   (19.4)   159.9 
Non-operating expenses, net    (10.6)   (6.4)   (20.5)
       
Income before income taxes and minority interest    717.0    586.9    261.6 
Income taxes    (198.2)   (196.1)   (88.8)
Net income before minority interest    518.8    390.8    172.8 
Minority interest    (16.4)   (21.2)   (14.4)
       
Net income    R$ 502.4    R$ 369.6    R$ 158.4 
       

(1) Restated. See Note 2(b) to our Consolidated Financial Statements.

Net Operating Revenues

     Our net operating revenues increased by 23.6% in 2005. Of the R$927.7 million increase in net operating revenues, R$670.4 million was due to sales to Final Customers, which increased mainly due to higher prices, and R$504.0 million was due to sales to distributors. Sales to distributors increased because, as a result of the implementation of the New Model Industry Law, our generation segment sold energy at auction to unaffiliated customers that, in past years, it would have sold to our distribution segment. There was a corresponding increase in our operating expenses, under “Energy purchased for resale,” because our distribution segment purchased more energy at auction from unaffiliated customers. These increases in our operating revenues were partially offset by an R$344.0 million increase in value-added taxes on sales and charges.

     Electricity Sales to Final Customers. Our revenues from electricity sales to Final Customers increased by 14.6% in 2005, due to a gradual increase in our effective tariffs, as we reduced the discounts we grant to customers who pay their utility bills on time. The average tariff increase for Final Customers was 14.8% as compared to the 2004. Revenues increased from all our main categories of customers in 2005.

     The rate of increase of the average price of energy was greatest for our industrial customers (21.5%) and smallest for our residential customers (8.0%). There was a variation in the average price increases among our different classes of customers because each class of customer receives their energy at a different voltage level and ANEEL’s tariff increases of June 2003, June 2004 and June 2005 varied depending upon voltage level.

     The increase in our average prices for electricity sold to Final Customers in 2005 was primarily due to the rate increases we received from ANEEL, 14.43% in June 2004 and 7.8% in June 2005.

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However, as discussed above, the actual tariff increases that we applied to our customers were less than the increases that were granted by ANEEL because we grant discounts from ANEEL’s approved tariffs to those of our customers who pay their bills on time in order to minimize the impact of ANEEL’s rate increases on our customers, to prevent a decrease in energy consumption, to motivate our customers to pay their bills on time and to attract new customers.

     The decrease in the volume of energy sold to Final Customers in 2005 primarily reflected a 6.8% decrease in the volume sold to industrial customers, because (i) some of our industrial customers became Free Consumers and decided to purchase their energy from one of our competitors and (ii) in 2004, the agreements pursuant to which we supplied electricity to Carbocloro and Volkswagen (Free Consumers located outside the State of Paraná) were terminated. On the other hand, the volume of energy we sold to commercial, rural and residential customers increased by 6.8%, 5.2% and 4.2%, respectively in 2005.

     The increase in the volume of electricity sold to our commercial customers is largely a result of economic growth during this period, as consumer credit became more widely available and the actual number of commercial customers increased. In December 2005, we invoiced 273,124 commercial customers, 2.5% more than the 266,491 we invoiced in December 2004.

     The 5.2% rate of growth among our rural consumers was mainly due to an increase in agricultural income from good harvests during the 2002-2004 period, which enabled farmers to invest in electric machinery.

     Residential consumption grew as a result of a 2.6% increase in the number of residential customers and a 1.5% increase in the rate of consumption per residential customer, compared to 2004. Increased consumption has resulted primarily from the increased sales of electronics, particularly DVD players, TV sets, and personal computers, as a result of individual consumers’ greater access to credit.

     Electricity Sales to Distributors. Electricity sales to distributors include sales under bilateral agreements (41.0% of the total supply revenues in 2005), sales through CCEAR auctions (45.8%), sales to CCEE and the Interconnected Power System (9.0%), and sales under Initial Supply Contracts (4.2%) . Our revenues from electricity sales to distributors increased by 113.0% in 2005, primarily due to the revenues we received from sales to the CCEAR auction in December 2005 (R$435.6 million). Sales to the CCEE and the Interconnected Power System were R$85.1 million in 2005, a 120.3% increase from 2004, as a result of the higher volume of electricity sold and the higher prices settled by CCEE in the spot market.

     Use of Main Transmission Grid. Revenues from third-party use of our Main Transmission Grid increased by 27.7% in 2005 as a consequence of the tariff increases enacted by ANEEL in June 2004 and June 2005, the incorporation of new transmission lines which increased the size of our transmission grid and an increase of the TUSD distribution tariff.

     Other Revenues. This category includes revenues from the sale of natural gas, the use of our fiber optic network, our energy consulting services, rental income and the fuel cost subsidy we receive for our thermal plant. These revenues increased by 13.8% in 2005, largely as a result of the increased revenues we received from the use of our fiber optic network and the sale of natural gas.

     Value-added Taxes and other Charges. In arriving at net operating revenues, we deduct value-added taxes imposed by the State of Paraná, generally assessed at 27.0%, and several other charges we pay on amounts billed to Final Customers. These charges generally increase with the amount of our gross revenues on sales to Final Customers. The value-added taxes and the other charges we pay were 28.8% of our gross revenue in 2005 and 29.2% of our gross revenues in 2004.

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Operating Expenses

     Total operating expenses increased by 21.7% in 2005. The most important factors in the increase were as follows:

Energy Purchased for Resale. Our expenses related to the energy we purchase for resale increased by R$472.4 million, or 49.0% in 2005. This increase was mainly due to the continued reduction in the volume of electricity sold pursuant to the initial contract between Copel Geração and Copel Distribuição and the consequent purchase of energy by Copel Distribuição in the first energy auction (992MW – R$430.6 million). Prior to the enactment of the New Industry Model Law, when electricity was sold by Copel Geração to Copel Distribuição, the cost of such energy was eliminated from our financial results in the consolidation of Copel Geração and Copel Distribuição by us.

Use of Main Transmission Grid. Expenses for use of the Main Transmission Grid increased by R$219.6 million, or 70.6%, in 2005. This increase was mainly due to the rate increases enacted by ANEEL in June 2004 and June 2005 and the amortization of R$130.3 million in deferred regulatory costs.

Personnel Expenses. Our personnel expenses increased by R$91.7 million, or 19.3%, in 2005. This increase was mainly due to the (i) wage increases granted under the collective bargaining agreement in March 2004 (5.5%), October 2004 (6.5%) and October 2005 (5.9%); (ii) an increase in the number of our employees; (iii) our increased contribution to our employees’ profit sharing plan; and (iv) an agreement by us to pay an aggregate of R$22.2 million a one-time payment to certain of our employees in connection with hazardous working conditions. If we were to disregard this last expense, personnel expenses would have increased by 14.6% .

Regulatory Charges. Regulatory charges increased by R$71.2 million, or 19.8%, in 2005. This increase was primarily due to an increase in charges for the CDE Account.

     These increases were partially offset by a R$136.2 million reduction in our expenses for purchases of natural gas, a 48.9% reduction in such expenses as compared to 2004. These expenses decreased in 2005 as a result of the cancellation of the contracts with Compagas and Araucária.

Equity in Results of Investees

     Our proportionate share of the results of equity method affiliates resulted in income of R$9.0 million and R$1.6 million in 2005 and 2004, respectively. The increase in our income in 2005 was primarily a result of the decrease of equity loss from our investee Sercomtel, from R$10.8 million in 2004 to R$0.3 million in 2005.

Financial Income (Expenses), Net

     We recognized R$101.0 million of net financial expenses in 2005, as compared with net financial expenses of R$19.4 million in 2004.

     Our financial expenses increased by 11.3% in 2005, mainly as a result of increased interest, monetary and financial charges on gas purchase agreements (from R$81.5 million in 2004 to R$190.9 million in 2005). These increases were partially offset by the appreciation of the real against the U.S. dollar. We recognized R$53.1 million of net monetary and exchange gains in 2005, as compared with R$7.9 million of net monetary and exchange losses in 2004. This increase was a result of the appreciation

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of the real during this period. Other factor, which contributed to the increase in our financial expenses, were an increase of R$46.9 million in interest and charges in 2005.

     Financial revenues decreased 7.3% in 2005, as compared to 2004, primarily due to a reduction of the IGP-DI index used to adjust the amount to be reimbursed by the State of Paraná to us under the CRC Account. The IGP-DI index decreased from 12.1% for 2004 to 1.2% for 2005.

Income Taxes

     In 2005, we recognized income tax expenses of R$198.2 million, reflecting an effective tax rate of 27.6% on our pretax income. This compared to an income tax expense of R$196.1 million in 2004, reflecting an effective tax rate of 33.4% on our pretax income. The decrease in our effective tax rate was primarily due to the tax benefit we received as a result of the deductibility of our distribution of interest on equity from R$32.7 million in 2004 to R$41.8 million in 2005 and the decrease of taxes on our non-deductible expenses, from R$22.5 million in 2004 to R$4.3 million in 2005.

Results of Operations for the Years Ended December 31, 2004 and December 31, 2003

Net Operating Revenues

     Our net operating revenues increased by 26.9% in 2004. Of the R$831.5 million increase in net operating revenues, R$869.0 million was due to energy sales to Final Customers, which increased mainly due to higher prices, and R$111.7 million was due to electricity sales to distributors, which increased mainly due to growth in volumes under bilateral contracts. These increases in our operating revenues were partially offset by a R$292.7 million increase in value-added taxes on sales and charges.

     Electricity Sales to Final Customers. Our revenues from electricity sales to Final Customers increased by 23.3% in 2004, due to an increase of 23.5% in average energy prices. Revenues increased from all our main categories of customers in 2004.

     There were variations in the rate of increase of the average price of energy among our customers, with our industrial customers experiencing the greatest increase in their average energy prices (30.3%) and the category of customers that we designate “rural and other customers” receiving the smallest increase (18.5%) . There was a variation in the average price increases among our different classes of customers because each class of customer receives their energy at a different voltage level and ANEEL’s tariff increases of June 2003 and June 2004 varied depending upon voltage level.

     The increase in our average prices for electricity sold to Final Customers in 2004 was primarily due to the rate increases we received from ANEEL, 25.27% in June 2003 and 14.43% in June 2004. However, as discussed above, the actual tariffs we applied to our customers were less than the increases granted by ANEEL. We granted an average discount of 20.17% on June 24, 2003, 8.2% on January 1, 2004, 12.5% on June 24, 2004 and 8.2% on February 1, 2005 from ANEEL’s tariff rates in order to minimize the impact of ANEEL’s rate increases on our customers, to prevent a decrease in energy consumption, to incentivize our customers to pay their bills on time and to attract new customers.

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     The decrease in the volume of energy sold to Final Customers in 2004 primarily reflected a 4.7% decrease in the volume sold to industrial customers, because some of our industrial customers became Free Consumers and decided to purchase their energy from one of our competitors. On the other hand, the volume of energy we sold to commercial customers and residential customers increased by 5.6% and 1.9%, respectively in 2004. The increase in volume sold to our commercial customers is largely a result of an increase in the overall number of our commercial customers, as a result of the development of the commercial sector. In December 2004, 266,491 new commercial customers were invoiced, 3.5% higher than the 257,408 invoiced in December 2003.

     Electricity Sales to Distributors. Electricity sales to distributors include sales under bilateral agreements (83.1% of the total supply revenues in 2004), sales to the MAE and the Interconnected Power System (8.7%), and sales under Initial Supply Contracts (8.2%) . Our revenues from electricity sales to distributors increased by 33.4% in 2004, primarily because our revenues from sales under bilateral agreements increased by 70.4%, from R$217.6 million in 2003 to R$370.7 million in 2004, primarily due to higher volumes in 2004. Sales to the MAE and the Interconnected Power System were R$38.6 million in 2004, a 56.5% decrease from 2003 as a result of the renegotiation of the Cien Agreements.

     Use of Main Transmission Grid. Revenues from third-party use of our Main Transmission Grid increased by 87.1% in 2004 as a consequence of the tariff increases enacted by ANEEL in June 2003 and June 2004, the incorporation of new transmission lines which increased the size of our transmission grid and an increase of the TUSD distribution tariff.

     Other Revenues. This category includes revenues from the sale of natural gas, which increased by R$20.9 million in 2004. This category also encompasses revenues from the use of our fiber optic network revenues, from our provision of energy consulting services, rental income and the fuel cost subsidy we receive for our thermal plant. These revenues increased by 19.3% in 2004, largely as a result of increased rental income.

     Value-added Taxes and other Charges. In arriving at net operating revenues, we deduct value-added taxes imposed by the State of Paraná, generally assessed at 27.0%, and several other charges we pay on amounts billed to Final Customers. These charges generally increase with the amount of our gross revenues on sales to Final Customers. As a result, the value-added taxes and other charge we pay were 29.2% of our gross revenues in 2004 and 30.0% of our gross revenue in 2003. In 2004, we deducted R$1.62 billion for value-added taxes on sales and charges, a 22.0% increase over 2003.

Operating Expenses

     Total operating expenses increased by 10.9% in 2004. The most important factors in the increase were as follows:

     Regulatory Charges. Regulatory charges increased by R$139.8 million, or 63.9%, in 2004. This increase was primarily due to an increase in charges for the CDE Account, which we paid for the full year in 2004 and only six months in 2003, and the CCC Account.

     Use of Main Transmission Grid. Expenses for use of the Main Transmission Grid increased by R$73.6 million, or 31.0%, in 2004. This increase was mainly due to the rate increases enacted by ANEEL in June 2003 and June 2004.

     Personnel Expenses. Our personnel expenses increased by R$72.3 million, or 18.0%, in 2004. This increase was mainly due to the wage increases granted under the collective bargaining agreement in October 2003 (10.0%), March 2004 (5.5%) and October 2004 (6.5%) .

     Materials and Supplies. Our costs for materials and supplies increased by R$48.5 million, or 16.3%, in 2004. This increase was mainly due to increased prices for the gas we purchase for resale and electric energy generation.

     Other Expenses. Other expenses increased by R$110.0 million, or 73.8%, in 2004. This increase was primarily due to an increase in amounts of ICMS that we owe to the State Government. From

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September 2002 until May 2004, the State Government of Paraná allowed us to offset the amounts of ICMS owed by us against the amounts we paid in ICMS related to our permanent assets. In May 2004, the State Government discontinued this credit and as a result, the amounts we owe for ICMS increased significantly in 2004.

     These increases were partially offset by a R$126.5 million, or 11.6%, reduction in our expenses for electricity purchases for resale. These expenses decreased primarily because in 2003, we recognized costs attributable to earlier years upon completing the renegotiation of the Cien Agreements.

Equity in Results of Investees

     Our proportionate share of the results of equity method affiliates resulted in a net gain of R$1.6 million and R$16.7 million in 2004 and 2003, respectively. The lower net gain in 2004 was primarily a result of our R$10.8 million equity loss from our investee Sercomtel.

Financial Income (Expense), Net

     We recognized R$19.4 million of net financial expenses in 2004, as compared with net financial income of R$159.9 million in 2003. Our financial expenses increased by 169.4% in 2004, mainly due to the impact of a lower rate of appreciation of the real against the U.S. Dollar. We recognized R$7.9 million of net monetary and exchange losses in 2004, as compared with R$119.6 million of net monetary and exchange gain in 2003. Other factors which contributed to the increase in our financial expenses were the increase in interest, monetary and financial charges of R$88.3 million on gas purchase agreements and recognition of losses on swap contracts in the amount of R$90.9 million in 2004, as compared with R$33.7 million in 2003. The increases in the financial expenses offset the increase in financial income in the amount of R$90.1 million in 2004, primarily by the higher financial income from interest and commissions in the amount of 94.6 million, as a result of a higher variation of IGP-DI, the index used to restate the CRC accounts receivable.

Income Taxes

     In 2004, we recognized income tax expenses of R$196.1 million, reflecting an effective tax rate of 33.4% on our pretax income. This compared to an income tax expense of R$88.7 million in 2003, reflecting an effective tax rate of 33.9% on our pretax income. The increase in our income tax expenses was primarily due to our higher taxable income in 2004.

Liquidity and Capital Resources

     Our principal capital requirements historically have been to finance the expansion and upgrading of our electricity distribution and transmission system and to finance the expansion of our generation business. Capital expenditures were R$671.6 million in 2005, R$453.6 million in 2004, and R$361.8 million in 2003. The following table sets forth a breakdown of our capital expenditures for the periods indicated.

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    Year ended December 31, 
     
    2005    2004    2003 
       
    (millions of reais)
Generation    20.9    18.3    11.3 
Transmission    148.9    88.6    70.9 
Distribution    241.1    208.8    182.9 
Telecom    23.7    43.3    44.9 
Interest in equity investees    2.7    22.5    42.1 
Compagas    9.2    19.3    9.7 
ELEJOR    225.1    52.8   
       
          Total    671.6    453.6    361.8 
       

     Of our total budgeted capital expenditures of R$644.1 million for 2006, R$87.6 million is for generation (including the investment in ELEJOR), R$176.8 million is for transmission, R$317.4 million is for distribution, R$34.9 million is for our telecommunication business, R$2.4 million is for investment in our affiliates and R$25.0 million is for piped gas distribution. In addition, we had a non-budgeted expense of US$190 million in connection with our acquisition, on May 30, 2005, of El Paso’s 60% stake in Araucária.

     Historically, we have financed our liquidity and capital requirements primarily with cash provided by our operations and through external financing. Our principal source of funds in 2005 was our operating activities. In 2005, net cash provided by operating activities was R$1,081.4 million, an increase from R$920.5 million in 2004 primarily due to an increase of R$132.8 million in net income. We expect our operating cash flow to be sufficient to finance our capital expenditures in 2006.

     Our ability to generate cash sufficient to meet our planned expenditures is dependent upon a variety of factors, including our ability to maintain adequate tariff levels, to obtain regulatory and environmental authorizations, to access domestic and international capital markets, and a variety of operating and other contingencies. In addition, we may seek to invest in controlling or non-controlling interests in other existing electric utilities, in communications services or in other areas, each of which may require additional domestic and international financing.

     Like other state-owned companies, we are subject to restrictions under resolutions of the National Monetary Council, Conselho Monetário Nacional (“CMN”) on our ability to obtain financing from domestic and international sources. These restrictions could limit our ability to access external sources of funding if our internally generated funds are insufficient to meet our budgeted capital expenditures.

     Our total debt outstanding at December 31, 2005 was R$2,044.1 million. Approximately R$121.5 million of the total debt outstanding at December 31, 2005 was denominated in U.S. dollars, R$20.0 million was denominated in Japanese yen and R$122.3 million was indexed to a basket of foreign currencies.

     At December 31, 2005, we had R$1,342.2 million of outstanding convertible and non-convertible debentures, of which R$696.2 million will mature in 2007. As of December 31, 2005, R$620.1 million of our outstanding debentures are indexed to the Interbank Deposit Certificate (“CDI”) rate plus a spread of 1.5% per year and the remaining amount is indexed to the IGP-M inflation index plus a spread of 13.25% per year.

     In February 2005, our subsidiary ELEJOR issued convertible debentures, comprised of two series, in an aggregate amount of R$255.6 million. These convertible debentures are indexed to TJLP, plus a spread of 4% per year. The first series of these debentures (R$660.0 million) will begin amortizing on May 2009 and will mature in February 2015, while the second series (R$340.0 million) will begin amortizing in May 2010 and will mature in February 2016.

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     In April 2005, we issued our third series of debentures in the amount of R$400.0 million. These debentures are indexed at 115.0% of the average daily rate of the CDI and will begin amortizing in February 2007. The proceeds from this issuance were used to redeem the U.S.$150 million Eurobonds we issued in 1997. As of December 31, 2005, the total outstanding balance under this series of our debentures was R$435.3 million.

     We have R$398.6 million in debt to Eletrobrás under government programs to finance expansion of the power industry. We also owe R$122.3 million to the IDB under a loan agreement to finance the development of the Segredo hydroelectric facility and the Rio Jordão deviation project. This loan is guaranteed by the Brazilian government and secured by liens on the financed assets.

     We are currently planning to issue approximately R$600 million in debentures. We plan to use the proceeds of this issuance to repay existing debt.

     We are required to comply with certain covenants measured in accordance with Brazilian GAAP: (i) consolidated EBITDA/consolidated financial expenses for the twelve month period ending on the last day of the fiscal quarters ended on March and September should be, at least, 1.8 through June 30, 2006 and 2.0 as from June 30, 2006; (ii) consolidated debt/consolidated EBITDA no greater than 4.0; and (iii) consolidated debt/(consolidated debt plus shareholders’ equity) no greater than 0.42.

     We have several legal contingencies and proceedings that could have a material adverse impact on our liquidity. In addition, we are contesting a determination by ANEEL that would require us to pay additional amounts for energy we purchased for resale in the MAE during the electricity rationing period in 2001 and the first quarter of 2002. We are also involved in several lawsuits including challenges of the legality of certain federal taxes, which have been assessed against us, claims by industrial customers that certain increases in electricity tariffs from March through November 1986 were illegal and several labor related claims. These contingencies are described in “Item 8. Financial Information – Legal Proceedings”. If any of these claims are decided against us either individually or in the aggregate, they could have a material adverse affect on our liquidity and our financial condition.

Contractual Obligations

     In the table below, we set forth certain of our contractual obligations as of December 31, 2005, and the period in which such contractual obligations come due. The table below does not include pension liabilities or estimated interest payments on our loans and financing and debentures.

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    Payments due by period 
     
        Less than            More than 
    Total    1 year    1-3 years    3-5 years    5 years 
           
    (in millions of reais)
 
Contractual obligations:                     
Loans and financing    701.9    99.3    163.0    147.9    291.7 
Debentures    1,342.2    115.7    829.6    196.8    200.1 
Suppliers    1,339.0    1,162.4    176.6     
Purchase obligations(1)   16,003.0    1,431.1    3,379.1    3,731.6    7,461.2 
Concession payments - ELEJOR    945.6    7.9    63.0    63.0    811.7 
Redeemable shares at ELEJOR(2)   65.1      2.3    18.2    44.6 
Pension plan contributions(3)   203.5    203.5       
           
          Total    20,600.3    3,019.9    4,613.6    4,157.5    8,809.3 
           

(1)      Consists of electric power purchase commitments pursuant to binding obligations which include all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions and delivery dates. Based upon the applicable purchase price at December 31, 2005.
 
(2)      Consists of redeemable shares of Eletrobrás at ELEJOR. Interest and monetary indexation of R$33.4 million is recorded in loans and financing.
(3)      Consists of pension plan contributions estimated for the following year.

     We are also subject to contingencies with respect to tax, labor and civil claims and have provisioned R$424.3 million for accrued liability for legal proceedings related to these claims as of December 31, 2005. For more information, see “Item 8. Financial Information-Legal Proceedings” and Note 20 to our Consolidated Financial Statements.

     Off-balance Sheet Arrangements

     We are not party to any off-balance sheet arrangements of the kind we are required to disclose in Form 20-F.

U.S. GAAP Reconciliation

     We prepare our consolidated financial statements in accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP. The differences are described in Note 33 to our Consolidated Financial Statements. Our net income (loss) in accordance with Brazilian GAAP was R$502.4 million in 2005, R$369.6 million in 2004 and R$158.4 million in 2003. Under U.S. GAAP, we would have reported net income (loss) of R$556.5 million in 2005, R$124.1 million in 2004 and R$(72.0) million in 2003. Our shareholders’ equity in accordance with Brazilian GAAP was R$5,487.2 million at December 31, 2005 and R$5,107.8 million at December 31, 2004. Under U.S. GAAP, we would have reported shareholders’ equity of R$5,964.0 million at December 31, 2005 and R$5,530.5 million at December 31, 2004.

     The differences between Brazilian GAAP and U.S. GAAP that have the most significant effects on our net income and shareholders’ equity are the treatment of capitalized interest, the rules regarding indexation of property, plant and equipment, treatment of special obligations, treatment of deferred regulatory assets and the treatment of future pension and health care benefits. For a discussion of the principal differences between Brazilian GAAP and U.S. GAAP as they relate to our Consolidated Financial Statements and a reconciliation of net income and shareholders’ equity, see Note 33 to our Consolidated Financial Statements.

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Item 6. Directors, Senior Management and Employees

We are managed by:

  • a Board of Directors, which may consist of seven to nine members and is currently composed of nine members; and
  • a Board of Executive Officers, which consists of six members.

Board of Directors

     The Board of Directors ordinarily meets once every three months and is responsible, among other things, for:

  • establishing our corporate strategy;
  • defining the general orientation of our business;
  • defining the responsibilities of members or our Board of Executive Officers, and
  • choosing and replacing members of our Board of Executive Officers,.

     Decisions of the Board of Directors require a quorum of a majority of the directors and are taken by majority vote. The members of the Board of Directors are elected to serve for two-year terms and may be reelected. Among the current nine members of the Board of Directors:

  • eight are elected by the holders of the Common Shares; and
  • one is elected by our employees.

     The member of our Board of Directors who is elected by the non-controlling shareholders has the right to veto (provided it is duly justified) the choice made by the majority of the members of our Board of Directors of the independent accountant.

     The State of Paraná and BNDES Participações S.A. – BNDESPAR (“BNDESPAR”), with the intervention of the Company and Paraná Investimentos, S.A., are parties to a shareholders’ agreement dated December 22, 1998, as amended on March 29, 2001 (the “Shareholders’ Agreement”). BNDESPAR is a wholly owned subsidiary of BNDES. Under the Shareholders’ Agreement, the parties agree to exercise their voting rights so that:

  • the State of Paraná appoints six members to the Board of Directors; and
  • BNDESPAR appoints two members to the Board of Directors.

     In addition, Brazilian law states that each minority shareholder that holds either (i) preferred shares representing at least 10.0% of our total share capital, or (ii) Common Shares representing at least 15.0% of our voting capital, has the right to appoint one member and an alternate to our Board of Directors. If no common or preferred shareholder meets the thresholds described above, shareholders holding preferred shares or Common Shares representing at least 10.0% of our total share capital are entitled to combine their holdings to appoint one member and an alternate to our Board of Directors. Until 2005, a director appointed by the preferred shareholders as a group, or collectively with the common shareholders, is to be chosen from a list of three names drawn up by the controlling shareholder.

