20-F 1 elpform20f2007.htm FORM 20-F 2007
As filed with the Securities and Exchange Commission on June 30, 2008 
 

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, 2007
Commission file number: 001-14668


COMPANHIA PARANAENSE DE ENERGIA – COPEL
(Exact Name of Registrant as Specified in Its Charter)

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

Rua Coronel Dulcídio, 800
80420-170 Curitiba, Paraná, Brazil
(Address of Principal Executive Offices)

Paulo Roberto Trompczynski
+55 41 3222 2027 - ri@copel.com
Rua Coronel Dulcídio, 800, 3th floor - 80420-170 Curitiba, Paraná, Brazil
(Name, telephone, e-email and/or facsimile number and address of company contact person)

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*  New York Stock Exchange 
American Depositary Shares (as evidenced by American Depositary  New York Stock Exchange 
Receipts), each representing 1 Class B Share   
___________________
*      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 of December 31, 2007:

145,031,080 Common Shares, without par value
398,342 Class A Preferred Shares, without par value
128,225,953 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 x   No o  

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 o   Nox  

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 x   No o  

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 filer x Accelerated filer o Non - accelerated filer o  

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

  U.S. GAAP o IFRS o Other x  

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow

  Item 17 o   .Item 18 x  

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 o   Nox  

Table of Contents

  Page 
   
Presentation of Information   1
Forward-Looking Statements   2
Item 1. Identity of Directors, Senior Management and Advisers  3
Item 2. Offer Statistics and Expected Timetable  3
Item 3. Key Information  3
      Exchange Rates   6
      Risk Factors   7
Item 4. Information on the Company  16
      The Company   16
      The Brazilian Power Industry   35
Item 4A. Unresolved Staff Comments  50
Item 5. Operating and Financial Review and Prospects  50
Item 6. Directors, Senior Management and Employees  66
Item 7. Major Shareholders and Related Party Transactions 72
      Related Party Transactions   73
Item 8. Financial Information.  74
      Legal Proceedings   74
      Dividend Payments   76
Item 9. The Offer and Listing  79
Item 10.   Additional Information  82
      Memorandum and Articles of Association   82
      Material Contracts   86
      Exchange Controls   86
      Taxation   87
      Dividends and Paying Agents   93
      Documents on Display   93
Item 11.   Quantitative and Qualitative Disclosures about Market Risk  93
Item 12.   Description of Securities Other than Equity Securities  94
Item 13.   Defaults, Dividend Arrearages and Delinquencies  94
Item 14.   Material Modifications to the Rights of Security Holders and Use of Proceeds  94
Item 15.   Controls and Procedures  94
Item 16A. Audit Committee Financial Expert  99
Item 16B. Code of Ethics  99
Item 16C. Principal Accountant Fees and Services  99
Item 16D. Exemption from the Listing Standards for Audit Committees  100
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers  100
Item 17.   Financial Statements  100
Item 18.   Financial Statements  100
Item 19.   Exhibits  101
Technical Glossary   102
Signatures   104

 


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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.

     Our audited consolidated financial statements as of December 31, 2007 and 2006 and for each of the three years in the period ended December 31, 2007 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, 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 35 to our Consolidated Financial Statements.

     Financial information in this Annual Report is presented in reais. On June 2, 2008, the selling exchange rate for reais was R$1.6320 per U.S.$1.00.

     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 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. 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 102.


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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, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005 have been derived from our Consolidated Financial Statements. The selected financial data as of December 31, 2005, 2004 and 2003 and for the years ended December 31, 2004 and 2003 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 35 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, 2007 and 2006 and net income for the years ended December 31, 2007, 2006 and 2005.

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    As of and for the year ended December 31, 
   
    2007    2006(3)   2005    2004(2)   2003(1)
           
    (millions of reais)
Income Statement Data:                     
Brazilian GAAP                     
Operating Revenues    7,920    7,421    6,801    5,533    4,420 
Net operating revenues(4)   5,422    4,889    4,440    3,620    2,927 
Operating expenses(4)   (3,815)   (3,340)   (3,620)   (3,009)   (2,822)
Operating income    1,607    1,549    820    611    105 
Financial income (expenses), net    20    295    (101)   (19)   160 
Equity in results of Investees      (6)       17 
Other income (expense), net    (31)   (23)   (11)   (7)   (21)
Income taxes    (460)   (558)   (198)   (196)   (89)
Income (loss) before non-controlling interest and extraordinary item    1,138    1,257    519    391    172 
Non-controlling interest    (31)   (14)   (16)   (21)   (14)
Extraordinary item, net of tax effect           
Net income (loss)   1,107    1,243    502    370    158 
Dividends declared    268    281    123    96    43 
 
U.S. GAAP                     
Operating Revenues    7,920    7,421    6,801    5,533    4,420 
Net operating revenues    5,422    4,889    4,440    3,620    2,927 
Operating income    1,383    1,185    884    279    (270)
Net income (loss)   981    1,019    556    124    (72)
 
Balance Sheet Data:                     
Brazilian GAAP                     
Current assets(5)   3,162    3,014    2,472    1,653    1,382 
Recoverable rate deficit (CRC)(6)   1,250    1,194    1,182    1,197    1,036 
Non-current assets(7)   1,991    1,839    2,047    2,222    2,165 
Property, plant and equipment, net    6,832    6,712    5,991    5,731    5,406 
Total assets    12,360    11,935    10,930    10,018    9,378 
Loans and financing and debentures (current)   265    929    215    671    273 
Current liabilities    1,815    2,581    2,352    2,337    1,305 
Loans and financing and debentures (long-term)   1,838    1,733    1,829    1,160    1,736 
Long-term liabilities    3,077    2,771    2,947    2,453    3,210 
Shareholders’ equity    7,236    6,376    5,487    5,108    4,834 
Capital stock    4,460    3,875    3,480    3,480    2,900 
U.S. GAAP                     
Total assets(8)   12,065    12,592    11,122    10,589    10,058 
Long-term liabilities(8)   2,206    2,669    2,803    2,837    2,913 
Shareholders’ equity(8)   7,841    7,169    5,964    5,530    5,475 

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    As of and for the year ended December 31, 
   
    2007(10)   2006         2005    2004    2003 
           
    (R$ except numbers of shares)
Share and per share data:                     
Brazilian GAAP                     
Net income per share at year end:    4.04    4.54    1.84    1.35    0.58 
Dividends per share at year end: (9)                    
       Common Shares    0.93    0.98    0.43    0.33    0.15 
       Preferred Shares—Class A    1.63    1.41    1.27    1.27    1.06 
       Preferred Shares—Class B    1.03    1.07    0.47    0.37    0.16 
Number of shares outstanding at year end (in thousands):                     
       Common shares    145,031    145,031    145,031    145,031    145,031 
       Preferred shares Class A    398    399    403    404    405 
       Preferred shares Class B    128,226    128,225    128,221    128,220    128,219 
           
       Total    273,655    273,655    273,655    273,655    273,655 
 
U.S. GAAP                     
Basic and Diluted - Earnings per share:                     
       Common Shares    3.42    3.56    1.94    0.43           (0.50)
       Preferred Shares—Class A    4.37    4.24    1.27    1.27    1.06 
       Preferred Shares—Class B    3.77    3.91    2.14    0.48   
Shares outstanding (weighted average – in thousands):                     
       Common Shares    145,031    145,031    145,031    145,031    145,031 
       Preferred Shares—Class A    399    403    404    405    406 
       Preferred Shares—Class B    128,225    128,221    128,220    128,219    128,218 
           
       Total    273,655    273,655    273,655    273,655    273,655 

_______________
(1)
The 2003 financial information includes the accounts of our subsidiary Companhia Paranense 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)
The 2006 financial information includes the accounts of our subsidiary UEG Araucária Ltda.
(4)
Fuel usage account (CCC), energy development account (CDE) and research and development (P&D and PEE) were classified in 2007 as deductions from gross operating revenues instead of operating costs as required by the ANEEL ordinance No. 3,073/2006. For comparative purposes, this reclassification was applied for 2006 and 2005. For more information, see note 2 to the Financial Statements.
(5)
Including the current balances of recoverable rate deficit (CRC) in the amount of R$41 million in 2007, R$ 35 million in 2006, R$32 million in 2005, R$29 million in 2004 and R$124 million in 2003.
(6)
Including both current and non-current CRC accounts receivable.
(7)
Including the non-current balances of recoverable rate deficit (CRC) in the amount of R$1,210 million in 2007, R$1,159 million in 2006, 1,150 million in 2005, R$1,168 million in 2004 and R$912 million in 2003. Also, pursuant to CVM Deliberation No. 489 (contingent assets and liabilities), we were required to present the reserve for contingencies, net of the related escrow deposit, for 2006 and 2005. This presentation did not affect the balance for periods prior to 2005.
(8)
We have adopted SFAS 158 as of December 31, 2006. See note 35 to the Financial Statements.
(9)
Amounts shown for 2005, 2004 and 2003 represent interest on equity, which we elected to pay in lieu of dividends. In 2007 we paid R$200 million in interest on equity and R$68 million in dividend, whereas in 2006 we paid R$158 million in dividends and R$123 million in interest on equity. For dividends per share in US$, see “Item 8. Financial Information.”
(10)
On July 2, 2007, the shareholders approved a reverse split of our shares 1,000-for-1. For comparative purposes, this chart reflects the reverse split retroactively for the years 2006, 2005, 2004, and 2003. For more information, see note 35.b(ii) to the Financial Statements.

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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 
         
 
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 
2006    2.0586    2.3711    2.1679    2.1380 
2007    1.7325    2.1556    1.9300    1.7713 

_______________
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 2007    1.7616    1.8233 
   January 2008    1.7414    1.8301 
   February 2008    1.6715    1.7681 
   March 2008    1,6700    1,7491 
   April 2008    1,6575    1,7534 
   May 2008    1,6434    1,6949 

_______________
Source: Central Bank

     On June 2, 2008, the Central Bank selling rate was R$1,6320 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.

     Fluctuations in the value of the Brazilian real against foreign currencies may result in uncertainty in the Brazilian economy and the Brazilian securities market, and they could have a material adverse effect on our net income and cash flow.

     In recent years, the Brazilian real has appreciated against foreign currencies, but the value of the real may continue to fluctuate and may rise or decline substantially from current levels. For additional information about historical exchange rates, see “Item 3. Key Information—Exchange Rates.”

     Depreciation of the real would increase the cost of servicing our foreign currency-denominated debt and the cost of purchasing electricity from the Itaipu power plant, a hydroelectric facility that is one of our major suppliers and that adjusts electricity prices based in part on its U.S. dollar costs. Depreciation of the real would also create additional inflationary pressures in Brazil that may negatively affect us. Depreciation generally curtails access to international capital markets and may prompt government intervention, including recessionary governmental policies. It also reduces the U.S. dollar value of distributions and dividends on the ADSs and the U.S. dollar equivalent of the market price of our Class B Shares and, as a result, the ADSs.

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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 Índice Geral de Preços —Disponibilidade Interna (“IGP-DI”) index, were 1.2% in 2005, 3.8% in 2006, 7.9% in 2007 and 5.1% for the five months ended May 31, 2008. 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.

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 the last decade and in the beginning of this decade (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 holds 58.6% of our outstanding common voting shares as of the date of this Annual Report, and whose interests may differ from other shareholders. 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

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  • 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.

     Government policies undertaken by the State of Paraná could have a material adverse effect on us and our business, results of operations, financial condition or prospects.

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. The GDP of the State of Paraná grew 6.0% in 2007, while Brazil’s GDP increased 5.4% during the same period.

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. For additional information, 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 unfavorable 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 the benefits of improved economies of scale 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 Customers. Free Customers 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. Moreover, customers with demand greater than 500 kW that are supplied at any voltage level can choose their supplier if their energy is derived from: small hydroelectric plants, aeolian plants, biomass plants or systems of qualified cogeneration. These Free Customers 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 Customers since December 2004, although our generation business has retained the right to compete with such suppliers for Free Customers. The increase in competition from other energy suppliers serving Free Customers 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.

Our customers may migrate from the distribution network to the transmission network.

     Certain customers may be entitled to connect directly to the transmission network, in which case our distribution business ceases to collect the distribution tariffs. The right that we have to recover part of this loss may not be sufficient to cover our investments in distribution and may adversely affect our revenues and results of operations.

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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.

     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 constitutionality of the New Industry Model Law is currently being challenged in the Brazilian Supreme Court. On October 11, 2006, in a majority decision, the Brazilian Supreme Court upheld the constitutionality of the New Industry Model Law. Although this decision is not final, the New Industry Model Law remains 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 introduce changes to the electricity industry.

     The impact on our business of 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.

     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

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respective distribution concession areas, up to five years prior to the actual delivery of electric energy. 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”)).

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

     During 2007, we provided electricity to 17 Free Customers, representing approximately 4.8% of our gross operating revenues from energy sales and approximately 3.7% of the total quantity of electricity sold by us. Less than 1% of the megawatts sold under contract to such customers are set to expire in 2008. There can be no assurance that, upon the expiration of these contracts, the Free Customers will purchase energy from us.

     At December 31, 2007, we had 33 customers that were eligible to qualify as Free Customers. There can be no assurance that upon becoming Free Customers, such customers will continue to purchase energy from us. A loss of business to other energy suppliers serving Free Customers 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.

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

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  • 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 extended 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. In addition, concessions for new generation projects (such as Mauá, in our case) are non-extendable, meaning that upon expiration, the concessionaire must again complete a competitive bidding process. 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.”

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 (“Depositary”) 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, 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 how to vote their shares. Because of this extra procedural step involving the Depositary, the process for exercising voting rights will take longer for ADS holders than for holders of Class B Shares. ADSs for which the Depositary does not receive timely voting instructions will not be voted at any meeting.

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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.

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 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 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

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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.

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 other services through various partnerships that we maintain.

     At December 31, 2007, we generated electricity at 17 hydroelectric plants and one thermoelectric plant, for a total installed capacity of 4,549.6 MW (approximately 99.6% of which is hydroelectric). Including the installed capacity of our partnerships in generation, our total installed capacity is 5,151.3 MW. Our electric power business is subject to comprehensive regulation by ANEEL.

     We hold concessions to distribute electricity in approximately 98.2% 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, 2007, we owned and operated 1,830 kilometers of transmission lines (which consist of a small portion of our 138 kV assets, our 230 kV assets and our 525 kV assets) and 177,046 kilometers of distribution lines (which consist of our assets of 138 kV and below), constituting the third-largest distribution network in Brazil. Of the electricity volume we supplied to our Final Customers during 2007:

  • 38.7% was to industrial customers;
  • 25.7% to residential customers;
  • 18.6% to commercial customers; and
  • 17.0% to rural and other customers.

     Industrial consumption, including Copel Geração’s Free Customers, accounted for 38.7% of our total sales in 2007, an increase of 7.5% as compared to 2006. This increase reflects the improved economic performance of the state of Paraná, led by positive results in the agricultural, industrial and service sectors. The state’s exports increased by 23.3%, led by greater sales of soy, corn, automobiles and poultry meat.

     In 2007, residential consumption, which accounts for 25.7% of our market sales to Final Customers, grew by 6.6%, as evidenced by the rate of consumption per residential customer, which reached 157.9 kWh/month in 2007, 3.6% higher than 2006 (152.5 kWh/month). This growth was largely due to increases in income, falling interest rates, greater access to credit and longer term credit, as well as the fact that average temperatures during 2007 were higher than average temperatures during 2006.

     Commercial consumption, which accounts for 18.6% of our market sales to Final Customers, recorded a 9.2% rate of growth, the highest rate of growth among our major customer categories. This increased consumption resulted from increased customer income and a larger number of customers with elevated levels of consumption, including supermarkets and shopping centers. Higher temperatures also led to increased commercial consumption.

     Rural consumption increased by 6.3% in 2007 and accounted for 7.6% of our total sales to Final Customers. This growth resulted from recovering agricultural activities, as evidenced by soy and corn production, for which Paraná has the largest production volume in Brazil. Average rural consumption increased by 4.7% in 2007 as compared to the previous year, reaching 380.2 kWh/month.

     Key elements of our business strategy include the following:

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  • expanding our power generation, transmission, and distribution systems;
  • expanding our generation business’ sales to Free Customers both inside and outside the state of Paraná;
  • seeking productivity improvements in the short term and sustained growth in the long term;
  • striving to keep customers satisfied and our workforce motivated and prepared;
  • seeking cost efficiency and innovation;
  • achieving excellence in data, image, and voice transmission; and
  • researching new technologies in the power sector in order to expand power output with renewable and non-polluting sources.
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. We are currently the largest company in the State of Paraná in our segment (power and related industries). We are a corporation incorporated and existing under the laws of Brazil, under the legal name Companhia Paranaense de Energia – COPEL. 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.

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.

     Recently, to comply with energy sector legislation, we transferred the assets of COPEL Transmissão to COPEL Distribuição (69 kV – 138 kV) and to COPEL Geração (a small portion of our assets of 138 kV and all our assets of 230 kV and above), changing the name of the latter to COPEL Geração e Transmissão S.A. (“COPEL Geração e Transmissão”).

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* share of voting capital

Business

     During 2007, we produced 42.8% of the total energy available in our systems. 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 share in the Brazilian electricity market. Itaipu is the largest operating hydroelectric power plant in the world, with an installed capacity of 14,000 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 2007. 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 during the 2003-2007 period.

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    Year ended December 31, 
   
    2007    2006    2005    2004    2003 
           
    (GWh)
Electricity we generated    18,134    10,358    18,436    19,121    16,598 
Electricity we purchased from Itaipu    4,666    4,665    4,683    4,609    5,678 
Auction—CCEAR – Subsidiaries    1,203    1,038    891     
Auction—CCEAR – Other    11,850    10,294    7,338     
Electricity we purchased from others(1)   6,472    12,877    7,787    5,805    7,286 
           
    Total.    42,325    39,232    39,135    29,535    29,562 
           

_______________
(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.

             Year ended December 31, 
   
    2007    2006    2005    2004    2003 
           
    (GWh)
 
Electricity delivered to Final Customers (retail and unregulated) (2)   19,984    18,691    18,696    18,736    18,782 
Electricity delivered to distributors in the State of Paraná    474    457    450    484    468 
Electricity delivered to out of state distributors under Initial Supply Contracts        35    70    105 
Bilateral Agreements    3,945    4,287    3,778    4,134    2,410 
Auction—CCEAR – Subsidiaries    1,203    1,038    891     
Auction—CCEAR – Other    10,737    10,136    7,597     
Electricity delivered to the Wholesale Energy Market and the Interconnected Power System (1)   2,927    1,814    4,417    4,101    6,199 
           
Subtotal    39,270    36,423    35,864    27,525    27,964 
           
 
Losses    3,055    2,809    3,271    2,010    1,598 
           
 
Total    42,325    39,232    39,135    29,535    29,562 
           

_______________
(1)
Includes capacity made available but not fully delivered.
(2)
Includes Free Customers.

Generation and Purchases of Energy

Generation Facilities

     At December 31, 2007, we operated 17 hydroelectric plants and one thermoelectric plant, with a total installed capacity of 4,549.6 MW. As of December 31, 2007 we also owned 100% of Centrais Eólicas do Paraná Ltda. (70% through Copel Geração e Transmissão and 30% through Copel Participações), a wind power plant with a total installed capacity of 2.5 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 2007. Our actual generation in any year differs from our assured energy, as a result of hydrological conditions and other factors. We generated 18,134 GWh in 2007, 10,358 GWh in 2006, and 18,436 GWh in 2005. The generation of electrical energy at our hydroelectric plants is supervised and coordinated by our generation operation center in the city of Curitiba. This operation center is responsible for coordinating the operations related to approximately 99.2% of our total installed capacity.

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     The following table sets forth certain information relating to our main plants in operation at December 31, 2007.

        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 
Wind    Centrais Eólicas do Paraná    2.5    N/A    1999    2029 
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.

     Centrais Eólicas do Paraná. Centrais Eólicas do Paraná Ltda., a company formed in December 1998 to install and operate the first wind power plant in southern Brazil, 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, the total cost of which was R$4 million. On September 6, 2007, Wobben WindPower Indústria e Comércio Ltda. signed an agreement with COPEL Geração to transfer its 70% interest in Centrais Eólicas do Paraná Ltda. to COPEL Geração for R$2.1 million. We now own 100% of the total issued and outstanding share capital of Centrais Eólicas do Paraná Ltda.

     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.

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     The following table sets forth information regarding certain generation plants in which we had an ownership interest as of December 31, 2007:

        Installed    Assured        Our Ownership    Concession 
         Type    Plant    Capacity    Energy    Placed in Service    Percentage    Expires 
             
        (MW)   (GWh/yr)            
Hydroelectric    Dona Francisca    125.0    700.8    February 2001    23.03%    2033 
 
Hydroelectric    Foz do Chopim    29.1    188.0    October 2001    35.77%    2030 
 
Hydroelectric    Elejor (Santa    246.3    1,229.0    July 2005    70.0%    2036 
    Clara and                     
    Fundão)           June 2006         
 
Thermal    Araucaria    484.5     N/A    September 2006    80.0%    2029 

     Dona Francisca. We own 23.03% 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. The share capital is also shared among Gerdau S.A. with a 51.82% interest, Celesc S.A. with a 23.03% interest and Desenvix with a 2.12% interest. Construction of Dona Francisca began in August 1998 and commercial operations started in February 2001. Dona Francisca’s balance sheet as of December 31, 2007 reflects accounts payable in the total amount of R$220.4 million, R$139 million of which refers to loans extended to it by the Interamerican Development Bank and Banco Nacional de Desenvolvimento Econômico e Social (“BNDES”), a Brazilian development bank wholly owned by the Brazilian government. The loans are guaranteed by a pledge of shares of Dona Francisco. In 2004, Dona Francisca signed a power purchase agreement with Copel Geração, valued at R$51.5 million annually, which will terminate in March 2015 and which obligates Copel Geração to purchase 100.0% of the energy generated at Dona Francisca. This agreement was ratified by ANEEL on December 29, 2004.

     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 Silea Participações Ltda. The plant has an installed capacity of 29.07 MW. The investment necessary to construct the plant was R$51.4 million. The first generation unit started operating on October 25, 2001, and the second-generation unit started operating on December 8, 2001.

     Santa Clara and Fundão. The Santa Clara and Fundão hydroelectric plants consist of two hydroelectric power generation units on the Jordão River in the State of Paraná. The aggregate total installed capacity of the units is 240 MW. Two smaller hydroelectric generation units are installed in the same location, these units are expected to have an additional installed capacity of 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 in December 2002 and in April 2004, respectively. In September 2004, after obtaining all of the required governmental authorizations, we acquired 30.0% of the voting capital of ELEJOR, valued at approximately R$40 million. These shares had previously been held by Triunfo Participações. 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 by 60 MW. The Fundão plant began operations in July 2006 adding 120MW to the total energy available to us. As of December 31, 2007, we own 70.0% of the common shares of ELEJOR and PaineraPar owns the remaining 30.0% .

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     ELEJOR is required to pay the Federal Government for the use of hydroelectric resources, from the sixth through the end of the thirty-fifth year of its concession, 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. In 2007, the aggregate amount of concession payments paid by ELEJOR to the Federal Government was R$33.5 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. 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 construction cost of the Santa Clara and Fundão plants was R$521.5 million, which was funded as follows (i) R$255.6 million was obtained through a loan agreement signed on April 28, 2005 with BNDES; (ii) 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; (iii) R$49.08 million was funded by us; and (iv) R$21.05 million was funded by PaineraPar. The remaining amount is being financed by the cash flow generated by such facilities.