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     The terms of the current members of the Board of Directors expire in 2007. The current members are as follows:

Name    Position    Since 
     
João Bonifácio Cabral Júnior    Chairman    2003 
Rubens Ghilardi    Director    2005 
Acir Pepes Mezzadri    Director    2003 
Sérgio Botto de Lacerda    Director    2004 
Laurita Costa Rosa    Director    2004 
Rogério de Paula Quadros    Director    2005 
Nelson Fontes Siffert Filho    Director    2005 
Francelino Lamy de Miranda Grando    Director    2003 
Maria Aparecida Rodrigues Plaça    Director    2005 

     Following are brief biographies of the current members of our Board of Directors:

     João Cabral Bonifácio Júnior. Mr. Bonifácio is 60 years old. He received a law degree from Pontifícia Universidade Católica do Paraná. He also attended a specialization course in Public Law and a post-graduate course in International Law and International Business at the Universidade de Santa Catarina in 2001. Previously, Mr. Cabral Júnior served as the Solicitor General (Procurador Geral) of the Attorney General’s Office of the Tribunal de Contas of the State of Paraná and as the Chief Administrative Officer of Itaipu Binacional. He has been the Chief Legal Officer of Itaipu Binacional for the last nine years. Mr. Bonifácio was appointed by the State of Paraná.

     Rubens Ghilardi. Mr. Ghilardi is 66 years old. He received degrees in economics from the Economics College of Paraná and in business administration from the Economics and Business Administration College of Pontifícia Universidade Católica of Paraná. Previously, Mr. Ghilardi was the Chief Financial Officer of Itaipu Binacional and the Chief Financial Officer of Copel. He is currently our Chief Executive Officer.

     Acir Pepes Mezzadri. Mr. Mezzadri is 60 years old. He previously attended the President Kennedy Cenecista Technical Secondary School. Previously, Mr. Mezzadri served as a member of the Legislative Assembly of the State of Paraná. Mr. Mezzadri was appointed by the State of Paraná.

     Sergio Botto de Lacerda. Mr. Lacerda is 47 years old. He received a law degree from the Federal University of Paraná. He is currently the solicitor general of the State of Paraná. Mr. Lacerda was appointed by the State of Paraná.

     Laurita Costa Rosa. Ms. Rosa is 47 years old. She received a degree as a certified public accountant from the Social Studies Foundation of the State of Paraná. Previously, Ms. Rosa was the general secretary of the Commercial Registrar of the State of Paraná. Ms. Rosa was appointed by the State of Paraná.

     Rogério de Paula Quadros. Mr. Quadros is 54 years old. He received a degree in Economic Sciences from the State University of Ponta Grossa. Previously, Mr. Quadros was the President of the Financial, Budget and Audit Committee of the Municipality of Ponta Grossa. He was appointed by the State of Paraná.

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     Nelson Fontes Siffert Filho. Mr. Siffert is 45 years old. He graduated and received a master’s degree in Economics from the Federal University of Rio de Janeiro and a doctor’s degree in Economics from the University of São Paulo. Previously, Mr. Siffert was the planning manager of BNDES. He was appointed by BNDESPAR.

     Francelino Lamy de Miranda Grando. Mr. Grando is 47 years old. He received a law degree from the University of São Paulo and doctor of ecology and natural resources degree from the Federal University of São Carlos - UFCAR. Mr. Grando is currently the Secretary of Corporate Technological Politics of the Ministry of Science and Technology. Mr. Grando was appointed by BNDESPAR.

     Maria Aparecida Rodrigues Plaça. Ms. Plaça is 48 years old. She received a business degree from the State College of Education, Science and Language of Paranavaí and an MBA in Marketing from Fundação Getúlio Vargas Mercosul. She has also attended a Course on Corporate Governance at IBGC (Brazilian Institute for Corporate Governance). Ms. Plaça joined Copel in 1977 and currently works in the administrative area of the Company. She was appointed by our employees to serve as a member of our Board of Directors from 2000 to 2002 and from 2005 to 2007.

     Board of Executive Officers

     Our Board of Executive Officers meets weekly and is responsible for the daily management of the Company. Each Executive Officer also has individual responsibilities established by our by-laws.

     According to our by-laws, our Board of Executive Officers consists of six members. The Executive Officers are elected by the Board of Directors for three-year terms but may be removed by the Board of Directors at any time. Under the Shareholders’ Agreement, BNDESPAR has the right to appoint one member to the Board of Executive Officers. The terms of the current members of the Board of Executive Officers expire in December 2008. The current members are as follows:

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Name    Position    Since 
     
Rubens Ghilardi    Chief Executive Officer    2005 
         
Paulo Roberto Trompczynski    Chief Financial Officer and Investor Relations    2005 
    Officer     
         
Ronald Thadeu Ravedutti    Chief Distribution Officer    2005 
         
Raul Munhoz Neto    Chief Power Generation & Transmission and    2006 
    Telecommunications Officer     
         
Luiz Antonio Rossafa    Chief Corporate Management Officer    2005 
         
Assis Corrêa    Chief Legal Officer    2003 

     Following are brief biographies of the current members of our Board of Executive Officers.

     Rubens Ghilardi. Mr. Ghilardi is 66 years old. He received degrees in economics from the Economics College of Paraná and in business administration from the Economics and Business Administration College of Pontifícia Universidade Católica of Paraná. Previously, Mr. Ghilardi was the Chief Financial Officer of Itaipu Binacional and the Chief Financial Officer of Copel.

     Paulo Roberto Trompczynski. Mr. Trompczynski is 61 years old. He received a degree in law from the Federal University of Paraná. Previously, Mr. Trompczynski was the head of the legal department of Fundepar, auditor at Curitiba Municipality and member of Copel’s Fiscal Council.

     Ronald Thadeu Ravedutti. Mr. Ravedutti is 56 years old. He received a degree in economics from the Social Studies Foundation of Paraná and completed post-graduate courses in utility finance, economics and finance, engineering economics, financial administration and systems analysis. He was the Chief Financial and Market Relations Officer of Copel from April to December 1994.

     Raul Munhoz Neto. Mr. Munhoz Neto is 63 years old. He received a degree in mechanical engineering from the Federal University of Paraná. Previously, Mr. Munhoz Neto was the Chief Financial and Administrative Officer of Araucaria Thermoelectric Plant and Chief Construction and Engineering Officer of Copel.

     Luiz Antonio Rossafa. Mr. Rossafa is 51 years old. He received a degree in agronomical engineering from Luiz Meneghel Agronomy College in Paraná and a master’s degree in Agriculture from Paulista State University (Unesp). Mr. Rossafa is currently the Chairman of the Regional Engineering, Architecture and Agronomy Committee of the State of Paraná and Chief Corporate Management Officer of Copel.

     Assis Corrêa. Mr. Corrêa is 60 years old. He received a degree in law from Pontifícia Universidade Católica do Paraná. Mr. Corrêa has been working as a lawyer in commercial, civil and administrative law for over thirty years.

Fiscal Council

     We have a permanent Fiscal Council, which generally meets every three months. The Fiscal Council consists of five members and five alternates elected for one-year terms by the shareholders at the annual meeting. The Fiscal Council, which is independent of our management and of our external auditors, is responsible for:

  • reviewing our financial statements and reporting on them to the shareholders;

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  • issuing special reports on proposed changes in capitalization, corporate budgets and proposed dividend distributions and any corporate reorganization; and
  • in general, supervising the activities of management and reporting on them to our shareholders.

     The current members and alternate members of the Fiscal Council, whose terms expire in 2007, are as follows:

Name    Since 
   
Antonio Rycheta Arten - President    2003 
Heron Arzua    2005 
Nelson Pessuti    2003 
Márcio Luciano Mancini    2005 
Jorge Miguel Lepeltier    2006 
 
 
Alternates     
   
Moacir José Soares    2003 
Maurílio Leopoldo Schmitt    2003 
Serafim Charneski    2004 
Felipe Gaiad de Camargo    2006 
Alexandre Luiz Oliveira de Toledo    2006 
Moacir José Soares    2003 

Audit Committee

     In June 2005, our shareholders amended our bylaws to establish an Audit Committee composed of at least three members of our Board of Directors, each of whom serves a term of two years, and may be reelected. Pursuant to the Audit Committee charter, the Audit Committee members are appointed by, and may be replaced by a resolution taken by our Board of Directors. The current members of the Audit committee are Mr. Acir Pepes Mezzandri, Mr. Rogério de Paula Quadros and Ms. Laurita Costa Rosa. All of the members of the Audit Committee are members of our Board of Directors. The Audit Committee is responsible for our Financial Statements, ensuring that we are in compliance with all legal requirements related to our reporting obligations, monitoring the work of the independent auditors and our staff who are responsible for internal auditing of the Company and reviewing the efficacy of our internal control and risk management procedures and staff.

     Under Brazilian law, the function of hiring independent auditors is reserved for the board of directors of a company. As a result, our Board of Directors acts as our Audit Committee, as specified in Section 3(a)(58) of the Exchange Act, for purposes of approving, on a case-by-case basis, any engagement of our independent auditors for audit and non-audit services provided to our subsidiaries or to us. Except in these respects, our Audit Committee is comparable to and performs the functions of audit committees of U.S. companies.

Compensation of Directors and Officers

     For the year ended December 31, 2005, the aggregate amount of compensation paid by us to the members of our Board of Directors and Board of Executive Officers was approximately R$5.5 million, as approved by our General Shareholders’ Meeting held on April 25, 2005.

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Employees

     At December 31, 2005, we had 7,771 employees including employees at Compagas, compared to 6,807 employees at December 31, 2004 and 6,347 employees at December 31, 2003. In addition, during 2005 we had approximately 1,704 third-party employees performing services for us, including security and cleaning services.

     The following table sets forth the number of our employees and a breakdown of employees by category of activity as of the dates indicated in each area of our operations.

    As of December 31, 
     
Area    2005    2004    2003 
       
 
Generation    701    612    590 
Transmission    782    721    664 
Distribution    4,733    4,123    3,784 
Telecommunications    227    194    186 
Gas    67    58    54 
Corporation staff and research             
     and development    1,228    1,057    1,029 
Other employees    33    42    40 
       
Total    7,771    6,807    6,347 
       

     All of our employees are covered by collective bargaining agreements that we renegotiate annually with the unions that represent the various employee groups. In 2005, we negotiated and signed labor agreements with the unions representing our employees. These new bargaining agreements became effective on October 1, 2005 and will be in place for a one-year term. We agreed to increase salaries by 5.9% in 2005.

     We provide a number of benefits to our employees. The most significant is the sponsorship of Fundação Copel de Previdência e Assistência Social (“Fundação Copel”), which supplements the Brazilian government retirement and health benefits available to our employees. As of December 31, 2005, approximately 97.18% of our employees had elected to participate in a flexible defined contribution plan.

     In accordance with federal law and our compensation policy, our employees participate in a profit-sharing plan. The Board of Directors and the shareholders must approve the amount of such compensation, which is determined in accordance with an agreement with an employee committee. Our employees are entitled to share in our profits during years in which our ratio of net profits to shareholders’ equity is at least 6.0% and certain performance criteria are met. In 2005, R$32.3 million was recorded as distributions to our employees as part of the profit-sharing plan. The terms of the profit-sharing agreement are currently being revised and negotiated for future years.

Share Ownership

     As of March 31, 2006, board members and executive officers held, collectively, directly or indirectly, less than 1.0% of any class of our shares.

Item 7. Major Shareholders and Related Party Transactions.

     Since 1954, the State of Paraná has owned the majority of our Common Shares and has exercised control over us. At December 31, 2005, the State of Paraná directly owned 58.6% of the Common Shares, and BNDESPAR owned directly and indirectly 26.4% of the Common Shares.

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     The following table sets forth certain information regarding the ownership of our Common Shares at May 31, 2006.

    Common Shares 
   
    (in millions)   (% of total)
Shareholder         
State of Paraná    85,028    58.6 
BNDESPAR    38,299    26.4 
ELETROBRAS    1,531    1.1 
ADR    4,320    3.0 
Traded in BOVESPA    15,262    10.5 
Others    591    0.4 
All directors and officers as a group      0.0 
     
Total    145,031    100.0 
     

     At May 31, 2006, 1.1% of the Common Shares and 12.9% of the Class B Shares were held by 105 holders who reside in the United States, which have registered with the Companhia Brasileira de Liquidação e Custódia, known as “CBLC”. At the same date, the ADRs represented 3.0% of the Common Shares and the ADSs represented 23.9% of the Class B Shares, and together, approximately 12.8% of our total share capital. On March 29, 2006, our shareholders approved the conversion of 359,612 Class A Shares into Class B shares.

Shareholders’ Agreement

     Under the Shareholders’ Agreement, the State of Paraná cannot approve, without BNDESPAR’s prior authorization, the following matters:

  • amendments to our by-laws;
  • reductions or increases of our capital stock;
  • changes in our corporate purpose;
  • creation of a new class of our preferred shares;
  • issuances of securities convertible into our shares or call options for our shares;
  • groupings or splits of issued shares;
  • reserves, funds or accounting provisions that affect the rights and interests of minority shareholders;
  • cessation of corporate liquidation;
  • mergers, amalgamations, spin-offs, transformations, transfers or acquisitions of interests in other companies;
  • incorporation of wholly-owned subsidiaries;

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  • adoption of policy with respect to minority shareholders in the case of merger, amalgamation, split-off and transfer of control in Copel; and
  • reduction in mandatory dividends.

RELATED PARTY TRANSACTIONS

     We engage in transactions, including the sale of electric energy, with our principal shareholders and with our affiliates. The tariffs we charge on electric energy sold to our related parties are approved by ANEEL, and the amounts are not material.

Transactions with Shareholders

     The following summarizes the most significant transactions with our principal shareholders:

     Government of the State of Paraná

     The State of Paraná owns 58.6% of our Common Shares. We had accounts receivable from the government of the State of Paraná under the CRC Account Agreement in the amount of R$1,182.2 million at December 31, 2005. The outstanding balance bears interest of 6.65% per month and is adjusted in accordance with the IGP-DI inflation index. We recorded interest income of R$90.8 million in 2005. For more information, see “Item 5. Operating and Financial Review and Prospects—Overview—Impact of CRC Account.” We had accounts receivable from the transfer of employees to the government of the State of Paraná of R$1.1 million as of December 31, 2005 and recorded an expense recovery of R$0.4 million in 2005.

     BNDESPAR

     BNDESPAR owns 26.4% of our Common Shares. BNDESPAR is a wholly owned subsidiary of BNDES and has the right to appoint two members to our Board of Directors. We had loans from BNDES of R$38.3 million as of December 31, 2005, and recorded interest expenses of R$4.9 million in 2005. As of December 31, 2005, we had debentures issued from ELEJOR and payable to BNDESPAR of R$286.9 million and capitalized interest expenses of R$16.4 million in 2005.

Transactions with Affiliates

     We have a variety of transactions with our affiliates. The material transactions are:

     Centrais Eólicas do Paraná Ltda.

     We have a power purchase agreement with Centrais Eólicas do Paraná; we also hold 30.0% of Centrais Eólicas do Paraná’s total issued and outstanding share capital. During 2005, our purchases from Centrais Eólicas do Paraná amounted to R$1.0 million. We had an accounts payable to Centrais Eólicas do Paraná of R$2.6 million as of December 31, 2005.

     Dona Francisca Energética S.A.

     We own 23.0% of the total issued and outstanding share capital of Dona Francisca Energética S.A. In 2004, we purchased R$48.4 million of power from them. We had accounts payable in the amount of R$4.2 million as of December 31, 2005. We provided guarantees to Dona Francisca in connection with loans obtained from the Interamerican Development Bank – IDB, and to BNDES, in an amount proportionate to our interest in Dona Francisca. The outstanding balance of the loans and financing was R$174.6 million as of December 31, 2005. proportionate to our interest in Dona Francisca. The outstanding balance of the loans and financing was R$174.6 million as of December 31, 2005.

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     Foz do Chopim Energética Ltda.

     We own 35.77% of the total issued and outstanding share capital of Foz do Chopim. We have outstanding loans to Foz do Chopim in the amount of R$35.4 million as of December 31, 2005, and recorded interest income of R$2.5 million in 2005. During 2005, we spent R$23.5 million to purchase energy from Foz do Chopim and recorded financial expense in connection with fines on the purchase of power from Foz do Chopim of R$0.8 million. We had accounts payable in the amount of R$69.2 million as of December 31, 2005.

Item 8. Financial Information.

     See Item 18. “Financial Statements” and pages F-1 through F-86.

LEGAL PROCEEDINGS

     We are currently subject to numerous proceedings relating to civil, administrative, labor and tax claims. Our Consolidated Financial Statements only include reserves for probable and reasonably estimable losses and expenses we may incur in connection with pending litigation. At December 31, 2005, our reserves for such contingencies were R$424.3 million, which we believe to be sufficient to meet probable and reasonably estimated losses in the event of unfavorable rulings relating to the legal proceedings in which we are a party. However, we cannot assure you that these reserves will be sufficient.

     Araucária

     On May 30, 2006, we entered into an agreement with Araucária to settle the outstanding legal disputes between us. Pursuant to this settlement agreement, we agreed to acquire all of the interests held by El Paso Empreendimentos e Participações Ltda. in UEG Araucária Ltda. for U.S.$190 million. As a result, we now own 80% of Araucária’s capital stock and Petrobras owns the remaining 20% and all legal proceedings that were initiated by us or by Araucária have been terminated.

Aneel Determinations

     We are contesting a determination by ANEEL that would require us to recognize, in our current liabilities at December 31, 2005, R$610 million in costs for energy we purchased for resale in the MAE during the rationing period in 2001 and the first quarter of 2002. We believe that it is reasonably possible that we will prevail in the lawsuit against ANEEL and that we will not be required to pay the R$610 million. For more information see “Item 5. – Operating Review and Financial Prospects – Critical Accounting Policies – The Wholesale Energy Market (“MAE”).

     Tax and Social Contribution Claims

     We are a party to certain lawsuits in which we are disputing the legality or constitutionality of certain federal taxes and social contributions assessed against us. We believe that none of these taxes and social contributions is due. In 1998, we won our lawsuit challenging our obligations to pay COFINS, a tax to finance social security. Based on a subsequent decision by the Brazilian Supreme Court, which ruled that electric utilities were subject to COFINS, the Brazilian government filed a new lawsuit in order to challenge the decision that released us from the obligation to pay COFINS. We have provisioned R$197.5 million to meet our purported COFINS obligations that were due from August 1998 through June 2001.

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     We also challenged the payment of contributions to the PIS-PASEP program (Programs for Social Integration and for the Establishment of Public Employee’s Patrimony). The rates and basis for calculation of PIS and PASEP have changed over time, resulting in significant differences in the final amounts due, and we believe that these changes have not been made in accordance with the Brazilian Constitution. In 1999, we benefited from a Federal Decree which allows companies to settle federal tax disputes without risking fines and charges related to the late payment. Based on this decree, we settled these taxes and a portion of the total amount that we had deposited in a judicial escrow account established during the PIS-PASEP action was returned to us. At December 31, 2005, the remaining balance in the escrow account was R$14.0 million, was still being reviewed by the judicial court to determine what amount will be refunded to us.

     We are party to administrative and judicial proceedings pursuant to which we are challenging claims of the Brazilian Social Security authorities that we must pay additional social security contributions for the period between 1991 and 2000. According to these claims, we must pay an additional aggregate amount of R$255 million, which were classified as a possible loss. As of December 31, 2005, we had provisioned R$25.6 million to cover our probable losses associated with these claims.

     Labor Related Claims

     We are the defendant in several lawsuits filed by either current or past employees of ours, related to overtime claims, dangerous work conditions, relocation, and other matters. As of December 31, 2005, we have provisioned R$82.7 million to cover probable losses related to these lawsuits.

     Cruzado Period Claims

     We are a defendant in several lawsuits brought by industrial customers alleging that increases in electricity tariffs during a price freeze imposed by the Brazilian government from March through November 1986 (the “Cruzado Period”) were illegal. The plaintiffs further allege that all of our tariff increases after the Cruzado Period were illegal, in part because they included the Cruzado Period increases in the amount that served as the basis for calculating the further increases. As of December 31, 2005, we have provisioned R$20.2 million to cover probable losses related to these lawsuits.

     Additional Claims

     In July 2004, Rio Pedrinho Energética S.A. (“Rio Pedrinho”) and Consórcio Salto Natal Energética S.A. (“Salto Natal”) commenced arbitration proceedings against Copel Distribuição seeking approximately R$25 million each for outstanding amounts that had been billed to us under energy purchase agreements with them, and any associated penalties. In September 2005, the arbitration panel ordered Copel Distribuição to pay each company approximately R$27.5 million.

     We filed a lawsuit in November 2005 in the local courts in Curitiba seeking to annul the decision of the arbitration panel. In the meantime, Rio Pedrinho and Salto Natal have filed judicial execution proceedings seeking to require that we pay them the awards granted by the arbitration. We believe that we are likely to prevail in these arbitrations, and accordingly, as of December 31, 2005, we had not provisioned any funds in connection with these arbitrations.

     Foz do Chopim Energética Ltda. filed a lawsuit against Copel Distribuição demanding payment of all amounts due since January 2003 under an electricity purchase agreement that we are a party to. Copel Distribuição filed a countersuit against Foz do Chopim Energética Ltda. requesting the annulment of the aforementioned agreement on the ground that it had not been approved by ANEEL. According to our legal advisors our annulment lawsuit will probably be decided in our favor.

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     We are a party to several lawsuits brought by landowners whose land has been affected by our transmission and distributions lines. As of December 31, 2005, we have provisioned R$13.4 million to cover a probable losses related to these lawsuits.

DIVIDEND PAYMENTS

     In accordance with our by-laws and the Brazilian Corporation Law, we regularly pay annual dividends for each fiscal year within sixty days after the declaration at the annual shareholders’ meeting. To the extent amounts are available for distribution, we are required to distribute as dividends an aggregate amount (the “Mandatory Dividend”) equal to at least 25.0% of Adjusted Net Profit (as hereinafter defined). Dividends are allocated pursuant to the formula described in “Dividend Priority of Class A Shares and Class B Shares” below. Under the Brazilian Corporation Law, we are not permitted to suspend the Mandatory Dividend payable with respect to the Common Shares, to the Class A Shares and to the Class B Shares for any year. Brazilian law permits, however, a company to suspend the payment of all dividends if the Board of Directors, with the approval of the Fiscal Council, reports to the shareholders’ meeting that the distribution would be incompatible with the financial circumstances of the company. In such a case, companies with publicly traded securities must submit a report to the CVM providing the reasons for the suspension of dividend payments. Notwithstanding the above, the Brazilian Corporation Law and our by-laws provide that Class A Shares and Class B Shares shall acquire voting rights if we suspend the Mandatory Dividend payments for more than three consecutive years. We are not subject to any contractual limitations on our ability to pay dividends.

Calculation of Adjusted Net Profit

     Dividends with respect to a fiscal year are payable from (1) retained earnings from prior periods and (2) after-tax income for such period (reduced by losses carried forward from prior fiscal years) following the addition or subtraction of amounts allocated to legal and other reserves (as described below) (“Adjusted Net Profit”).

     In accordance with Brazilian Corporation Law, we must maintain a legal reserve, to which we must allocate a minimum 5.0% of our net profits for each fiscal year until such reserve reaches an amount equal to 20.0% of our capital stock (calculated in accordance with the Brazilian Corporation Law). However, we are not required to make any allocations to our legal reserve in a fiscal year in which the legal reserve, when added to our other established capital reserves, exceeds 30.0% of our total capital. At December 31, 2005, our legal reserve was R$209.8 million, or approximately 6.0% of our capital stock at that date.

     In addition to deducting amounts for the legal reserve, under the Brazilian Corporation Law net profit may also be adjusted by deducting amounts allocated to two other reserves. One is a contingency reserve against future losses. The other is an unrealized profits reserve for specified categories of earnings that are currently required to be recognized, but that will be realized in subsequent periods. On the other hand, net profits may also be adjusted by reversing any amounts in any contingency reserve accounts that have been deposited in previous years and any amounts included in the unrealized profits reserve that have been realized in the relevant fiscal year and have not been used to offset losses. These reserves may only be established if they are proposed by the Board of Directors or management at a shareholders’ meeting and a resolution creating such reserves is adopted at that shareholders’ meeting.

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     The amounts available for distribution are determined on the basis of the Statutory Financial Statements prepared using the method required by the Brazilian Corporation Law, which differ from financial statements, such as the Consolidated Financial Statements included herein.

Dividend Priority of Class A Shares and Class B Shares

     According to our by-laws, Class A Shares and Class B Shares are entitled to receive annual, non-cumulative minimum dividends, which dividend per share shall be at least 10.0% higher than the dividends per share paid to the Common Shares. Class A Shares have a dividend priority over the Class B Shares, and Class B Shares have a dividend priority over the Common Shares. To the extent funds are available therefore, dividends are to be paid in the following order:

  • first, the holders of Class A Shares have the right to receive a minimum dividend equal to 10.0% of the total share capital represented by the Class A Shares outstanding as at the end of the fiscal year in respect of which the dividends have been declared;
  • second, to the extent there are additional amounts to be distributed after all amounts allocated to the Class A Shares have been paid, the holders of Class B Shares have the right to receive a minimum dividend per share equal to (1) the Mandatory Dividend divided by (2) the total number represented by Class B Shares outstanding as at the end of the fiscal year in respect of which the dividends have been declared; and
  • third, to the extent that there are additional amounts to be distributed after all amounts allocated to the Class A Shares and the Class B Shares have been paid, the holders of Common Shares have the right to receive an amount per share equal to (1) the Mandatory Dividend divided by (2) the total number of Common Shares outstanding as at the end of the fiscal year in respect of which dividends have been declared, provided that the Class A Shares and Class B Shares receive dividends per share at least 10.0% higher than the dividends per share paid to the Common Shares.

     To the extent that there are additional amounts to be distributed after all amounts described in the preceding items have been paid and in the form therein described, any such additional amount will be divided equally among all our shareholders.