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

     Araucária. Araucária was formed in April 1998 to construct the UEG Araucaria Thermoelectric Plant in the municipality of Araucária (located in the Curitiba metropolitan area). El Paso Empreendimentos e Participações Ltda (“El Paso”), managed by a subsidiary of El Paso Corporation owned 60% of the equity of Araucária, Petrobras owned 20% and we owned 20%. The plant was completed in September 2002, with a net capacity of 484.3 MW, but it started to operate in September, 2006. The plant is fueled by natural gas. ANEEL granted Araucária a license to operate as an independent power producer. On May 30, 2006, we entered into an agreement with Araucária to settle certain outstanding legal disputes among the shareholders relating to the UEG Araucaria Thermoelectric Plant. Pursuant to this settlement agreement, we agreed to acquire all of the interests held by El Paso in Araucária for U.S.$190 million.

     On December 28, 2006, the Araucária Thermal Power Plant Lease Agreement (the “Lease Agreement”) was signed by Araucária and Petrobras. It expires on June 30, 2008, but may be extended by joint agreement for up to 6 months. The Lease Agreement provides for a monthly lease, which is intended to cover all costs and taxes owed by Araucária and is composed of a monthly fixed portion and a monthly variable portion. The monthly fixed portion is R$14.16 per MWh multiplied by the reference power rating (428.35 MW) and by the number of hours of each month. The monthly variable portion, in the amount of R$35.85 per MWh, is calculated according to the actual power output.

     On the same date, the Araucária Thermal Power Plant Operation and Maintenance Service Agreement was also signed by Copel Geração and Petrobras. It will be in effect until December 31, 2008, or until the expiration of the Lease Agreement, whichever occurs first. The monthly fee paid to the service provider is R$6.31 per MWh multiplied by the reference power rating (428.35 MW) and by the number of hours of each month.

Expansion of Generating Capacity

     We expect to spend R$144.6 million in 2008 to expand our generation capacity at our wholly owned facilities and through generation partnerships.

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     We have participation interests in several generation projects, and the energy that these projects will generate will substantially enhance our generation capacity in the future. The following table sets forth information regarding our planned major generation projects for the period from 2008 to 2011.

    Estimated    Estimated    Budgeted    (Expected)        
    Installed    Assured    Completion    Beginning of    Our Ownership     
Facility    Capacity    Energy(1)   Cost    Operation    Percentage    Status 
             
    (MW)   (GWh/year)   (R$ million)            
 
                        Concession 
Mauá    362     1,732     991.3    January 2011    51.0%    Granted 
                        Concession 
São Jerônimo    331     1,450    510.0(2)   Unknown    41.2%    Granted 

_______________
(1)     
Values used to determine volumes committed for sale.
(2)     
As of October 2002.

     Mauá. In October 2006, a consortium that we established with Eletrosul (in which we hold a 51% stake and Eletrosul holds a 49% stake) was awarded a concession to construct and operate the Mauá hydroelectric power plant on the Tibagi River in the State of Paraná. The Mauá facility will have a minimum installed capacity of 350 MW. A small hydropower unit will also be built, adding an additional 12 MW of installed capacity to the project, amounting to a total installed capacity of 362 MW. The necessary environmental license was obtained on March 24, 2008, and construction is scheduled to begin in the first half of 2008. Commercial generation is scheduled to begin in January 2011. The facility’s total power output (192 average MW) is committed under a 30-year contract, at a price of R$112.96/MWh, with supply starting in January 2011.

     São Jerônimo. The São Jerônimo hydroelectric plant will be located between the municipalities of Tamarana and São Jerônimo da 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 the facility will begin. There are a number of issues that must be resolved before construction can begin, the most significant being that we must obtain permission from the Brazilian Congress to start construction since the plant will be located in an indigenous area.

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 316 MW of installed capacity. The following table sets forth information regarding our proposed generation projects.

        Estimated             
        Installed    Estimated Assured        Our Ownership 
Type    Project    Capacity    Energy    Estimated Cost    Percentage 
           
        (MW)   (GWh/yr)   (R$) in millions     
Hydroelectric    Rio Cavernoso    19    92    77(1)   100% 
Hydroelectric    Rio Areia    30    149    69(2)   30.0% 
Hydroelectric    Rio Chopim    123    598    184(2)   15.0% 
Thermal    UTE Figueira    144    1,060    470(3)   100.0% 

_____________
(1)
Cost is estimated as of December 2006.
(2)
Cost is estimated as of April 2002.
(3)
Cost is estimated as of August 2007.

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Purchases

     Itaipu

     We purchased 4,666.4 GWh of electricity from Itaipu in 2007, which constituted 11% of our total available electricity in 2007. Our purchases represented approximately 8% of Itaipu’s supply to 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 that 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.

     In 2007, we paid an average tariff of R$82.59 per MWh for energy from Itaipu, compared to R$71.88 per MWh during 2006. These figures do not include the transmission tariff that distribution companies must pay for the transmission of energy from Itaipu.

     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 to reduce the aggregate capacity to be purchased by us to 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.

     On January 2, 2007, we entered into amendments to the Cien Agreements, reducing the contracted volumes from an average of 400.0 MW to an average of 175 MW, for supply through December 31, 2007. This reduction was the result of an Argentine law limiting Argentina’s energy exports. The deficit in our distribution business caused by the reduction in the Cien contracts has not been completely offset, since COPEL Distribuição has had to purchase additional energy in the spot market. However, in order to compensate for this deficit, the Ministry of Mines and Energy, Ministério de Minas e Energia (“MME”) has allowed us to adjust the tariffs to offset the costs we incur by purchasing such additional volumes. During 2007, we recognized R$111.2 million for energy purchased from Cien.

     Specifically, to make up for the volumes no longer provided under the Cien Agreements, we acquired 159 MW, at a price of R$104.74/MWh, for the period from 2007 to 2014 at the A-1 Auction held on December 14, 2006. As a result of the amendments to the Cien Agreements, during the first quarter of 2007 we reverted R$100.9 million from a provision for payment of outstanding amounts under the amended agreements, which are now settled. In addition, we purchased 23.5 MW at the auction held in September 2007 to supplement our 2008 supply agreements.

     Other Suppliers

     In 2007, we purchased 13,053 GWh of electricity through auctions in the regulated market, of which 11,850 GWh we purchased from other concessionaires and 1,203 GWh we purchased from our own subsidiary. This energy represents 54% of the total electricity we purchased. For more information on the regulated market and the free market, see “—The Brazilian Power Industry—The New Industry Model Law.”

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     The following table contains information concerning volume, costs and average tariffs for the main sources of the electricity we purchased in the last three years. 

Source:        2007    2006    2005 
         
    Volume (GWh)   4,666    4,665    4,683 
Itaipu    Cost (R$ millions)   385.4    335.4    464.4 
    Average Tariff (R$/MWh)   82.59    71.88    99.17 
    Volume (GWh)   1,533    3,504    3,504 
Cien    Cost (R$ millions)   111.2    227.4    309.3 
    Average Tariff (R$/MWh)   72.53    64.89    88.28 
    Volume (GWh)   11,850    10,293    7,338 
(Regulated Auctions Market)(1)   Cost (R$ millions)   845.1    654.1    430.6 
    Average Tariff (R$/MWh)   71.32    63.55    58.69 

_______________
(1)     
Energy traded between Copel’s subsidiaries not included.

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.

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

    At December 31, 
   
    2007(1)   2006    2005    2004    2003 
           
Transmission and subtransmission lines                     
   (km)                    
         230 kV and 525 kV    1,822.0    1,739.8    1,737.0    1,736.9    1,736.9 
         l38 kV    7.8    7.8    7.8    7.8    7.8 
Distribution lines (km):                     
         l38 kV    4,290.7    4,238.5    4,056.3    4,056.1    4,036.9 
         88 kV    58.2    58.2    58.2    58.2    58.2 
         69 kV    1,173.2    1,166.1    1,137.2    1,137.2    1,137.2 
         23 kV to 44 kV    76,524.7    74,460.8    74,156.7    74,156.7    85,870.5 
         13.8 kV to 23 kV.    94,999.7    91,296.6    91,419.3    91,419.3    79,296.5 
Transformer capacity (MVA)                    
         Transmission substations    16,702.2(2)   16,043.9    15,168.9    15,085.6    15,043.9 
         Generation (step up) substations    5,004.1    5,004.1    5,004.1    5,004.1    5,004.1 
         Distribution substations    1,624    1,624    1,434    1,467.0    1,420.0 
         Distribution transformers (MVA)   8,216.4    6,651    6,651    6,65.0    6,629.0 
 
Total energy losses    7.2%    7.2%    8.3%    6.8%    5.4% 
           

______________
(1)
Recently, to comply with energy sector legislation, we transferred the assets of COPEL Transmissão to COPEL Distribuição (69 kV – 138 kV) and to COPEL Geração (a small portion of our assets of 138 kV and all our assets of 230 kV and above), changing the name of the latter to COPEL Geração e Transmissão.
(2)
This figure includes 69 kV and 138 kV substations, which were transferred to Copel Distribuição, as well as transformers with primary tensions of 69kV and 138kV which belong to Copel Distribuição but are implemented in 230kV and 525kV substations, which belong to Copel Geração e Transmissão.

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Transmission

     We operate transmission facilities (consisting of a small portion of our 138 kV assets and all our assets of 230 kV and above), 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 by paying the appropriate fees. ANEEL sets the charges for the use of the Main Transmission Grid.

     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 2007, we reinforced our transmission system by building two new substations, each with a voltage of 230 kV.

Distribution

     Our distribution system consists of a widespread network of overhead lines and substations with voltages up to 138 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, 2007, we provided electricity in a geographic area encompassing approximately 98% of the State of Paraná and served over 3.4 million customers.

     Residential customers, representing 25.7% of our market for electricity, used 5,143 GWh of electricity during 2007, an increase of 6.6% from residential use over 2006. Industrial customers, representing 38.7% of our market for electricity, used 7,740 GWh of electricity during 2007, an increase of 7.5% from industrial use during 2006.

     Our distribution network includes 171,524 kilometers of distribution lines (up to 44 kV), 322,115 distribution transformers and 236 distribution substations of 34.5 kV each. During 2007, 91,747 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.

     We have 34 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 6.3% of our total volume of electricity sold in 2007.

     We are responsible for expanding the 138 kV and 69 kV transmission grid within our concessionarea.

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.

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     Our energy losses totaled 7.2% of our available energy in 2007. Of our energy losses in 2007, 64% occurred during the distribution of energy, and 36% occurred during its transmission.

     In 2007, the two indicators by which we measure the quality of our performance – the duration and frequency of outages per customer – remained stable when compared to the same indicators in 2006.

     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    2007    2006    2005    2004    2003 
           
DEC - Duration of outages per customer per year (in hours)   14h 40 min    14h 48 min    13h 28 min    14h 02min    18h 53min 
FEC - Frequency of outages per customer per year (number of outages)   13.27    13.65    13.51    14.18    16.54 

Sales to Final Customers

     During 2007, we supplied approximately 97% of the energy distributed directly to captive customers in the State of Paraná. Our concession area includes over 3.4 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 17 Free Customers, three of which are located outside of our concession area. During 2007, the total power consumption throughout our concession area, including Free Customers, was 19,984 GWh as compared to 18,691 GWh during 2006. Residential customers, representing 25.7% of energy supplied to final customers, used 5,143 GWh during 2007 – an increase of 6.6% as compared to 2006. Industrial customers, representing 38.7% of energy supplied to final customers, used 7,740 GWh during 2007 – an increase of 7.5% over industrial use during 2006. 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    2007    2006    2005    2004    2003 
           
        (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    7,740    1,934.1    7,200    1,751.7    7,639    1,649.2    8,197    1,456.3    8,599    1,172.1 
Residential    5,143    1,900.1    4,826    1,884.1    4,653    1,857.0    4,467    1,651.4    4,382    1,365.3 
Commercial    3,722    1,242.6    3,407    1,172.1    3,231    1,092.9    3,024    912.2    2,864    724.7 
Rural and others(1)   2,803    556.7    2,684    559.6    2,608    554.4    2,497    481.2    2,396    389.5 
Public services    576    134.3    574    132.6    565    122.4    551    104.4    542    84.9 
Auction—CCEAR    11,940    721.9    11,174    634.9    8,488    435.6         
Wholesale Energy Market and Interconnected Power System(4)   2,927    69.2    1,813    158.0    4,417    85.1    4,101    38.6    6,199    88.7 
Other distributors (2)   4,419    576.5    4,745    498.1    4,263    429.2    4,688    407.2    2,982    245.4 
                     
    Total    39,270    7,135.4    36,423    6,791.1    35,864    6,225.8    27,525    5,051.3    27,964    4,070.6 
                     

______________
(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, 2007.

    Number of Final 
 Category    Customers 
   
 Industrial    58,795 
 Residential    2,713,463 
 Commercial    286,451 
 Rural and others(1)   378,369 
   
    Total.    3,437,078 
   

______________
(1)
Includes public services 

     Industrial and commercial customers accounted for approximately 27.1% and 17.4%, respectively, of our total revenues from energy sales during 2007. In 2007, 26.6% of our total revenues from energy sales were from sales to residential customers, with an average tariff of R$369.46 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 industrial customers.

     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.

     In June 2006, ANEEL authorized a 5.12% increase in our tariffs. Previously, we had effected a policy of tariff discounts to those of our Final Customers who paid their electricity bills when due. After that tariff increase, we discontinued our policy of providing a tariff discount.

     On June 24, 2007, ANEEL required us to decrease our tariffs by an average of 1.22% pursuant to the annual tariff readjustment. The primary reason that ANEEL decreased our tariffs was to account for the devaluation of the US dollar against the Real in 2006.

     Electrical energy tariffs have gone through a realignment process in order to reduce the subsidization of high-voltage customers by low-voltage customers. Consequently, the average readjustments applied were higher in high-voltage users (0.94%) and lower for low-voltage customers (-1.89%) . Nevertheless, comparing earlier tariffs with those currently in force, the average effect will be a -0.21% adjustment for high-voltage customers and a -2.04% adjustment for low-voltage customers.

     On June 23, 2008, ANEEL required us to decrease our tariffs by 3.35%, pursuant to the second periodic revision. This decrease consisted of a 7.17% decrease in our retail tariffs and a 3.82% increase for deferred regulatory asset recovery (CVA).

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     The following table sets forth the average tariffs (including value-added taxes) for each category of Final Customer in effect in 2007, 2006 and 2005.

    2007    2006    2005 
       
    (R$/MWh)   (R$/MWh)   (R$/MWh)
Tariffs             
       
Industrial.    249.88    243.30    215.91 
Residential    369.46    390.40    399.12 
Commercial    333.87    344.02    338.23 
Rural and others.    198.61    208.51    214.31 
Public services    233.18    231.07    216.61 
All Final Customers    288.62    294.27    282.19 

     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 2007, we served 745,956 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, ANEEL established a new formula for tariffs applied to small distributors. According to this new rule, small distributors must pay both an energy tariff and a distribution tariff. In 2007, we were granted an increase of approximately 35.6% in the average tariffs for Supply Contracts with distributors in the State of Paraná. During 2007, the average tariff for sales of energy pursuant to these Supply Contracts was R$114.21 per MWh. The Initial Supply Contracts were terminated by the end of 2005. We also had bilateral supply energy contracts with an average tariff of R$130.71/MWh in 2007.

     The following table sets forth average tariffs in effect in 2007, 2006 and 2005.

    2007    2006    2005 
       
    (R$/MWh)   (R$/MWh)   (R$/MWh)
 Tariffs             
 Supply Contracts with distributors in the State of Paraná    114.21    84.23    82.44 
             
 Initial Supply Contracts with out-of-state distributors(1)       60.42 
 
 Bilateral Contracts    130.71    111.56    107.62 

______________
(1)
The Initial Supply Contracts were terminated by the end of 2005. 


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     Transmission Tariffs. Transmission concessionaires are entitled to annual revenues based on the transmission network they own and operate. These revenues are periodically readjusted according to criteria stipulated in the concession contract. Copel Geração e Transmissão is party to two concession contracts, each of which has a different structure for calculating this revenue value. In addition, we pay third parties for the use of their transmission networks, which are also part of the Main Transmission Grid. In 2007, we recognized as expenses R$514.5 million for the use of the Main Transmission Grid and recognized R$141.7 million in revenues for the use of our transmission network by third parties.

     One portion of our annual revenues, which amounted to 25.0% of our gross transmission revenues in 2007, is subject to periodic adjustment by Aneel. The periodic revision scheduled for 2005 was carried out in 2007, at which time Aneel applied an adjustment of –15.08% . This adjustment was applied retroactively to July 2005. The remainder of our annual revenues was subject to adjustment by IGP-M. As a result, the aggregate adjustment in our 2007 gross transmission revenues was –5.69% . For more information on our transmission tariffs, see Notes 29 and 31 of our consolidated financial statements.

     In June 2005, ANEEL also set R$3,456.90/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 2006, ANEEL reduced this tariff to R$3,061.04/MW, and in June 2007 Aneel reduced it again, to R$3,012.28/MW.

Other Businesses

Telecommunications

     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 fiber optics network (10.5 thousand Km by the end of 2007). 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 2007, we served 181 of the 399 municipalities in the State of Paraná, which represents 83% of the total population of the state. In addition to 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 504 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, Arapongas and Tamarana in the State of Paraná and has obtained ANATEL’s authorization to make national and international telephone calls. 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 television transmission in Maringá and Londrina (State of Paraná).

     As of December 31, 2007, Sercomtel Telecomunicações, in its concessions area for fixed telephone services, possessed a total of 177,739 telephone lines installed, of which 157,642 were in operation. As of December 31, 2007, Sercomtel Celular had an installed capacity of 75,785 terminals in its TDMA system, of which 6,975 were in operation, as well as an installed capacity of 97,848 terminals in its GSM system, of which 66,143 were in operation. Sercomtel’s 2007 gross revenues were R$257.8 million, with net profits of R$5.9 million.

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Water and Sewage

     On January 14, 2008, Copel bought the entirety of the 30% stake in Dominó Holdings S.A. (“Dominó Holding”) held by Sanedo Ltda., a wholly-owned subsidiary of Grupo Vivendi, for R$110.2 million. We now own 45% of the total outstanding share capital of Dominó Holdings, which in its turn owns 34.75% of the voting stock of Companhia de Saneamento do Paraná – Sanepar (“Sanepar”), a public utility company that services 344 urban and rural municipalities and approximately 8.5 million people in the State of Paraná with water distribution and 4.4 million with sewage services. The State of Paraná owns 60.0% of the outstanding voting capital of Sanepar. Dominó Holdings’ net income in 2007 was R$55.2 million. The total outstanding share capital of Dominó Holdings are as follows: (1) 45.0% is held by us; (2) 27.5% is held by Construtora Andrade Gutierrez S/A; and (3) 27.5% is held by Daleth Participações S.A.

     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 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, two cogeneration plants, 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, 2007, we owned 51% of the capital stock of Compagas and accounted for this interest using the equity method. The minority shareholders of Compagas are Petrobras and Mitsui Gas, 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. The volume contracted by Compagas is enough to safely meet demand in the next two years. For future supplies, Compagas has already started to negotiate with Petrobras in order to contract additional purchases of Brazilian natural gas. Petrobras has indicated through its Anticipated Gas Production Plan (Antecipação de Produção de Gás – Plangás), that the investments made by Petrobras and other Brazilian companies are expected to offer a significant increase in the availability of Brazilian natural gas in the market, which is expected to increase from 28 million cubic meters per day in 2007 to 64 million cubic meters per day in 2009. Additionally, two new re-gasification plants are expected to become operational at the end of 2008 or the beginning of 2009, with a total processing capacity of 27 million cubic meters per day of natural gas. Compagas owns a gas distribution network in the State of Paraná consisting of 459 kilometers of pipelines. During 2007, Compagas recorded a daily average sales volume of 1,828,772 cubic meters of natural gas to 2,928 customers. During 2007, Compagas’ gross revenues were R$273.1 million, and its net income was R$47.9 million.

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Natural Gas Sales in 2007 

    Number of    Consumption    Participation 
Segment    Customers    (m3)   (%)
       
 
   Industrial    95    455,521    24.9% 
   Cogeneration      179,543    9.8% 
   Vehicular (gas stations)   24    91,292    5.0% 
   Commercial    163    6,810    0.4% 
   Residential (building)   2,642    2,123    0.1% 
   Raw Material      115,571    6.3% 
   Thermoelectrial plant      977,912    53.5% 
   Total    2,928    1,828,772    100.00% 
       

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 2007, ESCO’s net revenues were R$5.3 million, and it had a net income of R$0.2million.

     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. This process was approved by our Board of Directors in September 2005, and is still ongoing.

     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, which we will solicit from ANEEL 36 months prior to expiration.

     Since 1999, nine of our generation plants have had their concessions extended by Brazilian authorities for 20-year term in each case, as allowed by law. For those plants whose concessions have not yet expired, we will have the option to ask for a 20-year extension.

     We recently solicited renewals from ANEEL for the following plants, the concessions for which expire in 2009, 2010 and 2011: Gov. Ney Aminthas de Barros Braga (Segredo hydroelectric facility), Rio Jordão deviation project, Gov. José Richa (Salto Caxias hydroelectric facility) and Cavernoso. ANEEL has not yet initiated our renewal process. MME, the body eventually charged with deciding whether to renew a concession, has thus far granted all our other concession renewal requests.

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Seasonality

     We believe that seasonality does not 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 five 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 Customers at prices lower than those we currently charge. Furthermore, under certain circumstances, Free Customers may be entitled to connect directly to the transmission grid rather than the distribution grid. Unlike a Free Customer’s choice of another energy supplier, in which case that customer must still use our distribution network and thus pay us the appropriate tariff, our distribution business ceases to collect tariffs from a customer who migrates to the Main Transmission Grid. As such, the migration of customers from the distribution network to the transmission network results in the loss of revenues for our distribution business.

     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 Customers”) 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 2007, we provided electricity to 17 Free Customers, representing approximately 4.8% of our gross operating revenues from energy sales and approximately 3.7% of the total quantity of electricity sold by us. Less than 1% of the megawatts sold under contract to such customers are set to expire in 2008. There can be no assurance that, upon the expiration of these contracts, the Free Customers will purchase energy from us.

     At December 31, 2007, we had 33 customers that were eligible to qualify as Free Customers. Such customers represented approximately 3.7% of our total volume of electricity sold in 2007, and approximately 4.7% of our total gross operating revenues from energy sales 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 36 months prior to 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 2002, we started to implement the Environmental Management System (“EMS”) in accordance with ISO 14000 rules, which manage the regulation of the environmental aspects of our generation activities.

     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 two years.

     Among the environmental and social programs we are involved with is the “Tribute to the Waters” (Tributo às Águas), program whose objective is to facilitate and promote sustainable social, economic and environmental development of the communities located on the Paraná River basins.

     To reinforce our commitment to environmental, social and economical aspects of sustainability, we are listed in the sustainability index of BOVESPA and we also report to the Global Reporting Initiative – GRI-G3.

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, 2007 (including construction in progress), generation and transmission facilities represented 51.3%, distribution facilities represented 27.4%, telecommunications represented 2.7%, supply of gas represented 1.9%, ELEJOR represented 8.5% and UEG Araucaria Thermoelectric Plant represented 8.2% . 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, 2007 we estimated our liability related to the settlement of such disputes to be approximately R$5.2 million. This amount does not include the projections for land condemnation included in the budgets for each of our projects.

Insurance

     We maintain insurance for, fire natural disasters, accidents involving third parties, certain other risks associated with the transportation and assembly of equipment, construction of plants, and multirisks. Our subsidiaries Compagas, Elejor and Araucária also have similar insurance coverage. 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.

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THE BRAZILIAN POWER INDUSTRY

General

     In February 2008, 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 144.8 GW by 2016, of which 75.3% is projected to be hydroelectric, 15.3% is projected to be thermoelectric, 2.3% is projected to be nuclear and 7.1% is projected to be from alternative energy sources such as wind, small hydro and biomass.

     Approximately 40.0% 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 65% of the installed transmission capacity equal or 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. Under the New Model Industry Law, Eletrobrás and its subsidiaries were excluded from the National Privatization Program (Plano Nacional de Privatização), which the Brazilian government created in 1990 to promote the privatization of state-owned companies.