Payment of Dividends

     We are required to hold an annual shareholders’ meeting by April 30th of each year at which, among other things, an annual dividend may be declared by decision of the shareholders on the recommendation of the management, as approved by the Board of Directors. The payment of annual dividends is based on the financial statements prepared for the fiscal year ending December 31st. Under Brazilian law, we must pay dividends within sixty days following the date of the shareholders meeting that declared the dividends to shareholders of record on such shareholders’ meeting. A shareholders’ resolution may set forth another date of payment, which must occur prior to the end of the fiscal year in which such dividend was declared. We are not required to adjust the amount of paid-in capital for inflation for the period from the end of the last fiscal year to the date of declaration or to adjust the amount of the dividend for inflation for the period from the end of the relevant fiscal year to the payment date. Consequently, the amount, in real terms, of dividends paid to holders of Class B Shares may be substantially reduced due to inflation.

     According to our by-laws, our management may declare interim dividends to be paid from profits in our semi-annual financial statements approved by our shareholders. Any payment of interim dividends may be set off against the amount of mandatory distributions relating to the net profit earned in the year in which the interim dividends were paid.

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     Pursuant to Brazilian law, we may pay interest on equity in lieu of dividends as an alternative form of making distributions to shareholders. We may treat a payment of interest on equity as a deductible expense for tax purposes, provided that it does not exceed the lesser of:

  • the total amount resulting from (1) TJLP multiplied by (2) the total shareholders’ equity (determined in accordance with the Brazilian Corporation Law), less certain deductions prescribed by the Brazilian Corporation Law; and
  • the greater of (1) 50.0% of current net income (after the deduction of social contribution on profits (CSLL) and before taking such distributions and any deductions for corporate income tax) for the year in respect of which the payment is made or (2) 50.0% of retained earnings and profit reserves for the year prior to the year in respect of which the payment is made.

     Shareholders who are not residents of Brazil must register with the Central Bank in order for dividends, sales proceeds or other amounts with respect to their shares to be eligible to be remitted in foreign currency outside of Brazil. The Class B Shares underlying the ADSs are held in Brazil by the Custodian, as agent for the Depositary, which is the registered owner of our shares.

     Payments of cash dividends and distributions, if any, will be made in Brazilian currency to the Custodian on behalf of the Depositary, which will then convert such proceeds into U.S. dollars and will cause such U.S. dollars to be delivered to the Depositary for distribution to holders of ADRs. In the event that the Custodian is unable to convert immediately the Brazilian currency received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADRs may be adversely affected by devaluations of the Brazilian currency that occur before such dividends are converted and remitted.

     The table below sets forth the cash distributions we paid as interest on equity for the periods indicated.

        Distribution    Payment per Thousand Shares (R$)
Year    Payment Date    (in thousands of R$)  
             
            Common    Preferred A    Preferred B    Average 
             
     2001    October 2001    170,000           0.59166    0.65455    0.65455         0.61122 
    June 2002                     
 
     2003    June 2004    42,584           0.14734    1.05973    0.16211         0.15561 
 
     2004    June 2005    96,061           0.33396    1.27167    0.36743         0.35103 
 
     2005    June 2006    122,995           0.42811    1.27167    0.47101         0.44945 

Significant Changes

     No material changes have occurred since December 31, 2005, the date of our Consolidated Financial Statements included herein.

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Item 9. The Offer and Listing

     The principal trading market for the Class B Shares is the Bolsa de Valores de São Paulo (the “São Paulo Stock Exchange“ or “BOVESPA”). At December 31, 2005, we had approximately 2,233 shareholders of our Class B Shares.

     The following table sets forth the reported high and low closing sale prices for the Class B Shares on the São Paulo Stock Exchange for the periods indicated.

    Price per 1,000 Class B Shares 
   
    High    Low 
     
    (R$)
2001    19.79    12.49 
2002    18.91    7.15 
2003    14.05    7.31 
2004    13.87    8.40 
     1st Quarter    13.87    10.35 
     2nd Quarter    11.20    8.40 
     3rd Quarter    11.10    9.35 
     4th Quarter    13.02    9.96 
2005    19.20    10.50 
     1st Quarter    14.60    10.50 
     2nd Quarter    14.17    12.00 
     3rd Quarter    17.41    12.54 
     4th Quarter    19.20    16.05 
         December    19.20    17.35 
2006    24.19    18.70 
     1st Quarter    24.19    18.70 
         January    22.00    18.70 
         February    23.50    20.55 
         March    24.19    21.40 
     2nd Quarter    23.77    19.00 
         April    23.43    22.10 
         May    23.77    19.00 

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     In the United States, the Class B Shares trade in the form of ADSs, each representing 1,000 Class B Shares, issued by The Bank of New York, as depositary (the “Depositary”) pursuant to a Deposit Agreement (the “Deposit Agreement”) among Copel, the Depositary and the registered holders and beneficial owners from time to time of the ADRs. The ADSs trade under the symbol ELP. The following table sets forth the reported high and low closing sales prices for ADSs on the NYSE for the period indicated.

    U.S. dollars per ADS 
     
    High    Low 
     
    (U.S.$)
2001     10.65    4.71 
2002    8.45    1.84 
2003    4.88    2.03 
2004    4.94    2.64 
     1st Quarter    4.94    3.51 
     2nd Quarter    3.89    2.64 
     3rd Quarter    3.72    3.10 
     4th Quarter    4.75    3.49 
2005    8.71    3.88 
     1st Quarter    5.50    3.88 
     2nd Quarter    5.75    4.64 
     3rd Quarter    7.72    5.16 
     4th Quarter    8.71    7.00 
         December    8.71    7.33 
2006    11.44    8.15 
     1st Quarter    11.44    8.18 
         January    9.72    8.18 
         February    10.98    9.25 
         March    11.44    9.66 
     2nd Quarter    11.42    8.15 
         April    11.13    9.95 
         May    11.42    8.15 

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     On June 19, 2002, shares of the Company were listed through Latibex, which is part of the Madrid Stock Exchange (“Latibex”). Latibex is a Euro-based market for Latin American securities. The shares trade under the symbol XCOP.

Trading on the BOVESPA

     The BOVESPA has trading sessions each day, from 10:00 a.m. to 5:00 p.m. Brazil local time, except during daylight savings time in the United States. Trading is also conducted from 11:00 a.m. to 6:00 p.m. during daylight savings time in the United States, on an automated system known as the Computer Assisted Trading System (Sistema de Negociação Assistida por Computador) on the BOVESPA and on the National Electronic Trading System (Sistema Eletrônico de Negociação Nacional). This system is a computerized system, which links electronically with the seven smaller regional exchanges.

     The BOVESPA also permits trading from 5:45 p.m. to 7 p.m. during daylight savings time in the United States, on an online system connected to traditional and internet brokers called the “After Market”. All stocks traded during the regular trading session of the day may be traded on the After Market. Trading on the After Market is subject to regulatory limits on price volatility and on the volume of shares traded through Internet brokers. There are no specialists or officially recognized market makers for our shares on the BOVESPA.

     In order to better control volatility, the BOVESPA adopted a “circuit breaker” system pursuant to which trading sessions may be suspended for a period of thirty minutes to one hour whenever the indices of these stock exchanges fall below the limits of 10.0% or 15.0%, respectively, in relation to the index registered in the previous trading session.

     Settlement of transactions is effected three business days after the trade date. Delivery of and payment for shares are made through the facilities of the clearinghouse for each exchange, which maintain accounts for member brokerage firms. The seller is ordinarily required to deliver the shares to the clearinghouse on the second business day following the trade date. The clearinghouse for the BOVESPA is CBLC, which is wholly owned by BOVESPA.

     The BOVESPA is relatively small and less liquid than major world markets. As of March 31, 2006, the aggregate market capitalization of the 336 companies listed on the BOVESPA was approximately U.S.$ 591.7 billion, and companies listed on the BOVESPA index (IBOVESPA) represented approximately 75.0% of the total market capitalization of all listed companies. Although all the outstanding shares of a listed company may trade on a Brazilian stock exchange, in most cases less than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, by governmental entities or by one principal shareholder. For this reason, data showing the total market capitalization of Brazilian stock exchanges tend to overstate the liquidity of the Brazilian equity securities market.

     Trading on Brazilian stock exchanges by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes (a “Non-Brazilian Holder”) of Brazil is subject to certain limitations under Brazilian foreign investment legislation.

     With limited exceptions, Non-Brazilian Holders may only trade on Brazilian stock exchanges in accordance with the requirements of Resolution 2,689, of January 26, 2000, of the National Monetary Council. Resolution 2,689 requires that securities held by Non-Brazilian Holders be maintained in the custody of, or in deposit accounts with, financial institutions duly authorized by the Central Bank and that

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the Non-Brazilian Holders be duly registered with the Brazilian securities commission. In addition, Resolution 2,689 requires Non-Brazilian Holders to restrict their securities trading to transactions on Brazilian stock exchanges or qualified over-the-counter markets. With limited exceptions, Non-Brazilian Holders may not transfer the ownership of investments made under Resolution No. 2,689 to other Non-Brazilian Holders through a private transaction. See “Item 10. Additional Information—Taxation—Brazilian Tax Considerations—Taxation of Gains” for a description of certain tax benefits extended to Non-Brazilian Holders who qualify under Resolution 2,689.

Regulation of Brazilian Securities Markets

     The Brazilian securities markets are principally governed by Law No. 6,385, of December 7, 1976, and the Brazilian Corporation Law, each as amended and supplemented, and by regulations issued by the Brazilian securities commission, which has regulatory authority over the stock exchanges and securities markets generally, the CMN, and by the Central Bank, which has licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions. These laws and regulations, among others, provide for disclosure requirements applicable to issuers of traded securities, protection of minority shareholders and criminal penalties for insider trading and price manipulation. They also provide for licensing and oversight of brokerage firms and governance of the Brazilian stock exchanges. Nevertheless, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets.

     Under the Brazilian Corporation Law, a company is either public (companhia aberta), such as we are, or closely held (companhia fechada). All public companies, including us, are registered with the Brazilian securities commission and are subject to reporting requirements. A company registered with the Brazilian securities commission may have its securities traded on the Brazilian stock exchanges or in the Brazilian over-the-counter market. Our Class B Shares are listed and traded on the BOVESPA and may be traded privately subject to some limitations.

     To be listed on a Brazilian stock exchange a company must apply for registration with the Brazilian securities commission and the stock exchange where the head office of the company is located.

     We have the option to ask that trading in our securities on the BOVESPA be suspended in anticipation of a material announcement. Trading may also be suspended on the initiative of the BOVESPA or the Brazilian securities commission, among other reasons, based on or due to a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to the inquiries by the Brazilian securities commission or the BOVESPA.

     The Brazilian over-the-counter market consists of direct trades between individuals in which a financial institution registered with the Brazilian securities commission serves as intermediary. No special application, other than registration with the Brazilian securities commission, is necessary for securities of a public company to be traded in this market. The Brazilian securities commission requires that it be given notice of all trades carried out in the Brazilian over-the-counter market by the respective intermediaries.

     Trading on the BOVESPA by non-residents of Brazil is subject to limitations under Brazilian foreign investment and tax legislation. The Brazilian custodian for the Class B Shares underlying the ADSs must, on behalf of the depositary for the ADSs, obtain registration from the Central Bank to remit U.S. dollars abroad for payments of dividends, any other cash distributions, or upon the disposition of the shares and sales proceeds thereto. In the event that a holder of ADSs exchanges ADSs for Class B Shares, the holder will be entitled to continue to rely on the custodian’s registration for five business days after the exchange. Thereafter, the holder may not be able to obtain and remit U.S. dollars abroad upon the disposition of the Class B Shares, or distributions relating to the Class B Shares, unless the holder obtains a new registration. For more information, see “Item 10. Additional Information—Regulation of and Restrictions on Foreign Investors.”

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Item 10. Additional Information

MEMORANDUM AND ARTICLES OF ASSOCIATION

     Except as described in this section and in “Item 8. Financial Information—Dividend Payments,” all relevant information relating to our memorandum and articles of association are described on Section “Description of Capital Stock” of its Registration Statement pursuant to Rule 424(b)(1) filed with the Securities and Exchange Commission on July 31, 1997 (File No. 333-7148), which is incorporated herein by reference.

Organization

     We are a publicly traded company duly registered with the Brazilian securities commission under No. 1431-1. According to Article One of our by-laws, our objectives and purposes are:

  • researching and studying, technically and economically, any sources of energy;

  • researching, studying, planning, constructing, and developing the production, transformation, transportation, storage, distribution, and trade of energy in any of its forms, chiefly electric power, as well as fuels and energy raw materials;

  • studying, planning, designing, constructing, and operating dams and their reservoirs, as well as other undertakings for multiple uses of water resources;

  • providing information and technical assistance concerning the rational use of energy by business undertakings with the aim of implementing and developing economic activities deemed relevant for the development of the State of Paraná; and

  • implementing electronic data transmission, electronic communications, cellular telephone systems, and other endeavors that may be deemed relevant to the Company and the State of Paraná.

     Except as described in this section, our by-laws do not contain provisions addressing the duties, authority, or liabilities of directors and management, which are instead established by Brazilian Corporation Law.

Qualification of Directors

     Brazilian Corporation Law provides that only shareholders of a company may be appointed to its board of directors, although there is no minimum share ownership requirement for qualification as a director. Our by-laws also require that each director be a Brazilian citizen and reside in Brazil.

Limitations on Directors’ Powers

     Under Brazilian Corporation Law, if a director or an executive officer has a conflict of interest with the company in connection with any proposed transaction, the director or executive officer may not vote in any decision of the Board of Directors, or of the board of executive officers, regarding such transaction, and must disclose the nature and extent of the conflicting interest for transcription in the

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minutes of the meeting. A director or an executive officer may not transact any business with a company, including accepting any loans, except on reasonable or fair terms and conditions that are identical to the terms and conditions prevailing in the market or offered by third parties. According to our bylaws, shareholders set the aggregate compensation payable to directors and executive officers. For more information, see “Item 6. Directors, Management and Employees. Our bylaws do not establish any mandatory retirement age limits.

Shareholders’ Meetings

     We convene shareholders’ meetings by publishing a notice in Diário Oficial do Estado – PR, O Estado do Paraná and the DCI – Diario Comércio Indústria e Serviços. The convening of our shareholders’ meeting is made through publication of a notice to shareholders in three newspapers, as determined by the shareholders’ meeting. As provided by Brazilian law, publications have to be made in the official newspaper located in the state of our corporate headquarters, in a newspaper with broad coverage located in the same city as our corporate headquarters, and in a newspaper with broad coverage located in the same place as our stock exchange. The notice must be published no fewer than three times, beginning at least fifteen calendar days prior to the scheduled meeting date. All other information described in items “Voting Rights of Class A Shares and Class B Shares” and “Shareholders’ Meeting” of Section “Description of Capital Stock” of its Registration Statement pursuant to Rule 424(b)(1) filed with the Securities and Exchange Commission on July 31, 1997 (File No. 333-7148) is incorporated herein by reference.

Right of Redemption

     Brazilian Corporation Law provides that under certain circumstances a shareholder has the right to redeem its equity interest from a company and to receive a payment for the portion of shareholder’s equity attributable to his or her equity interest. This right of withdrawal may be exercised:

•    by a dissenting holder of the adversely affected class of shares (including any holder of Class B Shares) in the event that a majority of all outstanding Common Shares authorizes:
 
  •    the creation of preferred shares or an increase in an existing class of preferred shares relative to the other class of shares, except if already set forth under or authorized by our by-laws;
 
  •    the modification of a preference, privilege or condition of redemption or amortization conferred on one or more classes of preferred shares; or
 
  •    the creation of a new class of preferred shares with greater privileges than the existing class of preferred shares;
 
•    by a dissenting shareholder (including any holder of Class B Shares) in the event that a majority of all outstanding Common Shares authorizes:
 
  •    a reduction in the mandatory distribution of dividends;
 
  •    a change in our corporate purpose;
 
  •    a split up, subject to the conditions set forth in the Brazilian Corporation Law; or
 
  •    a transformation of us into another type of company;
 

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•    by a dissenting or non-voting holder of Common Shares or Class A Shares, in the event that a majority of all outstanding shares authorizes:
 
  •    the acquisition of control of another company at a price which exceeds certain limits set forth in the Brazilian Corporation Law;
 
  •    a transfer of all of our share capital to another company, making the Company a wholly- owned subsidiary of such company, known as an “incorporação de ações”;
 
  •    a merger or consolidation (“incorporação”); or
 
  •    our participation in a group of concerns (a “grupo de sociedades”) as defined under the Brazilian Corporation Law.
 

     The dissenting shareholders, if any, also have a right of withdrawal in the event that the entity resulting from our merger, incorporação de ações, or spin-off fails to become a listed company within 120 days of the shareholders’ meeting at which the relevant decision was taken. The dissenting or non-voting shareholders only have a withdrawal right if they held the shares that have been adversely affected at the time of the first call for the shareholders’ meeting in which the relevant decision was made. If a public announcement of the action taken or to be taken was made prior to the call for the shareholders’ meeting, the shareholders’ ownership of shares is based on the date of announcement.

     The right of withdrawal lapses thirty days after publication of the minutes of the shareholders’ meeting at which the action is taken, except when the resolution is subject to confirmation by, or to prior approval of, the majority of the preferred shareholders of each class of affected shares (which must be made at a special meeting to be held within one year). In that case the thirty-day term is counted from the date the minutes of the special meeting are published. We are entitled to reconsider any action giving rise to redemption rights within ten days following the expiration of such rights if the redemption of shares of dissenting shareholders would jeopardize its financial stability.

     In addition, rights of withdrawal connected to our merger or consolidation (“incorporação”) into another company, to our participation in a group of concerns (a “grupo de sociedades”) and to the acquisition of control of another company at a price which exceeds certain limits set forth in the Brazilian Corporation Law may not be exercised by holders of shares if such shares (1) are liquid, defined as being part of the BOVESPA Index or other stock exchange index (as defined by the CVM), and (2) are widely held, such that the controlling shareholder or companies it controls have less than 50.0% of our shares. Our Class B Shares are included on the BOVESPA Index.

     In all the situations described above, the shares would be redeemable at their book value, determined on the basis of the last balance sheet approved by shareholders. If the shareholders’ meeting giving rise to withdrawal rights occurs more than sixty days after the date of the last approved balance sheet, a shareholder may demand that its shares be valued on the basis of a new balance sheet of a date within sixty days preceding such shareholders’ meeting.

     Pursuant to the Brazilian Corporation Law, each preferred share of a class that is admitted to trading on the Brazilian stock exchanges must have the following rights under the Company’s by-laws:

  • one or both of the following priorities: priority in the receipt of fixed or minimum dividend; and/or priority in the reimbursement of capital, with or without premium; and

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  • one of the following rights: (A) right to participate in the distribution of the Mandatory Dividend of at least 25.0% of Adjusted Net Profit, pursuant to the following criteria: (i) priority in the receipt of dividends corresponding to at least 3.0% of the shares’ book value, and (ii) right to participate on the profit distribution with the Common Shares, in equal conditions, after the Common Shares have received dividends as set forth in (i) above; or (B) right to receive dividends in an amount per share at least 10.0% higher than the amount per share paid to holders of Common Shares; or (C) tag-along right at a price equal to at least 80.0% of the price paid to the controlling shareholder in case of transfer of control.

     Our by-laws comply with the directives of CVM as follows: (i) our Class A Shares shall have priority in the distribution of minimum dividends of 10.0% per year, pro rata, calculated as a percentage of the paid-in capital stock represented by such shares on December 31st of the previous fiscal year; (ii) our Class B Shares shall have priority in the distribution of minimum dividends, pro rata, in the amount equivalent to 25.0% of our net profits, as adjusted in accordance with Section 202 and its paragraphs of Law 6,404/76, calculated as a proportion of the paid-in capital stock represented by such shares on December 31st of the previous fiscal year; (iii) the dividends provided in item (ii) above to the Class B Shares shall be paid only from outstanding profits after the payment of priority dividends to Class A Shares; (iv) the dividends to be paid per preferred share, regardless of the class, shall be at least 10.0% higher than the dividends to be paid per Common Share, as provided by the Brazilian Corporation Law, as amended.

Liquidation

     In the event of liquidation of the Company, after all creditors have been paid, all shareholders will participate equally and ratably in any remaining residual assets.

Liability of the Shareholders for Further Capital Calls

     Neither Brazilian law nor our by-laws provide for capital calls. The shareholders’ liability is limited to the payment of the issue price of the shares subscribed or acquired.

Conversion Rights

Our by-laws provide that:

  • Class A Shares may be converted into Class B Shares;

  • Class B Shares cannot be converted into Class A Shares;

  • Class A Shares and Class B Shares cannot be converted into Common Shares; and

  • Common Shares cannot be converted into Class A Shares or Class B Shares.

Form and Transfer

     Our shares are maintained in book-entry form with a transfer agent (the “Transfer Agent”). To make the transfer the Transfer Agent makes an entry in the register, debit the share account of the transferor and credit the share account of the transferee.

     Transfers of shares by a foreign investor are made in the same way and executed by the investor’s local agent on the investor’s behalf. However, if the original investment was registered with the Central Bank pursuant to a foreign investment mechanism regulated by Resolution No. 2,689 of January 26, 2000 of the CMN (“Resolution 2,689”) as described under “—Exchange Controls” below, the foreign investor must declare the transfer in its electronic registration.

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     The shareholders may choose, at their individual discretion, to hold their shares through CBLC. Shares are added to the CBLC system through Brazilian institutions that have clearing accounts with the CBLC. Our shareholder registry indicates which shares are listed on the CBLC system. Each participating shareholder is in turn registered in a register of beneficial shareholders maintained by the CBLC and is treated in the same manner as the other registered shareholders.

Regulation of and Restrictions on Foreign Investors

     Foreign investors face no legal restrictions barring them from holding Common Shares, Class A Shares, Class B Shares or ADSs.

     The ability to convert into foreign currency dividend payments and proceeds from the sale of Class B Shares or preemptive rights and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, the registration of the relevant investment with the Central Bank. Any foreign investor who registers with the CVM in accordance with Resolution 2,689 may buy and sell securities on Brazilian stock exchanges without obtaining a separate certificate of registration for each transaction.

     Annex V to Resolution 1,289 of the CMN, known as the “Annex V Regulations,” allows Brazilian companies to issue depositary receipts in foreign exchange markets. Our ADR program is duly registered with the Central Bank and the CVM.

     Our by-laws do not impose any limitation on the rights of Brazilian residents or non-residents to hold our shares and exercise the rights in connection therewith.

Disclosure of Shareholder Ownership

     Brazilian regulations require that any person or group of persons representing the same interest that has directly or indirectly reached an interest corresponding to 5.0% or more of any class of shares, or any rights under such shares, of a publicly traded company must disclose its share ownership to the Brazilian securities commission and stock exchanges in which the shares are traded. In addition, a statement containing the required information must be published in the newspapers. Any subsequent increase of 5.0% or more in ownership of any class of shares must be similarly disclosed. Also, the same obligation applies if any person or group of persons representing the same interest and holding an interest corresponding to 5.0% or more of any class of shares of a publicly traded company for any reason ceases to hold this participation.

MATERIAL CONTRACTS

     For information concerning our material contracts, see “Item 4. Information on the Company and Item 5. Operating and Financial Review and Prospects.”

EXCHANGE CONTROLS

     There are no restrictions on ownership of Class A Shares, Class B Shares or Common Shares of the Company by individuals or legal entities domiciled outside Brazil.

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     The right to convert dividend payments and proceeds from the sale of shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, that the relevant investments have been registered with the Central Bank. Such restrictions on the remittance of foreign capital abroad may hinder or prevent Banco Itaú S.A. (the “Custodian”), as custodian for the Class B Shares represented by ADSs, or holders who have exchanged ADRs for Class B Shares from converting dividends, distributions or the proceeds from any sale of such Class B Shares, as the case may be, into U.S. dollars and remitting such U.S. dollars abroad. Holders of ADSs could be adversely affected by delays in, or refusal to grant any, required government approval for conversions of Brazilian currency payments and remittances abroad of the Class B Shares underlying the ADSs.

     Under Resolution 2,689, foreign investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are fulfilled. The definition of foreign investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered abroad.

To be eligible to invest in the Brazilian financial and capital markets, foreign investors must:

  • appoint at least one representative in Brazil with powers to perform actions relating to foreign investments;

  • complete the appropriate foreign investor registration form;

  • register as a foreign investor with the CVM; and

  • register the foreign investment with the Central Bank.

     Securities and other financial assets held by foreign investors must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM. In addition, securities trading is restricted to transactions carried out in the stock exchanges or organized over-the-counter markets licensed by the CVM.

     The Annex V Regulations provide for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. The ADS program had been approved under the Annex V Regulations by the Central Bank and the CVM prior to the issuance of the ADSs. Accordingly, the proceeds from the sale of ADSs by ADR holders outside Brazil are free of Brazilian foreign investment controls and holders of the ADSs who are not resident in a tax haven will be entitled to favorable tax treatment. For more information, see “—Taxation—Brazilian Tax Considerations—Taxation of Gains.”

     An electronic registration has been issued in the name of the Depositary with respect to the ADSs and is maintained by the Custodian on behalf of the Depositary. Pursuant to this electronic registration, the Custodian and the Depositary are able to convert dividends and other distributions with respect to the Class B Shares represented by ADSs into foreign currency and remit the proceeds outside Brazil. In the event that a holder of ADSs exchanges such ADSs for Class B Shares, such holder will be entitled to continue to rely on the Depositary’s electronic registration for five business days after such exchange, following which such holder must seek to obtain its own electronic registration with the Central Bank. Thereafter, any holder of Class B Shares may not be able to convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, such Class B Shares, unless such holder obtains his own electronic registration. A holder that obtains an electronic registration may be subject to less favorable Brazilian tax treatment than a holder of ADSs. For more information, see “—Taxation—Brazilian Tax Considerations.”

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     Under current Brazilian legislation, the Brazilian government may impose temporary restrictions on remittances of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments. For approximately six months in 1989 and early 1990, the Brazilian government froze all dividend and capital repatriations held by the Central Bank that were owed to foreign equity investors, in order to conserve Brazil’s foreign currency reserves. These amounts were subsequently released in accordance with Brazilian government directives. The imbalance in Brazil’s balance of payments increased during 1998, and there can be no assurance that the Brazilian government will not impose similar restrictions on foreign repatriations in the future.

TAXATION

     The following summary contains a description of the principal Brazilian and U.S. federal income tax consequences of the acquisition, ownership and disposition of Class B Shares or ADSs, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase Class B Shares or ADSs . The summary is based upon the tax laws of Brazil and regulations thereunder and on the tax laws of the United States and regulations thereunder as in effect on the date hereof, which are subject to change. Prospective purchasers of Class B Shares or ADSs should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of Class B Shares or ADSs.

     Although there is at present no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders of Class B Shares or ADSs. Prospective holders of Class B Shares or ADSs should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of Class B Shares or ADSs in their particular circumstances.

Brazilian Tax Considerations

     The following discussion summarizes the principal Brazilian tax consequences of the acquisition, ownership and disposition of Class B Shares or ADSs by an individual, entity, trust or organization resident or domiciled outside Brazil for purposes of Brazilian taxation and, in the case of Class B Shares, has registered its investment in such securities with the Central Bank as a U.S. dollar investment. This discussion does not address all the Brazilian tax considerations that may be applicable to any particular Non-Brazilian Holder, and each Non-Brazilian Holder should consult its own tax advisor about the Brazilian tax consequences of investing in Class B Shares or ADSs.

     Pursuant to Brazilian law, Non-Brazilian Holders may invest in the Class B shares under Resolution 2,689, of the National Monetary Council.

     The rules of Resolution No. 2,689 allow foreign investors to invest in almost all financial assets and to engage in almost all transactions available in the Brazilian financial and capital markets, provided that some requirements are fulfilled. In accordance with such Resolution, the definition of foreign investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered abroad.

     Pursuant to the rules, foreign investors must: (1) appoint at least one representative in Brazil with powers to perform actions relating to the foreign investment; (2) complete the appropriate foreign investor registration form; (3) register as a foreign investor with the Brazilian Securities Commission, or the CVM; and (4) register the foreign investment with the Central Bank.

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     Securities and other financial assets held by foreign investors pursuant to Resolution 2,689 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM. In addition, securities trading is restricted to transactions carried out in the stock exchanges or organized over-the-counter markets licensed by the CVM with the exception of certain immaterial transactions.

     Taxation of Dividends

     Dividends paid by the Company in cash or in kind from profits of periods beginning on or after January 1, 1996 (i) to the Depositary in respect of Class B Shares underlying ADSs or (ii) to a Non-Brazilian Holder in respect of Class B Shares will not be subject to Brazilian withholding income tax. Dividends paid from profits generated before January 1, 1996 may be subject to Brazilian withholding income tax at varying rates depending upon the year in which the profits have been obtained.

     Distributions of Interest on Equity

     In accordance with Law 9,249, dated December 26, 1995, as amended, Brazilian corporations may make payments to shareholders characterized as distributions of interest on the equity of the company as an alternative form of making dividend distributions. The rate of interest may not be higher than TJLP, as determined by the Central Bank from time to time. The total amount distributed as interest on equity may not exceed, for tax purposes, the greater of (i) 50.0% of net income (after social contribution on profits (the “CSLL”) and before the provision for corporate income tax and the amounts attributable to shareholders as net interest on equity) related to the period in respect of which the payment is made and (ii) 50.0% of the sum of retained profits and profit reserves as of the date of the beginning of the period in respect of which the payment is made.

     Payments of interest on equity are decided by the shareholders on the basis of recommendations of our board of directors.

     Distributions of interest on equity paid to Brazilian and Non-Brazilian Holders of Class B Shares, including payments to the Depositary in respect of Class B Shares underlying ADSs, are deductible by the Company for Brazilian corporate income tax and social contribution on profit purposes as far as the limits above described are observed. Such payments are subject to Brazilian withholding income tax at the rate of 15.0%, except for payments to beneficiaries situated in tax haven jurisdictions (that is, a country or location that does not impose income tax or where the maximum income tax rate is lower than 20% or where the local legislation imposes restrictions on disclosing the shareholding composition or the ownership of the investment - “Tax Haven Holder”), which payments are subject to tax at a 25.0% rate.

     No assurance can be given that our Board of Directors will not recommend that future distributions of profits will be made by means of interest on equity instead of by means of dividends.

     Amounts paid as interest on equity (net of applicable withholding income tax) may be treated as payments in respect of the dividends we are obligated to distribute to our shareholders in accordance with our by-laws and the Brazilian Corporation Law. Distributions of interest on equity in respect of the Class B Shares, including distributions to the Depositary in respect of Class B Shares underlying ADSs, may be converted into U.S. dollars and remitted outside of Brazil, subject to applicable exchange controls.

     Taxation of Gains

     According to Law 10,833 of December 29, 2003, or Law 10,833, the disposition of assets located in Brazil by a Non-Brazilian Holder, whether to other Non-Brazilian Holder or Brazilian holders, may become subject to taxation in Brazil. In this sense, if the Class B Shares are disposed of to a Non-Brazilian Holder, such holder may be subject to income tax on the gains assessed, following the rules described below, whether the transactions are conducted in Brazil or abroad and with a Brazilian resident or not. Although we believe that the ADSs do not fall within the definition of assets located in Brazil for purposes of Law No. 10,833, considering the general and unclear scope of it and the lack of judicial court ruling in respect thereto, we are unable to predict whether such understanding will ultimately prevail in the courts of Brazil. Thus, the gain on disposition of ADSs by a Non-Brazilian Holder to a resident in Brazil (or possibly even to non-Brazilian resident) may be subject to income tax in Brazil according to the rules described below for ADSs or the rules applicable to disposition of common shares, when applicable.

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     For purposes of Brazilian taxation, the income tax rules on gains related to disposition of Class B Shares or ADSs vary depending on the domicile of the Non-Brazilian Holder, the form by which such Non-Brazilian Holder has registered its investment before the Brazilian Central Bank and/or how the disposition is carried out, as described below.

     Generally, gains are the positive difference between the amount in reais realized on the sale or exchange of a security and its acquisition cost measured in reais (without correction for inflation).

     Gains assessed on the disposition of the Class B Shares carried out on the Brazilian stock exchange (which includes the transactions carried out on the organized over-the-counter market):

  • are exempt from income tax when assessed by a Non-Brazilian Holder that is a holder under Resolution No. 2689 Holder and (ii) is not a Tax Haven Holder; or

  • are subject to income tax at a rate of 15.0% in any other case, including the gains assessed by a Non- Brazilian Holder that (i) is not a 2,689 Holder, or (ii) is a 2,689 Holder but Tax Haven Holder. In these cases, a withholding income tax of 0.005% shall be applicable and can be offset with the eventual income tax due on the capital gain.

     Any other gains assessed on a disposition of the units that is not carried out on the Brazilian stock exchange is subject to an income tax rate of 15.0%, except for Tax Haven Holders who are subject to an income tax rate of 25.0% . In case these gains are related to transactions conducted on the Brazilian non-organized over-the-counter market, with intermediation, the withholding income tax of 0.005% shall also be applicable and can be offset with the eventual income tax due on the capital gain.

     In the case of redemption of the Class B Shares or capital reduction by a Brazilian corporation, such as our company, the positive difference between the amount effectively received by the Non-Brazilian Holder and the acquisition cost of the securities redeemed or reduced in reais is treated as capital gain derived from sale or exchange of the shares not carried out on a Brazilian stock exchange market and is therefore subject to income tax at the rate of 15.0% or 25.0% as the case may be.

     Any exercise of preemptive rights relating to the Class B Shares or ADSs will not be subject to Brazilian taxation. Gains on the sale or assignment of preemptive rights relating to the Class B Shares will be subject to the same tax treatment applicable to disposition of Class B Shares.

     The deposit of Class B Shares in exchange for the ADSs may be subject to Brazilian income tax if the amount previously registered with the Central Bank as a foreign investment in Class B Shares is lower than (i) the average price per preferred share on a Brazilian stock exchange on which the greatest number of such shares were sold on the day of the deposit; or (ii) if no Class B Shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of Class B Shares were sold during the fifteen trading sessions immediately preceding such deposit. In this case, the difference between the acquisition cost and the average price of the Class B Shares, calculated as set forth above, shall be considered a capital gain subject to income tax at a rate of 15.0% or 25.0% in the case of investors that are Tax Haven Holders. There are arguments to support the theory that such taxation is not applicable to 2689 Holders, which is not a Tax Haven Holder.

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     The withdrawal of Class B Shares in exchange for ADSs is not subject to Brazilian income tax, as long as the regulatory rules are appropriately observed with respect to the registration of the investment before the Central Bank.

     Other Brazilian Taxes

     There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of Class B Shares or ADSs by a Non-Brazilian Holder except for gift and inheritance taxes levied by some states in Brazil on gifts made or inheritances bestowed by Non-Brazilian Holders to individuals or entities that are resident or domiciled within such State in Brazil. There are no Brazilian stamp, issue, registration, or similar taxes or duties payable by holders of Class B Shares or ADSs.

     A tax on foreign exchange transactions (the “IOF/Exchange Tax”) may be imposed on a variety of foreign transactions, including the conversion of Brazilian currency into foreign currency (i.e., for purposes of paying dividends and interest) or vice-versa. The IOF/Exchange Tax rate on such conversions is currently 0% with some specific exceptions, but the Minister of Finance has the legal power to increase the rate to a maximum of 25.0% . Any such increase will be applicable only prospectively.

     IOF may also be levied on transactions involving bonds and securities (“IOF/Bonds Tax”), including those carried out on Brazilian stock, futures or commodities exchanges. As a general rule, the rate of this tax is currently zero. The Minister of Finance, however, has the legal power to increase the rate to a maximum of 1.5% per day, but only in respect to future transactions.

     In addition to the IOF taxes mentioned above, any transaction carried out by a holder of Class B Shares and/or ADSs that results in the transfer of Brazilian currency from an account maintained by such holder (or its custodian) with the Brazilian financial institution may be subject to the temporary contribution on financial transactions (the “CPMF Tax”), at a rate of 0.38% . Currently, the funds transferred for the acquisition of shares on the Brazilian stock exchange and the remittance abroad of the proceeds earned from the disposition of shares in Brazil by means of a currency exchange transaction are exempt from the CPMF Tax. In addition, according to the Fourth Article of Provisory Measure No. 281, of February 15, 2006, the CPMF Tax rate is reduced to zero on withdrawals from bank accounts used to buy shares in a public offering, provided the public offering is registered with the CVM and that the issuer is listed on a Brazilian stock exchange. This Provisory Measure is currently valid but it is pending approval by the Congress. The CPMF Tax will remain in effect until December 31, 2007.

U.S. Federal Income Tax Considerations

     The statements regarding U.S. tax law set forth below are based on U.S. law as in force on the date of this Annual Report, and changes to such law subsequent to the date of this Annual Report may affect the tax consequences described herein (possibly with retroactive effect). This summary describes the principal U.S. federal income tax consequences of the ownership and disposition of Class B Shares or ADSs, but it does not purport to be a comprehensive description of all of the U.S. tax consequences that may be relevant to a decision to hold or dispose of Class B Shares or ADSs. This summary applies only to purchasers of Class B Shares or ADSs who will hold the Class B Shares or ADSs as capital assets and does not apply to special classes of holders such as dealers in securities or currencies, holders whose functional currency is not the U.S. dollar, holders of 10.0% or more of our shares (taking into account shares held directly or through depositary arrangements), tax-exempt organizations, financial institutions, holders liable for the alternative minimum tax, securities traders who elect to account for their investment in Class B Shares or ADSs on a mark-to-market basis, and persons holding Class B Shares or ADSs in a hedging transaction or as part of a straddle, conversion or other integrated transaction for U.S. federal income tax purposes.

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     Each holder should consult such holder’s own tax advisor concerning the overall tax consequences to it, including the consequences under laws other than U.S. federal income tax laws, of an investment in Class B Shares or ADSs.

     In this discussion, references to a “U.S. holder” are to a beneficial holder of a Class B Share or an ADS (1) that is a citizen or resident of the United States of America, (2) that is a corporation organized under the laws of the United States of America or any state thereof, or (3) that is otherwise subject to U.S. federal income taxation on a net basis with respect to the Class B Share or ADS.

     For purposes of the U.S. Internal Revenue Code of 1986, as amended, which we call the “Code”, holders of ADSs will generally be treated as owners of the Class B Shares represented by such ADSs.

     Taxation of Distributions

     A U.S. holder will recognize dividend income for U.S. federal income tax purposes in an amount equal to the amount of any cash and the value of any property distributed by us as a dividend to the extent that such distribution is paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes, when such distribution is received by the custodian (or by the U.S. holder in the case of a holder of Class B Shares). The amount of any distribution will include the amount of Brazilian tax withheld on the amount distributed, and the amount of a distribution paid in reais will be measured by reference to the exchange rate for converting reais into U.S. dollars in effect on the date the distribution is received by the custodian (or by a U.S. holder in the case of a holder of Class B Shares). If the custodian (or U.S. holder in the case of a holder of Class B Shares) does not convert such reais into U.S. dollars on the date it receives them, it is possible that the U.S. holder will recognize foreign currency loss or gain, which would be ordinary loss or gain, when the reais are converted into U.S. dollars. Dividends paid by us will not be eligible for the dividends received deduction allowed to corporations under the Code.

     Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual prior to January 1, 2011 with respect to the ADSs will be subject to taxation at a maximum rate of 15.0% if the dividends are “qualified dividends.” Dividends paid on the ADSs will be treated as qualified dividends if (i) the ADSs are readily tradable on an established securities market in the United States and (ii) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company (“PFIC”). The ADSs are listed on the New York Stock Exchange, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. Based on our audited financial statements and relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2005 taxable year. In addition, based on our audited financial statements and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a PFIC for the 2006 taxable year. Based on existing guidance, it is not clear whether dividends received with respect to the Class B Shares will be treated as qualified dividends, because the Class B Shares themselves are not listed on a U.S. exchange. In addition, the U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of ADSs or Class B Shares and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to treat dividends as qualified for tax reporting purposes. Because such procedures have not yet been issued, it is not clear whether we will be able to comply with them. Holders of ADSs and Class B Shares should consult their own tax advisers regarding the availability of the reduced dividend tax rate in the light of the considerations discussed above and their own particular circumstances.Because such procedures have not yet been issued, it is not clear whether we will be able to comply with them. Holders of ADSs and Class B Shares should consult their own tax advisers regarding the availability of the reduced dividend tax rate in the light of the considerations discussed above and their own particular circumstances.

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     Distributions out of earnings and profits with respect to the Class B Shares or ADSs generally will be treated as dividend income from sources outside of the United States and generally will be treated separately along with other items of “passive” (or, in the case of certain U.S. holders, “financial services”) income for purposes of determining the credit for foreign income taxes allowed under the Code. Subject to certain limitations, Brazilian income tax withheld in connection with any distribution with respect to the Class B Shares or ADSs may be claimed as a credit against the U.S. federal income tax liability of a U.S. holder if such U.S. holder elects for that year to credit all foreign income taxes. Alternatively such Brazilian withholding tax may be taken as a deduction against taxable income. Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions and may not be allowed in respect of arrangements in which a U.S. holder’s expected economic profit, after non-U.S. taxes, is insubstantial. U.S. holders should consult their own tax advisors concerning the implications of these rules in light of their particular circumstances.

     Distributions of additional shares to holders with respect to their Class B Shares or ADSs that are made as part of a pro rata distribution to all our shareholders generally will not be subject to U.S. federal income tax.

     Holders of Class B Shares or ADSs that are foreign corporations or nonresident alien individuals, which we call “non-U.S. holders,” generally will not be subject to U.S. federal income tax or withholding tax on distributions with respect to Class B Shares or ADSs that are treated as dividend income for U.S. federal income tax purposes unless such dividends are effectively connected with the conduct by the holder of a trade or business in the United States.

     Taxation of Capital Gains

     Upon the sale or other disposition of a Class B Share or ADS, a U.S. holder generally will recognize gain or loss for U.S. federal income tax purposes. The amount of the gain or loss will be equal to the difference between the amount realized in consideration for the disposition of the Class B Share or ADS and the U.S. holder’s tax basis in the Class B Share or ADS. Such gain or loss generally will be subject to U.S. federal income tax as capital gain or loss and will be long-term capital gain or loss if the Class B Share or ADS has been held for more than one year on the date of the disposition. The net amount of long-term capital gain recognized by an individual holder before January 1, 2011 generally is subject to taxation at a maximum rate of 15.0% . Capital losses may be deducted from taxable income, subject to certain limitations. Gain realized by a U.S. holder on a sale or disposition of Class B Shares or ADSs generally will be treated as U.S. source income. Consequently, if Brazilian tax is imposed on such gain, the U.S. holder will not be able to use the corresponding foreign tax credit, unless the holder has other foreign source income of the appropriate type in respect of which the credit may be used.

     A non-U.S. holder will not be subject to U.S. federal income tax or withholding tax on gain realized on the sale or other disposition of a Class B Share or ADS unless (1) such gain is effectively connected with the conduct by the holder of a trade or business in the United States, or (2) such holder is an individual who is present in the United States of America for 183 days or more in the taxable year of the sale and certain other conditions are met.

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     Backup Withholding and Information Reporting

     Dividends paid on, and proceeds from the sale or other disposition of, the ADSs or Class B Shares to a U.S. holder generally may be subject to the information reporting requirements of the Code and may be subject to backup withholding unless the U.S. holder (i) is a corporation or other exempt recipient or (ii) provides an accurate taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. The amount of any backup withholding collected from a payment to a U.S. holder will be allowed as a credit against the U.S. holder’s U.S. federal income tax liability and may entitle the U.S. holder to a refund, provided that certain required information is furnished to the Internal Revenue Service.

     A non-U.S. holder generally will be exempt from these information reporting requirements and backup withholding tax, but may be required to comply with certain certification and identification procedures in order to establish its eligibility for such exemption in connection with payments received within the United States or through certain U.S.-related intermediaries.

DIVIDENDS AND PAYING AGENTS

     Entitlement to dividends arises on the date of acquisition of our shares or ADS. For a description of restrictions related to payments of dividends to foreign investors, see “Item 10. Additional information —Memorandum and Articles of Incorporation—Regulation of and Restrictions on Foreign Investors” and “Item10. Additional Information—Exchange Controls.” The depositary bank will distribute dividends and other distributions to the holders of our ADSs.

DOCUMENTS ON DISPLAY

     We file reports, including annual reports on Form 20-F, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at its Public Reference Room at 100 Fifth Street, N.W., Washington, D.C. 20459. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Since November 4, 2002, we are required to make filings with the SEC by electronic means. Any filings we make electronically will be available to the public over the Internet at the SEC’s web site at http://www.sec.gov.

     In accordance with Section 303A.11 of the New York Stock Exchange (“NYSE”) Listed Company Manual, we have disclosed on our website (www.copel.com/ir) the significant ways in which our corporate governance practices differ from those required of domestic companies under the NYSE’s corporate governance standards.

Item 11. Quantitative and Qualitative Disclosures about Market Risk

     We are exposed to market risk arising from our normal business activities. These market risks principally involve the possibility of changes in both foreign currency exchange rates and interest rates that will adversely affect the value of our assets and liabilities, in addition to our future cash flow and earnings. Foreign exchange rate risk exists to the extent our costs are denominated in currencies other than those in which we earn revenues. Similarly, we are subject to market risk deriving from changes in interest rates which may affect the cost of our financing. We entered into derivative financial instruments for purposes other than trading, in order to manage and reduce our exposures to market risk resulting from fluctuations in interest rates and foreign currency exchange rates.

     Beginning in 2003, we entered into cross-currency interest rate swaps to mitigate the risks caused by foreign exchange and interest rate fluctuations and to protect our foreign currency exposure. In April 2005, we paid U.S.$150.0 million in Eurobonds and settled our cross-currency interest rate swaps contracts.

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Risk

     At December 31, 2005, we had R$121.5 million of outstanding indebtedness denominated in U.S. dollars, R$20.0 million of indebtedness denominated in Japanese yens and R$122.3 million of indebtedness indexed to a basket of foreign currencies comprised by U.S dollars, Euros, Swiss francs and Japanese yens. At December 31, 2004, we had R$554.7 million of outstanding indebtedness denominated in U.S. dollars, R$32.8 million of indebtedness denominated in Japanese yens and R$176.7 million of indebtedness indexed to a basket of foreign currencies comprised by U.S dollars, Euros, Swiss francs and Japanese yens. In addition, our energy purchases from Itaipu are denominated in U.S. dollars, and the Cien Agreements are partially indexed to U.S. dollars For a more detailed description of these Agreements and of the status of our relationship with Cien, see “Item 4. Information on the Company—Business—Generation and Purchases of Energy—Cien”. We do not have revenues denominated in any of the above foreign currencies and, due to applicable regulations that require us to keep excess cash on deposit in real-denominated deposits with Brazilian banks, we do not have monetary assets denominated in such currencies. The potential loss to us that would result from a hypothetical 10% change in foreign currency exchange rates would be approximately R$60.1 million, primarily due to the increase in our real-denominated financial statements in the principal amount of the foreign currency indebtedness described above (which increase would be reflected as an expense in our income statement). A hypothetical and instantaneous change of 10.0% in foreign currency exchange rates would result in an additional annual cash outflow of approximately R$45.3 million, reflecting the increased cost in reais of servicing foreign-currency indebtedness and purchasing energy from Itaipu and Cien. The above sensitivity analyses assume a simultaneous unfavorable 10.0% fluctuation in each of the exchange rates affecting the foreign currencies in which the foreign-currency indebtedness described above, the related interest expense and the expenses relating to purchase of energy described above are denominated.

Interest Rate Risk

     At December 31, 2005, we had outstanding R$2,044.1 million in loans and financing, of which R$84.5 million bore interest at fixed interest rates and R$1,959.6 million bore interest at floating rates of interest (primarily the TJLP, CDI, IGP-M and Libor). Pursuant to applicable regulations, we invest excess cash primarily in short-term instruments. A hypothetical, instantaneous and unfavorable change of 100 basis points in interest rates applicable to floating rate financial assets and liabilities held at December 31, 2005, would result in a net additional cash outflow of approximately R$9.1 million. The above sensitivity analyses are based on the assumption of an unfavorable 100 basis point movement of the interest rates applicable to each homogeneous category of financial assets and liabilities. A homogeneous category is defined according to the currency in which financial assets and liabilities are denominated and assumes the same interest rate movement within each homogeneous category (i.e. U.S. dollars; currencies in the currency basket). As a result, our interest rate risk sensitivity model may overstate the impact of interest rate fluctuations for such financial instruments as consistently unfavorable movements of all interest rates are unlikely.

Item 12. Description of Securities Other than Equity Securities

     Not Applicable.

Item 13. Defaults, Dividend Arrearages and Delinquencies

     Not Applicable.

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Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

     None.

Item 15. Controls and Procedures

     The requirement to report on the effectiveness of our internal control over financial reporting will apply to us for the first time in our annual report on Form 20-F for the year ending December 31, 2006. In preparation for that report, we have begun to review our internal control over financial reporting, and we have identified certain material weaknesses. First, our controls regarding the selection of appropriate accounting policies under U.S. GAAP and Brazilian GAAP are not effective, as evidenced by the restatement of our previously issued financial statements reported in this annual report (see “Item 5—Financial and Operating Review and Prospects—Restatement of Previously Issued Financial Statements”). The Brazilian GAAP restatement was triggered by an ANEEL regulation covering accounting for R&D and EEP obligations. Second, our controls regarding the operational effectiveness in applying our accounting policies are not effective, as evidenced by our failure under U.S. GAAP to write down part of our unrecoverable deferred regulatory asset. Third, we have insufficient access controls on our information technology systems. We are taking steps to address these matters, but we may not be able to correct them, and we may determine that we have other material weaknesses that are unrelated to these matters.

     We have carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, because of the possible areas of material weakness that are summarized above, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures as of December 31, 2005 were not effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate in order to allow timely decisions regarding required disclosure.

     There has been no change in our internal control over financial reporting during 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16A. Audit Committee Financial Expert

     Our board of directors has reviewed the qualifications and backgrounds of the members of the audit committee and determined that Laurita Costa Rosa is an “audit committee financial expert” within the meaning of Item 16A and is independent. For more information regarding our audit committee, see “Item 6. Directors, Senior Management and Employees—Board Practices—Board Committees—Audit Committee.”

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Item 16B. Code of Ethics

     In November 2003, we adopted a code of ethics that also applies to our Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer. We have posted copies of this code of ethics on our Internet website at the following address: www.copel.com/ir. Copies of our code of ethics may also be obtained without charge by writing to us at the address set forth on the front cover of this Form 20-F. We have not granted any implicit or explicit waivers from any provision of our code of ethics to the officers described above since adoption of the code.

Item 16C. Principal Accountant Fees and Services

Audit and Non-Audit Fees

     PricewaterhouseCoopers Auditores Independentes acted as our independent registered public accounting firm for the fiscal years ended December 31, 2005 and 2004.

     The chart below sets forth the total amount billed to us by PricewaterhouseCoopers Auditores Independentes for services performed in 2005 and 2004, and breaks down these amounts by category of service in millions of reais:

    Year Ended December 31, 
   
    2005    2004 
       
   
(millions of reais)
 
Audit Fees   
0.7 
0.5 
Audit-Related Fees   
– 
– 
Tax Fees   
– 
– 
All Other Fees   
– 
– 
 
 
 
Total   
0.7 
0.5 
     

Audit Fees

     Audit fees are fees billed for the audit of our annual financial statements and for the reviews of our quarterly Brazilian GAAP financial information in connection with statutory and regulatory filings or engagements.

Audit Committee Pre-Approval Policies and Procedures

     Neither our board of directors nor our audit committee has established pre-approval policies and procedures for the engagement of our independent auditors for services. Our board of directors expressly approves on a case-by-case basis any engagement of our independent auditors for audit and non-audit services provided to our subsidiaries or to us. Our audit committee provides recommendations to our board of directors regarding such engagements. For more information regarding our board of directors and audit committee, see “Item 6. Directors, Senior Management and Employees—Board Practices.”

Item 16D. Exemption from the Listing Standards for Audit Committees

     None.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

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     None.

Item 17.

     Not applicable.

Item 18. Financial Statements

     Reference is made to pages F-1 through 86.

Item 19. Exhibits

1.1      Amended and Restated By-laws of the Company dated as of April 27, 2006 (English translation).
 
2.1      Deposit Agreement dated as of July 29, 1997 (incorporated by reference to our Registration Statement on Form F-6 filed with the SEC on March 23, 2000 (File No. 333-11692)).
 