Principal Regulatory Authorities

Ministry of Mines and Energy – MME

     The MME is the Brazilian government’s primary regulator of the power industry, acting as the granting authority on behalf of the Brazilian government and empowered with policymaking, regulatory and supervisory capacity. 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.

Energy Research Company - EPE

     The Energy Research Company, Empresa de Pesquisa Energética (“EPE”), was created in 2004 as a state-owned company connected to the MME. The EPE develops studies and research in subjects such as electricity, oil and gas and its byproducts, coal, renewable energy sources and energy efficiency, among others subjects, in order to support energy sector planning.

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 Customers. 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, permissions and authorizations in the electricity industry and Free Customers 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.

Energy Sector Monitoring Committee—CMSE

     The Energy Sector Monitoring Committee, Comitê de Monitoramento do Setor Elétrico (“CMSE”) was created by the New Industry Model Law to monitor service conditions in the next five years and to recommend preventative measures to ensure energy supply adequacy, including demand-side action and contracting of energy reserves.

Eletrobrás

     The New Industry Model Law excluded Eletrobrás and its subsidiaries from the National Privatization Program, which the Brazilian government created in 1990 to promote the privatization of state-owned companies. Eletrobrás serves as a holding company for the following federally-owned energy companies: Companhia Hidro Elétrica do São Francisco, Furnas, Eletrosul, Centrais Elétricas do Norte do Brasil S.A., Companhia de Geração Térmica de Energia Elétrica and Eltrobrás Termonuclear S.A. Electrobrás manages funds generated by some of the regulatory charges, as well as the commercialization of energy from Itaipu and from alternative energy sources, under the Proinfa Program.

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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:

  • 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 Customers, 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 Customers, to purchase electricity directly from suppliers holding a concession, permission or authorization, (iv) granted electricity suppliers and Free Customers 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;

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     - 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;

    - the establishment of public bidding processes for concessions for the construction and operation of power plants and transmission facilities;

     - separation of generation, transmission, distribution and commercialization activities;

     - the establishment of concentration restrictions for holding equity interests in distribution or generation; and

     - the appointment of BNDES as the financing agent of the power industry, especially to support new generation projects.

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:

     - 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 and related ANEEL regulations are summarized as follows:

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     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.

     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 anticipated 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.

     A concession agreement may also be terminated (1) through the mutual agreement of the parties, (2) upon the bankruptcy or dissolution of the concessionaire, or (3) following a final, non-appealable judicial decision rendered in a proceeding filed by the concessionaire.

     When a concession agreement is terminated, all assets, rights and privileges that are materially related to the rendering of electricity services revert to the Brazilian government. Following termination, the concessionaire is entitled to indemnification for its investments in assets that have not been fully amortized or depreciated, after deduction of any amounts due by the concessionaire related to fines and damages.

     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 regulations govern the imposition of sanctions against agents in the electricity sector and classify 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; (3) changes in controlling interest of the holder of the authorization or concession; and (4) changes to the by-laws. 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.

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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 addressed to certain participants (i.e., Free Customers 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 through a public auction and (2) the free market, which provides for the purchase of electricity by non-regulated entities (such as the Free Customers 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.”

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     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, either directly or through CCEE, 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.

     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 results in penalties to distributors. In the case of under-contracting, distributors are penalized directly in an amount that increases as the difference between projected demand and actual demand increases. Under-contracting distributors are also subject to indirect penalties, as they must pay additional amounts to meet their added demand by purchasing energy in the spot market.

     In the case of over-contracting, where the contracted volume falls between 100% and 103% of actual demand, the distributor is not penalized and the additional costs are compensated for through increases in its customers’ tariffs. Where the contracted volume is over 103% of actual demand, an indirect penalty is applied to the distributor by forcing the distributor to sell energy in the spot market. If the contract price proves lower than the current spot market price, the distributor sells its excess energy for a profit. On the other hand, if the contract price is higher than the spot market price, the distributor sells its extra energy at a loss.

     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. Concessions for new generation projects, such as Mauá, in our case, are non-renewable, meaning that upon expiration, the concessionaire must again complete a competitive bidding process.

     The Free Market

     The free market covers transactions between generation concessionaires, IPPs, self-generators, energy traders, exporters and importers of electric energy and Free Customers. The free market will also include bilateral contracts between generators and distributors signed under the old model, 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 do so upon the expiration of its contract with the local distributor, with advance notice or, in the case of a contract with no expiration date, upon 15 days notice in advance of the date on which the distributor must provide MME with its estimated electricity demand for the year. In the latter case, the contract will only be terminated in the following year. 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.

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     State-owned generators may sell electricity to Free Customers, 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.

     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 Customers 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 Customers.

Auctions on the Regulated Market

     Electricity auctions for new generation projects will be held (1) in the fifth year before the initial delivery date of electricity (referred to as “A-5” auctions), and (2) in the third year before the commencement of commercial operation (referred to as “A-3” auctions). Existing power generators will hold auctions (1) in the year before the initial delivery date (referred to as “A-1” auctions) and (2) up to four months before the delivery date (referred to as “market adjustments”). Auctions exclusively for electricity from eolian, small hydro and biomass power plants will be held between years “A-1” and “A-5”. 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. The contracts for electricity from eolian, small hydro and biomass power plants will have a term between ten and thirty years.

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     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 Customers 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.

     Since 2004, CCEE has conducted five auctions for new generation projects, six auctions for existing power generation facilities and one auction for alternate generation projects. No later than August 1st of each year, the generators and distributors provide their estimated electricity generation or estimated electricity demand for the 5 subsequent years. Based on this information, MME establishes the total amount of electricity to be traded in the auction and sets the generation companies that would participate in the auction. The auction is carried out in two phases via an electronic system.

     After the completion of the auction, generators and distributors execute the CCEAR, in which the parties establish the price and amount of the energy contracted in the auction. The CCEAR sets forth that the price will be annually adjusted upon the variation of the IPCA (Índice Nacional de Preços ao Consumidor Amplo, calculated and published by Fundação Instituto Brasileiro de Geografia e Estatística IBGE). The distributors grant financial guaranties to the generators (mainly receivables from the distribution service) to secure their payment obligations under the CCEAR.

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 Customers, 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 are not allowed to hold more than a 10.0% equity interest in any distributor.

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.

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).

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 Customers and the elimination of self-dealing, are expected to remain in full force and effect. For more information, see “Item 3. Key Information – Risk Factors – Risks Relating to the Brazilian Electric Sector.”

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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 customers 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 maximum contracted power 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 Customers for the use of the Basic Transmission Grid (electrical transmission system with voltage equal or higher than 230 kV). This tariff is revised annually to contemplate (i) an inflation index and (ii) the permitted annual revenues included in the grid. 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 Customers have signed contracts with the ONS entitling them to the use of the transmission grid in return for the payment of the TUST. 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.

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 in ANEEL public auctions; 
  • costs of electricity purchased from Itaipu; 
  • costs of electricity purchased pursuant to bilateral agreements by small distribution companies; 
  • certain other charges for connection to the transmission and distribution systems; and 
  • regulatory charges. 

Parcel B costs include: 

  • a component designed to compensate the distributor for the carrying cost of its assets; 

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  • depreciation costs; and
  • a component designed to compensate the distributor for its operating and maintenance costs.

     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”.

     The X factor for each distribution company is calculated based on two components:

  • Xa, based on the application of the IPC-A to the personnel portion of the concessionaire’s operational costs; and
  • Xe, based on the concessionaire’s increases in its economies of scale due to market growth, and which is measured at each periodic tariff adjustment.

     In addition, ANEEL recently enacted new regulations under which distribution companies will be required to comply under penalty of law with minimum pre-established targets measured by a new quality of service indicator related to customer satisfaction.

     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, which significantly change their cost structure. Extraordinary tariff adjustments were granted (1) in June 1999 to compensate for increased costs of electricity purchased from Itaipu as a result of the devaluation of the real against the dollar, (2) in 2000 to compensate for the increase in COFINS from 2% to 3%, and (3) in December 2001 to compensate for losses caused by the Rationing Program.

     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 Customers.

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 twenty years. In its initial phase, the Proinfa Program is limited to a total contracted capacity of 3,300 MW. 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.

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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 receives the UBP payments in a specific account.

CCC

     Distribution companies (and also some transmission companies responsible for Free Customers) 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 2003-2005 period, subsidies from the CCC Account were 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 monthly 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.

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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 that 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.

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.

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     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.

Research and Development

     The companies holding concessions and permissions for distribution of electricity must invest a minimum of 0.50% of their annual net operational revenues in research and development and 0.50% in energy efficiency programs. As of January 1, 2010, such percentages will be 0.75% and 0.25%, respectively.

     The companies holding concessions and authorizations for generation and transmission of electricity must invest a minimum of 1.0% of their annual net operational revenues in research and development. Companies that generate electricity exclusively from small hydroelectric power plants, cogeneration and alternative energy projects are not subject to this requirement.

     The amount to be invested in research and development must be distributed as follows:

  • 40% to the company research and development projects, under the coordination of ANEEL;
  • 40% to the Ministry of Sciences and Technology, to be invested in national research and development projects;
  • 20% to the Ministry of Mines and Energy, to defray Energy Research Company - EPE.

     The investments in energy efficiency must be done accordingly to ANEEL regulations.

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.

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     Our energy generation, distribution and transmission 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.

     The Brazilian Forestry Code and related regulations 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. In addition, Paraná state law requires a mandatory environmental audit of all companies, like us, whose activities may impact the environment within the state. The environmental and maintenance departments of our Company are responsible for performing this audit.

     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. Currently, we are soliciting bids for an external auditor to supply us with an independent evaluation of our environmental practices.

Item 4A. Unresolved Staff Comments

     None.

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 reconciliation to U.S. GAAP, and the notes thereto and the other financial information included elsewhere in this Annual Report.

Overview

Brazilian Economic Conditions

     All of our operations are in Brazil, and we are affected by general Brazilian economic conditions. In particular, the general performance of the Brazilian economy affects demand for electricity, and inflation affects our costs and our margins. The Brazilian economic environment has been characterized by significant variations in economic growth rates, with very low growth from 2001 through 2003 and an economic recovery that has led to consistent growth since 2004.

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

    Year ended December 31, 
   
    2007    2006    2005 
       
 
Inflation (IGP-DI)   7.9%                           3.8%     1.2% 
Appreciation of the real vs. U.S. dollar    20.7%                           9.5%    13.4% 
Period-end exchange rate – U.S.$1.00(1)   1.7713                           2.1380     2.3407 
Average exchange rate – U.S.$1.00(2)   1.9300                           2.1679     2.4125 
Change in real GDP(3)   5.4%                           3.8%     3.2% 
Average interbank interest rates(4)   11.9%                       15.0%    19.0% 

_______________
(1)
The real/U.S. dollar exchange rate at June 2, 2008 was R$1,6320 per U.S.$1.00.
(2)
Average of the closing exchange rates on the last day of each month in the period.
(3)
In 2007, the Brazilian Geography and Statistics Institute (“IBGE”) adopted a new GDP calculation method, which affected the GDP figures of prior years.
(4)
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.

     The economy grew 5,8% during the first quarter of 2008 as compared to the same period during 2007. The value of the real appreciated to R$1.6294 per U.S. dollar at May 31, 2008, as compared with R$1.7713 at December 31, 2007. The Central Bank increased the base interest rate from 11.18% to 11.64% during the first five months of 2008. The GDP of the State of Paraná grew 6.0% in 2007, a better performance than that of the Brazilian economy during the same period.

Rates and Prices

     Our results of operations are significantly affected by changes in the prices and tariffs that we charge for electricity. Most of our revenues come from sales to captive customers at regulated rates defined by ANEEL. In addition, we also sell energy through auctions, bilateral agreements and to free customers at prices that are not directly regulated, but they 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 in the agreements with delivery dates beginning in 2005, 2006 and 2007 reflected the electricity surplus, resulting in a reduction of energy prices. Electricity prices for the agreements with delivery dates beginning in 2008 and 2009 were higher than prior years, reflecting the system expansion costs.

     Sales to Final Customers represented about 50.9% of the volume of electricity we delivered in 2007, and accounted for 77.6% of our gross energy sales 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 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. We granted discounts from these ANEEL-approved tariffs to those of our customers who pay their bills on time, until we discontinued this policy in 2006.

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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). In light of our discount policy, we 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 decided to apply the entire readjustment and did not grant discounts to our customers.

     On June 24, 2007, ANEEL required us to decrease our tariffs by an average of 1.22% pursuant to the annual tariff readjustment. The primary reason that ANEEL decreased our tariffs was to account for the devaluation of the US dollar in 2006.

     On June 23, 2008, ANEEL required us to decrease our tariffs by 3.35%, pursuant to the second periodic revision. This decrease consisted of a 7.17% decrease in our retail tariffs and a 3.82% increase for deferred regulatory asset recovery (CVA).

Long-Term Purchase Contracts

     Our distribution business purchases energy from generators (including our generation business) and resells it to customers at regulated rates. In 2007, we purchased 11.0% of our total available energy under long-term contracts 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 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 2007, our electricity purchases from Itaipu amounted to R$385.4 million.
  • We purchased energy from Cien from 1999 through 2007. In 2007, we recognized R$111.2 million for electricity purchased from Cien. For more information, see “Item 4—Business— Generation and Purchases of Energy—Purchases.”
  • Under the New Industry Model Law, 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 under long-term contracts.

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. The Company used part of its CRC Account credit to settle outstanding debts with the Federal Government. In August 1994, we assigned the remainder of our CRC Account balance, equal to R$808.1 million, to the State of Paraná to settle debts with the Federal Government, pursuant to an assignment agreement (the “CRC Account Agreement”). Pursuant to the terms of the CRC Account Agreement, the State of Paraná now has an accounts payable to the Company, and if it fails to make payments on a timely basis, we may 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.

     The balance of these receivables as of December 31, 2004, which amounted to R$1,197 million, will be paid to us by the State of Paraná beginning on January 30, 2005 and adjusted at IGP-DI plus 6.65% per year. 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, 2007, the total outstanding balance under the CRC Account Agreement was R$1,250.4 million. Payment of the installments is guaranteed by funds derived from dividends owed by us to the State of Paraná.

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 fixed assets, including those purchased with the contributions received from the Federal Government and our customers.

     On October 31, 2006, ANEEL issued a new regulation, which changed the treatment of special obligations with respect to the tariff setting process. The regulation establishes, among other things, that beginning on the date of the next respective tariff revision, the special obligations would be amortized as a reduction of net allowable costs over future periods, thereby reducing tariffs. Consequently, in accordance with SFAS No. 71 “Accounting for the Effects of Certain Types of Regulation,” after the issuance of this regulation, the special obligations became a regulatory liability. According to the aforementioned regulation, the accounting treatment for Special Obligations under Brazilian GAAP changed and, as from 2006, they started to be amortized prospectively starting on the date future tariff reviews for each distribution concessionaire. The amount we recorded as special obligations as of December 31, 2007 was R$857.2 million.

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 Assets

     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 readjustment 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$93.1 million and the deferred regulatory liabilities totaled R$165.8 million at December 31, 2007.

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 provisions were necessary for 2005, 2006 and 2007. 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.

Electric Energy Trading Chamber - CCEE

     For accounting purposes, we recognize costs and revenues related to purchases and sales of energy in the spot market based on our internal estimates, which estimates are reviewed by the CCEE.

     We claimed a credit based on energy sales from Itaipu during the energy rationing period that occurred in 2001, when there was a significant difference in prices of spot market energy. There are legal challenges pending which could affect our accounting of these transactions in 2001 and 2002. As of December 31, 2007, the estimated amount of calculation differences is R$860.0 million, which we have not recognized as a contingency, based on the opinion of our legal counsel. For more information, see Note 21(b) to our Consolidated Financial Statements and “Item 8–Financial Information–Legal Proceedings.”

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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.

     In compliance with CVM Deliberation 489, of October 3, 2005, the legal proceedings considered of possible loss by us in December 31, 2007 totaled R$1,631 million, of which R$40.7 million was related to labor claims, R$861.5 million was related to regulatory proceedings, R$325.1 million was related to civil claims and R$403.6 million was related to tax proceedings.

Valuation of Derivative Instruments

     We used swap instruments to manage risks from changes in foreign exchange and interest rates in 2006 and 2005. We recorded 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 settled all outstanding cross-currency interest rate swap contracts in 2006 and we recorded gains in the amount of R$22.4 million and losses of R$42.0 million in 2006 and 2005, respectively. We did not use derivative instruments in 2007. For more information, see note 30 to the Financial Statements.

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.

     The estimated costs for 2008 and 2007, according to principles established at CVM Deliberation 371/2000, amount to R$14.7 million and R$69.7 million, respectively, relating to the welfare plan and the health care plan. In 2007, the Company recorded income in the amount of R$ 13.9 million in the statement of operations related to the pension and health care plans.

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 most important operating segments correspond to Copel S.A. (Holding) and each of our wholly owned subsidiaries, namely, Copel Geração e Transmissão, which is engaged in electricity generation and transmission activities and Copel Distribuição, which is engaged in electricity distribution activities. On November 30, 2007, as a result of a spin-off, we transferred the assets of COPEL Transmissão to COPEL Distribuição and to COPEL Geração. For comparative purposes, the balances of COPEL Transmissão for December 31, 2006 and 2005 and the years then ended were reclassified into COPEL Geração e Transmissão and COPEL Distribuição. For more information, see Note 31 to our audited Consolidated Financial Statements.

     Our largest operating segment is distribution. Revenues from our distribution business represented 72.7%, 74.6% and 80.8% of our total net operating revenues in 2007, 2006 and 2005, respectively, before eliminations and adjustments. Revenues from our generation and transmission business represented 27.0%, 26.5% and 28.4% of our total net operating revenues in 2007, 2006 and 2005, respectively, before eliminations and adjustments.

     Copel Geração e Transmissão 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. Our generation business has grown to represent an increased proportion of our revenues, as a result of increased production from new generation projects, particularly Elejor’s hydroelectric power plants (Santa Clara and Fundão), which started operations in 2005 and 2006, respectively. We expect this trend to continue as a result of additional generation projects, particularly Mauá and São Jerônimo, as well as increased sales to Free Customers and energy sales in the Pool. 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.

Analysis of Electricity Sales and Cost of Electricity Purchased

     The following table sets forth the volume and average rate components of electricity sales and purchases for the years 2005 to 2007.

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    Year ended December 31, 
   
    2007    2006    2005 
       
Electricity Sales:             
Sales to Final Customers:             
   Average price (R$/MWh):(1)            
     Industrial customers(5)   249.88    243.30    215.91 
     Residential customers    369.46    390.40    399.12 
     Commercial customers    333.87    344.02    338.23 
     Rural and other customers(2)   198.61    208.51    214.31 
     Public service customers    233.18    231.07    216.61 
     All customers(5)   288.62    294.27    282.19 
 Volume (GWh):             
     Industrial customers(5)   7,740    7,200    7,639 
     Residential customers    5,143    4,826    4,653 
     Commercial customers    3,722    3,407    3,231 
     Rural and other customers(2)   2,803    2,684    2,608 
     Public service customers    576    574    565 
     All customers(5)   19,984    18,691    18,696 
 Total revenues from sales to Final Customers (millions of R$)   5,768    5,500    5,276 
Sales to distributors and others(7)            
     Average price (R$/MWh)(1)   89.47    77.33    72.57 
     Volume (GWh) (6)   15,285    16,694    13,090 
     Total revenues (millions of R$)   1,368    1,291    950 
Electricity Purchases:             
Purchases from Itaipu:             
     Average cost (R$/MWh)(3)   82.51    71.83    99.08 
     Volume (GWh)   4,666    4,665    4,682 
     Percentage of total Itaipu production purchased    6.5    6.7    6.5 
     Total cost (millions of R$)(4)   385    335    464 
Purchases from others (7)            
   Average cost (R$/MWh)   63.03    66.35    73.67 
   Volume (GWh) (6)   16,565    16,646    13,193 
   Total cost (millions of R$)(4)   1,044    1,104    972 


______________
(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 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 Customers from outside Paraná.
(6)
Energy Reallocation Mechanism not included.
(7)
Energy traded between Copel’s Subsidiaries not included.

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Results of Operations for the Years Ended December 31, 2007, 2006 and 2005

     The following table summarizes our results of operations for the years ended December 31, 2005, 2006 and 2007:

    Year ended December 31, 
   
    2007    2006    2005 
       
    (in millions of reais)
Net operating revenues:             
Energy sales to final customers(1)   R$ 5,767.8    R$ 5,500.1    R$ 5,275.9 
Electricity sales to distributors    1,367.6    1,291.0    949.9 
Use of main transmission grid    296.8    283.8    268.0 
Other revenues    487.9    346.4    307.5 
Value-added taxes on sales and charges(2)   (2,498.0)   (2,532.7)   (2,361.7)
       
    5,422.1    4,888.6    4,439.6 
       
Operating expenses:             
Electricity purchased for resale    (1,429.4)   (1,439.7)   (1,436.3)
Use of main transmission grid    (514.5)   (534.8)   (530.8)
Other operating expenses    (1,870.9)   (1,365.4)   (1,652.9)
       
    (3,814.8)   (3,339.9)   (3,620.0)
       
 
Operating income    1,607.3    1,548.7    819.6 
 
Equity in results of investees    1.6    (6.2)   9.0 
Financial income (expenses), net    20.2    294.7    (101.0)
Non-operating expenses, net    (31.1)   (23.0)   (10.6)
       
Income before income taxes and non-controlling interest    1,598.0    1,814.2    717.0 
Income taxes    (460.3)   (557.7)   (198.2)
Net income before non-controlling interest    1,137.7    1,256.5    518.8 
Non-controlling interest    (31.1)   (13.8)   (16.4)
       
Net income    R$ 1,106.6    R$ 1,242.7    R$ 502.4 
       

_______________
(1)
Energy sales to final customers include energy sales, as well as charges billed to final customers for the usage of distribution grid (TUSD).
(2)
Fuel usage account (CCC), energy development account (CDE) and research and development (P&D and PEE) were reclassified in 2007 as deductions from gross operating revenues instead of operating costs as required by the ANEEL under Brazilian Accounting Principles. For comparative purposes, this reclassification was applied for 2006 and 2005.

Results of Operations for 2007 compared with 2006

Net Operating Revenues

     Our net operating revenues increased by 10.9% in 2007, compared to 2006. Of the R$533.5 million increase in net operating revenues, R$267.7 million was due to sales to Final Customers, which increased mainly due to market growth, while R$76.6 million was due to increased sales to distributors.

     Sales to Final Customers. Our revenues from electricity sales to Final Customers (including energy sales to Final Customers and income for the use of the distribution grid) increased by 4.9% in 2007, mainly due to growth in the volume of electricity sold (6.9% in 2007). The average tariff for Final Customers decreased by 1.9% as compared to the 2006 average rate. The residential, commercial, rural and other classes of rates decreased by 5.4%, 3.0% and 4.7%, respectively. In contrast, the industrial rate increased by 2.7% . The variation in average price increases between different classes of customers reflects the fact that ANEEL’s tariff increases in June 2005, 2006 and 2007 varied depending upon the voltage level received and the gradual phasing out of the crossed subsidies between high and low voltage customers.

     The increase in the volume of energy sold to Final Customers in 2007 primarily reflected an increase in all main categories of Final Customers.

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     The 6.6% increase in the volume of electricity sold to residential customers in 2007 was mainly due to an increased number of customers, coupled with the 3.6% increase in average consumption per residential customer. Average temperatures in 2007 were higher than in the previous year, further contributing to increased sales volumes.

     The increased volume of electricity sold to our commercial customers was largely a result of favorable conditions in the service sector, particularly in the wholesale, retail, hotel and food segments. The corresponding increase in the number of customers in this category resulted in a 9.2% expansion in the volume sold to this category.

     The 7.5% increase in the volume of electricity sold to industrial customers in 2007 was mainly due to increased industrial activity in the following sectors: textiles, paper, cardboard, cellulose and food and beverages. Our base of industrial customers expanded by 3.7% in 2007.

     Electricity Sales to Distributors. Electricity sales to distributors include sales through CCEAR auctions (52.8%), sales under bilateral agreements (37.7% of the total supply revenues in 2007), sales to CCEE and the Interconnected Power System (5.1%) and sales to small distributors in the State of Paraná (4.4%) .

     Our revenues from electricity sales to distributors increased by 5.9% in 2007, primarily due to the commencement of sales resulting from new auction contracts settled for the 2007-2014 period. The tariff adjustments to the outstanding contracts applied in 2007 further contributed to our increase in revenues.

     Use of Main Transmission Grid. Revenues from third-party use of our Main Grid increased by 4.6% in 2007 as a consequence of (i) the tariff increases enacted by ANEEL in June 2007 and June 2006 and (ii) the expansion of our transmission grid.

     Other Revenues. This category includes revenues from the sale of natural gas, the use of our fiber optic network, our energy consulting services, lease income and the fuel cost subsidy we receive for our thermal plant.

     These revenues increased by 40.8% in 2007, largely as a result of (i) the increased revenues we received from the sale of natural gas, (ii) the lease of UEG Araucaria Thermoelectric Plant facilities, which we leased to Petrobras on July 7, 2007 for R$79.1 million, and (iii) the increase of R$33.1 million in the amount of services revenues received by Copel Geração and Transmissão S.A. and UEG Araucaria Thermoelectric Plant.

     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 fell as a percentage of our gross revenues, from 34.1% in 2006 to 31.5% in 2007, which was primarily due to a reduction in the rate of the regulatory charges for our CCC Account.

Operating Expenses

     Total operating expenses increased by 14.2% in 2007 compared to 2006. Factors and events that were significant to our operating expenses in 2007 included the following:

  • Energy Purchased for Resale. Our expenses related to the energy we purchase for resale decreased by R$10.3 million, or 0.7%, in 2007. This variation was mainly due to the agreement established with CIEN, which reduced the volume of contracted energy from 400 average MW to 175 average MW in 2007. The main amounts booked in 2007 were: R$385.4 million from ITAIPU, R$111.2 million from CIEN, R$98.2 million from Itiquira and R$845.1 million from the energy auction.

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  • Use of Main Transmission Grid. Expenses for use of the Main Transmission Grid decreased by R$20.3 million, or 3.8%, in 2007. This decrease was mainly due to a reduction in the tariffs established by ANEEL, affecting our CVA related to the use of the main transmission grid, which amounted to R$23.0 million in 2007 (2006 - R$80.1 million).
  • Pension and Health Care Plans. Pension and Health Care represented a credit of R$13.9 million in 2007, as compared to expenses of R$127.7 million in 2006. This change is the result of an actuarial gain recorded in 2007.
  • Raw material and supplies for electric power production. In 2006, this account reflected the reversal of R$298.1 million due to the agreement established in May 2006 between Copel, Petrobras and Compagas, related to natural gas for the UEG Araucaria Thermoelectric Plant.
    In 2007, this account reflected a reversal of Pasep and Cofins tax contingencies, in the amount of R$29.9 million, which resulted in a net credit of R$9 million.
  • Natural Gas and Raw material for Natural Gas. The expenses related to natural gas purchases decreased by 25.3% as compared to 2006 due to a reduction in purchase volume of natural gas recorded by Compagas. The UEG Araucaria Thermoelectric Plant has been leased to Petrobras as of June 2007, and Compagas has not supplied natural gas to UEG Araucaria Thermoelectric Plant since then. In addition there was a decrease in the average price paid for natural gas, due to monetary and exchange rate variations, since natural gas prices are set in U.S. dollars.
  • Depreciation and Amortization. The increase of R$49.7 million in this balance was due mainly to new assets capitalized in 2007, as well as partnership acquisitions made by Copel, which increased the consolidated fixed asset balances and, consequently, the depreciation charges. The capitalization of the Fundão Plant, which belongs to ELEJOR, resulted in an addition in depreciation expenses in the amount of R$6.2 million in 2007. The UEG Araucaria Thermoelectric Plant, which has been acquired and consolidated since June 2006 represented R$26.7 million in 2006 depreciation expenses. In 2007, depreciation expenses recorded by UEG Araucaria Thermoelectric Plant amounted to R$ 49.4 million, an increase of R$ 22.7 million when compared to 2006.
  • Provisions and reversions. In 2007, R$242.4 million was recorded as provisions expenses, whereas in 2006 reversals of other provisions resulted in income in the amount of R$ 80.7 million. This charge resulted from new provisions expensed in 2007, mainly related to COFINS tax contingencies (R$171.6 million), other tax contingencies (R$36.6 million) and labor contingencies (R$14.4 million).
  • Other Operating Expenses. Other operating expenses increased by 26.4% as compared to 2006 balance mainly due to the increase of financial compensation related to the use of water resources, which was R$73.9 million in 2007.

Financial Income (Expenses), Net

     We recognized R$20.2 million of net financial income in 2007, as compared with net financial income of R$294.7 million in 2006.

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     Our financial expenses decreased by 13.5% in 2007, mainly as a result of the reduction of R$25.8 million in monetary variations, due to the higher appreciation of the Brazilian real in 2007 and to the reduction in debentures charges, due to the settlements of the 2nd and 3rd series in February, 2007.

     Financial revenues decreased 45.7% in 2007, as compared to 2006, primarily due to the booking of R$283.2 million in 2006 related to the discounts obtained in the negotiations between Copel, Petrobras and Compagas on the gas purchase agreement for the UEG Araucaria Thermoelectric Plant. Other contributing factors include (i) absence of gains from derivative operations, which represented R$22.4 million in 2006 and (ii) reduction in income from fines and other penalties over sales invoices.

Income Taxes

     In 2007, we recognized income tax and social contribution expenses of R$460.3 million, reflecting an effective tax rate of 28.8% on our pretax income. This compared to an income tax and social contribution expense of R$557.7 million in 2006, reflecting an effective tax rate of 30.7% on our pretax income. The decrease in our effective tax rate was primarily due to the higher amount of interest on equity paid to shareholders in 2007 (R$ 200.0 million) when compared to the amount paid in 2006 (R$ 123.0 million).

Results of Operations for 2006 compared with 2005

Net Operating Revenues

     Our net operating revenues increased by 10.1% in 2006. Of this R$449.0 million increase in net operating revenues, R$224.2 million was due to sales to Final Customers, which increased mainly due to higher prices, and R$341.1 million was due to sales to distributors.

     Electricity Sales to Final Customers. Our revenues from electricity sales to Final Customers increased by 4.2% in 2006, 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 and, as of June 20, 2006, finished granting the discounts. The average tariff increase for Final Customers was 4.3% as compared to the 2005. Revenues increased from all our main categories of customers in 2006.

     The rate of increase of the average price of energy was greatest for our industrial customers (12.7%) and the rate from residential and rural and other customers decreased (2.2% and 2.7% respectively). 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 2004, June 2005 and June 2006 varied depending upon voltage level.

     The increase in our average prices for electricity sold to Final Customers in 2006 was primarily due to the rate increases we received from ANEEL, 7.8% in June 2005 and 5.1% in June 2006. 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-approved tariffs to those of our customers who pay their bills on time in order to minimize the impact of ANEEL 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. From June 2006 on, the discounts were discontinued.

     The slight decrease in the volume of energy sold to Final Customers in 2006 primarily reflected a 5.7% decrease in the volume sold to industrial customers, because (i) some of our industrial customers became Free Customers and decided to purchase their energy from one of our competitors; (ii) of lower industrial output due to a reduction in certain commodities’ international prices; and (iii) of the appreciation of the real. On the other hand, the volume of energy we sold to commercial, residential and rural and other customers increased by 5.4%, 3.7% and 3%, respectively in 2006.

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     The increase in the volume of electricity sold to our commercial customers is largely a result of the favorable conditions of the tertiary sector (particularly the wholesale, retail, hotel and food segments), coupled with the increase in the number of customers. In December 2006, we invoiced 278,963 commercial customers, 2.1% more than the 273,124 we invoiced in December 2005.

     The 3% rate of growth in the volume of electricity among our rural and other consumers was mainly due to the long drought, which demanded greater use of irrigation. Average rural consumption increased by 2.7% compared to the previous year, reaching 363.1 kWh/month. Residential consumption grew 3.7% as a result of an increase in the number of residential customers and a 0.7% increase in the rate of consumption per residential customer, compared to 2005.

     Electricity Sales to Distributors. Electricity sales to distributors include sales under bilateral agreements (35.5% of the total supply revenues in 2006), sales through CCEAR auctions (49.2%), sales to CCEE and the Interconnected Power System (12.2%), and sales to distributors in the State of Paraná (3.1%) .

     Our revenues from electricity sales to distributors increased by 35.9% in 2006, primarily due to the expiration of the Initial Supply Contract between Copel Geração and Copel Distribuição (excluded in the consolidated figures) and the consequent sale of 368 average MW at the first public auction from existing power plants for the 2006-2013 period. We also accounted on sales to distributors, the revenue from the UEG Araucaria Thermoelectric Plant’s emergency output order from September 2006 until December 2006, in the amount of R$87.1 million, and there was an increase in the revenue from bilateral contract to supply Celesc (from 380 average MW in 2005 to 480 average MW in 2006).

     Use of Main Transmission Grid. Revenues from third-party use of our Main Transmission increased by 5.9% in 2006 as a consequence of the tariff increases enacted by ANEEL in June 2005 and June 2006, 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 12.7% in 2006, largely as a result of the increased revenues we received from 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 34.1% of our gross revenue in 2006 and 34.7% of our gross revenue in 2005.

Operating Expenses

     Total operating expenses decreased by 7.7% in 2006, mainly by the reversion effects related to the gas contract amounts and Cofins provisions. The most important factors were as follows:

  • Energy Purchased for Resale. Our expenses related to the energy we purchase for resale increased by R$3.4 million, or only 0.2% in 2006. The main amounts booked were: R$335.4 million from ITAIPU, R$227.4 million from CIEN, R$87.7 million from Itiquira and R$654.1 million from the energy auction. In addition, R$45.2 million was booked as passive CVA.

  • Use of Main Transmission Grid. Expenses for use of the Main Transmission Grid increased by R$4.0 million, or 0.8%, in 2006. This increase was mainly due to the rate increases enacted by ANEEL in June 2005 and 2006.

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  • Personnel Expenses. Our personnel expenses increased by R$75.4 million, or 13.3%, in 2006. This increase was mainly due to the (i) wage increases granted under the collective bargaining agreement in October 2005 (5.9%) and October 2006 (3.5%); (ii) an increase in the number of our employees; and (iii) our increased contribution to our employees’ profit sharing plan.

  • Raw material and supply for electric power production. This account reflects the reversal of R$298.1 million due to the agreement established in May 2006 between Copel, Petrobras and Compagas, related to natural gas for the UEG Araucaria Thermoelectric Plant.

  • Provisions and reversions. This account includes the reversal of the COFINS tax provisions, in the amount of R$197.6 million, in December 2006, partially offset by the bookings related to Energética Rio Pedrinho (R$25.0 million) and Consórcio Salto Natal Energética (R$23.8 million).

Financial Income (Expenses), Net

     We recognized R$294.7 million of net financial income in 2006, as compared with net financial expenses of R$101.0 million in 2005.

     Our financial expenses decreased by 12.6% in 2006, mainly as a result of the reversal of two non-recurring events in 2005: Compagas’ contractual penalties of R$190.9 million and charges regarding derivative operations, in the amount of R$42.0 million.

     Financial revenues increased 84.0% in 2006, as compared to 2005, primarily due to the booking of R$283.2 million in May 2006, related to the discounts obtained in the negotiations between Copel, Petrobras and Compagas on the gas purchase agreement for the UEG Araucaria Thermoelectric Plant. Other factors leading to this result include (i) higher revenue from financial investments, due to a higher cash position in the period, and (ii) gains from derivative operations (R$22.4 million).

Equity in Results of Investees

     Our proportionate share of the results of equity method affiliates resulted in loss of R$6.2 million in 2006 and income of R$9.0 million in 2005. The loss in 2006 was primarily a result of the accounting of equity loss from our investee Sercomtel Telecomunicações (R$11.7 million) and Sercomtel Celular (R$2.7 million).

Income Taxes

     In 2006, we recognized income tax expenses of R$557.7 million, reflecting an effective tax rate of 30.7% on our pretax income. This compared to an income tax expense of R$198.2 million in 2005, reflecting an effective tax rate of 27.6% on our pretax income. The increase in our effective tax rate was primarily due to the tax benefit reduction in relation to the pretax income, being 3.3% in 2006 against 6.4% in 2005.

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$530.4 million in 2007 (including the acquisition of Centrais Eolicas do Parana and investments in the UEG Araucaria Thermoelectric Plant, Compagas and Elejor), R$1,010.0 million in 2006 (including the acquisition of the UEG Araucaria Thermoelectric Plant and investments in Compagas and Elejor), and R$671.6 million in 2005. The following table sets forth a breakdown of our capital expenditures for the periods indicated.

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    Year ended December 31, 
   
    2007    2006    2005 
       
    (millions of reais)
Generation and Transmission    56.7    88.7    99.9 
Distribution    423.8    383.8    311.0 
Telecom    31.6    30.1    23.7 
Interest in equity investees    3.1(2)   436.7(1)   2.7 
UEG Araucaria Thermoelectric Plant    0.9     
Compagas    13.8    10.9    9.2 
Elejor    0.5    59.8    225.1 
       
     Total    530.4    1,010.0    671.6 
       

_______________
(1)
Includes the acquisition of the UEG Araucaria Thermoelectric Plant.
(2)
Includes the acquisition of the Centrais Eolicas do Parana Power Plant in the amount of R$ 2.1 million.

     Our total budgeted capital expenditures for 2008 is R$839.9 million, of which:

  • R$487.3 million is for distribution, including R$99.8 million allocated for investments in lower voltage transmission assets (69 kV and 138 kV) that were transferred to Copel Distribuição as a result of the spin-off of Copel Transmissão;

  • R$263.0 million is for generation and transmission, including R$118.4 million allocated for investments in higher voltage transmission assets (230 kV or higher);

  • R$42.1 million is for our telecommunication business, R$35.3 million is for piped gas distribution, R$6.3 million is for the UEG Araucaria Thermoelectric Plant, R$5.8 million is for Elejor and R$0.1 million is for investments in our affiliates.

     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 2007 was our operating activities. In 2007, net cash provided by operating activities was R$1,357.3 million, an increase from R$911.5 million in 2006. Such increase is basically due to the adjustments to net income in 2006, mainly related to reversals of provisions for contingencies, which do not affect cash balances. We expect our operating cash flow to be sufficient to finance our capital expenditures in 2008.

     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 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 outstanding loans and financing at December 31, 2007 were R$2,102.5 million. Approximately R$78.1 million of the total debt outstanding at December 31, 2007 was denominated in U.S. dollars, R$8.0 million was denominated in Japanese yen and R$62.7 million was indexed to a basket of foreign currencies. For more information on the terms of these loans and financings, see Note 16 of our Consolidated Financial Statements. Our major loans and financing arrangements are:

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  • Eletrobrás (including Elejor’s debt) - We have R$410.6 million in debt under government programs to finance expansion of the power industry.

  • IDB - We have R$62.7 million in debt 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.

  • Banco do Brasil S.A. – We have R$351.2 million of outstanding debt with Banco do Brasil, which we contracted to pay debentures issued in 2002, 2005 and 2006.

     At December 31, 2007, we had a total of R$1,174.5 million in outstanding convertible debentures issued by Elejor and non-convertible debentures issued by Copel. The terms of these debentures are summarized in Note 17 of our Consolidated Financial Statements.

     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, 2007, 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.

    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    833.3    92.7    116.6    95.8    528.1 
Debentures    1,174.5    171.8    198.3    692.1    112.3 
Suppliers    556.9    366.5    38.1    76.2    76.2 
Purchase obligations(1)   19,255.4    1,833.7    4,126.2    4,814.6    8,480.9 
Concession payments - ELEJOR    996.0    34.3    68.6    68.6    824.5 
Redeemable shares at ELEJOR(2)   94.7      16.5    33.0    45.2 
                     
           
     Total    22,910.8    2,499.0    4,564.3    5,780.3    10,067.2 
           

_______________
(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, 2007.
(2)
Consists of redeemable shares of Eletrobrás at ELEJOR. Interest and monetary indexation of R$50.0 million is recorded in loans and financing. In August 2007, ELEJOR anticipated the redemption of shares in the amount of R$20.4 million and paid interest and monetary variations in the amount of R$18.7 million.

     We are also subject to contingencies with respect to tax, labor and civil claims and have provisioned R$514.3 million for accrued liability for legal proceedings related to these claims as of December 31, 2007. For more information, see “Item 8. Financial Information-Legal Proceedings” and Note 21 to our Consolidated Financial Statements.

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Off-balance Sheet Arrangements

     We have not engaged in any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

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 35 to our Consolidated Financial Statements. Our net income in accordance with Brazilian GAAP was R$1,106.6 million in 2007, R$1,242.7 million in 2006 and R$502.4 million in 2005. Under U.S. GAAP, we would have reported net income of R$981.2 million in 2007, R$1,019.3 million in 2006 and R$556.5 million in 2005. Our shareholders’ equity in accordance with Brazilian GAAP was R$7,236.2 million at December 31, 2007 and R$6,376.3 million at December 31, 2006. Under U.S. GAAP, we would have reported shareholders’ equity of R$7,840.7 million at December 31, 2007 and R$7,169.4 million at December 31, 2006.

     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 35 to our Consolidated Financial Statements.

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 seven 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.

     Meetings 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:

  • seven are elected by the holders of the Common Shares;

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  • one is elected by minority shareholders, holders of both the Common Shares or preferred 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 five members to the Board of Directors; and

  • BNDESPAR appoints two members to the Board of Directors.

     According to the Brazilian Corporation Law, minority shareholders are entitled to appoint and remove a member of the Board of Directors, in a separate election, where such minority shareholders (i) hold at least fifteen percent of the company’s voting shares or (ii) hold at least ten percent of the company’s outstanding non-voting shares.

     The terms of the current members of the Board of Directors expire in 2009. The current members are as follows:

Name    Position    Since 
     
João Bonifácio Cabral Júnior    Chairman    2003 
Rubens Ghilardi    Director    2005 
Jorge Michel Lepeltier    Director    2007 
Munir Karam    Director    2008 
Laurita Costa Rosa    Director    2004 
Rogério de Paula Quadros    Director    2005 
Nelson Fontes Siffert Filho    Director    2005 
Luiz Antonio Rodrigues Elias    Director    2006 
Nildo Rossato    Director    2007 

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

     João Bonifácio Cabral Júnior. Mr. Bonifácio is 62 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 ten years. Mr. Bonifácio was appointed by the State of Paraná.

     Rubens Ghilardi. Mr. Ghilardi is 68 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, Escelsa and Copel. He is currently our Chief Executive Officer.

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     Jorge Michel Lepeltier. Mr. Lepeltier is 60 years old. He received a degree in economics and accountancy from the Pontifícia Universidade Cato ica de São Paulo and attended an environmental management course in the Escola Superior de Agricultura “Luiz de Queiroz” ESALQ-USP. Previously, Mr. Lepeltier was treasurer and then administrative – finance officer and market relations officer of Brasmotor SA and audit manager at PricewaterhouseCoopers. Mr. Lepeltier was appointed by the minority shareholders.

     Munir Karam. Mr. Karam is 70 years old. He received a law degree from Federal University of Paraná. Formerly, he served as a state judge and law professor. Currently, Mr. Karam is the chairman of the Board of Directors of ParanaPrevidência, the Paraná state pension fund, as well as a member of the law faculty at the Federal University of Paraná. Mr. Karam was appointed by the state of Paraná.

     Laurita Costa Rosa. Ms. Rosa is 49 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 56 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.

     Nelson Fontes Siffert Filho. Mr. Siffert is 47 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. Mr. Siffert is the manager of the energy department of BNDES. He was appointed by BNDESPAR.

     Luiz Antonio Rodrigues Elias. Mr. Elias is 55 years old. He received a degree in economics from University Benett-Centro Universitário Metodista de Brasilia. Previously, Mr. Elias was an officer of Rede Ferroviáia Federal by appointment of the Ministry of Planning and a researcher of the National Institute of Intellectual Property-INPI, where he was in charge of the transfer of technology departments. Mr. Elias is currently an officer of technological and innovation development of the Ministry of Sciences and Technology, chairman of the management committees of the electric power sectorial fund (CT -Energ) and mineral sectorial fund (CT-Mineral) and a member of the audit committee (Consellio Fiscal) of the Brazilian Nuclear Industries (Indústrias Nucleares Brasileiras-INB). Mr. Elias was appointed by the BNDESPAR.

     Nildo Rossato. Mr. Rossato is 42 years old. He is a technician in rural business administration from Faculdades Reunidas de Administracão, Ciências Contábeis e Ciências Económicas de Palmas-FACEPAL. Mr. Rossato joined Copel in 1986 and currently works as manager in the distribution office of the Company. He was appointed by our employees as member of the Board of Directors.

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 seven 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, Investor Relations Officer and Investment Portfolio Manager    2005 
Ronald Thadeu Ravedutti    Chief Distribution Officer    2005 
Raul Munhoz Neto    Chief Power Generation & Transmission and Telecommunications Officer    2006 
Luiz Antonio Rossafa    Chief Engineering Officer    2008 
Antonio Rycheta Arten    Chief Management Officer    2008 
Zuudi Sakakihara    Chief Legal Officer    2006 

     The following are brief biographies of the current members of our Board of Executive Officers:

     Rubens Ghilardi. Mr. Ghilardi is 68 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 63 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 58 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 65 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 UEG Araucaria Thermoelectric Plant and Chief Construction and Engineering Officer of Copel.

     Luiz Antonio Rossafa. Mr. Rossafa is 53 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 was the Chairman of the Regional Engineering, Architecture and Agronomy Committee of the State of Paraná.

     Antonio Rycheta Arten. Mr. Arten is 55 years old. He received a degree in accounting from the FAE Economics and Business Administration School and a masters degree in economics and finance engineering from Sociedade Paranaense de Ensino - SPEI. He was CEO (2003-2008) and Administrative and Finance Officer (2003) of the Development Agency of the State of Paraná – AFPR. He was alternate and primary member of the Fiscal Council of Copel during 2003-2004 and 2004 –2005, respectively.

     Zuudi Sakakihara . Mr. Sakakihara is 70 years old. He received a law degree from the Faculdade de Direito da Universidade Federal do Paraná and attended specialization courses in civil procedure at Universidade de Brasilia and in tax law at the Pontifícia Universidade Católica de São Paulo. Mr. Sakakihara was, previously, a teacher of tax law at Escola da Magistratura Federal do Paraná and at Universidade Federal do Paraná, a teacher of tax law in a master course at Universidade Estadual de Londrina and at Pontifícia Universidade Católica do Paraná. He was also a federal judge in Londrina and Curitiba, legal officer (Diretor Jurídico) of Banco BHM de Investimentos, member of the taxpayer council of the State of Paraná and legal officer of financial institutions and of companies rendering services and commercial companies.

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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;

  • 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 following table lists the current and alternate members of the Fiscal Council, who were appointed at the 53rd shareholders General Meeting held on April 17, 2008, and whose terms expire in 2009:

Name    Since 
   
Osmar Alfredo Kohler – President    2008 
Heron Arzua    2005 
Beatriz Oliveira Fortunato    2008 
Nelson Pessuti    2003 
Márcio Luciano Mancini    2005 
 
Alternates    Since 
   
Moacir José Soares    2003 
Maurílio Leopoldo Schmitt    2003 
Frederico Djun Takahashi Saraiva    2008 
Serafim Charneski    2004 
Vacant   

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 with terms until 2009 are: Mr. Jorge Michel Lepeltier, 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.