4.1      The Adjustment Agreement of August 4, 1994 between the State of Paraná and Companhia Paranaense de Energia-COPEL (the “Adjustment Agreement”) (incorporated by reference to our Form F-1 333-7148, filed with the SEC on June 30, 1997) and the Deed of Amendment to the Adjustment Agreement (Quarto Termo Aditivo ao Termo de Ajuste celebrado em 21 de janeiro de 2005) (English translation).
 
8      List of Subsidiaries
 
12.1      Certification of the Chief Executive Officer of Copel, pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.
 
12.2      Certification of the Chief Financial Officer of Copel, pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.
 
13.1      Certification of Chief Executive Officer of Copel, pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
 
13.2      Certification of the Chief Financial Officer of Copel, pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
 

     There are omitted from the exhibits filed with or incorporated by reference into this Annual Report certain promissory notes and other instruments and agreements with respect to our long-term debt none of which authorizes securities in a total amount that exceeds 10% of our total assets. We hereby agree to furnish to the Securities and Exchange Commission copies of any such omitted promissory notes or other instruments or agreements as the Commission requests.

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INDEX OF DEFINED TERMS
             
Adjusted Net Profit    85    Group A Customers    33 
ADRs    ii    Group B Customers    33 
ADSs    ii    GW    iii 
American Depositary Shares    ii    GWh    iii 
ANEEL    ii    IBGE    57 
Annex V Regulations    96    ICMS Tax    63 
BNDESPAR    75    IDB    27 
BOVESPA    88    IGP-DI    10 
Braspower    37    Initial Supply Contracts    15 
Brazilian Corporation Law    ii    Interconnected Power System    22 
Brazilian GAAP    ii    Itaipu    22 
CBLC    81    kV    iii 
CCC Account    53    kW    iii 
CCEE    41    kWh    iii 
CDE Account    53    Latibex    90 
CDI    72    Low Income Residential Customers    34 
Central Bank of Brazil      Main Transmission Grid    30 
CETIP    57    Mandatory Dividend    85 
CGE    43    MME    40 
Cien Agreements    29    MRE    54 
Class A Shares    ii    MW    iii 
Class B Shares    ii    MWh    iii 
CMN    72    New Industry Model Law    14 
CNPE    40    Non-Brazilian Holder    90 
Common Shares    ii    ONS    41 
Company    ii    Petrobras    27 
Concessions Law    42    Pool    15 
Consolidated Financial Statements    ii    Power Concessions Law    42 
Copel    ii    PPT    52 
Copel Agreement    29    R$    ii 
Copel Distribuição    15    reais    ii 
Copel Geração    15    real    ii 
Copel-Agra    37    Resolution 2,689    96 
Copel-Amec    37    RGR Fund    52 
CRC Account    54    Sanepar    36 
CRC Account Agreement    58    São Paulo Stock Exchange    88 
Custodian    97    Securities Act    18 
CVM    ii    Sercomtel    35 
Deposit Agreement    89    Sercomtel Celular    35 
Depositary    89    Sercomtel Telecomunicações    35 
dollars    ii    Shareholders’ Agreement    75 
Dominó Holding    36    the Company    110 
Dona Francisca    27    Transfer Agent    95 
ELEJOR    26    TUSD    50 
Eletrobrás    26    TUST    50 
Eletrosul    30    U.S. dollars    ii 
ESCO    37    U.S. GAAP    ii 
Free Consumers    38    U.S.$    ii 
Fundação COPEL    80    UBP    52 
Furnas    30         

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TECHNICAL GLOSSARY

     Average Tariff or Rate: Total sales revenue divided by total megawatt hours (MWh) sold for each relevant period, including in the case of the Company, unbilled electricity. Total sales revenue, for the purpose of computing average tariff or rate, includes both gross billings before deducting value-added tax and unbilled electricity sales upon which such taxes have not yet accrued.

     Capacity Charge: A charge for sales of energy that is based on the amount of firm capacity contracted by a customer and that is independent of the amount of energy actually consumed by that customer.

     Distribution: The transfer of electricity from the transmission lines at grid supply points and its delivery to customers through distribution lines at voltages between 13.8 kV and 44 kV.

     Distributor: An entity supplying electrical energy to a group of customers by means of a distribution network.

     Energy Charge: A charge for sales of energy to a customer that is dependent upon the amount of energy actually consumed by that customer.

     Final Customer: A party that uses electricity for its own needs.

     Firm Capacity: The level of electricity which we can deliver from a specified power plant with a 95.0% degree of certainty, determined in accordance with certain prescribed statistical models.

     Free Consumers: (i) existing customers with demand of at least 10 MW and supplied at voltage level equal to or greater than 69 kV; (ii) new customers with demand of at least 3 MW at any voltage; (iii) groups of customers subject to agreement with the local distribution concessionaire; (iv) customers who do not receive supply for more than 180 days from a local distribution concessionaire; and (v) certain others.

     Generating Unit: An electric generator together with the turbine or other device that drives it.

     Gigawatt (GW): One billion watts.

     Gigawatt hour (GWh): One gigawatt of power supplied or demanded for one hour, or one billion watt hours.

     High Voltage: A class of nominal system voltages equal to or greater than 100,000 volts and less than 230,000 volts.

     Hydroelectric Plant: A generating unit that uses water power to drive the electric generator.

     Installed Capacity: The level of electricity which can be delivered from a particular generating unit on a full-load continuous basis under specified conditions as designated by the manufacturer.

     Interconnected Power System: Systems or networks for the transmission of energy, connected together by means of one or more links (lines and/or transformers).

     Interconnected Power System—South/Southeast: The Interconnected Power System that links the distribution and transmission lines of the South, Southeast and Midwest.

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     IPP: Independent Power Producer, a legal entity or consortium holding a concession or authorization for power generation for sale for its own account to public utility concessionaires or Free Consumers.

     Itaipu: Itaipu Binacional, a hydroelectric facility owned equally by Brazil and Paraguay. Kilovolt (kV): One thousand volts. Kilowatt (kW): One thousand watts.

     Kilowatt hour (kWh): One kilowatt of power supplied or demanded for one hour, or one thousand watt hours.

     Megawatt (MW): One million watts.

     Megawatt hour (MWh): One megawatt of power supplied or demanded for one hour, or one million watt hours.

     Megavolt Ampère (MVA): One thousand volt ampères.

     ONS: Operator Nacional do Sistema, an entity responsible for operational planning, administration of generation and transmission and planning of transmission investments in the electricity sector.

     Self-producer: An electric-intensive user that holds a concession, permission or authorization to produce energy for its own consumption.

     South Region: The states of Paraná, Rio Grande do Sul and Santa Catarina.

     Southeast Region: The states of São Paulo, Rio de Janeiro, Minas Gerais and Espírito Santo.

     State of Paraná: The Brazilian state of Paraná.

     Substation: An assemblage of equipment which switches and/or changes or regulates the voltage of electricity in a transmission and distribution system.

     Thermoelectric Plant: A generating unit which uses combustible fuel, such as coal, oil, diesel natural gas or other hydrocarbon as the source of energy to drive the electric generator.

     Transmission: The bulk transfer of electricity from generating facilities to the distribution system at load center station by means of the transmission grid (in lines with capacity between 69 kV and 525 kV).

     Unbilled electricity: Electricity which has been delivered to a customer, but for which the utility has yet to deliver a bill.

     Utility: An entity which is the holder of a concession or authorization to engage in the generation, transmission or distribution of electric energy in Brazil.

     Volt: The basic unit of electric force analogous to water pressure in pounds per square inch.

     Watt: The basic unit of electrical power.

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SIGNATURES

     The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

COMPANHIA PARANAENSE DE ENERGIA – COPEL 
 
 
By:
  /s/ Rubens Ghilardi
   
  Name: Rubens Ghilardi 
  Title: Chief Executive Officer 
 
 
 
 
By:
  /s/ Paulo Roberto Trompczynski 
   
  Name: Paulo Roberto Trompczynski 
  Title: Chief Financial Officer 

Date: June 30, 2006

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Index

Report of Independent Registered Public Accounting Firm   
F-2 
Consolidated Balance Sheets at December 31, 2005 and 2004    
F-3 
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003   
F-5 
Statements of Changes in Shareholders' Equity for the years ended December 31, 2005, 2004 and 2003   
F-7 
Consolidated Statements of Changes in Financial Position for the years ended December 31, 2005, 2004 and 2003   
F-8 
Notes to the Consolidated Financial Statements   

F - 1


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Companhia Paranaense de Energia - COPEL

1
We have audited the accompanying consolidated balance sheets of Companhia Paranaense de Energia - COPEL (the "Company") and its subsidiaries as of December 31, 2005 and 2004, and the consolidated statements of operations, of changes in shareholders' equity and of changes in financial position for the years ended December 31, 2005, 2004 and 2003, as restated (Note 2(b)). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
   
2
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
   
3
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Companhia Paranaense de Energia - COPEL and its subsidiaries as of December 31, 2005 and 2004, and the results of their operations, the changes in its shareholders' equity and the changes in their financial position for the years ended December 31, 2005, 2004 and 2003 in conformity with accounting practices adopted in Brazil.
   
4
Our audits were performed for the purpose of issuing an opinion on the financial statements referred to in the first paragraph, prepared in conformity with accounting practices adopted in Brazil. The statement of cash flows which provides supplemental information about the Company and its subsidiaries is not a required component of the financial statements. We also applied the audit procedures described in the second paragraph to the statements of cash flows for the years ended December 31, 2005, 2004 and 2003 and, in our opinion, they are fairly stated in all material respects in relation to the financial statements taken as a whole.
   
5
As discussed in Note 2(b) to the consolidated financial statements, the balance sheets as of December 31, 2004 and the related statements of operations, of changes in shareholders’ equity, of changes in financial position and of cash flows for the years ended December 31, 2004 and 2003 have been adjusted compared to those previously presented.
   
6
Accounting practices adopted in Brazil vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 33, as restated (Note 33(a)(ii).4), to the consolidated financial statements.


PricewaterhouseCoopers 
Curitiba, Brazil 
Auditores Independentes 
June 29, 2006 

F - 2


Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Consolidated Balance Sheets 
Expressed in thousands of Brazilian reais 
 

    December 31 
   
 
Assets    2005    2004 
     
        (as restated)
Current assets         
     Cash and cash equivalents    1,131,766    533,092 
     Accounts receivable, net    885,985    725,479 
     Dividends receivable    3,665    2,886 
     Materials and supplies    36,590    30,632 
     Recoverable rate deficit (CRC)   31,803    29,459 
     Deferred regulatory asset – CVA    128,187    197,162 
     Regulatory asset - Pis and Cofins    43,876   
     Deferred income taxes    25,676    24,054 
     Recoverable taxes    107,442    69,374 
     Other assets, net    77,333    41,034 
     
 
    2,472,323    1,653,172 
     
 
Non-current assets         
     Accounts receivable    104,483    100,703 
     Related parties    35,357    33,476 
     Recoverable taxes    47,621    41,018 
     Deferred income taxes    478,885    487,667 
     Judicial deposits    145,183    146,662 
     Recoverable rate deficit (CRC)   1,150,464    1,167,945 
     Deferred regulatory asset - CVA    8,559    111,246 
     Regulatory asset - Pis and Cofins    43,608    80,426 
     Other assets    48,275    52,407 
     
 
    2,062,435    2,221,550 
     
 
Permanent assets         
     Investments    414,320    407,627 
     Property, plant and equipment, net    5,991,291    5,730,561 
     Deferred charges, net    5,375    4,996 
     
 
    6,410,986    6,143,184 
     
 
Total assets    10,945,744    10,017,906 
     

The accompanying notes are an integral part of these financial statements.

F - 3


Table of Contents

Companhia Paranaense de Energia - COPEL   
   
Consolidated Balance Sheets   
Expressed in thousands of Brazilian reais (continued)  
   

    December 31 
   
 
Liabilities and shareholders' equity    2005    2004 
     
        (as restated)
Current liabilities         
     Suppliers    1,162,416    783,315 
     Loans and financing    99,253    514,396 
     Debentures    115,703    156,620 
     Deferred income taxes    54,916    66,808 
     Taxes on sales and others    327,049    258,347 
     Dividends and interest on equity    114,467    91,352 
     Accrued payroll costs    108,326    84,468 
     Pension and health-care plans    132,902    124,783 
     Deferred regulatory liabilities    65,664   
     Regulatory charges    41,280    64,135 
     Unrealized losses from cross-currency interest rate swaps      124,629 
     Other accrued liabilities    130,371    67,854 
     
 
    2,352,347    2,336,707 
     
Long-term liabilities         
     Suppliers    176,609    240,663 
     Loans and financing    602,624    702,868 
     Debentures    1,226,525    457,407 
     Deferred income taxes    26,694    72,350 
     Pension and health-care plans    470,609    542,899 
     Provision for contingencies    424,269    428,762 
     Deferred regulatory liabilities    24,912   
     Other long-term liabilities    10,541    7,646 
     
 
    2,962,783    2,452,595 
     
 
Minority interest    143,431    120,803 
     
 
Shareholders' equity         
     Capital stock    3,480,000    3,480,000 
     Capital reserves    817,293    817,293 
     Revenue reserves    1,189,890    810,508 
     
 
    5,487,183    5,107,801 
     
 
Total liabilities and shareholders' equity    10,945,744    10,017,906 
     

The accompanying notes are an integral part of these financial statements.

F - 4


Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Consolidated Statements of Operations 
Expressed in thousands of Brazilian reais, except per share amount
 

    Year ended December 31 
   
 
    2005    2004    2003 
       
        (as restated)   (as restated)
Operating revenues             
     Electricity sales to final customers    5,275,883    4,605,469    3,736,473 
     Electricity sales to distributors    949,937    445,856    334,157 
     Use of main transmission grid    267,996    209,766    112,118 
     Other revenues    322,314    283,234    237,475 
     Value-added taxes on sales and charges    (1,962,594)   (1,618,551)   (1,325,925)
       
 
     Net operating revenues    4,853,536    3,925,774    3,094,298 
       
 
Operating expenses             
     Electricity purchased for resale    (1,436,330)   (963,883)   (1,090,392)
     Use of main transmission grid    (530,798)   (311,153)   (237,603)
     Depreciation and amortization    (328,906)   (308,910)   (296,232)
     Personnel expenses    (566,455)   (474,796)   (402,454)
     Regulatory charges    (429,841)   (358,645)   (218,780)
     Third party services    (197,143)   (192,793)   (170,688)
     Materials and supplies    (266,829)   (345,288)   (296,847)
     Pension and other benefits    (108,000)   (100,171)   (126,678)
     Other expenses, net    (169,634)   (259,058)   (149,115)
       
 
     Total operating expenses    (4,033,936)   (3,314,697)   (2,988,789)
       
 
Operating income before financial results and equity in             
     results of investees    819,600    611,077    105,509 
       
 
Financial results             
     Financial income    396,279    427,539    325,823 
     Financial expenses    (497,280)   (446,911)   (165,965)
       
 
    (101,001)   (19,372)   159,858 
       
 
Equity in results of investees    9,048    1,635    16,734 
       
 
Operating income    727,647    593,340    282,101 
       
 
Non-operating expenses, net    (10,646)   (6,358)   (20,530)

The accompanying notes are an integral part of these financial statements.

F - 5


Table of Contents

Companhia Paranaense de Energia - COPEL   
   
Consolidated Statements of Operations   
Expressed in thousands of Brazilian reais, except per share amount (continued) 
   

    Year ended December 31 
   
    2005    2004    2003 
       
        (as restated)   (as restated)
Income before income taxes and minority interest    717,001    586,982    261,571 
Income taxes    (198,200)   (196,107)   (88,738)
       
Income before minority interest    518,801    390,875    172,833 
       
Minority interest    (16,424)   (21,243)   (14,408)
       
Net income for the year    502,377    369,632    158,425 
       
Net income per thousand shares at year-end    1.84    1.35    0.58 
       

The accompanying notes are an integral part of these financial statements.

F - 6


Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Statements of Changes in Shareholders' Equity 
Expressed in thousands of Brazilian reais 
 

            Revenue reserves         
           
 
    Capital    Capital    Legal    Investment    Retained     
    stock    reserves    reserve    reserve    earnings    Total 
             
 
At January 1, 2003 (as restated)   2,900,000    817,288    157,438    840,060      4,714,786 
     Prior year adjustment            3,598    3,598 
     Donations and investment grants             
     Net income for the year            158,425    158,425 
     Appropriation of net income                         
             Legal reserve        8,557      (8,557)  
             Interest on equity            (42,584)   (42,584)
             Income reserve          110,882    (110,882)  
             
 
At December 31, 2003 (as restated)   2,900,000    817,293    165,995    950,942      4,834,230 
             
     Capital increase    580,000        (580,000)    
     Net income for the year            369,632    369,632 
     Appropriation of net income                         
             Legal reserve        18,707      (18,707)  
             Interest on equity            (96,061)   (96,061)
             Income reserve          254,864    (254,864)  
             
 
At December 31, 2004 (as restated)   3,480,000    817,293    184,702    625,806      5,107,801 
             
     Net income for the year            502,377    502,377 
     Appropriation of net income                         
             Legal reserve        25,119      (25,119)  
             Interest on equity            (122,995)   (122,995)
             Income reserve          354,263    (354,263)  
             
 
At December 31, 2005    3,480,000    817,293    209,821    980,069      5,487,183 
             

The accompanying notes are an integral part of these financial statements.

F - 7


Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Consolidated Statements of Changes in Financial Position 
Expressed in thousands of Brazilian reais 
 

    Year ended December 31 
   
 
    2005    2004    2003 
       
Sources of funds        (as restated)   (as restated)
 Funds from operations             
 Net income for the year    502,377    369,632    158,425 
 Expenses (income) not affecting working capital             
     Depreciation and amortization    328,906    308,910    296,232 
     Loss on disposal of property, plant and equipment and other    24,336    13,669    10,307 
     Equity in results of investees    (9,048)   (1,685)   (16,734)
     Write-off of non-current assets    85    68,274    4,256 
     Monetary and foreign currency exchange variations, net    (42,777)   (88,255)   (272,210)
     Unrealized losses from cross-currency interest rate swaps      90,905    33,724 
     Long-term liabilities provision    197,764    121,267    448,783 
     Deferred income taxes    (36,874)   21,251    (30,838)
     Provision for losses on tax incentives        39,590 
     Gain on sale of interest in equity investees      (400)   (24,903)
     Minority interest    16,424    21,243    14,408 
       
 
    981,193    924,811    661,040 
       
Funds from third-parties             
 Refund of judicial deposits      25,000   
 Long-term loans and financing    35,532    25,412   
 Debentures    755,626     
 Customers' contribution - special obligations    39,675    47,925    44,109 
 Sale of interest in equity investees        88,309 
 Interest on equity and dividends receivable    4,576    5,237    4,368 
 Transfer from long-term to current assets    246,231    285,719    159,967 
 Other    6,705    644   
       
 
    1,088,345    389,937    296,758 
       
 
Total sources    2,069,538    1,314,748    957,798 
       
 
Application of funds             
 Interest on equity and dividends    122,995    96,061    42,584 
 Property, plant and equipment    668,866    431,122    319,729 
 Deferred charges    752    911    2,440 
 Investments    2,707    23,609    42,094 
 Non-current assets             
     Deferred regulatory asset    13,884    120,604    184,583 
     Regulatory asset - PIS and Cofins   48,597    80,426   
     Judicial deposits    19,826    32,420    35,005 
     Recoverable rate deficit (CRC) - reclassified from current assets      170,149   
     Accounts receivable    11,255    1,859    89,436 
     Loans to related parties      113,271    24,000 
     Deferred income taxes and tax recoverable    2,232    11,407    17,676 
     Other non-current assets    1,647      4,116 
 Transfers from long-term to current liabilities             
     Suppliers    64,321    33,656    6,516 
     Long-term loans and financing    95,900    581,618    104,694 
     Debentures      100,000    100,000 
     Taxes and other payables    51,941    7,216    6,555 
     Pension plan    131,644    144,416    133,483 
     Provision for losses on swap contracts      124,629   
     Provision for contingencies   693    1,607    5,010 
     Deferred regulatory liability     28,767     
       
 
Total applications    1,266,027    2,074,981    1,117,921 
       
 
Increase (decrease) in working capital    803,511    (760,233)   (160,123)
       

The accompanying notes are an integral part of these financial statements.

F - 8


Table of Contents

Companhia Paranaense de Energia - COPEL   
   
Consolidated Statements of Changes in Financial Position   
Expressed in thousands of Brazilian reais (continued) 
   

    Year ended December 31 
   
 
    2005    2004    2003 
       
        (as restated)   (as restated)
Represented by             
 Current assets             
     Beginning of the year    1,653,172    1,381,805    1,052,860 
     End of the year    2,472,323    1,653,172    1,381,805 
       
 
 Increase in current assets    819,151    271,367    328,945 
       
 
 Current liabilities             
     Beginning of the year    2,336,707    1,305,107    816,039 
     End of the year    2,352,347    2,336,707    1,305,107 
       
 
 Decrease (increase) in current liabilities    (15,640)   (1,031,600)   (489,068)
       
 
Total increase (decrease) in working capital    803,511    (760,233)   (160,123)
       

The accompanying notes are an integral part of these financial statements.

F - 9


Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

1 The Company and its Operations

Companhia Paranaense de Energia - COPEL ("COPEL" or the "Company") is a mixed-capital corporation (sociedade de economia mista), organized under the laws of the Federative Republic of Brazil and controlled by the Paraná State Government.

The Company is engaged, through its subsidiaries, in the research, study, planning, building, and exploitation, production, transformation, transportation, distribution, and sale of energy, in any of its forms, in particular electric energy. These activities are regulated by the National Agency of Electric Energy (ANEEL), which reports to the Brazilian Ministry of Mines and Energy. Additionally, COPEL is authorized to be a member, together with private companies, of consortiums or companies with the objective of engaging in operations in the energy, telecommunications and natural gas areas.

As a Brazilian publicly held company, COPEL is registered with Comissão de Valores Mobiliários - CVM (the "CVM"), the Brazilian Securities Commission, and its shares are traded on the Brazilian stock exchanges. The Company is registered with the US Securities and Exchange Commission - SEC and its shares are listed on the New York Stock Exchange ("NYSE"), through an American Depositary Shares (ADS) program. The Company is also listed at LATIBEX, which is part of the Madrid Stock Exchange in Spain.

The subsidiaries of COPEL and their main activities are as follows:

(i) COPEL Geração S.A.: wholly owned subsidiary, which is intended to exploit the energy generation service; and has 18 power plants in operation, 17 hydroelectric and one thermoelectric plant, with a combined installed capacity of 4,549.6 MW. COPEL Geração S.A. received from ANEEL the following concessions, renewable pursuant to current legislation:

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

Power generation plants

        Installed    Date     
        capacity    concession    Year of 
Power plant    River    (MW) (*)   was issued    expiration 
         
 
Hydroelectric plants                 
Gov. Bento Munhoz da Rocha Neto (Foz do Areia)   Iguaçu    1,676.00    May 24, 73    2023 
Gov. Ney Aminthas de Barros Braga (Segredo)   Iguaçu    1,260.00    Nov 14, 79    2009 
Gov. José Richa (Caxias)   Iguaçu    1,240.00    May 02, 80    2010 
Gov. Pedro Viriato Parigot de Souza    Capivari - Cachoeira    260.00    Apr 23, 65    2015 
Guaricana    Arraial    36.00    Aug 13, 76    2026 
Chaminé    São João    18.00    Aug 13, 76    2026 
Apucaraninha    Apucaraninha    10.00    Oct 13, 75    2025 
Mourão    Mourão    8.20    Jan 20, 64    2015 
Derivação do Rio Jordão    Jordão    6.50    Nov 14, 79    2009 
Marumbi    Ipiranga    4.80    (**)    
São Jorge    Pitangui/Tibagi    2.30    Dec 04, 74    2024 
Chopim I    Chopim    1.98    Mar 20, 64    2015 
Rio dos Patos    Rio dos Patos/Ivaí    1.72    Feb 14, 84    2014 
Cavernoso    Cavernoso/Iguaçu    1.30    Jan 07, 81    2011 
Salto do Vau    Palmital    0.94    Jan 27, 54    (***)
Pitangui    Pitangui    0.87    Dec 05, 54    (***)
Melissa    Melissa    1.00    Oct 08, 93    (***)
 
Thermoelectric plant                 
Figueira        20.00    Mar 21, 69    2019 

(*) Unaudited. 
(**) Under approval by ANEEL. 
(***) Power plants with capacity lower than 1 MW are only registered with ANEEL. ANEEL only regulates power generation plants above 1MW. 
 

(ii) COPEL Transmissão S.A.: wholly owned subsidiary, which is principally engaged in the transport and transmission of electric energy, in addition to operating part of the south-interconnected power system to the National Electric System Operator - ONS. As of December 31, 2005, COPEL Transmissão S.A. has 125 substations, operating at voltages equal to or higher than 69 kV, and 6,996.5 km of transmission lines.

(iii) COPEL Distribuição S.A.: wholly owned subsidiary, which is engaged in the distribution and sale of electricity, fuels and energetic raw materials; it distributes electricity in 392 of the 399 municipalities of the State of Paraná, serving 98 percent of the customers in the State of Paraná, as well as the municipality of Porto União, in the State of Santa Catarina.

(iv) COPEL Telecomunicações S.A.: wholly owned subsidiary, which is engaged in providing telecommunications and communications services in general. COPEL Telecomunicações S.A. has network and specialized circuit services under permission of ANATEL - Agência Nacional de Telecomunicações, the Brazilian National Telecommunication Agency. The Company provides telecommunication services since 1998. In 2005, net operating revenues from external customers of COPEL Telecomunicações S.A. represented 0.9% (2004 and 2003 - 0.8%) of consolidated net operating revenues.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

(v) COPEL Participações S.A.: wholly owned subsidiary, which is engaged in holding ownership interests in other companies or consortiums.

(vi) Companhia Paranaense de Gás - COMPAGAS: COPEL Participações S.A. holds 51% of the voting capital of COMPAGAS, which is engaged in the supply of piped natural gas in the State of Paraná.

(vii) Centrais Elétricas do Rio Jordão S.A. - ELEJOR: COPEL Participações S.A. holds 70% of the voting capital of ELEJOR, which is engaged in the generation of electric energy in Fundão-Santa Clara Power Complex on the Jordão River in the State of Paraná.

2 Basis for Presentation

(a) Presentation of financial statements

The financial statements have been prepared in accordance with accounting practices adopted in Brazil ("Brazilian GAAP") which are based on the Brazilian Corporation Law (Law No. 6404/76, as amended), in compliance with the standards and procedures determined by the Brazilian Securities Commission (CVM), the accounting standards issued by the Conselho Federal de Contabilidade - CFC (the Federal Accounting Council), the Instituto dos Auditores Independentes do Brasil - IBRACON (the Brazilian Institute of Independent Auditors) and also in compliance with the standards and procedures of ANEEL included in the "Accounting Manual for the Electric Energy Public Service".

The accompanying financial statements are a translation and adaptation from those originally issued in Brazil, based on the Brazilian GAAP. Certain reclassifications and changes in terminology have been made and these notes have been expanded, in order to conform more closely to disclosure practices prevailing pursuant to accounting principles generally accepted in the United States of America ("US GAAP").

The consolidated financial statements prepared by the Company for statutory purposes, which include the stand alone financial statements of the parent company, were filed with the CVM in March 2006. The financial statements presented herein do not include the parent company's stand alone financial statements and are not intended to be used for statutory purposes. The financial statements originally filed with the CVM, for statutory and regulatory purposes, presents an adjustment to opening retained earnings as of January 1, 2005 for R$ 28,516, net of tax effects, for provision of research and development programs (R&D) and energy efficiency programs (PEE). The Brazilian GAAP financial statements, as of December 31, 2004 and for the years ended December 31, 2004 and 2003, included herein, has been restated, as described below, These restated financial statements have been prepared to be filed at the United States Securities and Exchange Commission (SEC) and are no intended to replace the financial statements for statutory and regulatory purposes.

Brazilian GAAP differs in significant respects from US GAAP. A reconciliation of the net income and shareholders' equity from Brazilian GAAP to US GAAP is provided herein (Note 33).

F - 12


Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

(b) Restatement

Subsequent to the issuance of the Company’s financial statements as of and for the year ended December 31, 2004, the Company’s management modified its accounting for provision of research and development programs (R&D) and energy efficiency programs (PEE), as discussed in Note 19, and other adjustments. Consequently, shareholders’ equity as of December 31, 2004 and 2003 was decreased by R$ 28,516 and R$ 24,000, after tax effects, and the net income for the years ended December 31, 2004 and 2003 was decreased in the amount of R$ 4,516 and R$ 12,712, respectively, after tax effects.

The Brazilian GAAP financial information as of December 31, 2004 and for the years ended December 31, 2004 and 2003 has been restated to reflect these adjustments.

The correction of the adjustments from the accounting treatment for provision of research and development programs (R&D) and energy efficiency programs (PEE) and other adjustments, represented by pension plan, capitalization of interest and resulted in the following additional charges:

    Shareholders’ equity    Net income for the year ended 
    as of December 31, 2004    December 31, 2004 
     
    Before    Tax    Net of    Before    Tax    Net of 
Description    tax effects    effects    tax effects    tax effects    effects    tax effects 
             
Provision for R&D and PEE programs    (43,206)   14,690    (28,516)   (27,791)   9,449    (18,342)
Other          20,949    (7,123)   13,826 
             
    (43,206)   14,690    (28,516)   (6,842)   2,326    (4,516)
             
         
    Shareholders’ equity    Net income for the year ended 
    as of December 31, 2003    December 31, 2003 
     
    Before    Tax    Net of    Before    Tax    Net of 
Description    tax effects    effects    tax effects    tax effects    effects    tax effects 
             
Provision for R&D and PEE programs    (15,415)   5,241    (10,174)   (15,415)   5,241    (10,174)
Other    (20,949)   7,123    (13,826)   (3,845)   1,307    (2,538)
             
    (36,364)   12,364    (24,000)   (19,260)   6,548    (12,712)
             

    As previously        As 
    reported    Adjustment    restated 
       
 
Shareholders’ equity as of December 31, 2004    5,136,317    (28,516)   5,107,801 
Net income for the year ended December 31, 2004    374,148    (4,516)   369,632 
Net income per thousand shares at year end    1.37    (0.02)   1.35 
 
Shareholders’ equity as of December 31, 2003    4,858,230    (24,000)   4,834,230 
Net income for the year ended December 31, 2003    171.137    (12,712)   158,425 
Net income per thousand shares at year end    0.63    (0.05)   0.58 

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

3 Consolidated Financial Statements

The consolidated financial statements are presented in accordance with CVM Instruction 247/1996 and include the accounts of the subsidiaries COPEL Geração S.A., COPEL Transmissão S.A., COPEL Distribuição S.A., COPEL Telecomunicações S.A., COPEL Participações S.A., Companhia Paranaense de Gás - COMPAGAS and Centrais Elétricas do Rio Jordão S.A. - ELEJOR.

As authorized by CVM Circular 022/2003, the subsidiary Companhia Paranaense de Gás - COMPAGAS was not included in the Company's consolidated financial statements for the year ended December 31, 2003, as it does not have a significant impact on the Company's consolidated financial position. However, the consolidated financial statements as of December 31, 2005 and 2004 and for the three years ended December 31, 2005 presented herein included the consolidation of COMPAGAS, despite the non-consolidation of COMPAGAS in the original publication for the year ended December 31, 2003.

In 2004, COPEL acquired 30% of the common shares of ELEJOR and accordingly held 70% of the shareholding control of ELEJOR. As authorized by CVM Circular 009/2005, the subsidiary ELEJOR was not included in the Company's consolidated financial statements, originally published in 2004, as it does not have a significant impact on the Company's consolidated financial position and as of December 31, 2004, ELEJOR was a pre-operational company and, consequently, there were no results under Brazilian GAAP. However, the consolidated financial statements as of December 31, 2005 and 2004 and for the years then ended presented herein included the consolidation of ELEJOR, despite the non-consolidation of ELEJOR in the original publication of December 31, 2004 and for the year then ended.

In the consolidated financial statements, the Company's investments in the subsidiaries' shareholders' equity, intercompany balances and transactions have been eliminated.

4 Summary of Significant Accounting Policies

The Company's accounting policies comply with Brazilian GAAP which include the accounting principles specifically applicable to electric utility companies as required by ANEEL. Certain accounting policies under Brazilian GAAP do not conform with US GAAP. See Note 33 for further discussions of the differences and the reconciliation of shareholders' equity and net income to US GAAP.

(a) Regulated accounting policies

a(i) Property, plant and equipment

Property, plant and equipment are stated at acquisition or construction cost, inflation-indexed up to December 31, 1995 in accordance with Brazilian GAAP.

Depreciation is computed on the straight-line method. The annual rates of depreciation are calculated based on ANEEL Instruction No. 44 of March 17, 1999 and are presented in Note 13.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

a(ii) Construction work in progress

According to the Accounting Manual for Electric Energy Public Service, interest, other financial charges (foreign exchange and monetary variations), related to financings obtained from third parties, effectively applied in construction in progress, are recorded in this caption as part of cost.

General administrative expenses are allocated to property, plant and equipment and other construction in progress. The allocation of direct costs with personnel and outside services is permitted based on properly established criteria.

Interest capitalized on construction work in progress totaled R$ 49,757, R$ 48,125 and R$ 20,127 in 2005, 2004 and 2003, respectively.

a(iii) Special obligations

A liability is recorded for contributions received from the Federal Government and customers exclusively for investment in the electric energy distribution network. This liability is recorded in the property, plant and equipment and upon conclusion of the operating concession granted to the Company will be off-set against the concessionaire assets, including those purchased with these contributions received from the Federal Government and customers.

a(iv) Materials and supplies (including those included
in property, plant and equipment)

Those classified in current assets, are stated at average acquisition cost, materials and supplies to be used in construction are included in property, plant and equipment at acquisition cost (materials are stated at average cost). These amounts do not exceed their replacement or realizable values.

a(v) Recoverable rate deficit - CRC account

Until 1993, two important principles dominated the tariff setting process in Brazil:

(i) That electric utilities should be guaranteed an annual real rate of return on service-related assets included in the tariff base; and

(ii) That the tariffs charged to each class of customer for electric power should be uniform throughout Brazil, notwithstanding the high cost of distributing electricity to remote areas of the country.

Under the previous tariff structure, the guaranteed return was set by the regulatory agency at a level between 10% and 12%, depending on the particular circumstances of each concessionaire.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

In order to compensate concessionaire companies experiencing a rate of return below the national average of the sector, the Federal Government created the National Reserve for Compensation of Remuneration - RENCOR, through which profits from more profitable companies were to be reallocated to less profitable companies, so that the rate of return realized by all companies would be equal to the national average of the sector.

The shortfall experienced by most concessionaire companies between the guaranteed return and the actual realized rate of return was accounted for by an increase in each company's recoverable rate deficit (CRC account), equal to such shortfall. This account was recorded, until 1992, in a memorandum account, not as an asset in the balance sheet.

Law No. 8,724 of October 28, 1993, and related regulations, introduced significant changes to the regulatory structure governing electricity tariffs in Brazil, as follows:

(a) The CRC account was abolished and concessionaires with positive CRC account balances were permitted to offset such balances against any liabilities such concessionaires had to the other concessionaires, to Federal financial institutions and to the Federal Government. Additionally, the Company was permitted to transfer CRC account balances to the State of Paraná.

(b) Under the new system, the guaranteed return concept was abolished. Rather, under the new system, each concessionaire is required to propose a tariff structure, based on its particular circumstances, for approval by the Federal regulatory authorities. Each concessionaire is required to submit a tariff proposal to the ANEEL for the period and for each subsequent three-year period, based on the individual company's cost structure.

The proposed tariff is to be calculated taking into account the concessionaire's desired level of remuneration as well as the following costs: operating expenditures, including personnel, materials and third party service costs; costs of Itaipu electricity and electricity purchased from other concessionaire companies; depreciation and amortization charges, Global Reversal Reserve (Reserva Global de Reversão, or RGR) fund contributions and other regulatory charges and taxes other than income taxes.

On June 30, 1994, the Federal Government enacted certain provisional regulations in connection with its economic stabilization plan. These regulations, among other measures, suspended the tariff-setting process established by Law No. 8,631, and provided that tariffs are to be fixed on an annual basis commencing July 1, 1995.

Under an agreement dated August 4, 1994, the remaining balance of the CRC account was negotiated to be reimbursed by the Paraná State Government in 240 monthly installments updated based on the IGP-DI (General market price - internal availability) and interest of 6.65% per year. On October 1, 1997, the balance of R$ 506,692 was renegotiated extending the term to 330 equal monthly installments, which include interest and principal amortization. The last monthly installment would be due on March 30, 2025. The remaining clauses of the original contract, including interest rates, were maintained. Interest earned is recorded as interest and commissions in the income statement. The Company renegotiated on January 21, 2005 with the Paraná State Government, through the fourth amendment, the CRC receivables outstanding at December 31, 2004. The balance of R$ 1,197,404 will be reimbursed in 244 monthly installments, the first installment will due on January 30, 2005. The installment overdue in February 2003 and the installments overdue from March 2003 to December 2004 were not paid and were restated by the IGP-DI rate plus interest of 1% per month, these overdue installments were included in the renegotiated amount. The renegotiated amount is updated based on the IGP-DI plus interest of 6.65% per year. The other original clauses were maintained.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

a(vi) Regulation and deferred regulatory asset

Memorandum account for Parcel "A" variations - CVA

Pursuant to Administrative Rule 25, of January 24, 2002, COPEL calculated the effects of the Memorandum Account for "Parcel A" Variations (CVA), intended to record the changes in costs in the period between annual tariff adjustments required, beginning in 2001, and related to the items laid down in the electric distribution concession contracts.

Administrative Rule 116, of April 4, 2003, postponed for 12 months the recovery of the balance of Memorandum Account for "Parcel A" Variations - CVA, for the annual tariff adjustments occurring between April 8, 2003 and April 7, 2004. The balance of CVA, as well the CVA balance calculated over the subsequent 12 months under the Administrative Rule 25 above, has been recovered over the 24 months subsequent to the annual tariff adjustment occurring between April 8, 2004 and April 7, 2005.

Administrative Rule 116 and Administrative Rule 361 of November 11, 2004 also prescribes that for electric energy supply tariff adjustment calculation purposes, the Account for Offsetting "Parcel A" Variations (CVA), must also record changes in the collection quota to the Energy Development Account (CDE), costs for purchase of power, and the power and cost-sharing quotas of the Program of Incentives for Alternative Energy Sources - Proinfa.

In accordance with ANEEL Technical Note 146 of June 21, 2004, the tariff adjustment in June 2004 included 50% of the balance of Recoverable CVA for 2002/2003 and for 2003/2004 periods. The remaining balances of the two periods were considered in the 2005 tariff adjustment.

In June 2005, ANEEL granted an average tariff increase of 7.8% . This increase consisted of 1.25% decrease in retail tariffs and a 9.05% increase to recover the deferred regulatory asset.

The balance of CVA for 2003, 2004 and 2005 will be realized during the first half of 2006.

(b) General accounting policies

b(i) Cash and cash equivalents

Cash and cash equivalents are stated at cost plus accrued interest. Cash equivalents consist principally of time deposits and certificates of deposits (with original maturity dates of three months or less) denominated in Brazilian reais.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

b(ii) Accounts receivable

Accounts receivable includes both amounts billed and accrued revenue relating to amounts unbilled to customers as of the balance sheet date.

b(iii) Allowance for doubtful accounts

The allowance for doubtful accounts is recognized in an amount considered sufficient to cover probable losses on the realization of account receivables.

b(iv) Investments

The investments in affiliates are accounted for under the equity method of accounting. Other investments are stated at cost, less valuation reserves when applicable.

b(v) Income taxes

Income taxes are accrued on taxable results at the applicable income tax (25%) and social contribution tax (9%) rates. Deferred taxes arising from temporary differences and tax losses are accounted for under the liability method.

b(vi) Pension plans and other payroll accruals

The Company maintains a separate entity ("Fundação Copel") to administer pension funds and other post-retirement benefit plans for its employees (see Note 21). Compensated absences and bonuses payable to employees were accrued as earned during the vesting periods. As from January 1, 2001, pension funds and other post-retirement benefits started being accounted for on accrual basis, based on costs and obligations computed by independent actuaries in accordance with the rules established by CVM Statement 371/2000.

b(vii) Revenues, costs and expenses

Revenues, costs and expenses are recognized on an accrual basis, i.e., when the delivery of goods has occurred or services have been rendered, regardless of when the cash is received or paid.

Revenues from the electricity sales to final customers are recognized when earned. Billings for these sales are made on a monthly basis throughout the month. Unbilled revenues from the billing cycle up to the end of each month are estimated based on the prior month's billing cycle up to the end of each month. Differences between estimated and actual unbilled revenues, which have not been significant, are recognized in the following month. Electricity sales to distributors and to the interconnected power system (initial supply contracts, wholesale energy market and bilateral agreements) are recorded when earned and are billed monthly. Revenues from the supply of gas are recognized when the gas is delivered to final customers and are billed monthly.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

b(viii) Other revenues and expenses

Other revenues and expenses are also recognized on an accrual basis.

b(ix) Assets and liabilities denominated in
foreign currencies or subject to indexation

Assets and liabilities denominated in foreign currencies are translated into Reais at the exchange rate reported by the Central Bank of Brazil at each balance sheet date. Those denominated in Reais, and contractually or legally subject to indexation are restated to the balance sheet date applying the corresponding index.

Foreign currency exchange gains and losses and monetary variation gains and losses are recognized in income on a current basis, except those related to construction work in progress, which are capitalized in the respective property, plant and equipment accounts.

b(x) Net income per share

These amounts are calculated based on the number of shares outstanding at the balance sheet date.

b(xi) Use of estimates

The preparation of financial statements in accordance with Brazilian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the balance sheet date, and the reported amounts of revenues and expenses for the reporting periods. Actual results could differ from those estimates. The principal estimates related to the financial statements refer to the recording of effects arising from allowance for doubtful accounts, useful lives of property, plant and equipment, impairment of long-lived assets, provision for contingencies, income tax, pension plan assumptions, application of regulatory accounting and transactions involving purchase and sale of energy in the MAE and in the Electric Energy Trading Chamber - CCEE which are recorded on estimated basis and final billing and settlement information are subject to review by participants in the CCEE.

b(xii) Derivative financial instruments

Unrealized losses, net related to cross-currency interest rate swap transactions calculated based on contractual rates, are recognized on the accrual basis, and are recorded in current liabilities under Unrealized losses from cross-currency interest rate swaps account, with a contra entry to financial expenses.

b(xiii) Regulated industry

Regulated assets have been recorded for future recovery through tariff increases, to the extent that recovery is considered to be reasonably assured.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

5 Cash and Cash Equivalents

        December 31 
     
    Interest rates    2005    2004 
       
Cash and banks        85,793    53,475 
Cash equivalents    Average of 100% of CDI (*)   1,045,973    479,617 
       
        1,131,766    533,092 
       

(*) CDI - Certificado de Depósito Interbancário, an interbank variable interest rate.

6 Accounts Receivable, Net

    December 31 
   
 
    2005    2004 
     
 
Customers         
     Residential    155,429    132,083 
     Industrial    132,088    113,238 
     Commercial    78,334    66,168 
     Rural    16,744    13,403 
     Public entities    54,400    69,052 
     Public lightning    14,854    14,810 
     Public services    11,356    9,579 
     Unbilled    135,157    126,570 
     Installment receivables - current portion    64,659    50,434 
     Installment receivables - non current    73,091    73,124 
     Other    120,861    121,152 
     
 
    856,973    789,613 
     
Distributors         
     Short-term sale    40    142 
     Electricity sales to distributors - CCEE (Note 20(b))   11,018    11,725 
     Generating companies - short term reimbursement (a)   13,332    3,680 
     Generating companies - long-term reimbursement (a)   31,389    26,693 
     Initial supply contracts    9,520    4,978 
     Energy Auction    50,415   
     Bilateral agreements    36,862    38,816 
     
 
    152,576    86,034 
     
 
Transmission system    40,511    27,418 
Telecommunications and other services    7,349    2,823 
Services in progress   12,132    5,621 
Allowance for doubtful accounts (b)   (79,073)   (85,327)
     
 
Accounts receivable, net    990,468    826,182 
     
 
Current assets - accounts receivable, net    885,985    725,479 
Non current assets - accounts receivable    104,483    100,703 
     

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

(a) Generators' reimbursement right

Generators' reimbursement right refers to the amounts related to electricity from independent suppliers sold within the context of MAE during the emergency rationing period, from June 1, 2001 to February 28, 2002. These amounts were formally approved by ANEEL Resolution No. 483, of August 29, 2002, which was ratified by ANEEL Resolution No. 036, of January 29, 2003, and rectified by ANEEL Regulatory Resolutions Nº 40 of January 24, 2004 and No. 45, of March 3, 2004.

Receivables by COPEL Geração S.A. were segregated between current and long-term assets based on their expected realization, according to ANEEL Circular No. 2,218/2005.

(b) Allowance for doubtful accounts

The allowance for doubtful accounts was recorded pursuant to ANEEL Accounting Manual for the Electric Energy Public Service and to the chart of accounts from the Brazilian National Petroleum Agency (ANP) for gas supply receivables, based on a detailed analysis of past-due receivables, and at an amount considered by management sufficient to cover probable losses on the realization of receivables.

    December 31 
   
 
    2003    Additions (*)   Write-offs    2004 
         
 
Residential    22,810    54,729    (20,840)   56,699 
Industrial    4,533    9,519    (3,526)   10,526 
Commercial    5,417    2,188    (5,307)   2,298 
Public entities    16,957      (1,376)   15,581 
Other    2,928    752    (3,457)   223 
         
 
    52,645    67,188    (34,506)   85,327 
         
 
    December 31 
   
 
    2004    Additions (*)   Write-offs    2005 
         
 
Residential    32,061    52    (16,859)   15,254 
Industrial    10,526    6,650    (5,271)   11,905 
Commercial    26,298    8,483    (6,497)   28,284 
Public entities    15,581    6,633      22,214 
Other    861    1,107    (552)   1,416 
         
 
    85,327    22,925    (29,179)   79,073 
         

(*) Net of reversals and recoveries.

F - 21


Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

7 Dividends Receivable

    December 31 
   
 
    2005    2004 
     
 
Sercomtel S.A. Telecomunicações    942   
Tradener Ltda.    64    64 
Dominó Holdings S.A.    2,637    2,437 
Other    22    385 
     
 
    3,665    2,886 
     

8 Recoverable Rate Deficit (CRC)

The Paraná State Government has paid the renegotiated installments as determined by the fourth amendment to the CRC Account Agreement. Amortizations are secured by dividends payable by the Company to the Paraná State Government.

Maturity of the non-current CRC is as follows:

    December 31, 
    2005 
   
 
2007    33,918 
2008    36,174 
2009    38,580 
2010    41,145 
2011    43,882 
Thereafter    956,765 
   
 
    1,150,464 
   

F - 22


Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

9 Deferred Regulatory Assets and Liabilities

a) CVA

    December 31 
   
 
    2005    2004    2005    2004 
         
 
Asset    Current Asset    Non Current 
     
 
Recoverable CVA - tariff adjustment 2003                 
 Electricity purchased for resale (Itaipu)   22,712    45,425      22,712 
 Transmission of electricity purchased from Itaipu    321    641      321 
 Use of transmission installations - basic network    11,011    22,022      11,011 
 Regulatory charges (CDE)   8,300    16,600      8,300 
 Charges on use of system services - ESS    5,980    11,960      5,980 
         
 
    48,324    96,648      48,324 
         
 
Recoverable CVA - tariff adjustment 2004                 
 Electricity purchased for resale (Itaipu)     3,967     
 Transmission of electricity purchased from Itaipu      2,415     
 Use of transmission installations - basic network    41,885    40,154      40,154 
 Regulatory charges (CDE)     7,603     
 Charges on use of system services - ESS      14,680     
 Regulatory charges (CCC)     8,927     
         
 
    41,885    77,746      40,154 
         
 
Recoverable CVA - tariff adjustment 2005                 
 Electricity purchased for resale (Itaipu)     (3,525)     (3,525)
 Transmission of electricity purchased from Itaipu    1,086    918      918 
 Use of transmission installations - basic network    15,689    20,271      20,271 
 Regulatory charges (CDE)   4,991    (535)     (535)
 Charges on use of system services - ESS    3,267    1,586      1,586 
 Regulatory charges (CCC)   4,386    4,053      4,053 
         
 
    29,419    22,768      22,768 
         
 
Recoverable CVA - tariff adjustment 2006                 
 Transmission of electricity purchased from Itaipu    910      910   
 Use of transmission installations - basic network    854      854   
 Regulatory charges (CDE)   1,617      1,617   
 Charges on use of system services - ESS    598      598   
 Regulatory charges (CCC)   4,580      4,580   
         
 
    8,559      8,559   
         
 
Total    128,187    197,162    8,559    111,246 
         

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

    December 31 
   
 
    2005    2004    2005    2004 
         
 
Liabilities    Current liabilities    Long-term liabilities 
     
 
Recoverable CVA - tariff adjustment 2005                 
 Electricity purchased for resale                 
         Auction    16,565       
         CIEN    7,239       
         Itiquira    (370)      
         Itaipu    17,318       
         
 
    40,752       
         
 
Recoverable CVA - tariff adjustment 2006                 
 Electricity purchased for resale                 
         Auction    14,556      14,556   
         CIEN    5,752      5,752   
         Itiquira    (7,557)     (7,557)  
         Itaipu    12,161      12,161   
         
               
    24,912      24,912   
         
 
Total    65,664      24,912   
         

The changes of the deferred regulatory balances, monetary indexed by SELIC rates, are presented as follows:

                Monetary         
    2004    Additions    Amortization    indexation    Transfer    2005 
             
 
Assets                         
 Electricity purchased for resale (Itaipu)   67,254    (27,804)   (60,009)   8,635    34,636    22,712 
 Transmission of electricity purchased from Itaipu    5,208    2,011    (4,820)   828      3,227 
 Use of transmission installations - basic network    153,746    (8,794)   (90,037)   15,378      70,293 
 Regulatory charges (CDE)   29,527    15,531    (34,665)   6,132      16,525 
 Charges on use of system services - ESS    35,635    4,364    (35,480)   5,924      10,443 
 Regulatory charges (CCC)   17,038    8,551    (15,349)   3,306      13,546 
             
 
    308,408    (6,141)   (240,360)   40,203    34,636    136,746 
             
 
Liabilities                         
Electricity purchased for resale                         
 Auction      58,867    (18,168)   4,978      45,677 
 CIEN      25,023    (7,940)   1,660      18,743 
 Itiquira      (15,013)   404    (875)     (15,484)
 Itaipu      22,661    (18,990)   3,333    34,636    41,640 
             
 
      91,538    (44,694)   9,096    34,636    90,576 
             

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

b) Regulatory Asset – Pis and Cofins

Brazilian Federal Laws No. 10,637 and No. 10,833 changed the calculation basis and increased the rates of PIS and COFINS. As a result, PIS expenses increased as from December 2002 and COFINS expenses as from February 2004.

ANEEL Circular Letter No. 190/2005, as amended by Circular Letter 302/2005, recognized the Company’s right to be reimbursed the additional PIS and COFINS expenses, requiring recognition of a regulatory asset or liability at December 31, 2004, depending on whether they increased or reduced costs, respectively. Based on ANEEL regulations, the Company recorded an asset of R$ 80,426 in long-term receivables with a contra entry reducing PIS and COFINS expenses at December 31, 2004.

Pursuant to the ANEEL authorization as of June 2005, COPEL began to include PIS/PASEP and COFINS taxes in the amounts billed to customers. As a result, amounts billed to customers increased in the range of 5.0% to 5.5%, and these taxes will no longer be included in the basis for determining electricity rates.

The amounts recorded in the non-current assets of R$ 43,608, as of December 31, 2005, are waiting ANEEL definitions in relation to the recovery period. Accordingly, these amounts have not been monetarily restated.

10 Recoverable Taxes

    December 31 
   
    2005    2004 
     
Income and social contribution taxes recoverable    100,509    58,227 
Value Added Tax (ICMS) recoverable    52,138    52,104 
Other    2,416    61 
     
    155,063    110,392 
     
Recoverable taxes - current assets    107,442    69,374 
Recoverable taxes - non-current assets    47,621    41,018 
     

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

11 Deferred Income Taxes

Income taxes in Brazil include federal income tax and social contribution. The Brazilian statutory rate is 34.0%, comprised of income tax (25.0%) and social contribution tax (9.0%) .