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Compensation of Directors and Officers

     For the year ended December 31, 2007, the aggregate amount of compensation paid by us to the members of our Board of Directors, Board of Executive Officers and Fiscal Council was R$5.5 million, as approved by our 52nd General Shareholders’ Meeting held on April 27, 2007.

Employees

     At December 31, 2007, we had 8,347 employees, compared to 8,119 employees at December 31, 2006 and 7,704 employees at December 31, 2005. Including employees at Compagas, Elejor and the UEG Araucaria Thermoelectric Plant (companies in which we have a majority stake) we had 8,441 employees by the end of 2007. In addition, during 2007 we had approximately 2,237 third-party employees performing services for us, including security and cleaning services. Including the controlled companies, the third-party employees were 2,244 by the end of 2007.

     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    2007    2006    2005 
       
Generation and Transmission*    1,394    979    1072 
Distribution*    5,351    5,542    5,144 
Telecommunications.    243    252    227 
 
Corporation staff and research and development    1,342    1,323    1,228 
Other employees    17    23    33 
Total Employees Copel wholly owned subsidiaries    8,347    8,119    7,704 
       
Compagas    85    76    67 
Elejor       
UEG Araucária       
       
Total    8,441    8,206    7,775 
       

* On December 1, 2007, all employees of Copel Transmissão were transferred to Copel Geração (renamed Copel Geração e Transmissão S.A.) and to Copel Distribuição. For comparative purposes, this table reflects this transfer retroactively in 2006 and 2005.

     All of our employees are covered by collective bargaining agreements that we renegotiate annually with the unions that represent the various employee groups. In 2007, we negotiated and signed labor agreements with the unions representing our employees. These new bargaining agreements became effective in October 2007 and will be in place for a one-year term. We agreed to increase salaries by 5.5% in 2007.

     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, 2007, approximately 99% of our employees had elected to participate in a 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 9.0% and certain performance criteria are met. In 2007, R$54.3 million was recorded as distributions to our employees as part of the profit-sharing plan. In 2006 and 2005, R$52.0 million and R$32.3 million, respectively, were recorded as profit sharing. The terms of the profit-sharing agreement are currently being revised and negotiated for future years.


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Share Ownership

     As of May 31, 2008, 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, 2007, the State of Paraná directly owned 58.6% of the Common Shares, and BNDESPAR owned directly and indirectly 26.4% of the Common Shares.

     The following table sets forth certain information regarding the ownership of our Common Shares at May 31, 2008.

    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    5,273    3.0 
Traded in Bovespa    14,340    10.5 
Others    560    0.4 
All directors and officers as a group    0(1)   0.0 
     
Total    145,031    100.0 
     

____________
(1) Our directors and officers hold an aggregate of 111 common shares.

     At May 31, 2008, 1.49% of the Common Shares and 15.33% of the Class B Shares were held by 170 holders who reside in the United States and have registered with the Companhia Brasileira de Liquidação e Custódia, known as “CBLC”. At the same date, the ADRs represented 3.6% of the Common Shares and the ADSs represented 22.0% of the Class B Shares, and together, approximately 12.2% of our total share capital. Until May 31, 2008, our shareholders approved the conversion of 873 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;

  • reverse splits or splits of issued shares;

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  • incorporation of reserves, funds or accounting provisions that affect the rights and interests of minority shareholders;

  • liquidations or voluntary corporate restructurings;

  • mergers, spin-offs, transformations, transfers or acquisitions of interests in other companies;

  • incorporation of wholly-owned subsidiaries;

  • 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$1,250.4 million at December 31, 2007. The outstanding balance bears interest of 6.65% per year and is adjusted in accordance with the IGP-DI inflation index. We also had ICMS payables in the amount of R$126.3 million as of December 31, 2007. ICMS expenses during 2007 amounted to R$1,507.9 billion. We recorded interest income and monetary variation receivable from the government of the State of Paraná under the CRC of R$167.5 million in 2007. For more information, see “Item 5. Operating and Financial Review and Prospects—Overview—Impact of CRC Account.”

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$25.4 million as of December 31, 2007, and recorded interest expenses of R$2.4 million in 2007. As of December 31, 2007, we had debentures issued from ELEJOR and payable to BNDESPAR of R$272.5 million.

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. In 2006, our purchases from Centrais Eólicas do Paraná amounted R$1 million. Since August 2007, we own 100% of the share capital of Centrais Eólicas do Paraná and we fully consolidate Centrais Eólicas do Paraná into our financials statements.


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Dona Francisca Energética S.A.

     We own 23.03% of the total issued and outstanding share capital of Dona Francisca Energética S.A. We had accounts payable in the amount of R$51.5 million as of December 31, 2007. 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$139 million as of December 31, 2007.

Dominó Holdings S.A.

     On January 14, 2008, COPEL acquired Sanedo’s interest in Dominó Holdings S.A., which corresponded to 30% of its capital stock, for R$ 110.2 million. COPEL now holds a 45% stake in Dominó Holdings, which, in turn, holds 34.7% of the voting stock of Sanepar (the Sanitation Company of Paraná).

Item 8. Financial Information.

     See Item 18. “Financial Statements” and pages F-1 through F-121.

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, 2007, our reserves for such contingencies were R$579.3 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.

Aneel Determinations

     We are contesting a determination by ANEEL that would require us to recognize, in our current liabilities at December 31, 2007, R$860.0 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$860.0 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 had provisioned R$197.5 million to meet our purported COFINS obligations that were due from August 1998 through June 2001. This provision, however, was reverted in December 2006 following a ruling by the Supreme Court in favor of Copel.

     On September 4, 2007, however, the Superior Court of Justice overturned the decision it unanimously reached less than one year ago and ruled against Copel, rejecting Copel’s statute of limitation’s claim. Even though this ruling may be appealed, it is unlikely that the same justices will overturn their own decision once again. In addition, there are few legal ground for appealing this decision to the Federal Supreme Court. In light of this unforeseen ruling by the Superior Court of Justice, we reclassified the risk that we would be required to pay COFINS tax amounts from “remote” to “likely.” Thus, we set aside a provision in the amount of R$ 171.6 million, which corresponds to the COFINS tax restated principal amount plus charges.


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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 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 Legislative Act that allows companies to settle federal tax disputes without risking fines and charges related to the late payment.

     We are party to administrative and judicial proceedings pursuant to which we are challenging claims of the Brazilian Social Security authorities to pay additional security contributions for the period between 2000 and 2006. In these proceedings, we estimate the value of our probable loss to be R$27.8 million and the value of our possible loss to be R$316.2 million.

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, 2007, we have provisioned R$102.5 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, 2007, we have provisioned R$6.5 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$25.0 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. As of December 31, 2007, we had provisioned R$50.0 in connection with these arbitrations.

     In a lawsuit filed in November 29, 2004 by Ivaí Engenharia de Obras S.A., COPEL was sentenced to the payment of R$180.9 million as compensation for a supposed economic-financial imbalance, related to the construction work of the Jordão River diversion project. COPEL appealed to this decision and was partially successful, avoiding the application of the SELIC interest rate on top of the penalty interest. COPEL will continue to dispute this claim in court, through all means legally available. As of December 31, 2007, the Company has recorded a provision of R$101.9 million for probable losses.

     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, 2007, we have provisioned R$16.1 million to cover a probable losses related to these lawsuits.


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     For more information on our contingencies, see Note 21 of the Financial Statements.

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 our adjusted net profit for such period. The Brazilian Corporation Law defines “net profit” for any fiscal year as the result of a fiscal year after the deduction of income and social contribution taxes for that fiscal year and any amounts allocated to employees’ and management’s participation in our results in such fiscal year. The “net profit” for a relevant fiscal year is subject to adjustment by 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. The amounts to be allocated to such reserve must be approved by our shareholders in a shareholders´ meeting and may be used only for the increase of our capital stock or compensation of losses. At December 31, 2007, our legal reserve was R$323.7 million, or approximately 7.3% 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:

     (i) the contingency reserve: under the Brazilian Corporation Law, our shareholders’ meeting, upon a justified proposal of our Board of Directors or Board of Executive Officers, may decide to allocate a percentage of our net profits to a contingency reserve for anticipated losses that are deemed probable in future years, which amount may be estimated;

     (ii) the tax incentives reserve: under the Brazilian Corporation Law, our shareholders’ meeting, upon a justified proposal of our Board of Directors or Board of Executive Officers, may decide to allocate a percentage of our the net profits resulting from government donations or subventions for investment purposes.

     On the other hand, net profits may also be increased by:


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     (i) the reversal of any amounts previously allocated to a contingency reserve in the fiscal year in which the loss that had been anticipated does not occur as projected or in which the anticipated loss occurs; and

     (ii) 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, as approved by our shareholders´ meeting, upon proposal of our Board of Directors or Board of Executive Officers.

     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.


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     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.

     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.


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

        Distribution                 
Year   Payment Date   (in thousands of R$)   Payment per Thousand Shares (R$)
           
            Common    Preferred A    Preferred B    Average 
             
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 
2006   June 2007   280,951           0.98001    1.41617    1.07821         1.02666 
2007   May 2008   267,750           0.93356    1.62979    1.02713         0.97842 

     The table below sets forth the cash distributions we paid as interest on equity, translated into US$ based on the exchange rate at year-end, for the periods indicated.

        Distribution                 
Year   Payment Date   (in thousands of US$)   Payment per Thousand Shares (US$)
         
            Common    Preferred A    Preferred B    Average 
             
2003   June 2004   14,739             0.05100    0.36679    0.05611     0.05386 
2004   June 2005   36,189             0.12581    0.47908    0.13842     0.13224 
2005   June 2006   52,546             0.18290    0.54329    0.20123     0.19202 
2006   June 2007   131,408             0.45838    0.66238    0.50431     0.48020 
2007   May 2008   151,160             0.52705    0.92011    0.57987     0.55237 

Significant Changes

     On June 23, 2008, ANEEL required us to decrease our tariffs by 3.35%, pursuant to the second periodic revision. This decrease consisted of a 7.17% decrease in our retail tariffs and a 3.82% increase for deferred regulatory asset recovery (CVA).

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, 2007, we had approximately 4,193 shareholders of our Class B Shares.


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     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$)
2003    14.05                                 7.31 
2004    13.87                                 8.40 
2005    19.20                               10.50 
2006    26.13                             17.70 
        1st Quarter    24.19                             18.70 
        2nd Quarter    23.77                             17.70 
        3rd Quarter    24.51                             19.90 
        4th Quarter    26.13                             23.01 
2007    35.20                             23.40 
        1st Quarter    26.09                             23.40 
        2nd Quarter    33.67                             24.15 
        3rd Quarter    35.20                             28.20 
        4th Quarter    31.40                             26.00 
             December    29.74                             26.00 
2008    30.58                             24.44 
        1st Quarter    29.60                             24.44 
             January    27.21                             24.44 
             February    28.80                             29.60 
             March    29.60                             26.85 
        2nd Quarter    30.58                             27.29 
             April    30.43                             27.29 
             May    30.58                             27.29 


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     On July 2, 2007, the shareholders approved a reverse split of our shares 1,000-for-1. In the United States, the Class B Shares trade in the form of ADSs, each representing 1 Class B Share (as a result of the reverse stock split), 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 symbols ELP and ELPVY. 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.$)
2003    4.88    2.03 
2004    4.94    2.64 
2005    8.71    3.88 
2006    12.22    7.64 
        1st Quarter    11.44    8.18 
        2nd Quarter    11.42    7.64 
        3rd Quarter    11.61    9.00 
        4th Quarter    12.22    10.66 
2007    19.06    11.04 
        1st Quarter    12.52    11.04 
        2nd Quarter    17.46    11.83 
        3rd Quarter    19.06    13.56 
        4th Quarter    17.45    14.39 
             December    16.85    14.39 
2008    18.52    13.86 
        1st Quarter    17.59    13.86 
             January    15.30    13.86 
             February    17.42    14.22 
             March    17.59    15.77 
        2nd Quarter    18.52    16.22 
             April    18.52    16.22 
             May    18.51    16.42 

     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.

Corporate Governance Practices

     In 2000, BOVESPA introduced three special listing segments, known as Level 1, Level 2 and the Novo Mercado, aiming at fostering a secondary market for securities issued by Brazilian companies with securities listed on BOVESPA, by prompting such companies to follow good practices of corporate governance. The listing segments were designed for the trading of shares issued by companies voluntarily undertaking to abide by corporate governance practices and disclosure requirements in addition to those already imposed by Brazilian law. These rules generally increase shareholders’ rights and enhance the quality of information provided to shareholders and stakeholders.

     On May 7, 2008, we signed an agreement with BOVESPA to list our securities on Level 1. The main corporate governance standards established by the Level 1 Regulation are: (i) maintenance of a free-float of at least twenty-five percent of the company’s capital stock; (ii) employment of mechanisms to enhance capital dispersion in the company’s public offerings; (iii) improvement of quarterly reports, including the disclosure of consolidated financial statements and special audit revisions; (iv) monthly disclosure of transactions entered into by controlling shareholders involving the company’s securities; and (v) disclosure of an annual calendar of corporate events.


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     In accordance with Section 303A.11 of the NYSE Listed Company Manual, we have posted a summary of significant differences between the NYSE corporate governance standards and our corporate governance practices on our website, at http://www.copel.com/ir.

Item 10. Additional Information

MEMORANDUM AND ARTICLES OF ASSOCIATION

Organization

     We are a publicly traded company duly registered with the CVM 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 services 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 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.


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Shareholders’ Meetings

     We convene shareholders’ meetings by publishing a notice in Diário Oficial do Estado – PR, O Estado do Paraná and the Diário de São Paulo. 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 wide circulation located in the same city as our corporate headquarters, and in a newspaper with wide circulation located in the same place as our stock exchange. The notice must be published no fewer than three times, beginning at least thirty calendar days prior to the scheduled meeting date.

Right of Withdrawal

     Brazilian Corporation Law provides that under certain circumstances a shareholder has the right to withdraw 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;

  • 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.

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     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.

     Pursuant to our bylaws, in the situations described above and in the event of a delisting of our shares, our shareholders shall be entitled to redeem their shares at market value. The market value of the shares shall be determined by a specialized appraisal company or a group of experts selected by the shareholders.

     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

  • 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.


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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.

     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.


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     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 CVM 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

     The ownership of Class A Shares, Class B Shares or Common Shares of the Company by individuals or legal entities domiciled outside Brazil is subject to certain conditions established in the Brazilian Law, as described below.

     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

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  • 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.”

     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.


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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 (“Non-Brazilian Holder”). It is based on Brazilian law currently in effect, which is subject to differing interpretations and changes that may apply retroactively. 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.

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 the deduction of the social contribution on net profits and before taking into account 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.

     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 net profits 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 withholding income tax at a 25.0% rate. These payments may be included, at their net value, as part of any mandatory dividend. To the extent that payment of interest on net equity is so included, the corporation is required to distribute to shareholders an additional amount to ensure that the net amount received by them, after payment of the applicable withholding income tax, plus the amount of declared dividends, is at least equal to the mandatory dividend.

Taxation of Gains

     According to Law 10,833 of December 29, 2003, capital gains realized on the disposition of assets located in Brazil by a Non-Brazilian Holder, whether to another non-Brazilian residents or to Brazilian residents, are subject to taxation in Brazil. In this sense, if the Class B Shares are disposed of by a Non-Brazilian Holder, as they are defined as assets located in Brazil, such holder will be subject to income tax on the gains assessed, following the rules described below, whether the disposition is conducted in Brazil or abroad and with a Brazilian resident or not.


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     Regarding ADSs, although the matter is not free from doubt, the gains realized by a Non-Brazilian Holder on the disposition of ADSs to another Non-Brazilian Holder would not be taxed in Brazil, based on the theory that ADSs do not constitute assets located in Brazil for purposes of Law 10,833/03. However, we cannot assure you that Brazilian courts would adopt this theory. Thus, the gain on a disposition of ADSs by a Non-Brazilian Holder to a resident in Brazil (or possibly even to a Non-Brazilian Holder) may be subject to income tax in Brazil in the event that courts determine that ADSs would constitute assets located in Brazil, according to the rules described below for ADSs or the rules applicable to disposition of the Class B Shares, when applicable.

     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 defined as the positive difference between the amount realized on the sale or exchange of a security and its acquisition cost. 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 registered under Resolution No. 2,689 of the National Monetary Council (“2,689 Holder”) that is not a Tax Haven Holder; or

  • 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 and a Tax Haven Holder. In these cases, a withholding income tax of 0.005% on the sale value 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 Class B Shares 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% on the sale value shall also be applicable and can be offset with the eventual income tax due on the capital gain.

     The deposit of Class B Shares in exchange for the ADSs may be subject to Brazilian income tax if the acquisition cost of the Class B Shares is lower than (i) the average price per Class B 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.

     The withdrawal of Class B Shares upon cancellation of 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.

     In the case of redemption of the Class B Shares or ADSs 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 is treated as capital gain derived from sale or exchange of 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.


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     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 will be subject to the same tax treatment applicable to disposition of Class B Shares.

     There can be no assurance that the current preferential treatment for 2,689 Holders will continue in the future.

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 individuals or entities not resident or domiciled in Brazil or in the relevant State 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.

     Pursuant to Decree No. 6,306 of December 14, 2007, a tax on foreign exchange transactions (“IOF/Exchange”) may be imposed on the conversion of Brazilian currency into foreign currency (e.g., for purposes of paying dividends and interest) or vice-versa. Currently, for most exchange transactions, the rate of IOF/Exchange is 0.38% . However, exchange transactions carried out by 2,689 Holders are subject to a zero percent IOF/Exchange rate. Nonetheless, the Brazilian government may increase the rate to a maximum of 25.0% . Any such increase will be applicable only prospectively.

     Also under Decree No. 6,306/07, the Tax on Bonds and Securities Transactions (“IOF/Bonds”) may be levied on transactions involving bonds and securities, including those carried out on Brazilian stock, futures or commodities exchanges. As a general rule, the rate of this tax is currently zero. The Brazilian government may, however, increase the rate to a maximum of 1.5% per day, but only in respect to future transactions.

     As a general rule, until December 31, 2007, transactions carried out in Brazil that resulted in the transfer of funds from an account maintained with a Brazilian financial institution were subject to the Temporary Contribution on Financial Transactions (“CPMF Tax”), at the rate of 0.38% . However, as of January 1, 2008, the CPMF Tax is no longer in force, and should not be levied on any debit to bank accounts carried after that date. The Brazilian government may attempt to reestablish the CPMF Tax after February 2008, by submitting a new proposal to the Brazilian Congress. In the event CPMF is reestablished, it will only apply after a period of 90 days have elapsed after enactment of the respective introductory legislation, and only in regard to prospective triggering events.

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, partnerships or other pass-through entities, insurance companies, U.S. expatriates, 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 is encouraged to consult such holder’s 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, or any other entity taxable as a corporation, organized under the laws of the United States of America or any state thereof, including the District of Columbia, 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 2007 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 2008 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.


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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” 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 (including the gross amount of the proceeds before the deduction of any Brazilian tax) 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. Alternatively, such Brazilian tax may be taken as a deduction against taxable income if the U.S. holder does not take a credit for any foreign income tax during the taxable year.

     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.

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.


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     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 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.

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.

Foreign Currency Exchange Rate Risk

     At December 31, 2007, we had R$78.1 million of outstanding indebtedness denominated in U.S. dollars, R$8.0 million of indebtedness denominated in Japanese yen and R$62.7 million of indebtedness indexed to a basket of foreign currencies comprised by U.S dollars, Euros, Swiss francs and Japanese yen. At December 31, 2006, we had R$102.1 million of outstanding indebtedness denominated in U.S. dollars, R$13.6 million of indebtedness denominated in Japanese yen and R$93.5 million of indebtedness indexed to a basket of foreign currencies comprised by U.S dollars, Euros, Swiss francs and Japanese yen. In addition, our energy purchases from Itaipu are denominated in U.S. dollars. 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%


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change in foreign currency exchange rates would be approximately R$10.2 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 cash outflow of approximately R$36.9 million per year, reflecting the increased cost in reais of servicing foreign-currency indebtedness and purchasing energy from Itaipu, which will be compensated in the next tariff adjustment.

Interest Rate Risk

     At December 31, 2007, we had outstanding R$2,102.5 million in loans and financing, of which R$52.0 million bore interest at fixed interest rates and R$2,050.5 million bore interest at floating rates of interest (primarily the TJLP, CDI 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, 2007, would result in a net additional cash outflow of approximately R$7.0 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.

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

     None.

Item 15. Controls and Procedures

Financial Responsibility, Disclosure Controls and Procedures, and Report on Internal Control Over Financial Reporting

     (a) Disclosure Controls and Procedures

     We have carried out an evaluation under 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, 2007. There are inherent limitations to the effectiveness of any disclosure controls and procedures systems, 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 on our evaluation, because of the material weakness in internal control over financial reporting that is described below, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures as of December 31, 2007 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 as appropriate in order to allow timely decisions regarding required disclosure.


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     (b) Management’s Annual Report on Internal Control over Financial Reporting

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934. Our internal controls were designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

     All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may decline.

     Our management assessed the effectiveness of our internal controls over financial reporting as of December 31, 2007. In making this assessment, it used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation and those criteria, our management has concluded that our internal control over financial reporting was not effective as of December 31, 2007 because of the material weakness in our internal control over financial reporting described below:

  • The Company did not maintain effective controls to ensure the completeness and accuracy of the judicial lawsuits and related escrow accounts or performed periodic review/update of them, including the valuation and update of expected losses for accrual purposes. These control deficiencies resulted in adjustments recorded to three interim financial statements, which affected the provision of contingencies and related escrow accounts and operating expenses.

     Deloitte Touche Tohmatsu, an independent registered public accounting firm, has issued the attestation report below on our internal control over financial reporting as of December 31, 2007.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Shareholders of
Companhia Paranaense de Energia - COPEL
Curitiba– PR, Brazil

We have audited the internal control over financial reporting of Companhia Paranaense de Energia - COPEL and subsidiaries (the "Company" or “Copel”) as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness have been identified and included in the Company´s December 31, 2007 management's assessment:

  • The Company did not maintain effective controls to ensure the completeness and accuracy of the judicial lawsuits and related escrow accounts or performed periodic review/update of them, including the valuation and the update of expected losses for accrual purposes. These control deficiencies resulted in adjustments recorded to three interim financial statements which affected the provision for contingencies and related escrow accounts and related operating expenses.

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the Company’s consolidated balance sheet as of December 31, 2007, and the related consolidated statements of operations, changes in shareholders’ equity and changes in financial positions as of and for the year ended December 31, 2007, of Companhia Paranaense de Energia – COPEL and subsidiaries and this report does not affect our report on such financial statements.

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s balance sheets as of December 31, 2007 and 2006, and the related consolidated statements of operations, changes in shareholders’ equity and changes in financial positions for each of the two years in the period ended December 31, 2007, of Companhia Paranaense de Energia – COPEL and subsidiaries and our report dated June 24, 2008, expressed an unqualified opinion on those financial statements.

/s/ Deloitte Touche Tohmatsu Auditores Independentes

Curitiba, Paraná, Brazil

June 24, 2008

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     (c) Changes in Internal Control over Financial Reporting

     Remediation of material weaknesses

     During 2007, we developed and implemented action plans to address the following material weaknesses in internal control over financial reporting that we identified in our assessment as of December 31, 2006.

  • The Company did not maintain effective controls to ensure the completeness/accuracy or the review/monitoring of the monthly accrual for received services and goods, as required by the accrual basis of accounting. These control deficiencies did not result in material audit adjustments to the 2007 financial statements. However, these control deficiencies could result in a misstatement of accrued liabilities and the related expense provisions that would result in material misstatements of annual or interim financial statements that would not be prevented or detected.