The major components of the deferred tax accounts are as follows:

    December 31 
   
 
    2005    2004 
     
 
Current assets         
     Net operating losses carryforward    745   
     Temporary differences    24,931    24,054 
     
 
    25,676    24,054 
     
 
Non-current assets         
     Temporary differences         
             Pension plan deficit - Plan III    109,973    116,064 
             Pension and health-care plans - CVM Resolution 371    53,082    57,295 
             Provisions for contingencies and other    236,153    197,259 
     Net operating losses carryforward    79,677    117,049 
     
 
    478,885    487,667 
     
 
Total deferred income tax asset    504,561    511,721 
     
 
Current liabilities         
     CVA deferral    (37,696)   (66,808)
     Other    (17,220)  
     
 
    (54,916)   (66,808)
     
 
Long-term liabilities         
     CVA deferral    (2,910)   (38,050)
     Deferred regulatory asset    (14,827)   (27,345)
     Other    (8,957)   (6,955)
     
 
    (26,694)   (72,350)
     
 
Total deferred income tax liability    (81,610)   (139,158)
     
 
Total deferred income tax, net    422,951    372,563 
     

Pursuant to income tax legislation, tax loss carryforwards are available for offset up to the limit of 30% of annual taxable income, without expiration period.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

Reconciliation of income taxes

The reconciliation of the income taxes, calculated at the rates in effect, with the amounts shown in the statements of operations, is as follows:

    Year ended December 31 
   
 
    2005    2004    2003 
       
        (as restated)   (as restated)
 
Income before income taxes and minority interest    717,001    586,982    261,571 
Statutory income taxes rates - %    34    34    34 
       
Income taxes expenses computed based on statutory rates    (243,780)   (199,574)   (88,934)
Income tax effects on             
     Benefit from interest on equity    41,818    32,661    14,479 
     Equity in results of investees    4,590    1,989    7,301 
     Non-deductible pension expenses    (4,274)   (22,501)   (20,789)
     Other    3,446    (8,682)   (795)
       
 
Tax expense per statement of operations    (198,200)   (196,107)   (88,738)
       
 
Current income tax    (248,228)   (131,698)   (132,216)
Deferred income tax    50,028    (64,409)   43,478 
       

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

12 Investments

    December 31 
   
 
    2005    2004 
     
 
    Investee's    Investees'    Total    Equity in    Total    Total 
    shareholder's    net income    ownership    results of    investment    investment 
    equity    (loss)   - %    investees    balances    balances 
             
 
Investments accounted for under the equity method                         
     Sercomtel S.A. - Telecomunicações    211,501    (633 )   45.00    (285 )   95,175    97,677 
     Sercomtel Celular S.A.    33,534    (4,649 )   45.00    (2,092 )   15,091    17,367 
     Dominó Holdings S.A.    564,569    63,907    15.00    9,519    84,685    77,341 
     Escoelectric Ltda.    (1,919 )   (2,473 )   40.00    (222 )     222 
             Advance for future capital increase                  2,500   
     Copel Amec S/C Ltda.    890    198    48.00    95    427    332 
     Dona Francisca Energética S.A.    (4,753 )   11,597    23.03       
     Carbocampel S.A.    513    (55 )   49.00    (27 )   252    278 
             Advance for future capital increase                  198   
     Braspower International Engineering S/C Ltda.    (336 )   (263 )   49.00       
             Advance for future capital increase                  176    176 
     Centrais Eólicas do Paraná Ltda.    5,582    671    30.00    201    1,675    1,473 
     Foz do Chopim Energética Ltda.    69,983    17,647    35.77    6,312    25,033    18,721 
     UEG Araucária Ltda.    (182,102 )   (57,151 )   20.00       
             Advance for future capital increase                  141,899    141,899 
             
 
                13,501    367,111    355,486 
             
 
Other investments                         
     Goodwill on investments, net of amortization                         
             Sercomtel S.A. - Telecomunicações                (4,228 )   10,024    14,252 
             Sercomtel Celular S.A.                (580 )   1,383    1,963 
             Centrais Elétricas do Rio Jordão S.A. -                         
                 ELEJOR                  22,815    22,815 
     Tax incentive                         
             FINAM                  40,370    40,046 
             FINOR                  9,870    9,870 
     Reserve for tax incentive losses                 
(47,900 )
 
(47,900 )
     Assets for future use                  6,825    6,810 
     Other                  3,822    4,285 
     Dividends                355     
             
 
                9,048    414,320    407,627 
             

On May 15, 1998, COPEL acquired 45% of Sercomtel S.A. - Telecomunicações total shares and 45% of Sercomtel Celular S.A. total shares, both public telecommunication companies for the municipalities of Londrina and Tamarana, in the State of Paraná. The total amount paid for both companies was R$ 186,000, resulting in total goodwill of R$ 48,103, which is being amortized over 10 years, based on the expected future return generated by the investments. Goodwill paid on the investments in Sercomtel S.A. Telecomunicações and Sercomtel Celular S.A. was based on the expected future return to be generated by these investments and the amortization over ten years, at the annual rate of 10 percent, resulted from the evaluation of the return on the investments based on discounted cash flows.

On December 18, 2003, the Company entered into an agreement with Triunfo Participações e Investmentos S.A. to acquire 30% of the common shares of ELEJOR. This transaction was approved by ANEEL on July 27, 2004 and by the Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica - CADE), the anti-trust regulator. Accordingly, the Company holds 70% of the shareholding control of ELEJOR as of December 31, 2005 and 2004 (2003 - 40% of the common shares) and 35% of the total shares of ELEJOR.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

Tax incentives are investments approved by the Federal Government in underdeveloped regions of Brazil or in specific projects, which are available to Companies without additional cost upon the payment of taxes.

13 Property, Plant and Equipment

    December 31 
   
 
    2005    2004 
     
 
        Accumulated            Accumulated     
    Cost    depreciation    Net    Cost    depreciation    Net 
             
In service                         
     Generation    4,265,518    (1,486,354)   2,779,164    4,208,087    (1,384,574)   2,823,513 
     Transmission    1,381,276    (443,291)   937,985    1,294,572    (406,546)   888,026 
     Distribution    3,255,323    (1,584,860)   1,670,463    3,019,795    (1,451,514)   1,568,281 
     Telecommunications    290,969    (130,451)   160,518    271,775    (106,324)   165,451 
     Holdings    383    (232)   151    407    (209)   198 
     Elejor    285,405    (3,895)   281,510    313    (122)   191 
     Gas    130,798    (21,207)   109,591    101,440    (16,526)   84,914 
             
 
    9,609,672    (3,670,290)   5,939,382    8,896,389    (3,365,815)   5,530,574 
             
 
Construction work in progress    817,032      817,032    925,435      925,435 
             
 
    10,426,704    (3,670,290)   6,756,414    9,821,824    (3,365,815)   6,456,009 
             
 
Special obligations                         
     Transmission    (7,140)     (7,140)   (7,140)     (7,140)
     Distribution    (757,983)     (757,983)   (718,308)     (718,308)
             
 
    (765,123)     (765,123)   (725,448)     (725,448)
             
 
    9,661,581    (3,670,290)   5,991,291    9,096,376    (3,365,815)   5,730,561 
             

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

The principal annual depreciation rates are as follows:

    Percentage 
   
 
Generation     
     Equipment    10.0 
     Generator    3.3 
     Reservoirs, dams and water mains    2.0 
     Hydraulic turbine    2.5 
Transmission     
     System structure and conductor, and power transformer    2.5 
     Equipment    10.0 
     Re-ignition    4.3 
Distribution     
     System structure and conductor, and power transformer    5.0 
     Capacitors and distribution switches    6.7 
     Voltage regulator    4.8 
Telecommunications     
     Energy and transmission equipment    10.0 
     Overhead and underground cables, wiring and private switching center    10.0 
Holdings     
     Equipment    10.0 
     Furniture    10.0 
     Buildings    4.0 
     Vehicles    20.0 
Gas     
     Gas pipeline    3.3 
     Gas pipeline operation equipment    10.0 

(a) Expropriation

Certain properties required for the implementation of the Company's projects, specifically those necessary for the construction of dams and transmission lines, have been expropriated pursuant to specific legislation and are subject to compensation, negotiations and settlement with their prior owners. Because of the difficulty in arriving at precise cost estimates and the time required to obtain court decisions when out-of-court negotiations are unsuccessful, the cost of each is determined only at the end of the expropriation process and is then capitalized as part of property, plant and equipment.

(b) Assets related to the concessions

In accordance with articles 63 and 64 of Decree 41,019 of February 26, 1957, assets and installations used in the generation, transmission and distribution of electric energy are linked to these services and cannot be retired, sold or pledged in guarantee without the prior written approval of ANEEL. ANEEL Resolution No. 20/99 determined that the proceeds from the sale of assets which are not linked to the concessions should be deposited in a restricted bank account to be invested in the concession.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

(c) Special obligations

These are obligations linked to the Electric Energy Public Service Concession and represent funds provided by the Federal Government and customers, as well as certain unconditional donations and grants for investments in the electric energy public service in the distribution activity. The special obligations are established by the regulatory authorities for transmission and distribution concessions, and by the end of the concession the amount of special obligations will be off-set against the net book value of related assets.

14 Suppliers

    December 31 
   
 
    2005    2004 
     
 
Transmission network use charges         
     Connection    252    251 
     Basic network    41,765    35,318 
     Energy transmission    3,102    2,622 
     
 
    45,119    38,191 
     
 
Electricity suppliers         
     ANDE (Paraguay)   4,763    5,229 
     Eletrobrás (Itaipu)   77,921    62,736 
     CIEN - short-term (Note 20(c)(ii))   63,000    63,000 
     CIEN - long-term (Note 20(c)(ii))   175,452    239,774 
     Foz do Chopin Energética Ltda.    69,244    44,878 
     Furnas Centrais Elétricas S.A.    18,348   
     Itiquira Energética S.A.    7,037    5,894 
     Dona Francisca Energética S.A.    4,182    30,517 
     Other concessionaires    35,851    6,625 
     
 
    455,798    458,653 
     
 
Supplies and services         
     Petróleo Brasileiro S.A. - Petrobras (a)   778,286    468,495 
     Petróleo Brasileiro S.A. - Petrobras - long-term    268   
     Other suppliers - short-term    58,665    57,750 
     Other suppliers - long-term    889    889 
     
 
    838,108    527,134 
     
 
    1,339,025    1,023,978 
     
 
Suppliers - Current liabilities    1,162,416    783,315 
Suppliers - Long-term liabilities    176,609    240,663 
     

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

(a) Petróleo Brasileiro S.A. - Petrobras

The amounts owed to Petrobras totaling R$ 778,286 as of December 31, 2005 (2004 - R$ 468,495), comprise gas purchases of R$ 495,088 (R$ 371,134 in 2004) and fines and penalties of R$ 283,198 (R$ 97,361 in 2004). The outstanding balance as of December 31, 2005 is subject to the outcome of negotiations concerning the agreement with UEG Araucária Ltda.

15 Loans and Financing

    December 31 
   
 
    2005    2004 
     
 
    Current portion    Long-term         
         
 
        Accrued             
    Principal    interest    Principal    Total    Total 
           
 
Foreign currency                     
     Eurobonds            404,738 
     IDB (i)   21,414    2,423    98,465    122,302    176,699 
     National Treasury Department (ii)   9,771    1,533    110,096    121,400    149,929 
     Banco do Brasil S.A (iii)   4,907    413    14,720    20,040    32,766 
     Eletrobrás        57    66    80 
           
 
    36,099    4,371    223,338    263,808    764,212 
           
 
Local currency                     
     Eletrobrás (iv)   49,774    2,465    312,947    365,186    402,160 
     Eletrobrás - ELEJOR (v)       33,377    33,377   
     BNDES (vi)   6,376      31,939    38,315    49,509 
     Other    163      1,023    1,191    1,383 
           
 
    56,313    2,470    379,286    438,069    453,052 
           
 
    92,412    6,841    602,624    701,877    1,217,264 
           

(i) IDB (Inter-American Development Bank) - consists of a loan for the Segredo hydroelectric power plant and Rio Jordão deviation project, guaranteed by the Federal Government, which as of January 15, 1991 amounted to US$ 135 million. Interest and principal payments are due semi-annually to 2011 and interest is calculated according to a rate determined by the institution each year, which in the second half of 2005 was 4.23% per annum. The loan is guaranteed by statutory liens on the financed assets and mortgage guarantee, in addition to the co-guarantee of the Federal Government. The contract has debt covenants such as liquidity ratio (current assets/current debt) of 1.2:1, total non-current debt to shareholders' equity ratio under 0.9:1 and restrictions on the acquisition of new debt if the liquidity ratio is less than 1.5.

Other requirement includes:

  • the Company should take proper measures to obtain tariffs which could cover all operating costs;

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

  • the Company is prohibited from acquiring its own shares and distributing any part of its capital without the bank's prior authorization.

(ii) National Treasury Department (NTD) - the debt classified as National Treasury Department which terms and payment conditions were established as part of the Brazilian foreign debt restructuring, under Law 4,131/62, signed on May 20, 1998, in the context of the Brady Plan, is as follows:

                December 31 
         
    Maturity        Amortization         
Bond type    (years)   Due date    (in installments)   2005    2004 
           
 
Par bond (a)   30    2024    One payment at maturity    37,375    42,356 
Capitalization bond (b)   20    2014    21 semi-annual    27,121    34,367 
Debt conversion bond (c)   18    2012    17 semi-annual    23,050    30,009 
Discount bond (d)   30    2024    One payment at maturity    25,984    29,319 
EI-bond (interest bonds) (e)   12    2006    19 semi-annual    1,273    4,309 
New money bonds (f)   15    2009    17 semi-annual    3,274    4,749 
FLIRB (g)   15    2009    13 semi-annual    3,323    4,820 
           
 
                121,400    149,929 
           

The annual interest rates and amortization are as follows:

a) Par Bond - Interest of 6.0% per year to final maturity, with a single repayment at the end of the agreement.
b) Capitalization Bond - Interest of 8.0% per year to final maturity, repayable in 21 semi-annual installments, starting April 2004.
c) Debt Conversion Bond - Interest equivalent to semi-annual LIBOR + 7/8 of 1% per year, repayable in 17 semi-annual installments, starting April 2004.
d) Discount Bond - Interest equivalent to semi-annual LIBOR + 13/16 of 1% per year, with a single repayment at the end of the agreement.
e) El Bond - Interest Bonds - Interest equivalent to semi-annual LIBOR + 13/16 of 1% per year, repayable in 19 semi-annual installments, starting April 1997.
f) New Money Bonds - Interest equivalent to semi-annual LIBOR + 7/8 of 1% per year, repayable in 17 semi-annual installments, starting April 2001.
g) FLIRB - Interest equivalent to 4.0% to 5.0% per year in the first years and semi-annual LIBOR + 13/16 of 1% per year after the 6th year to the end of the agreement, repayable in 13 semi-annual installments, starting April 2003.

As collateral for this agreement, the Company assigned and transferred to the Federal Government, conditioned to the nonpayment of any financing installment, the credits to be made to its account receivable for own revenues, up to a limit sufficient to cover the payment of installments and other charges payable at each maturity. For Discount Bonds and Par Bonds, there are collateral deposits of R$ 11,147 and R$ 15,893 (2004 - R$ 11,149 and R$ 15,871), respectively, accounted for in other assets non current.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

(iii) Banco do Brasil S.A. - consists of a loan in Japanese Yen for the gas thermoelectric substation of the Salto Caxias plant, with amortization in 20 semi-annual installments, beginning March 7, 2000, subject to and interest of 6.6% per year. The debt is guaranteed by COPEL's accounts receivable, in case of default.

(iv) Eletrobrás - consists of loans funded by Fundo de Financiamento da Eletrobrás - FINEL and the RGR for the expansion of the generation, transmission and distribution systems. Amortization of the outstanding balances started in February 1999 and the final maturity is in August 2021. Interest of 5.5% to 6.5% per year and principal are paid on a monthly basis indexed by the FINEL (Eletrobrás financing rate) index and UFIR.

(v) Eletrobrás - ELEJOR - consist of interest and monetary indexation on ELEJOR preferred shares held by Eletrobrás, which are redeemable. The redeemable shares are adjusted by the IGP-M plus interest of 12% per year and deducted by dividends paid, beginning in 24 months after the start-up of ELEJOR and payable in 32 quarterly installments.

(vi) BNDES - consists of a loan obtained by Companhia Paranaense de Gás - COMPAGAS, signed on December 14, 2001, a line of credit repayable in 99 installments. Tranches A and C are subject to TJLP plus an interest of 4% per year, in the event of TJLP exceeds 6% per year, the surplus will be added to the principal. Tranches B and D are subject to UNBND rate plus an interest of 4% per year.

(a) Maturity of long-term loans and financing

    As of December 31, 2005 
   
 
    Foreign    Local     
    currency    currency    Total 
       
 
2007    35,306    47,709    83,015 
2008    35,306    44,696    80,002 
2009    34,373    43,100    77,473 
2010    28,534    41,873    70,407 
2011    17,594    41,873    59,467 
Thereafter    72,225    160,035    232,260 
       
 
    223,338    379,286    602,624 
       

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

16 Debentures

As of December 31, 2005 and 2004, the debentures balances were as follows:

    December 31 
   
    2005    2004 
     
    Short-term    Long-term    Total    Total 
         
Local currency                 
     Second Issue (a)   57,220    562,902    620,122    614,027 
     Third Issue (b)   35,251    400,000    435,251   
     ELEJOR (c)   23,232    263,623    286,855   
         
    115,703    1,226,525    1,342,228    614,027 
         

a) Debentures - Second Issue

The issuance of simple debentures was approved at the 156th Extraordinary Shareholders' Meeting of February 19, 2002, and concluded on May 9, 2002, with full subscription in the amount of R$ 500,000, divided into 3 series (R$ 100,000, R$ 100,000 and R$ 300,000, respectively), with a 5-year validity term and maturity on March 1, 2007. The first series was repurchased on February 27, 2004 and the 2nd series was renegotiated in March 2005.

Debentures are non-preferred (negotiable), for which COPEL's wholly owned subsidiaries were jointly and severally collateralized. These debentures are nonconvertible into shares. These proceeds were used to settle of Euro-Commercial Paper and applied in the 2002-2004 investments program in the wholly-owned subsidiaries. The remuneration of the 1st and 2nd series will be equivalent to the average of the CDI, expressed as an annual percentage, base 252 days, calculated and issued by the Central System for Custody and Financial Settlement of Securities - CETIP, and a spread of 1.75% per year. The interest will be paid semi-annually on the first business day of March and September. The nominal unit value of the 3rd series debentures will be remunerated as from the issuance date, March 1, 2002, based on the IGP-M index published by Fundação Getúlio Vargas, considering the number of days, and subject to interest of 13.25% per year. Interest will be paid annually at the first business day of March, adjusted based on the IGP-M, in a single installment, together with the principal.

b) Debentures - Third Issue

In March 2005, the Company filed with the CVM the request to issue a Debenture Program in the amount of R$ 1,000,000. The 1st series of this program totaled R$ 400,000 and the proceeds were used in May 2005 to repay the Eurobonds of US$ 150,000 issued in 1997. The debentures are nonconvertible into shares and remunerated at 115% of the average daily rate of the CDI, with amortization beginning in 2007 and final maturity in 2009. Interest is paid semi-annually, starting on August 1, 2005 to February 1, 2009.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

The debentures of the third issue are secured by the bank account at Banco do Brasil S.A. from Copel Geração S.A., where are deposited the resources from the energy sales agreements.

The Company is required to comply with certain covenants measured in accordance with Brazilian GAAP: (i) consolidated EBITDA/consolidated financial expenses for the twelve month period ending on the last day of the fiscal quarters ended on March and September should be, at least, 1.8 through June 30, 2006 and 2.0 as from June 30, 2006; (ii) consolidated debt/consolidated EBITDA no greater than 4.0; and (iii) consolidated debt/(consolidated debt plus shareholders’ equity) no greater than 0.42.

c) Debentures - ELEJOR

In February 2005, ELEJOR issued 1,000 convertible debentures comprised by two series in the amount of R$ 255,626 indexed to TJLP, plus a spread of 4% per year, the amortization of 660 debentures from the first series starts in May 2009 and the final mature is in February 2015, and the amortization of 340 debentures from the second series starts in May 2010 and the final mature is in February 2016. Interest on the first series will start on February 2006, and will be paid quarterly through February 2015. Interest on the second series will be paid annually through February 2007, and will be paid quarterly starting on May 2007 through May 2016.

The debentures issued by ELEJOR were acquired by BNDES Participações S.A. - BNDESPAR, and were guaranteed by Copel Participações S.A., the proceeds will be used mainly to: (i) investments in the Fundão-Santa Clark Power Complex; (ii) investments in two small hydroelectric plants, PCH Santa Clara I and PCH Fundão; (iii) payment of 50% of the amount borrowed between July 1, 2004 and September 30, 2004 from Copel Participações S.A.; (iv) payment of loans from Copel Participações S.A., as from October 1, 2004.

Maturity of long-term debentures, as of December 31, 2005:

    Total 
   
 
2007    696,222 
2008    133,320 
2009    155,667 
2010    41,233 
2011    45,064 
Thereafter    155,019 
   
 
    1,226,525 
   

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

17 Taxes on Sales and Others

    December 31 
   
 
    2005    2004 
     
 
ICMS payable    157,129    127,778 
PIS and COFINS payable    54,106    31,091 
INSS included in REFIS, net of payments (i)   71,023    67,240 
Other    44,791    32,238 
     
 
    327,049    258,347 
     

(i) Tax Recovery Program - REFIS

In 2000, the Company included in the Tax Recovery Program (REFIS), created by Law 9,964, of April 10, 2000, a total debt of R$ 89,766, arising from tax obligations to the National Institute of Social Security (INSS), and settled R$ 45,766 related to interest, using credits deriving from income tax and social contribution loss carryforwards purchased from third parties. Considering that the Federal Revenue Secretariat (SRF) has not yet completed the analysis of this transfer of tax credits, the Company set up the provision in September 2003. As of December 31, 2005, the provision recorded totaled R$ 71,023 including interest and monetary indexation (2004 - R$ 67,240).

18 Regulatory Charges

    December 31 
   
 
    2005    2004 
     
 
Financial settlement - water resources    12,382    12,392 
Energy development account - CDE    10,934    7,093 
Emergency capacity charges    10,021    22,067 
Global reversal reserve - RGR    5,390    4,686 
ANEEL inspection fare    1,117    795 
Fuel consumption account - CCC    1,051    15,709 
Other    385    1,393 
     
 
    41,280    64,135 
     

19 Other accrued liabilities

Other accrued liabilities include the provision for research and development programs (R&D) and energy efficiency programs (PEE) in the amount of R$ 95,870 and 43,206, as of December 31, 2005 and 2004, respectively.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

Concessionaires of public distribution of electric energy are required to spend at least 1.0% of their annual net operating revenue, after deducting ICMS and emergency capacity charges, in programs identified as Energy Efficiency Programs (PEE) and Research and Development (R&D), as prescribed by Law 9,991/2000, and amended by Law 10,848/2004. Until December 31, 2005, such amount should be spent 50% for PEE and 50% for R&D. Out of the total amounts to be invested in R&D, such amounts should be spent: (i) 40% in research and development projects carried out by the Company or by third parties; (ii) 40% should be paid to a third-party, the Brazilian National Scientific and Technological Development Fund (FNDCT); and (iii) the remaining 20% should be paid to another third-party, the Brazilian Energy Research Company (EPE).

The amounts payable to FNDCT and EPE, have been provided for by the Company monthly following the accrual basis. However, the amounts related to PPE and item (i) of R&D were accounted for in the financial statements for periods through December 31, 2004 on a cash basis.

In November 2005, ANEEL, through Resolution No. 176, and the Manual for PEE, determined that: (a) a provision should be recorded following the accrual basis for amounts required to be spent of PEE and R&D, and (b) that the amounts to be spent should be increased by interest computing using the SELIC interest rate.

IBRACON, through Technical Notice 03/2006, issued on January 23, 2006, concluded that the non recognition of a liability for expenditures on PEE and R&D are prior-year adjustments resulting from misinterpretation of facts. Technical Notice 03/2006 also required: (a) to recognize a liability against retained earnings as of January 1, 2005 for the amounts accrued but not yet spent as of January 1, 2005 for PEE and R&D, and (b) to record within financial expenses for the year ended December 31, 2005 the cumulative interest on such liability based on SELIC since the requirement to adjust the amount to be spent by SELIC has been established during 2005. As a result, the Company recorded on its financial statements for statutory and regulatory purposes an adjustment to opening retained earnings as of Janury 1, 2005 for R$ 28,516, net of tax effects. The Brazilian GAAP financial information, included in these financial statements, as of December 31, 2004 and for the years ended December 31, 2004 and 2003 has been restated to reflect these adjustments (Note 2(b)).