During 2007, we reviewed our options for improving our controls in order to address, on a timely basis, issues related to our received goods and services. Using our various information systems, our financial expert established formal rules to improve controls to remediate this deficiency. As a result, management has determined that there was no longer a material weakness in this area as of December 31, 2007. In 2008, we will nevertheless continue to address these issues in order to effectively monitor the effectiveness and timeless of these new controls and implement automated solutions in our monthly accounting for received goods and services.

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  • The Company did not maintain effective controls to ensure the completeness/accuracy or the review/monitoring of the environmental litigation process. These control deficiencies did not result in material audit adjustments to the 2007 financial statements. However, these control deficiencies could result in a misstatement of accrued liabilities and the related operating expenses that would result in material misstatements of annual or interim financial statements that would not be prevented or detected.

In 2007, we established a working group to identify and evaluate our environmental risks and liabilities. The results of these efforts were presented to our board of directors, who in turn determined the potential actions to be undertaken in identifying, avoiding and mitigating these weaknesses. At the same time, our accounting specialists ran a similar assessment, determining that no additional accruals were necessary with respect to our environmental liabilities. As a result, management has determined that there was no longer a material weakness in this area as of December 31, 2007. In order to ensure a degree of continuity, however, these results were incorporated in the documentation of reviews that will be periodically monitored through efficiency tests. In 2008, we will also be reviewing options in order to establish formal management guidelines and continuously monitor potential environmental risks and liabilities.

  • The Company did not maintain effective controls to ensure the completeness/accuracy or the review/monitoring of the postretirement benefits plans (pension and health-care plans) sponsored by us, including detailed review of the actuarial assumptions, reconciliation between actuarial valuation report and accounting records and also the cash flow for the contribution payments. These control deficiencies could result in material misstatements of the pension and health-care plans liabilities and the related pension and other benefits expenses.

According to Brazilian law, we are required engage specialists in preparing for actuarial valuation reports. Because we lacked personnel with the adequate experience and training necessary to review the 2006 actuarial valuation reports, we had to rely on specialists in order to account for arising deficiencies in reviewing and monitoring retirement plans sponsored by us. In 2007, our accountants ran studies on Brazilian legislation and participated in training in order to increase their knowledge of this subject. We have conducted discussions with actuarial specialists and accountants and, as a result, some accounting procedures have been revised. We have also documented procedures related to pension plans sponsored by us, which identify risks and controls and examine efficiency tests. We attribute these procedures to an expert of vast experience in this area. As a result, management has determined that there was no longer a material weakness in this area as of December 31, 2007.

  • The Company did not maintain effective controls to ensure the appropriate review/ monitoring of the reconciliation items from BR GAAP to US GAAP financial statements. These control deficiencies did not result in material audit adjustments to the 2006 financial statements. However, these control deficiencies could result in material misstatements that would pervasively affect the annual and interim financial statements and would not be prevented or detected.

    In 2007, we contracted an external consultant to assist the Company in the process of reconciling our financial statements to US GAAP. At the same time, we have selected a group of professionals to be trained in the process of reconciling financial statements from BR GAAP to US GAAP. Our professionals are now proficient with respect to the procedures and conversion of financial reporting to US GAAP, which, in our final assessment, reduces possibilities of error or material misstatements in our financial statements. As a result, management has determined that there was no longer a material weakness in this area as of December 31, 2007.

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     We also developed an action plan to address the material weakness concerning monitoring of judicial lawsuits that we reported at December 31, 2006 and December 31, 2007.

     In 2007, we established new controls over judicial lawsuits and regulated the flow of information between our legal and accounting departments, allowing timely accounting of our judicial liabilities. A final assessment in December 2007, however, identified material weaknesses relating to the valuation and estimation of potential losses to be accrued, as well as to the approval and disclosure of accounting liabilities. In 2008, we will be readdressing, establishing and disclosing formal procedures to be adopted by our legal department and outside advisors in order to provide reasonable assurances in accounting related to our contigent liabilities.

     Other than as described above, there have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal year ended December 31, 2007 that have materially affected, or are 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.”

tem 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. In December 2006, we sent hard copies of our Code of Ethics to all of our employees. 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

     Deloitte Touche Tohmatsu Auditores Independentes acted as our independent registered public accounting firm for the fiscal years ended December 31, 2007 and 2006. PricewaterhouseCoopers Auditores Independentes acted as our independent registered public accounting firm for the fiscal year ended December 31, 2005.


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     The chart below sets forth the total amount billed to us by Deloitte Touche Tohmatsu Auditores Independentes and PricewaterhouseCoopers Auditores Independentes for services performed in 2007, 2006 and 2005, and breaks down these amounts by category of service in millions of reais:

    Year Ended December 31, 
       
    2007    2006    2005 
       
        (millions of reais)    
Audit Fees    1.4    1.2    0.7 
Audit-Related Fees    –    –    – 
Tax Fees    –    –    – 
All Other Fees    –    –    – 
       
Total    1.4    1.2    0.7 
       

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 Registered Public Accounting Firm for services. Our board of directors expressly approves on a case-by-case basis any engagement of our Registered Public Accounting Firm 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

     None.

Item 17. Financial Statements

     Not applicable.

Item 18. Financial Statements

     Reference is made to pages F-1 through F-121.

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Item 19. Exhibits

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).

     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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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 that we can deliver from a specified power plant with a 95.0% degree of certainty, determined in accordance with certain prescribed statistical models.

     Free Customers: (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 that 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 Customers.

     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 average (MWavg): An amount of energy (in MWh divided by the time (in hours) in which such energy is produced or consumed. 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 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 that 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, 2008

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Companhia Paranaense
de Energia - COPEL

Consolidated Financial Statements as of
December 31, 2007 and 2006 and for the
Three Years Ended December 31, 2007
and Report of Independent Registered
Public Accounting Firm


Table of Contents


Deloitte Touche Tohmatsu 
Rua Pasteur, 463 - 5º andar 
Curitiba – PR – 80250-080 
Brasil 
 
Tel: + 55 (41) 3312-1400 
Fax:+ 55 (41) 3312-1470 
www.deloitte.com.br 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Companhia Paranaense de Energia - COPEL
Curitiba - PR, Brazil

We have audited the accompanying consolidated balance sheets of Companhia Paranaense de Energia - COPEL (a Brazilian corporation) and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related consolidated statements of operations, changes in shareholders' equity and changes in financial position for each of the two years in the period ended December 31, 2007, all expressed in Brazilian reais. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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 consolidated financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Companhia Paranaense de Energia - COPEL and subsidiaries as of December 31, 2007 and 2006, and the results of their operations, changes in shareholders' equity and changes in their financial position for each of the two years in the period ended December 31, 2007, in conformity with accounting practices adopted in Brazil.

Our audit was performed for the purpose of issuing an opinion on the consolidated financial statements referred to in the first paragraph, prepared in conformity with accounting practices adopted in Brazil. The consolidated 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 consolidated statement of cash flow for each of the two years in the period ended December 31, 2007 and, in our opinion, it is fairly stated in all material respects in relation to the financial statements taken as a whole.

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 35 to the consolidated financial statements.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's effectiveness of internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 24, 2008 expressed an adverse opinion on the Company's internal control over financial reporting because of a material weakness identified in relation to ineffective controls over lawsuits and judicial deposits to ensure proper adjustments to the contingency reserve. This material weakness was considered in determining the nature, timing, and extent of our audit procedure and does not affect our report on the financial statements referred to in paragraph 1 above.

/s/ Deloitte Touche Tohmatsu Auditores Independentes

Curitiba, Paraná, Brazil

Date: June 24, 2008

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  PricewaterhouseCoopers
  Al. Dr. Carlos de Carvalho, 417 10º 
  80410-180 Curitiba, PR - Brasil 
  Caixa Postal 699 
  Telefone (41) 3322-7911 
  Fax (41) 3222-6514 
  www.pwc.com/br 

Report of Independent Registered Public Accounting Firm  

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

We have audited the accompanying consolidated statements of operations, of changes in shareholders' equity and of changes in financial position for the year ended December 31, 2005 of Companhia Paranaense de Energia – COPEL (the “Company”) and its subsidiaries. These statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these statements based on our audits.

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.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the the results of their operations, the changes in its shareholders' equity and the changes in their financial position for the year ended December 31, 2005 of Companhia Paranaense de Energia – COPEL and its subsidiaries, in conformity with accounting practices adopted in Brazil.

Our audit was performed for the purpose of issuing an opinion on the 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, which in our opnion, is fairly stated in all material respects in relation to the financial statements taken as a whole.

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 35 to the consolidated financial statements.

/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Auditores Independentes  

  Curitiba, Brazil
June 27, 2006, except for
footnotes 2(b), 32 and 35a(v).8
which are as June 24, 2008

 


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

    December 31 
   
 
Assets    2007    2006 
     
 
Current assets         
     Cash and cash equivalents (note 5)   1,540,871    1,504,004 
     Accounts receivable, net (note 6)   1,078,195    986,978 
     Dividends receivable (note 7)   2,767    2,019 
     Materials and supplies    52,195    51,444 
     Recoverable rate deficit (CRC) (note 8)   40,509    35,205 
     Deferred regulatory asset – CVA (note 9 a)   67,614    90,048 
     Regulatory asset - PIS and Cofins (note 9 b)     3,408 
     Other regulatory assets (note 9 c)   17,186   
     Deferred income taxes (note 11)   116,855    106,145 
     Recoverable taxes (note 10)   38,744    128,939 
     Other assets, net    207,474    105,443 
     
 
    3,162,410    3,013,633 
     
 
Non-current assets         
     Accounts receivable (note 6)   134,907    108,157 
     Recoverable taxes (note 10)   61,835    44,874 
     Deferred income taxes (note 11)   400,592    337,654 
     Judicial deposits (note 21 a)   121,340    140,954 
     Recoverable rate deficit (CRC) (note 8)   1,209,853    1,158,898 
     Deferred regulatory asset – CVA (note 9 a)   25,478    12,273 
     Other regulatory assets - (note 9 c)   5,729   
     Other assets    30,873    36,539 
     
 
    1,990,607    1,839,349 
     
 
Permanent assets         
     Investments (note 12)   256,809    229,953 
     Property, plant and equipment, net (note 13)   6,832,379    6,711,686 
     Intangible assets (note 14)   112,585    116,798 
     Deferred charges, net    5,227    23,204 
     
 
    7,207,000    7,081,641 
     
 
Total assets    12,360,017    11,934,623 
     

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

F - 4


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

    December 31 
   
 
Liabilities and shareholders' equity    2007    2006 
     
 
Current liabilities         
     Suppliers (note 15)   366,510    392,219 
     Loans and financing (note 16)   92,684    90,152 
     Debentures (note 17)   171,827    838,355 
     Deferred income taxes (note 11)   24,664    33,671 
     Taxes on sales and others (note 18)   224,796    277,414 
     Dividends and interest on equity    252,362    277,421 
     Accrued payroll costs    146,119    134,218 
     Pension and health-care plans (note 22)   42,286    133,635 
     Deferred regulatory liabilities (note 9 a)   143,436    110,498 
     Other regulatory liabilities (note 9 c)   46,476   
     Regulatory charges (note 19)   32,722    51,705 
     Research and Development and Energy Efficiency Programs (note 20)   185,280    174,316 
     Other accrued liabilities    85,465    67,766 
     
 
    1,814,627    2,581,370 
     
Non-current liabilities         
     Suppliers (note 15)   190,394    234,212 
     Loans and financing (note 16)   835,268    604,306 
     Debentures (note 17)   1,002,674    1,129,230 
     Deferred income taxes (note 11)   19,317    12,515 
     Pension and health-care plans (note 22)   454,411    488,771 
     Provision for contingencies (note 21 a)   514,270    222,473 
     Deferred regulatory liabilities (note 9 a)   22,330    52,053 
     Other regulatory liabilities (note 9 c)   18,935   
     Other long-term liabilities    19,495    27,517 
     
 
    3,077,094    2,771,077 
     
 
Negative goodwill    592   
     
 
Non controlling shareholders’ interest    231,527    205,906 
     
 
Shareholders' equity (note 23)        
     Capital stock (note 23 a)   4,460,000    3,875,000 
     Capital reserves (note 23 b)   838,340    817,293 
     Profit reserves (note 23 c)   1,937,837    1,683,977 
     
 
    7,236,177    6,376,270 
     
 
Total liabilities and shareholders' equity    12,360,017    11,934,623 
     

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

F - 5


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

    Year ended December 31 
   
 
    2007    2006    2005 
       
Operating revenues (note 25 and 26)            
     Electricity sales to final customers    5,767,847    5,500,122    5,275,883 
     Electricity sales to distributors    1,367,595    1,290,976    949,937 
     Use of main transmission and distribution grid    296,796    283,773    267,996 
     Other revenues    487,856    346,455    307,482 
     Value-added taxes on sales    (1,507,882)   (1,428,729)   (1,373,494)
     PIS on sales    (91,280)   (98,775)   (79,883)
     Cofins on sales    (415,162)   (448,539)   (361,509)
     Regulatory charges    (419,712)   (495,993)   (399,093)
     Other charges and deductions on sales    (63,932)   (60,675)   (147,708)
       
 
     Net operating revenues    5,422,126    4,888,615    4,439,611 
       
 
Operating (expenses) income             
     Electricity purchased for resale (note 27 a)   (1,429,417)   (1,439,744)   (1,436,330)
     Use of main transmission grid    (514,450)   (534,780)   (530,798)
     Depreciation and amortization    (422,049)   (372,395)   (328,906)
     Personnel expenses (note 27 b)   (649,717)   (641,885)   (566,455)
     Third party services    (240,942)   (226,779)   (196,976)
     Materials and supplies (note 27 c)   (186,990)   35,019    (266,829)
     Pension and other benefits    13,851    (127,686)   (108,000)
     Other expenses, net    (385,132)   (31,648)   (185,717)
       
 
     Total operating expenses    (3,814,846)   (3,339,898)   (3,620,011)
       
 
Operating income before financial results and equity in results of             
     investees    1,607,280    1,548,717    819,600 
       
 
Financial results (note 28)            
     Financial income    396,017    729,203    396,279 
     Financial expenses    (375,774)   (434,510)   (497,280)
       
 
    20,243    294,693    (101,001)
       
 
Equity in results of investees (note 12)   1,601    (6,187)   9,048 
       
 
Operating income    1,629,124    1,837,223    727,647 
       
 
Non-operating expenses, net (note 29)   (31,109)   (22,977)   (10,646)
       
 
Income before income taxes and Non controlling shareholders’             
interest    1,598,015    1,814,246    717,001 
 
Income taxes (note 11)   (460,315)   (557,678)   (198,200)
       
 
Income before Non controlling shareholders’ interest    1,137,700    1,256,568    518,801 
       
 
Non controlling shareholders’ interest    (31,090)   (13,888)   (16,424)
       
 
Net income for the year    1,106,610    1,242,680    502,377 
       
 
Net income per outstanding shares at year-end – in Reais    4.04    4.54    1.84 
       

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 
 

            Profit reserves         
           
 
    Capital    Capital    Legal    Reserve for    Retained     
    stock    reserves    reserve    Investments    earnings    Total 
             
 
At December 31, 2005    3,480,000    817,293    209,821    980,069      5,487,183 
             
     Changes in Brazilian accounting                         
             practices            (72,642)   (72,642)
     Capital increase    395,000        (395,000)        
     Net income for the year            1,242,680    1,242,680 
     Appropriation of net income                         
             Legal reserve        58,502      (58,502)  
             Interest on equity            (123,000)   (123,000)
             Dividends            (157,951)   (157,951)
             Transfer to profit reserve          830,585    (830,585)  
             
 
At December 31, 2006    3,875,000    817,293    268,323    1,415,654      6,376,270 
     Capital increase    585,000        (585,000)    
     Tax incentive (Note 12(d))     21,047          21,047 
     Net income for the year                    1,106,610    1,106,610 
     Appropriation of net income                         
             Legal reserve        55,330      (55,330)  
             Interest on equity            (200,000)   (200,000)
             Dividends            (67,750)   (67,750)
             Transfer to profit reserve          783,530    (783,530)  
 
At December 31, 2007    4,460,000    838,340    323,653    1,614,184      7,236,177 
             

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 
   
 
    2007    2006    2005 
       
Sources of funds             
 Funds from operations             
 Net income for the year    1,106,610    1,242,680    502,377 
 Expenses (income) not affecting working capital             
     Depreciation and amortization    422,049    372,395    328,906 
     Loss on disposal of property, plant and equipment and other    29,878    14,721    24,336 
     Equity in results of investees    9,658    6,187    (9,048)
     Write-off of non-current assets    9,472    51,399    85 
     Contract renegotiation – CIEN    (62,862)    
     Monetary and foreign currency exchange variations, net    (54,545)   (14,751)   (42,777)
     Long-term liabilities provision    255,657    39,595    197,764 
     Deferred income taxes    (56,136)   123,079    (36,874)
     Review adjustment share – transmission utilities’ rate review (Note 9 (c))   26,412     
     Non controlling shareholders’ interest    31,090    13,888    16,424 
       
 
    1,717,283    1,849,193    981,193 
       
Funds from third-parties             
 Long-term loans and financing    346,592    16,937    35,532 
 Suppliers - Petrobras renegotiation (Note 15 (a))     157,443   
 Issuance of long-term debentures      600,000    755,626 
 Customers' contribution - special obligations    48,580    43,489    39,675 
 Interest on equity and dividends receivable    10,545    13,730    4,576 
 Transfer from long-term to current assets    167,590    143,160    246,231 
 Non controlling shareholders’ interest      113,703    6,705 
 Changes in accounting policies impacting working capital      (72,642)  
 Disposal of fixed assets    6,652     
 Other accounts payable      8,960   
       
 
    579,959    1,024,780    1,088,345 
       
 
Total sources    2,297,242    2,873,973    2,069,538 
       
 
Application of funds             
 Interest on equity and dividends    267,750    280,951    122,995 
 Property, plant and equipment    516,142    567,778    666,542 
 Intangible    4,406    5,747    2,324 
 Deferred charges    341    145    752 
 Investments    13,754    534,546    2,707 
 Non-current assets             
     Deferred regulatory asset        13,884 
     Regulatory asset - Pis and Cofins      9,432    48,597 
     Judicial deposits    9,900    30,778    19,826 
     Accounts receivable    112,271    25,109    11,255 
     Deferred income taxes and tax recoverable    17,057    8,893    2,232 
     Other non-current assets    1,405    2,140    1,647 
 Transfers from long-term to current liabilities             
     Suppliers    267    112,590    64,321 
     Long-term loans and financing    116,363    85,000    95,900 
     Debentures    138,858    720,087     
     Taxes and other payables        51,941 
     Pension plan    41,348    127,478    131,644 
     Provision for contingencies    59,846    6,355    693 
     Deferred regulatory liability    82,014    44,657    28,767 
       
 
Total applications    1,381,722    2,561,686    1,266,027 
       
 
Increase in working capital    915,520    312,287    803,511 
       

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 
   
    2007    2006    2005 
       
Represented by             
 Current assets             
     Beginning of the year    3,013,633    2,472,323    1,653,172 
     End of the year    3,162,410    3,013,633    2,472,323 
       
             
 Increase in current assets    148,777    541,310    819,151 
       
 Current liabilities             
     Beginning of the year    2,581,370    2,352,347    2,336,707 
     End of the year    1,814,627    2,581,370    2,352,347 
       
             
 Decrease (increase) in current liabilities    766,743    (229,023)   (15,640)
       
             
Total increase in working capital    915,520    312,287    803,511 
       

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

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Table of Contents

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

1 The Company and its Operations (information related to installed capacity and other similar operational and technical aspects are unaudited)

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:

(a) Direct subsidiaries

(i) COPEL Geração e Transmissão S.A.: This is the new name of COPEL Geração S.A., which incorporated on November 30, 2007 part of COPEL Transmissão S.A., and it carries out the Company’s power generation and transmission business with 18 power plants in operation – of which 17 are hydroelectric and one is thermoelectric – featuring an overall installed capacity of 4,549.6 MW. It also relies on 30 substations at voltages equal to or greater than 230 kV, of which 10 are automated and remote operated, with installed step-up transformer capacity of 5,004.1 MVA. This subsidiary holds the following concessions granted by ANEEL:

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
All amounts 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 

(*)
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. 

The extension of the concessions for the Governor Ney Aminthas de Barros Braga (Segredo), Governor José Richa (Caxias), and Jordão River Diversion Power Plants has already been requested to ANEEL.

COPEL Geração e Transmissão also holds interests in Centrais Eólicas do Paraná (note 1.(b)(v)) and Consórcio Energético Cruzeiro do Sul, an independent power producer, owned by COPEL Geração e Transmissão (51%), and by Eletrosul Centrais Elétricas S.A. (49%). On November 28, 2006, at the Auction of Power from New Projects, this company won the rights to the 35-year concession of the Mauá Hydroelectric Power Plant, which will feature 361 MW of installed capacity (Note 12 e).

(ii) COPEL Distribuição S.A.: COPEL Distribuição merged, on November 30, 2007, a part of COPEL Transmissão. The company is engaged in the distribution and sale of energy in any form, especially electric energy, fuels and energy raw materials. It distributes power to 392 out of the 399 municipalities in the State of Paraná, and also to the town of Porto União, in the State of Santa Catarina. The concessions held by COPEL Distribuição expire in 2015.

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Table of Contents

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

(iii) COPEL Telecomunicações S.A.: Engaged in providing communications and telecommunications services and in conducting studies, projects, and planning in the field of telecommunications, as well as any related activities, as authorized by law, for an indeterminate period of time, on a non-exclusive basis, both nationally and internationally, with a service area comprising the State of Paraná and Region II of the General Grants Plan, pursuant to Act No. 31,337 by the National Telecommunications Agency - ANATEL, which reports to the Ministry of Communications.

(iv) COPEL Participações S.A.. Incorporated to hold investments in other companies or consortiums in several business areas. COPEL currently holds five partnerships in independent power producers, all of which are operational and constituted as special purpose companies (SPCs), with a total installed capacity of 887.4 MW. It also holds interests in the sanitation, gas, telecommunications, and service sectors. On August 4, 2006, the second generating unit of the Fundão Power Plant (Fundão – Santa Clara Power Complex) entered commercial operation, for a total of 120.1 MW of installed capacity. The Santa Clara Power Plant, the other facility in the complex, rated 120.2 MW, has been fully operational since September 2005.

(b) Indirect subsidiaries

(i) Companhia Paranaense de Gás - COMPAGAS: a mixed (state/private) capital company in which COPEL Participações holds a 51% voting interest, whose main activity is the supply of piped natural gas, through a 459-km long distribution network throughout Paraná in the municipalities of Araucária, Curitiba, Campo Largo, Balsa Nova, Palmeira, Ponta Grossa, and São José dos Pinhais. At the end of 2007, Compagas supplied a total of 2,928 customers, comprising 95 industrial customers, 24 vehicular gas stations, 163 commercial customers, 2,642 households, 2 co-generation plants, and one company which uses natural gas as a raw material, and the Araucária Thermal Power Plant.

(ii) Centrais Elétricas do Rio Jordão S.A. - ELEJOR: a special purpose company in which COPEL Participações holds a 70% voting interest. It was constituted to implement and run the Fundão – Santa Clara Power Complex, on the Jordão River, within the Iguaçu River sub-basin, in the State of Paraná, comprising the Santa Clara and Fundão Power Plants. These facilities feature 240.3 MW of installed capacity, in addition to two small hydropower units embedded in the Santa Clara and Fundão dams, with 3.6 MW and 2.4 MW of installed capacity, respectively. The concession for the project was granted on October 23, 2001 for a 35-year term, renewable upon request by the holder and at ANEEL’s discretion.

(iii) COPEL Empreendimentos Ltda. - This is a private limited company whose main objective is the rendering of corporate planning, coordination and organization services to companies aimed at the production of electric energy, transportation and selling of activities for the management, implementation, operation and maintenance of power plants, and the participation in other companies as stockholder or quotaholder. On May 31, 2006, COPEL Participações acquired the company El Paso Empreendimentos e Participações Ltda., controlling quotaholder of UEG Araucária Ltda., with 60% of its capital, and changed its name to COPEL Empreendimentos Ltda;

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Table of Contents

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

(iv) UEG Araucária Ltda – This is a private limited company whose objective is the use of natural gas for the generation of electric energy and its trading. The thermoelectric plant has installed capacity of 484.5 MW. The authorization for the Company to establish itself as an independent electric energy producer was issued by ANEEL on December 22, 1999, for a 30-year period, which may be extended at the request of the interested party and at the discretion of ANEEL.

(v) Centrais Eólicas do Paraná Ltda. – This is a private limited company which has been controlled by COPEL Geração e Transmissão since September 6, 2007, and which has been set up to build, assemble, and operate a 2.5 MW wind power plant, in the region of Palmas, in the State of Paraná (Note 12).

2 Basis of Presentation

(a) Presentation of the 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".

These financial statements also incorporate changes introduced by the following accounting rules and regulations: (i) ANEEL Ordinance No. 2,409/2007, dated November 14, 2007; and (ii) ANEEL Ordinance No. 3,073/2006, dated December 28, 2006. Certain reclassifications were made to the financial statements as of December 31, 2006 and 2005, featured herein for purposes of comparison, in order to adjust them to the rulings above and to allow readers to properly compare them to the current statements. The main changes resulting from the application of these rulings are the following:

a) Reclassification of the revenue related to the use of the main distribution grid from “Electricity sales to final customers” to the group “Use of main transmission and distribution grid”.

b) Reclassification of regulatory charges, previously classified under operating expenses, as charges over sales, as a reduction of net operating revenues.

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 ("U.S. GAAP").

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Table of Contents

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

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 2008. 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.

Brazilian GAAP differs in significant respects from U.S. GAAP. A reconciliation of the net income and shareholders' equity from Brazilian GAAP to U.S. GAAP is provided herein (Note 35).

(b) Reclassifications

The financial statements at December 31, 2006 and 2005, presented for comparison purposes, present certain reclassifications to conform to the mentioned Resolutions and permit the comparison with the current year.

The main reclassifications made by the Company to the financial statements at December 31, 2006 are as follows:

 
From    To    Consolidated 
        Value 
 
Non-current assets    Non-current assets     
   Investments       Intangible    76,015 
Non-current liabilities    Non-current liabilities     
   Non controlling shareholders’ interest       Loans and financing    65,116 
Other operating expenses    Regulatory charges     
   Fuel Consumption Accounts (CCC)      Fuel Consumption Accounts (CCC) (i)   278,052 
   Energy Development Account (CDE)      Energy Development Account (CDE) (i)   165,676 
   Research and Development Programs       Research and Development Programs     
   (R&D) and Energy Efficiency Programs       (R&D) and Energy Efficiency Programs (EEP) (i)    
   (EEP)       52,265 
 

The main reclassifications made by the Company to the financial statements at December 31, 2005 are as follows:

 
From    To    Consolidated 
        Value 
 
Other operating expenses    Regulatory charges     
   Fuel Consumption Accounts (CCC)      Fuel Consumption Accounts (CCC) (i)   199,615 
   Energy Development Account (CDE)      Energy Development Account (CDE) (i)   152,707 
   Research and Development Programs       Research and Development Programs     
   (R&D) and Energy Efficiency Programs       (R&D) and Energy Efficiency Programs (EEP) (i)    
   (EEP)       46,771 
 

(i)
According to ANEEL ordinance 3,073/2006, expenses related to Fuel Consumption Accounts (CCC), Energy Development Account (CDE) and Research and Development Programs (R&D) and Energy Efficiency Programs (EEP) should be accounted for in the account 'Charges over sales'.

The subsidiaries follow the same accounting practices adopted by COPEL.

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
All amounts 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, subsequent and additional rules and include the accounts of the direct subsidiaries COPEL Geração e Transmissão S.A., COPEL Distribuição S.A., COPEL Telecomunicações S.A., COPEL Participações S.A., and indirect subsidiaries Companhia Paranaense de Gás – COMPAGAS, Centrais Elétricas do Rio Jordão S.A. – ELEJOR, COPEL Empreendimentos Ltda. (former El Paso Empreendimentos e Participações Ltda.), UEG Araucária Ltda and Centrais Eólicas do Paraná Ltda. 

The consolidation of corporate interests includes, as from June 1, 2006, the financial statements of COPEL Empreendimentos Ltda. and UEG Araucária Ltda and, as from September 1, 2007, the financial statements of Centrais Eólicas do Paraná Ltda. The financial statements of COPEL Transmissão were part of the consolidation until November 30, 2007, as this company was merged into COPEL Geração and Copel Distribuição on November 30, 2007. 

The Company’s investments in the shareholders’ equities of subsidiaries, as well as the assets, liabilities, revenues, and expenses arising from intercompany operations, have been eliminated upon consolidation, and the non controlling shareholders’ interest s are shown separately, so that the consolidated financial statements effectively represent the balances of transactions with third parties. 

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 U.S. GAAP. See Note 35 for further discussions of the differences and the reconciliation of shareholders' equity and net income to U.S. GAAP. 

(a)Regulated accounting policies 

a(i)Allowance for doubtful accounts 

The allowance for doubtful accounts is deemed sufficient by COPEL’s senior management to cover potential losses on the realization of customer receivables and others whose recovery is considered unlikely. 

This allowance is set up based on the amounts overdue by residential customers for over 90 days, the amounts overdue by commercial customers for over 180 days, and the amounts overdue by industrial and rural customers, public agencies, public lighting, and public services for over 360 days, pursuant to the Electric Utility Accounting Manual. It comprises receivables billed until the date of the balance sheets, accounted for on an accrual basis. 

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Table of Contents

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

a(ii) Property, plant and equipment

Recorded at their purchase or construction cost. Depreciation is calculated under the straight-line method, based on accounting balances recorded in the respective Record Units, pursuant to DNAEE Ordinance No. 815, dated November 30, 1994, supplemented by ANEEL Resolution No. 15, dated December 24, 1997.

Annual depreciation rates are set in the tables annexed to ANEEL Resolution No. 240, dated December 5, 2006, and featured in Note 13.

a(iii) Construction work in progress

According to the Accounting Manual for Electric Energy Public Service, interest and 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 based on criteria permitted by Aneel.

The total amount of interest, financial charges and general administrative expenses capitalized on construction work in progress totaled R$11,173, R$12,759, and R$49,757 in 2007, 2006 and 2005, respectively.

a(iv) 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 as a reduction in the property, plant and equipment and upon conclusion of the operating concession granted to the Company will be offset against the concessionaire assets, including those purchased with these contributions received from the Federal Government and customers. See Note 35 a(v).2.

a(v) Materials and supplies (including those classified 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(vi) Intangible assets

Recorded at their acquisition or development cost. Amortization, when applicable, is calculated under the straight-line method, based on accounting balances recorded in the respective Record Units, pursuant to DNAEE Ordinance No. 815, dated November 30, 1994, supplemented by ANEEL

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Table of Contents

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

Resolution No. 15, dated December 24, 1997. Annual amortization rates are set in the tables annexed to ANEEL Resolution No. 240, dated December 5, 2006. 

a(vii)Unbilled revenues 

Unbilled revenues correspond to revenues from sales of power to final customers which have been delivered but not yet billed and to revenues from the use of the distribution grid not yet billed, both of which are calculated based on estimates covering the period from the meter reading day to the last day of the month. 

a(viii)Power purchase and sale transactions in the Electric Energy Trading Chamber (CCEE)

Power purchase and sale transactions in CCEE are recorded on the accrual basis according to the information disclosed by the Trading Chamber or to estimates prepared by COPEL’s senior management, when such information is not available in time. 

a(ix)Recoverable rate deficit - CRC account 

Until 1993, two important principles ruled 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 rate of return was set by the regulatory agency at a level between 10% and 12% of service-related assets included in the tariff base depending on the particular circumstances of each concessionaire. 

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 compensation 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: 

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Table of Contents

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

(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 financial income in the statement of operations. 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 being 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.

The State Government has been in compliance with the payments of the renegotiated installments according to the terms of the fourth amendment to the CRC agreement. Amortizations are secured by resources from dividends (see note 8)

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Table of Contents

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

a(x) Regulation and deferred regulatory asset

Account for compensation of portion "A" variations - CVA

In accordance with Administrative Rule 25 of Brazilian Ministry of Finance and Ministry of Mines and Energy, of January 24, 2002, COPEL calculated the effects of the account for compensation of “Portion A" Variations (CVA), intended to record the changes in costs in the period between annual tariff adjustments, beginning in 2001, and related to the items described in the electric distribution concession contracts.

Administrative Rule 116, of Ministry of Finance and Ministry of Mines and Energy, of April 4, 2003, postponed for 12 months the recovery of the balance for compensation of “Portion 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.

Later on, Joint Ministry Ordinances No. 116, dated April 4, 2003, and No. 361, dated November 26, 2004, added new eligible items, such as the Energy Development Account (CDE) quota, 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 the 2002/2003 and for the 2003/2004 periods. The remaining balances of these two periods were considered in the 2005 tariff adjustment.

In June 2005, ANEEL granted an average tariff increase of 7.8% to COPEL Distribuição. This increase consisted of 1.25% decrease in retail tariffs and a 9.05% increase to recover the Portion A Cost items.

Under ANEEL Resolution No. 345/2006, COPEL Distribuição was granted an average increase of 5.12% on its rates for sales to final customers, effective June 24, 2006. Out of this total, 4.91% correspond to the rate review index, and 0.21% to financial adjustments outside the range of the rate review. CVA is part of the latter group, amounting to R$21,978 or 0.58% of the granted increase, and is made up of three installments: CVA for the rate year 2005-2006, a liability of R$7,557; CVA balance liability from the previous year to be offset, in the amount of R$4,317; and deferred CVA asset balance from previous years, in the amount of R$33,852.

a(xi) Energy Efficiency Programs (EEPs), Research and Development (R&D), National Scientific and Technological Development Fund (FNDCT), and Energy Research Company (EPE)

These are research and development and energy efficiency programs required by ANEEL to which energy concessionaires are compelled to allocate 1% of their net operating revenues.

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Table of Contents

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

The funds are applied to projects approved by ANEEL and to contributions to FNDCT and to the Ministry of Mines and Energy (MME). 

a(xii)Deferral of distribution costs 

The rate setting mechanism in Brazil guarantees the recovery of costs incurred by COPEL Distribuição in connection with the purchase of power and with regulatory charges through rate increases. Following ANEEL instructions, COPEL Distribuição records variations of these costs as deferred regulatory assets and liabilities, when there is a likely expectation that future revenues, equivalent to the incurred costs, will be billed and collected, as a direct result of the inclusion of such costs in an adjusted rate set according to the parametric formula established in the company’s concession agreement. Deferred regulatory assets and liabilities are realized upon authorization by the granting authority for their inclusion in COPEL Distribution’s rate basis, which is adjusted annually on the anniversary date of its concession agreement. 

(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 (short term, highly liquid, readily convertible and near maturity) denominated in Brazilian reais. 

b(ii)Accounts receivable 

This item comprises billed power sales to final customers and to distributors, estimated power supplied but unbilled as of the date of the financial statements, and supply of natural gas, accounted for on the accrual basis. 

b(iii)Materials and supplies (including those under property, plant and equipment)

Materials and supplies in inventory, classified under current assets, have been recorded at their average purchase cost, and those assigned for replacement of fixed asset, classified under property, plant and equipment, have been recorded at their actual purchase cost (goods in bulk, such as poles and cables, are recorded according to average cost). Recorded amounts do not exceed their replacement costs or realization figures. 

b(iv)Investments 

Permanent interests in subsidiaries and investees have been recorded under the equity method. Other investments have been recorded at their purchase cost, net of provision for losses, when applicable. 

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Table of Contents

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

b(v) Deferred charges

Deferred charges comprise pre-operational, financial, and feasibility study costs, less amortization, which is calculated under the straight-line method at rates that take into account the estimated useful lives of the respective assets.

b(vi) Loans, financing and debentures

Loans, financing and debentures are restated according to monetary and exchange rate variations up to the date of the financial statements, including interest and other contractual charges.

b(vii) Income taxes

Income and social contribution taxes are calculated based on the rates in effect at the balance sheet date. The Company recognized the effects of income and social contribution tax credits on tax loss carryforwards and temporary differences, supported by projections of future generation of taxable income, in a period not to exceed ten years.

b(viii) Pension plans and other payroll accruals

Fundação COPEL administers pension funds and other post-retirement benefit plans for its employees (see Note 22). 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 the accrual basis, based on costs and obligations computed by independent actuaries in accordance with the rules established by CVM Statement 371/2000.

b(ix) Provision for contingencies

These are recorded until the date of the financial statements based on likely estimates of losses, in light of the nature of each contingency. The bases and the nature of each provision are described in note 21.

b(x) Revenues, costs and expenses

Revenues, costs and expenses are recognized on the 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. 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 
All amounts expressed in thousands of Brazilian reais unless otherwise stated 
 

Taxes and charges on revenue are presented on a gross basis and consist of: (i) value-added tax (“ICMS”), which is a state tax due on the sales to final customers, and is billed to the consumers and recorded as part of gross revenue; (ii) COFINS revenue tax; (iii) PIS-PASEP social contribution tax on revenues; (iv) Regulatory charges; and (v) Other charges and deductions on sales. It is the Company’s policy to deduct these taxes from gross revenues.

b(xi) Other revenues and expenses

Other revenues and expenses are also recognized on the accrual basis.

b(xii) 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(xiii) Net income per share

These amounts are calculated based on the number of shares outstanding at the balance sheet date.

b(xiv) 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, and transactions involving purchase and sale of energy in the Spot Market which are recorded on an estimated basis and final billing and settlement information are subject to review by participants in the CCEE.

b(xv) 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.

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

The Company does not have any derivative instruments as of December 31, 2007 and 2006.

b(xvi) Regulated industry

Regulatory assets have been recorded for future recovery through tariff increases, to the extent that recovery is considered to be reasonably assured.

5 Cash and Cash Equivalents

        December 31 
         
    Interest rates    2007    2006 
       
Cash and banks        194,208    67,299 
Cash equivalents    Average of 100% of CDI (*)   1,346,663    1,436,705 
       
        1,540,871    1,504,004 
       

The annual CDI rate was 11.77% as of December 31, 2007 (14.97% as of December 31, 2006)

(*) CDI - Certificado de Depósito Interbancário, an interbank variable interest rate.

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Table of Contents

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

6 Accounts Receivable, Net

    December 31 
   
 
    2007    2006 
     
 
Customers         
     Residential    157,698    154,840 
     Industrial    170,828    150,038 
     Commercial    93,099    88,466 
     Rural    18,271    17,232 
     Public entities    27,161    50,658 
     Public lighting    12,174    13,031 
     Public services    12,568    11,976 
     Unbilled    143,921    156,649 
     Installment receivables - current portion    96,772    69,509 
     Installment receivables - non-current    118,032    79,456 
     Low income customers rate (a)   99,417    30,434 
     Other current assets    60,433    113,663 
     Other non-current assets    1,834    1,592 
     
 
    1,012,208    937,544 
     
Distributors         
     Short-term sale    126    138 
     Electricity sales to distributors - CCEE (Note 21(b))   7,158    29,521 
     Generating companies - current reimbursement (b)   1,492    10,854 
     Generating companies - non-current reimbursement (b)   12,004    27,109 
     Initial supply contracts    6,522    4,591 
     Energy auction    86,914    76,765 
     Bilateral agreements    49,186    52,146 
     
 
    163,402    201,124 
     
 
Transmission system    53,209    34,756 
Telecommunications and other services    8,750    13,399 
Telecommunications and other services – non-current    7,251   
Services in progress    51,343    20,038 
Allowance for doubtful accounts (c)   (71,592)   (111,726)
Allowance for doubtful accounts – non-current (c)   (11,469)    
     
 
Accounts receivable, net    1,213,102    1,095,135 
     
 
Current assets - accounts receivable, net    1,078,195    986,978 
     
Non-current assets - accounts receivable    134,907    108,157 
     

(a) Low income customers rate

The Federal Government, by means of Law No. 10,438, dated April 26, 2002, established an exemption from the charge for generation capacity costs to low income residential customers. This rate benefit had a significant impact on the Company's operating revenues.

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Table of Contents

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

In September 2002, the Company started applying the low income rate to electricity bills based on the new criteria for eligibility as low income customers.

On December 17, 2002, Law No. 10,604 modified the means of compensation to utilities, authorizing the granting of an economic subsidy, in order to contribute to the low price of the low income rate. This subsidy is funded by the dividend surplus owed by Centrais Elétricas Brasileiras S.A. -Eletrobrás to the Federal Government, in connection with the sale of power by Federal Government-owned generation companies at power auctions, and by Global Reversal Reserve (RGR) funds.

ANEEL, through different resolutions, set forth a new methodology for the calculation of the economic subsidy to which utilities are entitled, in order to offset the effects of the rate policy applicable to low income customers. As of December 2007, the low income rate was applied to 710,898 customers, who account for 26.2% of the total of 2,713,452 residential customers supplied by COPEL.

Due to discrepancies between the amounts recorded by COPEL and those gathered by ANEEL inspection, COPEL recalculated these amounts, resulting in a balance of approximately R$89,000. Out of this total, approximately R$35,000 have already been approved by ANEEL, and the remaining R$54,000 shall be approved by April 2008.

The Company, on account of the recalculation above, recorded an allowance of R$10,412 in connection with the accounts receivable related to low income customers, in the amount of R$99,417.

(b) Generators' reimbursement right – free energy

Power generator reimbursements rights refer to free energy amounts sold within MAE Spot Market during the emergency power consumption program, from June 1, 2001 to February 28, 2002, and which were not covered by initial contracts or similar agreements and by bilateral contracts. The approval of the amounts of power to be sold was formalized under ANEEL Resolution No. 483, dated August 29, 2002.

To make up for part of the losses incurred by utilities due to the power rationing, ANEEL created the Extraordinary Rate Adjustment (RTE), under Resolution No. 36, dated January 29, 2003, later amended by Resolution No. 89, dated February 25, 2003. This resolution sets forth procedures for the recovery and transfer to generation companies, starting in February 2003, of free energy amounts, calculated as a percentage of RTE revenues.

ANEEL, through Letter No. 2,396/2006-SFF/ANEEL, dated December 28, 2006, ordered generation utilities to set up a provision for potential losses, supported by in-house studies. In 2006, the balance of allowance for doubtful accounts was increased by R$11,469, referring to amounts with a low chance of recovery from distribution utilities.

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

Pursuant to ANEEL/SFF Letter No. 2218/2005, power generator reimbursement balances are as follows:

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Table of Contents

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

    December 31 
   
 
    2007    2006 
     
Distribution companies         
         Companhia Energética de Minas Gerais – Cemig    4,981    6,571 
         Eletropaulo Metropolitana Eletricidade de São Paulo – Eletropaulo      4,595 
         LIGHT – Serviços de Eletricidade S.A.    3,244    4,735 
         Centrais Elétricas do Norte do Brasil S.A. – Eletronorte      4,639 
         Companhia Paulista de Força e Luz – CPFL      3,223 
         Companhia de Eletricidade do Estado da Bahia – Coelba    1,151    1,885 
         Empresa Bandeirante de Energia S.A. – EBE      1,616 
         Companhia de Eletricidade do Rio de Janeiro – Cerj    1,014    1,669 
         Companhia Energética de Pernambuco – Celpe    677    1,281 
         Espírito Santo Centrais Elétricas S.A. – Escelsa      1,292 
         Companhia Energética do Ceará – Coelce    865    1,203 
         Companhia Piratininga de Força e Luz      1,033 
         Elektro Eletricidade e Serviços – Elektro      344 
         Companhia Energética de Brasília – CEB      695 
         Companhia Energética do Rio Grande do Norte – Cosem    607    731 
         Centrias Elétricas do Pará S.A. – Celpa      415 
         Companhia Hidro Elétrica do São Francisco – Chesf      94 
         Other    957    1,942 
     
 
    13,496    37,963 
     
 
Current    1,492    10,854 
Non-current    12,004    27,109 
     

(c) 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 
   
 
    2006    Additions (*)   Write-offs    2007 
         
 
Residential    15,083    12,660    (11,475)   16,268 
Industrial    39,720    8,945    (6,724)   41,941 
Commercial    6,600    7,658    (5,804)   8,454 
Public entities    37,722    (35,997)       1,725 
Other    12,601    2,619    (547)   14,673 
         
 
    111,726    (4,115)   (24,550)   83,061 
         

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Table of Contents

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

                December 31 
   
 
    2005    Additions (*)   Write-offs    2006 
         
 
Residential    15,254    13,946    (14,117)   15,083 
Industrial    11,905    30,598    (2,783)   39,720 
Commercial    28,284    (17,151)   (4,533)   6,600 
Public entities    22,214    19,355    (3,847)   37,722 
Other    1,416    11,713    (528)   12,601 
         
 
    79,073    58,461    (25,808)   111,726 
         
 
 
 
                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.