20 Commitments and Contingencies

(a) Provision for contingencies and judicial deposits

The Company is a party to several labor claims, tax suits, and civil actions filed with different courts. Company management, based on the opinion of its legal counsel, decided to maintain a provision for contingencies relating to litigation with a probable chance of an unfavorable outcome. The Company also made judicial deposits of equivalent or lesser amounts pending final legal position.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

    December 31 
   
 
            Provision for 
    Judicial deposits    contingencies 
    (non-current assets)   (long-term liabilities)
     
 
    2005    2004    2005    2004 
         
 
Labor contingencies - a(i)   62,693    44,147    82,667    64,504 
         
 
Civil                 
     Customers - tariff litigation - a(ii)   1,648    1,456    20,205    15,657 
     Land expropriation - a(iii)   6,852    6,399    13,384    35,847 
     IUEE - municipal governments          7,374 
     Civil and tax courts    10,946    8,936    32,059    28,018 
         
 
    19,446    16,791    65,648    86,896 
         
 
Taxes                 
     COFINS - a(iv)       197,549    197,549 
     PASEP - a(v)   14,045    35,350    14,263    35,568 
     INSS - a(vi)   48,015    48,014    25,625    18,245 
     Federal taxes        30,741    26,000 
     Other        7,776   
         
 
    62,060    83,364    275,954    277,362 
         
 
Other judicial deposits - a(vii)   984    2,360     
         
 
    145,183    146,662    424,269    428,762 
         

a(i) Labor contingencies

Refer to labor lawsuits in progress for which the Company, based on the opinion of outside legal counsel and Company's lawyers, recognized a reserve for probable losses.

a(ii) Customers - tariff litigation

The Company is a party to lawsuits in which certain industrial customers are challenging the constitutionality of the tariff increase based on DNAEE Ordinances 38 and 45, of January 27, 1986 and March 4, 1986, respectively, which became effective during the Brazilian government's "Cruzado Plan", and claiming refunds of the amounts involved. It is not possible to anticipate the final outcome of these lawsuits, although several other companies have obtained partial success. The Company recognized an accrual as of December 31, 2005 of R$ 20,205 (2004 - R$ 15,657) to cover probable losses on these lawsuits, regarding the tariff difference charged to industrial customers in the period from March to November 1986, plus charges on late payments. The amount is considered sufficient to cover probable losses.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

a(iii) Land expropriation

Lawsuits brought by owner whose land were expropriated for the installation of Company's projects, specifically those necessary for the construction of dams and transmission lines.

a(iv) COFINS

The contributions to the FINSOCIAL Program (a program for financing of public assistance activities) were calculated based on the Company's operating revenues. Its rate increased over time from 0.5% to 2.0% until such contribution was terminated in 1991. The COFINS contribution was introduced immediately after the discontinuation of the FINSOCIAL contribution and has the purpose of financing social security. The Company claimed that these contributions violate the Brazilian Constitution, which provides that electric utility companies are subject only to income tax, value-added tax and taxes on imports and exports.

Prior to 1998, the probability of loss was considered probable and a provision for the probable loss was recorded. On August 18, 1998, the Federal Court of Appeals, 4th Region, issued a judgment granting COPEL immunity from COFINS levied on electric energy operations. On August 10, 2000, the Federal Government requested a new trial to annul such judgment. The Company was summoned on November 21, 2000, thus raising the issue of the loss of the exemption. On December 14, 2000, the process was concluded by the court reporter, which was contested by COPEL, based on conclusive opinions of renowned jurists on the impropriety of the government’s request to annul the original judgment. In August 2003, a majority of the court approved the government’s request to annul the judgement. The Company filed an appeal requesting clarification of the decision, which was partially accepted. In June 2004, COPEL filed a request for reconsideration and the judgment was scheduled for December 2, 2004, however, the Federal Court announced its postponement.

On June 2, 2005, the Federal Court resumed trial and accepted, by majority vote, COPEL’s claim of lapsing of right to take legal action, and on August 3, 2005, the ruling was published.

The Federal Government filed a Special Appeal on September 19, 2005, and COPEL submitted its brief of appellee. After admissibility review, the appeal was accepted by the 4th District Federal Court, to which COPEL responded by filing a request for clarification, with a view to overruling the decision that had accepted the appeal.

As of December 31, 2005, the Company has maintained its liability for the deferred contingent gain on this while awaiting a final judgment.

a(v) PASEP

According to legislation, Brazilian companies are required to pay contributions either to the PIS Program (Program for Social Integration) or to the PASEP Program (Program for the Establishment of Public Employee's Patrimony), depending on its classification as privately or Government-owned, respectively. Being a mixed-capital corporation, and based on the Brazilian Constitution, which provides that public service concessionaires should be treated as private sector companies for tax purposes, the Company believed that it should contribute to the PIS Program, although the Federal Government has stated that it should contribute to the PASEP Program. The rates and basis for calculation of such contributions have changed over time and differ from one another, resulting in significant differences in the final amounts due.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

In 1999, the Company adopted the benefits of the Provisional Measure ("Medida Provisória") 1,858-8, dated August 27, 1999 (up dated by the Provisional Measure 2,037 of December 21, 2000), which provided for abatement of penalties if the Company paid the taxes and abandoned the judicial proceedings. A portion of the total balance deposited in a judicial escrow account in the past was already refunded to the Company in 1999 and the related reserve was reduced based on original values of the claim. The remaining balance as of December 31, 2005 of R$ 14,263 (2004 - R$ 35,568) refers to interest and fines on the same subject which are still being reviewed by the Judicial Court, for which COPEL is waiting for the final court decision on the residual amount to be refunded.

a(vi) INSS

During 2001 the Company received tax assessment in connection with various aspects of the Social Security (INSS) legislation, mainly regarding vacation premium, amounts payable as indemnity to employees, social security co-responsibility with contractors, and failure in retention of INSS contribution of contracted independent workers.

The Company has initiated a judicial proceeding against this assessment and based on the risk evaluation of its legal advisors estimates that its maximum exposure in this matter would be R$ 25,625 as of December 31, 2005 (2004 - R$ 18,245), which was recorded as a liability. The amount of R$ 255,000, which is represented mostly by contingencies related to INSS on third-party services, was classified as "possible loss" by the legal advisers, and therefore was not provided for in the consolidated financial statements.

a(vii) Other contingencies and judicial deposits

The Company is a party to other administrative and judicial lawsuits related to environmental, tax, civil and labor matters, which were also analyzed by independent counselors. Management considers that these lawsuits will not have a material effect on the Company's financial position and, therefore, did not recognize an accrual for them.

a(viii) Possible losses

The Company has other possible (unprovided) contingencies for labor and civil contingencies, based on the reports of legal advisors, amounting to R$ 36,414 (2004 - R$ 14,901) and R$ 73,612 (2004 - R$ 56,910), respectively, as of December 31, 2005.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

(b) Electric Energy Trading Chamber - CCEE

The Wholesale energy market - MAE was extinguished and on November 11, 2004, and its activities, assets and liabilities were assumed by the Electric Energy Trading Chamber - CCEE (Câmara de Comercialização de Energia Elétrica).

Amounts related to the sale of electric energy by COPEL Distribuição in 2000, 2001 and the first quarter of 2002 were recognized by the Company based on estimates prepared by the Company and information provided by the MAE. These amounts were calculated under criteria and data set forth in ANEEL Decision 288/2002 and ANEEL Resolution 395/2002, and the Company has already contested these decisions at the administrative and judicial levels.

The Company's claim involves the partial sale of energy from Itaipu in the Southern and Southeastern sub-markets to comply with the bilateral agreements of electricity sales to distributors and industrial customers during the rationing period in 2001, when there was a significant difference in the prices of spot market energy. As of December 31, 2005, the estimated amount of calculation differences is approximately R$ 610,000 (2004 - R$ 534,000), which has not been recognized as a liability by the Company on its books. Management, based on the opinion of its legal counsel, considers that the probability of loss in this lawsuit is possible, accordingly, no provision was recorded as of December 31, 2005 and 2004.

On August 27, 2002, the Company obtained a favorable injunction issued by the Federal Regional Court - 1st Section, in order not to consider the new accounting set forth in ANEEL Decision 288 and ANEEL Resolution 395.

Changes in spot-market energy amounts (CCEE) in 2005 were as follows:

    Amount to            Amount to 
    be settled at            be settled at 
    December 31,            December 31, 
    2004    Settlement    Appropriation    2005 
         
 
Current assets (Note 6)   11,725    (82,339)   81,632    11,018 
Current liabilities      (28,580)   28,580   
         
 
MAE, net balance    11,725    (53,759)   53,052    11,018 
         

The amounts above can be subject to changes depending on the decisions on the ongoing lawsuits filed by some industry companies and the interpretation of COPEL of the current market rules. The companies that were not included in the rationing area were granted an injunction that nullifies ANEEL Decision No. 288, of May 16, 2002, the purpose of which was to explain to industry companies the treatment and the application of some MAE accounting rules included in the General Agreement for the Electric Energy Sector.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

(c) Commitments

Company management is renegotiating contracts, conducting studies, currently effective surveys, analysis, and audits to improve the contractual terms and conditions currently effective. Accordingly, the Board of Directors authorized the suspension of payments on the following contracts:

c(i) UEG Araucária Agreement

COPEL entered into an agreement with UEG Araucária to purchase for exclusive sale the total initial guaranteed energy in the amount of 484.3 MW.

The agreement was signed on May 31, 2000 and is valid for 20 years since the commencement of the commercial operations, renewable as mutually agreed between the parties.

The monthly amounts paid to December 2002 refer to an advance for future capital increase. Starting January 2003, payments were suspended by the new management of COPEL because the validity of this contract is being challenged.

In case the agreement is terminated due to default by COPEL, UEG Araucária may opt for transferring the power plant to COPEL, and COPEL will pay to UEG Araucária "the Fair Value of the Power Plant" or "the Present Value of Monthly Payments" still due under the agreement, at a 7% discount rate per year, plus taxes or other tax liabilities.

On April 1, 2003, UEG Araucária filed a claim against the Company to the "International Court of Arbitration of the International Chamber of Commerce in Paris - (the International Chamber)" with the purpose of promoting the arbitration of outstanding payments and contractual default, as well as claiming that the purchase price of the plant is US$ 827.4 million, which Araucária contends is the discounted present value of the capacity payments.

On April 22, 2003, UEG Araucária sent to COPEL a notification terminating the contract.

On June 22, 2003, COPEL filed in the Paraná State courts an action claiming the annulment of the arbitration clause and was granted an injunction suspending the arbitration procedures, or otherwise subjecting the other party to a daily fine.

Based on the Legal Opinion of the Civil Law Institute (IDC), prepared by renowned jurists, Company management understands that this contract is null and void from a legal standpoint because it was not approved by ANEEL. Based on this definition and on the contract termination notification sent by UEG Araucária, COPEL is no longer liable for the unsettled monthly payments, whether prior or subsequent to the contract termination date.

Additionally, the opinion mentions that the payment of the value of the plant claimed in the arbitration request cannot be considered due before there is a final decision on the litigation by the Brazilian courts.

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Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

Company management, based on this legal opinion and on the understanding that the contract signed by the parties is null and void, chose to reverse the accrued monthly billings of the UEG Araucária contract at June 30, 2003.

On August 14, 2003, the Company filed a new lawsuit against UEG Araucária, called Anticipated Evidence Injunction, notified under No. 24,546/2003 with the 3rd District Tax Court of Curitiba, currently in the distribution and audit stage. The Company intends, in this manner, to have evidence in its favor that it is impossible to operate the plant in a continuous, safe, permanent manner. A court inspection will be carried out by an expert appointed by court based on prerequisites filed by the Company and UEG Araucária, who will issue a technical report. The Company and UEG Araucária will appoint technical assistants to follow up on the inspection. These assistants will also issue their conclusions on the same prerequisites.

The preliminary hearing at the Arbitration Court, CCI, Paris, was held on February 22, 2004. This hearing was adjourned to April 15, 2004. On that occasion, COPEL reaffirmed its position that it will not accept the arbitration and noted that there is a decision by Brazilian courts nullifying the contract's arbitration clause that supported the Paris proceedings. In July 2004, there was a further hearing in Paris, continuing the arbitration procedure, when COPEL reaffirmed its previous position. On December 6, 2004, the Arbitration Court decided that it is competent to judge the proceedings. This judgment will not affect or change the decisions of the Brazilian courts concerning this matter. The Arbitration Court will discuss the merits of the litigation between the parties. From January 23 through January 27, 2006, the examining sessions took place. Final claims shall be submitted and a new hearing shall take place in April 2006; the arbitration shall be concluded within the first half of 2006.

On May 30, 2005, the Company, despite not acknowledging the jurisdiction of the Arbitration Court over this matter, submitted its counterclaims against UEG Araucária, based on the "principle of eventuality" and as a form of defense against Araucária’s claims.

ANEEL has acknowledged the technical and operational issues that prevent the Araucária facility from generating energy. In a letter sent to COPEL’s Chief Executive Officer and to the management of UEG Araucária, ANEEL, in addition to discussing the reasons for the facility’s failure to operate, states that the conditions for its commercial operation had already been " jeopardized" as of September 27, 2002 (date of inauguration of the plant).

The expert reports received by ANEEL attest that the facility cannot be operated in a safe and continuous manner, as COPEL has claimed since 2003. These reports, which have been confirmed by experts from Scott Wilson Raymond in England and from Instituto Superior Técnico (IST) from Portugal, two renowned European institutions specialized in thermal energy, corroborate all the issues raised by COPEL in the court-ordered expert investigation discussed above.

c(ii) CIEN Agreement

On December 13, 1999, COPEL and CIEN reached a firm energy purchase commitment by entering into two contracts of 400 MW, totaling 800 MW of firm power and associated energy, to be made available by CIEN of 525 kV from Substation Itá (Santa Catarina).

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Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

In order to resolve pending issues, on August 18, 2003, COPEL and CIEN renegotiated the "Memorandum of Understandings" in which the parties established the guidelines for the addenda to contracts 001/99 and 002/99.

These addenda comprise the following amendments to the original contracts: decrease in the contracted energy price; annual escalator based on criteria defined by the concession granting authority; decrease of contract period to 13 years from 20 years, with an option in 2005 to reduce contract termination to 2009, where this option would be free of charge for COPEL and burdensome for CIEN; reduction of the amounts of each contract by 50 percent; guarantees of receivables separate from the collection portfolio.

In 2005, the Company recognized R$ 309,334 (2004 - R$ 322,037 and 2003 - R$ 564,569) in operating expenses for electricity purchased for resale from CIEN. The amount of R$ 564,569 includes R$332,000 of electricity purchased in 2003, R$ 7,499 of indexation and the balance of R$ 225,070 related to electricity purchased in prior years (R$ 315,000 under the renegotiation of the agreement, including R$ 63,000 paid in 2003 and R$ 252,000 provided for payments due in 2004 through 2007, less R$ 89,930 related to amounts provided as of December 31, 2002), which was recognized following the renegotiation of the agreement in 2003.

The addenda to formalize the agreement were signed on December 10, 2003 and approved by ANEEL on December 23, 2003.

c(iii) COMPAGAS Agreement

Because of the litigation initiated with UEG Araucária and the fact that the energy purchase agreement entered into by the Company with UEG Araucária was not approved by ANEEL, the Company suspended the payments related to the natural gas purchase agreement. This natural gas would be the fuel of the power plant that is currently idle and there is no forecast as when and if the plant will operate again.

The Company provided an accrual of the natural gas volume guaranteed by the agreement signed by the parties on a take-or-pay basis. The agreement also prescribes that the amount paid can be recovered over a seven-year period, linked to the equivalent gas consumption. However, this recovery depends on the results of the Company discussions with the other shareholders of UEG Araucária. As of December 31, 2005, the amount payable to Petrobras was recorded as suppliers and totaled R$778,286 (2004 - R$ 468,495).

c(iv) Other commitments

COPEL Distribuição is renegotiating the energy purchase agreements with Rio Pedrinho Energética S.A. and Consórcio Salto Natal Energética S.A. and since September 2003 and November 2003, respectively, has not made payments. Rio Pedrinho Energética S.A. and Consórcio Salto Natal Energética S.A. commenced arbitrations proceedings against COPEL Distribuição seeking the amount of R$ 27,479 and R$ 27,416, respectively, for the outstanding amounts and penalties that had been billed to COPEL Distribuição according to its energy purchase agreements and both case were ruled in their favor. COPEL Distribuição is currently presenting its defense, based on the understanding that the contracts are null and void, since they are damaging to the Company’s assets.

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Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

The Company’s management based on the advice of its legal counsel believes that it is probable to prevail in these arbitrations, and accordingly, no provisions were recorded as of December 31, 2005 and 2004.

21 Pension and Health Care plans

The Company sponsors a retirement pension plan ("pension plan") and a health-care plan, for medical and dental assistance during and after employment for its employees and their dependents, ("health-care plan") both administered by a separate entity, Fundação Copel, which operates in accordance with specific legislation and regulations in Brazil.

The funded status for both pension plan and health-care plan were as follows:

    December 31 
   
    2005    2004 
     
    Pension    Health-care         
    plan    plan    Total    Total 
         
Fully or partially covered obligations    2,050,038    433,172    2,483,210    2,387,929 
Fair value of plan assets    (2,407,368)   (100,736)   (2,508,104)   (2,156,525)
Actuarial (gains) losses to be amortized    681,747    (53,342)   628,405    436,278 
         
Total actuarial obligation balance    324,417    279,094    603,511    667,682 
         
Pension and health-care plans - current liability    119,344    13,558    132,902    124,783 
Pension and health-care plans - long-term liability    205,073    265,536    470,609    542,899 
         

Pension plan

Up to December 31, 1997, the Company sponsored a "defined benefit" pension plan, which was changed into a new "defined contribution" pension plan, as approved at the shareholders' meeting of October 15, 1998.

Due to the change in the former pension plan, the participant rights generated an obligation, which the Company agreed with Fundação Copel to pay in 240 monthly installments, beginning on February 1, 1999, indexed based on INPC (National Consumer Price Index) plus interest of 6% annually.

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Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

Upon the creation of wholly owned subsidiaries on July 1, 2001, the obligation generated in 1998, updated until that date by the interest and indexation in accordance with the agreement with Fundação Copel was formally transferred to them, with the same interest and index of the original agreement mentioned above, to be paid in 210 monthly installments, with maturity beginning August 1, 2001. As a guarantee, the sponsors authorized Fundação Copel to restrict their bank account in case of default and the Company remained as guarantor of any deficit arising from the granting of benefits.

Health-care plan

Up to August 2001, medical assistance to employees and their dependents was provided directly by the Company, under the administration of Fundação Copel. After that date, the Company and its wholly owned subsidiaries implemented a new health-care plan for its employees and dependents, which is being funded by monthly contributions from both sponsors and employees, computed in accordance with Brazilian actuarial rules and criteria.

The estimated net periodic plan costs for 2006 (unaudited) and 2005, as follows:

    2006    2005 
     
 
    Pension    Health-care         
    plan    plan    Total    Total 
         
 
Cost of current service    6,774    7,182    13,956    12,493 
Estimated interest cost    369,279    52,728    422,007    378,960 
Estimated return on plan assets    (320,618)   (9,161)   (329,779)   (290,313)
Estimated employee contributions    (653)     (653)   (588)
Amortization of gain and losses    (25,353)     (25,353)   (13,930)
         
 
Total estimated    29,429    50,749    80,178    86,622 
         

In 2005, 2004 and 2003, expenses incurred with pension and health-care plans were as follows:

    Year ended December 31 
   
    2005    2004    2003 
       
    Pension    Health-care             
    plan    plan    Total    Total    Total 
           
Post employment expenses    35,202    51,420    86,622    80,752    109,872 
Active employee expenses      21,378    21,378    19,419    16,806 
           
    35,202    72,798    108,000    100,171    126,678 
           

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

Actuarial assumptions applied in the calculation of obligations and costs for 2006 and 2005 were as follows:

    2006    2005 
     
 
Inflation rate    5.05%    6.13% 
Expected discount/return rates    11.35%    12.50% 
Salary increase rate    7.15%    8.26% 
Health care cost increase rate    4.18%    4.18% 

22 Shareholders' Equity

(a) Capital stock

At December 31, 2005, the capital stock amounts R$ 3,480,000 (2004 - R$ 3,480,000) and are held, of record, among the following main shareholders as follows:

    Thousands of shares 
   
 
            Preferred shares         
           
    Common                             
Shareholder    shares    %    Class A    %    Class B    %    Total    % 
                 
 
State of Paraná    85,028,464    58.6            85,028,464    31.1 
Paraná Investimentos S.A.    134          13,639      13,773   
BNDESPAR    38,298,775    26.4        27,282,007    21.3    65,580,782    24.0 
Eletrobrás    1,530,775    1.1            1,530,775    0.6 
Stock exchange (Brazil)   16,111,629    11.1    120,312    29.8    70,687,484    55.1    86,919,425    31.7 
Stock exchange (ADRs)   3,447,455    2.4        30,099,406    23.5    33,546,861    12.3 
Municipalities    184,295    0.1    14,716    3.6        199,011    0.1 
Other    429,554    0.3    268,687    66.6    138,044    0.1    836,285    0.2 
                 
 
Total    145,031,081    100.0    403,715    100.0    128,220,580    100.0    273,655,376    100.0 
                 

The preferred shares "A" do not have any voting rights, however, they have priority in the reimbursement of capital and the right to dividend payments of 10% per annum, calculated proportionally on the capital stock of this class of shares at the balance sheet date, or to receive a dividend 10% higher than dividends paid to common shares, non-cumulative.

The preferred shares "B" do not have any voting rights, however, they have priority to receive annual dividends per share, which are 10% higher than dividends paid to common shares, after the priority of payments to preferred shares "A". The minimum dividends to preferred shares "B" are computed based on 25% of net income adjusted as prescribed by Brazilian Corporate Law and the Company's by-laws.

Under Article 17 of Brazilian Corporate Law No. 6,404 (as amended), dividends paid to preferred shares must be at least 10 percent higher than those attributed to common shares.

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Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

On March 29, 2006, the shareholders approved the conversion of 359,612 preferred shares "A" into preferred shares "B".

(b) Capital reserves

    December 31 
   
    2005    2004 
     
Contributions and grants for investments    702    702 
Recoverable rate deficit (CRC)   790,555    790,555 
Other    26,036    26,036 
     
    817,293    817,293 
     

(c) Revenue reserves

The legal reserve is computed based on 5% of net income under Brazilian GAAP limited to 20% of capital stock. This reserve can only be used to increase capital stock or to offset accumulated deficits.

The investment reserve arises from the retention of net income remaining after legal and statutory distributions, and is required to ensure the Company's future investments program.

(d) Dividends and interest on equity

In accordance with the Company's by-laws, dividends are distributable annually and computed based on net income for the year determined under the Brazilian GAAP, after the adjustments required by the Brazilian Corporate Law.

Article 9 of Law 9,249 dated December 26, 1995, allowed the deductibility for income tax purposes of interest on equity paid to shareholders, provided that such interest is computed based on the TJLP rate, effective in the year the interest on equity is computed.

As allowed by the CVM, the Company elected to pay interest on equity in the amount of R$ 122,995 as of December 31, 2005 (2004 - R$ 96,061), instead of paying dividends, and retain the remaining net income as an investment reserve.

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Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

    Year ended December 31 
   
    2005    2004    2003 
       
        (as previously reported)
Net income for the year    502,377    374,148    171,137 
Tax effects due to the option of paying interest on equity    (41,818)   (32,661)   (14,479)
       
Net income without tax effects of interest on equity    460,559    341,487    156,658 
Legal reserve (5%) computed over net income above    (23,028)   (17,074)   (7,833)
       
Basis for dividend computation    437,531    324,413    148,825 
       
Minimum dividends (25%)   109,383    81,103    37,206 
Income tax withheld on interest on equity (*)   12,974    10,290    4,493 
       
Minimum dividend computed considering the             
    effects of income tax    122,357    91,393    41,699 
Excess over minimum dividend    638    4,668    885 
       
Appropriated Interest on equity    122,995    96,061    42,584 
       

(*)      On the portion of interest on equity distributed to exempt shareholders, income tax withholding is not applicable, resulting in an effective rate of 10.55% for 2005 (2004 - 10.71% and 2003 - 10.55%).
 

23 Tariff Adjustments

(a) Annual tariff adjustment

ANEEL approved, through Resolution No. 284, of June 23, 2003, electric energy tariffs chargeable to the Company's final customers, established the annual revenue of the connection plant, set the annual amount of the electric energy inspection service fee, and the tariffs for the use of distribution plants.

The tariff increase applies since June 24, 2003, with an average increase of up to 25.27% .

As disclosed in the Material Event published on June 27, 2003, in order to mitigate the impacts of this increase for the Paraná customers and avoid a possible decrease in consumption, reduce default, reward timely payments by customers that pay their bills on the due date, and to attract new customers, especially manufacturers, the Board of Directors of the Company analyzed, during the 60th Extraordinary Meeting held on August 26, 2003 and the 102nd Ordinary Meeting, of December 9, 2003, the granting of a discount on energy bills in the same amount of the increase authorized by ANEEL to performing customers. This measure was also analyzed by the 159th Extraordinary General Meeting, of October 3, 2003, re-ratified by the 160th Extraordinary General Meeting, of November 13th 2003.

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Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

Starting in January 2004, the Company decided to reduce to 8.2% the average discount offered to performing customers. This decision resulted in an average increase of 15 percent in the total amount of energy bills.

(b) Periodic tariff review

Electric energy utility concession contracts establish that ANEEL can periodically review regulated tariffs to increase or decrease them because of changes in the cost structure and the market of the concessionaire, the tariffs charged by similar domestic and foreign companies, incentives to stimulate investments, efficiency, and the type of tariffs.

On June 24, 2004, ANEEL published on the Resolution No. 146/04 the final result of the periodical tariff review of COPEL. Based on this resolution, the average readjustment was 14.43% on the tariffs approved by Resolution No. 284/2003. This adjustment comprises 9.17% relating to the tariff determined by the process of tariff review, and 5.26% relating to cost recoveries of deferred regulatory assets (CVA).

In order to control the default levels and stimulate the electric energy consumption in the State of Paraná, the Company decided to continue granting discounts to those consumers who pay bills on time. Accordingly, on the amounts of Resolution No. 146/04 (which includes the adjustment of 25.27% for 2003 and 14.43% for 2004), the Company granted an average discount of 12.5% .

As a result, the average increase transferred to customers who pay bills on time, as from June 24, 2004, was approximately 9%. To enable the discounts granted by Copel Distribuição to its final customers, Copel Geração also granted an average discount of 28% in 2004.

As from February 1, 2005, the average discount granted to customers who pay the bills on time was reduced to 8.2% on the tariffs allowed by ANEEL Resolution No. 146/04, resulting in an average adjustment of 5%.

In June 2005, ANEEL granted an average tariff increase of 7.8% . This increase consisted of 1.25% decrease in retail tariffs and a 9.05% increase to recover the deferred regulatory asset. The Company continued the discounts policy and as from August 1, 2005, the average discount granted to customers who pay the bills on time is 6.8% .

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Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
Expressed in thousands of Brazilian reais, unless otherwise stated 
 

24 Operating Revenues

    Year ended December 31 
   
 
    2005    2004    2003 
       
 
Electricity sales to final customers             
     Residential    1,856,980    1,651,363    1,365,309 
     Industrial    1,649,222    1,456,340    1,172,135 
     Commercial    1,092,912    912,171    724,652 
     Rural    242,188    210,550    166,748 
     Public entities    168,008    142,457    116,423 
     Public lighting    144,214    128,199    106,265 
     Utility service    122,359    104,389    84,941 
 </