7 Dividends Receivable

        December 31 
   
    2007    2006 
     
Dominó Holdings S.A.    2,159    1,975 
Foz do Chopim Energética Ltda.    608   
Eletrosul      44 
     
    2,767    2,019 
     

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Table of Contents

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

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 CRC is as follows:

    December 31, 
    2007 
   
 
2008    40,509 
2009    43,203 
2010    46,077 
2011    49,141 
2012    52,409 
Thereafter    1,019,023 
   
 
Total    1,250,362 
   
 
Current    40,509 
Non-current    1,209,853 
   

9 Deferred Regulatory Assets and Liabilities a) CVA

    December 31 
   
 
    2007    2006    2007    2006 
         
 
Assets        Current assets    Non-current assets 
     
 
Recoverable CVA - tariff adjustment 2006                 
 Electricity purchased for resale (Itaipu)     18,162     
 Transmission of electricity purchased from Itaipu      2,195     
 Use of transmission installations - basic network      10,699     
 Regulatory charges (CDE)     11,549     
 Charges on use of system services - ESS      3,741     
 Regulatory charges (CCC)     17,481     
 Program of Incentives for Alternative Energy Sources -           
     Proinfa        5,886         
 Electricity purchased for resale (CVA Energy)     8,061     
         
 
      77,774     
         
 
Recoverable CVA - tariff adjustment 2007                 
 Electricity purchased for resale (Itaipu)   22,289    5,133        5,133 
 Regulatory charges (CDE)   6,125    2,199        2,199 
 Charges on use of system services - ESS    7,082    3,350        3,350 

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Table of Contents

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

    December 31 
   
 
    2007    2006    2007    2006 
         
 
Assets        Current assets    Non-current assets 
     
 
 Regulatory charges (CCC)   1,869       
 Transmission of electricity purchased from Itaipu    211       
 Program of Incentives for Alternative Energy Sources -               
     Proinfa    4,560    1,592        1,591 
         
 
    42,136    12,274      12,273 
         
 
Recoverable CVA - tariff adjustment 2008                 
 Regulatory charges (CCC)   5,659      5,659   
 Use of transmission installations - basic network    4,074      4,074   
 Electricity purchased for resale (Itaipu)   12,309      12,309   
 Regulatory charges (CDE)   1,922      1,922   
 Charges on use of system services (ESS)   372      372   
 Electricity purchased for resale (Itaipu)   37      37   
 Program of Incentives for Alternative Energy Sources -             
     Proinfa    1,105        1,105     
         
 
    25,478      25,478   
         
 
Total    67,614    90,048    25,478    12,273 
         
 
 
 
    December 31 
   
 
    2007    2006    2007    2006 
         
 
Liabilities    Current liabilities    Non-current liabilities 
     
 
Recoverable CVA - tariff adjustment 2006                 
 Electricity purchased for resale (CVA Energy)     58,445     
         
 
      58,445     
         
 
Recoverable CVA - tariff adjustment 2007                 
 Electricity purchased for resale (CVA Energy)   54,155    37,877      37,877 
 Use of transmission installations - basic network    31,803    4,577      4,577 
 Regulatory charges (CCC)   34,146    9,197      9,197 
 Transmission of electricity purchased from Itaipu    1,002    402      402 
         
 
    121,106    52,053      52,053 
         
 
Recoverable CVA - tariff adjustment 2008                 
 Electricity purchased for resale (CVA Energy)   16,511      16,511   
 Use of transmission installations - basic network    1,186      1,186   
 Charges on use of system services (ESS)   3,722      3,722   
 Regulatory charges (CCC)   855      855   
 Transmission of electricity purchased from Itaipu    56      56   
         
 
    22,330      22,330   
         
 
Total    143,436    110,498    22,330    52,053 
         

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Table of Contents

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

The changes in the deferred regulatory balances, monetarily indexed by SELIC rates, are presented as follows:

                Monetary         
    2006    Additions    Amortization    indexation    Transfer    2007 
             
 
Assets                         
 Electricity purchased for resale (Itaipu)   28,428    55,854    (42,541)   5,166      46,907 
 Transmission of electricity purchased from Itaipu    2,195    497    (2,557)   150      285 
 Use of transmission installations - basic network    10,699    8,096    (11,009)   362      8,148 
 Regulatory charges (CDE)   15,947    11,150    (18,607)   1,479      9,969 
 Charges on use of system services - ESS    10,441    7,611    (11,309)   1,083      7,826 
 Regulatory charges (CCC)   17,481    15,166    (20,678)   1,218      13,187 
 Program of Incentives for Aternative Energy                         
     Sources - Proinfa    9,069    7,860    (11,143)   984        6,770 
 Regulatory charges (CCC)   8,061      (8,061)      
             
 
    102,321    106,234    (125,905)   10,442    -    93,092 
             
 
 Current    90,048    62,950    (125,905)   8,653    31,868    67,614 
 Non-current    12,273    43,284      1,789    (31,868)   25,478 
             
 
Liabilities                         
 Electricity purchased for resale    134,199    61,325    (118,608)   10,261      87,177 
 Charges on use of system services - ESS      7,193      251      7,444 
 Regulatory charges (CCC)   18,394    49,310    (36,119)   4,271      35,856 
 Use of transmission installations - basic network    9,154    50,413    (32,580)   7,188      34,175 
 Transmission of electricity purchased from Itaipu    804    1,251    (1,059)   118      1,114 
             
 
    162,551    169,492    (188,366)   22,089      165,766 
             
 
 Current    110,498    119,422    (188,366)   19,868    82,014    143,436 
 Non-current    52,053    50,070      2,221    (82,014)   22,330 
             

The deferred regulatory assets will be recovered up to June, 2009. The realization of deferred regulatory assets is broken down below.

    Amount to be 
    recovered 
   
2008    67,614 
2009    25,478 
   
 
    93,092 
   

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 302/2005 and additional resolutions, recognized the Company’s right to be reimbursed by the additional PIS and Cofins charges, requiring recognition of a regulatory asset or liability, depending on whether they increased or reduced costs, respectively. Based on ANEEL regulations, the Company recorded an asset of R$82,094 with a contra entry reducing PIS and Cofins expenses. As of December 31, 2007, the balance has been fully realized.

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Table of Contents

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

Pursuant to the ANEEL authorization as of June 2005, COPEL began to include PIS/PASEP and COFINS taxes in the amounts billed to customers.

c) Review adjustment share - transmission utilities' rate review

The concession agreements signed by the transmission utilities contain a clause which sets the date of July 1, 2005 as the date of the first periodic review of annual allowed revenues. The rate review was concluded and its results were approved on July 1, 2007, applicable retroactively to July 1, 2005. Thus, it became necessary to calculate the retroactive discrepancy for the period from 2005 to 2007, which has been treated as a “review adjustment share”. This balance, which has been accrued by transmission utilities, is being offset over 24 months, starting July 2007.

As of December 31, 2007, COPEL Geração e Transmissão had a balance to be offset in the amount of R$36,391.

ANEEL has calculated the discrepancy corresponding to the “connection point review adjustments” for all distribution utilities, resulting in a balance of R$22,915 to be paid by COPEL Distribuição to COPEL Transmissão As regards the “basic network review adjustments", the application of COPEL Distribuição's participation percentage to the total adjustment share resulted in the amount of R$29,020 to be collected from the remaining transmission utilities which underwent the rate review process. These amounts, which shall be financially settled with the transmission utilities, will be taken into account in COPEL Distribuição’s next rate review. COPEL expects that the amounts classified as long-term on the date of its balance sheet will be recovered in up to two years from that date. Consolidated balances as of December 31, 2007 are shown below:

    Assets    Liabilities 
     
    Current    Non-    Total    Current    Non-    Total 
        current            current     
             
COPEL Distribuição S.A.                         
 
Connection review adjustment    465    154    619       
Basic Network review adjustment    16,721    5,575    22,296    21,765    7,255    29,020 
             
 
    17,186    5,729    22,915    21,765    7,255    29,020 
COPEL Geração e Transmissão S.A.                         
Basic Network review adjustment          24,711    11,680    36,391 
             
 
    17,186    5,729    22,915    46,476    18,935    65,411 
             

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Table of Contents

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

10 Recoverable Taxes

        December 31 
   
    2007    2006 
     
Income and social contribution taxes recoverable    21,344    121,261 
Value Added Tax (ICMS) recoverable    77,686    51,448 
Other    1,549    1,104 
     
    100,579    173,813 
     
Recoverable taxes - current assets    38,744    128,939 
Recoverable taxes - non-current assets    61,835    44,874 
     

Amounts recorded as income and social contribution taxes recoverable refer mostly to amounts withheld and prepaid according to estimates during the period.

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 
   
    2007    2006 
     
 
Current assets         
     Net operating loss carryforwards    7,778    8,269 
     Temporary differences    109,077    97,876 
     
 
    116,855    106,145 
     
 
Non-current assets         
     Temporary differences         
             Pension and health-care plans - CVM Resolution 371    138,990    153,682 
             Provisions for contingencies and other    241,278    166,203 
     Net operating loss carryforwards    20,324    17,769 
     
 
    400,592    337,654 
     
 
Total deferred income tax asset    517,447    443,799 
     
 
Current liabilities         
     CVA deferral    (19,654)   (27,281)
     Other    (5,010)   (6,390)
     
 
    (24,664)   (33,671)
     
 
Long-term liabilities         
     CVA deferral    (7,543)   (3,053)
     Other    (11,774)   (9,462)
     
 
    (19,317)   (12,515)
     
 
Total deferred income tax liability    (43,981)   (46,186)
     

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Table of Contents

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

        December 31 
   
    2007    2006 
     
 
Total deferred income tax, net    473,466    397,613 
     

In compliance with CVM Ruling No. 371, dated June 27, 2002, the Company’s Board of Directors and Fiscal Council have approved the technical study prepared by the Chief Finance and Investor Relations Office on future profitability projections, which indicate the realization of deferred taxes. According to the estimates of future taxable income, the realization of deferred taxes is broken down below.

    Estimated    Actual realized    Estimated 
    realizable amount    amount    realizable amount 
       
2007    27,078    69,382     
2008        92,191 
2009        55,219 
2010        33,749 
2011        14,363 
2012        14,772 
After 2012        263,172 
       
 
    27,078    69,382    473,466 
       

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.

Reconciliation of income taxes

The reconciliation of the income taxes, calculated at the current rates, with the amounts shown in the statements of operations, is as follows:

    Year ended December 31 
   
 
    2007    2006    2005 
       
 
Income before income taxes and non controlling shareholders’             
     interest    1,598,015    1,814,246    717,001 
Statutory income taxes rates - %    34    34    34 
       
Income taxes expenses computed based on statutory rates    (543,325)   (616,844)   (243,780)
Income tax effects on             
     Benefit from interest on equity    68,000    41,820    41,818 
     Equity in results of investees    (595)   (10,075)   4,590 
     Non-deductible pension expenses      (2,066)   (4,274)
     Changes in Brazilian accounting practices      9,937   
     Valuation allowance for recoverable taxes - COFINS      6,922   
     Dividends    3,088    1,140    121 
     Tax incentives    7,932    7,407    2,259 
 
     Other    4,585    4,081    1,066 
       
Tax expense per statement of operations    (460,315)   (557,678)   (198,200)
       
 
Current income tax    (536,168)   (499,727)   (248,228)
Deferred income tax    75,853    (57,951)   50,028 
       

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Table of Contents

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

12 Investments

    December 31 
   
 
                    2007    2006 
     
 
 
    Investee's    Investees'    Total    Equity in    Total    Total 
    shareholders’    net income    ownership    results of    investment    investment 
    equity    (loss )   - %    investees    balances    balances 
         ;    
 
Investments accounted for under the equity method                         
     Sercomtel S.A. - Telecomunicações    182,562    8,773    45.00    (1,310 )   82,153    83,463 
     Sercomtel Celular S.A.    19,464           (2,879 )   45.00    (3,610 )   8,759    12,369 
     Dominó Holdings S.A. (a)   601,035    55,221    15.00    (1,367 )   90,155    91,522 
             Interest on equity received                2,175         
     Escoelectric Ltda.    (3,374 )   214    40.00    (3,304 )   (1,390 )    
             Advance for future capital increase                    1,025    2,500 
     COPEL Amec S/C Ltda.    293    44    48.00    23    140    468 
     Dona Francisca Energética S.A.    25,754    16,970    23.03    3,908    5,931    2,023 
     Carbocampel S.A.    (115 )   (589 )   49.00    (288 )   (56 )   232 
             Advance for future capital increase                    1,059    198 
     Braspower International Engineering S/C Ltda.    (407 )     49.00             
             Advance for future capital increase                    176    176 
     Centrais Eólicas do Paraná Ltda.        407    30.00    122        1,050 
     Foz do Chopim Energética Ltda. (b)   45,718    23,602    35.77    707    16,353    16,362 
             Dividends received                8,370         
     Goodwill on investments, net of amortization                         
             Sercomtel S.A. - Telecomunicações (c)                 1,568    5,796 
                          Amortization for the year                (4,228 )        
             Sercomtel Celular S.A. (c)                 223    803 
                          Amortization for the year                (580 )    
     Goodwill on acquisition of Centrais Elétricas Rio                         
     Jordão S.A. - ELEJOR - Amortization for the year                (754 )    
     Goodwill on acquisition of COPEL                         
             Empreendimentos Ltda                         
                          Amortization for the year                (2,346 )    
             
 
                (2,482 )   206,096    216,962 
             
 
Other investments                         
     Tax incentives (d)                        
             FINAM                --    52,783    40,370 
             FINOR                  9,870    9,870 
     Reserve for tax incentive losses                  (26,801 )   (47,900)
     Assets for future use                  4,588    6,825 
     Consórcio Energético Cruzeiro do Sul (e)                 6,450     
     Other                4,083    3,823    3,826 
             
 
                4.083    50,713    12,991 
             
 
                1,601    256,809    229,953 
             

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Table of Contents

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

(a) Dominó Holding S.A.

Dominó Holding S.A. is a company which owns 34.75% of the share capital of Companhia de Saneamento do Paraná – SANEPAR, a mixed (state/private) capital company whose business comprises basic sanitation services, including water supply and sewage collection and treatment. 

(b) Foz do Chopim Energética Ltda. 

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. COPEL Participações S.A. owns 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 COPEL Participações S.A The first generating unit started operating on October 25, 2001, and the second generating unit started operating on December 8, 2001. 

(c) Sercomtel S.A. - Telecomunicações and Sercomtel Celular S.A. 

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 a total goodwill of R$48,103. 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 is over ten years, at the annual rate of 10 percent, resulting from the evaluation of the return on the investments based on discounted cash flows, in the annual amount of R$4,808. 

(d) Tax incentives 

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. 

(e) Consórcio Energético Cruzeiro do Sul (operational and technical information unaudited)

On November 28, 2006, at the Auction of Power from New Projects, Consórcio Energético Cruzeiro do Sul, an independent power producer owned by COPEL Geração e Transmissão (with a 51% interest)and by Eletrosul Centrais Elétricas S.A. (49%), won the rights to the 35-year concession of the Mauá Hydroelectric Power Plant. 

This project is included in the Federal Government’s Growth Acceleration Program (PAC) and will comprise a main power plant rated 350 MW and an additional small hydropower unit rated 11 MW, for a total of 361 MW of installed capacity, which is enough to supply approximately 892,400 people. The facility will take advantage of the hydroelectric potential in the middle section of the Tibagi River, between the towns of Telêmaco Borba and Ortigueira, in mideastern Paraná. 

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Table of Contents

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

The deadline for the commercial operation of the facility’s first generating unit is January 1, 2011. Total estimated expenditures amount to R$991,283, as of October 2006, of which 51% (R$505,554) will be invested by COPEL Geração e Transmissão, while the remaining 49% (R$485,729) will be invested by Eletrosul Centrais Elétricas S.A.

The power from the Mauá Power Plant was sold at an ANEEL auction at the rate of R$112.96/MWh, restated according to the IPCA inflation index starting on November 1, 2006. The company sold 192 average MW, for supply starting in January 2011. The assured power of the project, established in its concession agreement, is 197.7 average MW, after full motorization, and the maximum reference rate set in the auction notice was R$116.00/MWh.

Work began in May 2007 with the procurement of the basic project and the beginning of the executive project for the facility and its associated transmission system, the preparation of technical specifications, calculation records, designs, and other documents regarding the different structures within the facility, additional geological surveys, and topography services. The project has been concluded and submitted to ANEEL review. The project’s Environmental Impact Study and Environmental Impact Report have been disclosed at a public hearing and approved by the licensing authority, resulting in the issue of Preliminary License No. 9,589 by the Environmental Institute of Paraná (IAP) – an agency which reports to the State Environment and Water Resources Department, provided that around 70 environmental requirements covering the physical, biological, and socioeconomic aspects of the project are met prior to the issue of the Construction License.

In November 2007, the National Monetary Council (CMN) authorized an exception to Central Bank Resolution No. 2827/01, which limited credit to state-owned companies, in order to allow COPEL to obtain financing from the National Economic and Social Development Bank (BNDES), in the amount of R$340,000, for the Company’s share of construction expenditures in connection with the Mauá Hydroelectric Power Plant.

Expenditures in this project are recorded as investments, proportionally to COPEL’s share in the consortium, pursuant to the Accounting Manual for Electric Energy Utilities.

(f) Centrais Eólicas do Paraná

The Company, through COPEL Participações, held a 30% interest in Centrais Eólicas do Paraná (CEOPAR). On September 6, 2007, COPEL acquired the remaining 70% interest held by Wobben Windpower Indústria e Comércio Ltda., thus becoming the holder of 100% of the share capital of CEOPAR. This transaction resulted in negative goodwill of R$592, which was reclassified upon consolidation to negative goodwill.

13 Property, Plant and Equipment

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Table of Contents

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

 

        December 31 
       
    2007    2006 
       
        Accumulated            Accumulated     
    Cost    depreciation    Net    Cost    depreciation    Net 
             
In service                         
     Generation and                         
     Transmission    5,171,655    (1,937,690)   3,233,965    5,084,453    (1,839,827)   3,244,626 
     Distribution    4,462,250    (2,116,451)   2,345,799    4,101,492    (1,926,830)   2,174,662 
     Telecommunications    326,892    (179,894)   146,998    304,534    (154,505)   150,029 
     Holdings    341    (237)   104    342    (222)   120 
     Elejor    605,458    (30,333)   575,125    604,961    (14,023)   590,938 
     Compagas    144,355    (33,636)   110,719    139,853    (26,820)   113,033 
     UEG Araucaria    634,233    (76,315)   557,918    633,335    (44,856)   588,479 
     Centrais Eólicas    4,129    (2,215)   1,914       
             
 
    11,349,313    (4,376,771)   6,972,542    10,868,970    (4,007,083)   6,861,887 
             
 
Construction work in                         
     progress    717,029      717,029    658,411      658,411 
             
 
    12,066,342    (4,376,771)   7,689,571    11,527,381    (4,007,083)   7,520,298 
             
 
Special obligations                         
     Generation and                         
     Transmission    (4,925)     (4,925)   (3,787)     (3,787)
     Distribution    (852,267)     (852,267)   (804,825)     (804,825)
             
 
    (857,192)     (857,192)   (808,612)     (808,612)
             
 
Property, plant and                         
     equipment, net    11,209,150    (4,376,771)   6,832,379    10,718,769    (4,007,083)   6,711,686 
             

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Table of Contents

Companhia Paranaense de Energia - COPEL 
 
Notes to the Consolidated Financial Statements 
All amounts 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 
     Steam and gas turbines    5.0 
     Water treatment and cooling    5.0 
     Gas conditioner    5.0 
Transmission     
     System structure and conductor (voltage lower than 69kV)   5.0 
     System structure and conductor (voltage higher than 69kV) and power transformer    2.5 
     Equipment    10.0 
     Re-ignition    4.3 
Distribution     
     System structure and conductor (voltage lower than 69kV) and distribution     
          transformer    5.0 
     System structure and conductor (voltage higher than 69kV)   2.5 
     Capacitors and distribution switches (voltage lower than 69kV)   6.7 
     Capacitors and distribution switches (voltage higher than 69kV)   5.0 
     General equipments    10.0 
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 

ANEEL Regulatory Resolution No. 240, dated December 5, 2006, requires that power utilities calculate and account for new periodic depreciation quotas as of January 1, 2007. The adoption of the new quotas has no material effects for the year ended December 31, 2007, and will have material effects in future periods which should require additional disclosures.

(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 asset is determined only at the end of the expropriation process and is then capitalized as part of property, plant and equipment.

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Table of Contents

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

(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 no longer useful to the concessions should be deposited in a restricted bank account to be invested in the concession.

(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 offset against the net book value of related assets.

In accordance with ANEEL Resolution No.234, October 31, 2006, which establishes the principles for holding the second cycle of the periodic tariff review, in June 2008 for COPEL Distribuição, the special obligations will be amortized, based on this review, using the depreciation rates applied for depreciation of the Property, plant and equipment. See Note 35 a(ii).2.

(d) Electric Energy Universalization Plans

Under Resolution No. 223, dated April 29, 2003, later amended by Resolution No. 52, dated March 25, 2004, and Resolution No. 175, dated November 28, 2005, ANEEL set forth the overall conditions for the development of Electric Energy Universalization Plans aimed at supplying new customers or increasing the capacity of supply to existing customers. This Resolution regulates the provisions of Articles 14 and 15 of Law No. 10,438, dated April 26, 2002, and sets out the duties of the holders of electric energy distribution concessions and permits. These articles were later amended by Law No. 10.762, dated November 11, 2003, and by Law No. 10,848, dated March 15, 2004. The changes include a reorganization of the priority of service to municipalities, emphasizing municipalities with a lower rate of electrification and limiting service to new customers connected at low voltage (lower than 2.3 kV), with loads of up to 50 kW.

The “Luz para Todos” (“Light for Everyone”) program, launched by the Federal Government under Decree No. 4,783, dated November 11, 2003, is aimed at providing electric energy to 100% of Brazil by 2008, at no extra charge to consumers.

This program is coordinated by the Ministry of Mines and Energy and carried out with the participation of Centrais Elétricas Brasileiras S.A. – Eletrobrás. In Paraná, the Ministry is represented by Eletrosul, and the participants are the State Government and COPEL.

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Table of Contents

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

Furthermore, the program is integrated with several social and rural development programs implemented by the Federal Government and by State Governments, to ensure that the rural electrification efforts result in increased agricultural output, in increased income and in social inclusion, providing better standards of living to the rural communities.

COPEL’s preliminary goal was to connect 36,000 (unaudited) rural customers by the end of the program, scheduled for 2006. Even though it was originally scheduled to begin in January, the Program only became operational in June 2004, due to a six-month delay in the signature of the agreement. The Ministry of Mines and Energy took into account, for purposes of fulfilment of the goal, the 6,000 (unaudited) connections COPEL had made from January to June 2004.

In order to implement the remaining 30,000 (unaudited) connections, the estimated investments for the program were broken down as follows:

   
Source    Share - %    2007 
     
 
     Federal Government – CDE subsidy    30.00    44,820 
     Paraná State Government    10.00    14,940 
     RGR Financing    40.00    59,760 
     Contractor - COPEL    20.00    29,880 
     
 
    100.00    149,400 
     

Another 7,150 (unaudited) connections were provided free of charge under the universalization program, for a total of 37,150 (unaudited) rural households supplied.

Due to the appearance of new households without power supply, COPEL is in the process of signing another agreement with Eletrobrás for another 30,000 (unaudited) connections, a figure which may vary due to the wide publicity about the deadline for enrollment in the program, on March 31, 2008.

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Table of Contents

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

14 Intangible Assets

    December 31 
   
    2007    2006 
     
    Rights of                     
    use    Accumulated    Land rights             
    of software    amortization    of way    Other    Net    Net 
           
 
In service                         
   COPEL Geração e                         
         Transmissão    8,751    (8,064)   9,027    27    9,741    9,000 
   COPEL Distribuição    29,958    (23,425)   17,606    113    24,252    20,895 
 COPEL                       
       Telecomunicações    4,094    (2,396)         1,698    1,748 
   COPEL Participações             
   Compagas    636    (389)       20    267    260 
   Elejor        101      101    101 
   UEG Araucária    70    (63)        
             
 
    43,509    (34,337)   26,734    161    36,067    32,014 
             
 
Work in progress                         
   COPEL Geração e                         
       Transmissão    425      449      874    869 
   COPEL Distribuição    705      1,997      2,702    7,873 
   Elejor        27      27    27 
 
Other                         
   Goodwill - Elejor (a)         21,306    21,306    22,060 
   Goodwill - COPEL                       
         Empreendimentos (b)           51,609    51,609    53,955 
             
 
    1,130      2,473    72,915    76,518    84,784 
             
 
    44,639    (34,337)   29,207    73,076    112,585    116,798 
             

Intangible assets, with the exception of goodwill balances, relate basically to rights of use of software and land rights of way, which are amortized at the annual amortization rate 20%.

The fully amortized amount of intangible assets in service as of December 31, 2007 and 2006 was R$23,674 and R$22,519, respectively.

(a) Goodwill - ELEJOR

On December 18, 2003, the Company entered into an agreement with Triunfo Participações e Investimentos 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

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Table of Contents

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

Administrativo de Defesa Econômica - CADE), the anti-trust regulator. Accordingly, the Company holds 70% of the shareholding control of ELEJOR as of December 31, 2007 and 35% of the total shares of ELEJOR.

The acquisition of the shares held by Triunfo Participações e Investimentos S.A., in December 2003, resulted in total goodwill of R$22,626. The amortization of goodwill was economically determined by the remaining time of the 30-year concession, which expires in October 2036, and it is amortized according to the straight-line method. The total amount of amortization expensed in 2007 was R$754 (R$565 in 2006).

(b) Goodwill - COPEL Empreendimentos Ltda.

The acquisition on May 31, 2006 of COPEL Empreendimentos Ltda., which was previously known as El Paso Empreendimentos e Participações Ltda. and which held a 60% interest in UEG Araucária Ltda., resulted in net final goodwill of R$53,955. The linear amortization of goodwill was economically determined by the expected income from the commercial operation of the concession, which expires in December 2029, and its effect on the statement of operations for 2007 was R$2,346.

15 Suppliers

    December 31 
     
    2007    2006 
     
Transmission network use charges         
     Connection    237    213 
     Basic network    50,291    45,383 
     Energy transmission    3,028    2,728 
     
 
    53,556    48,324 
     
 
Electricity suppliers         
     ANDE (Paraguay)     1,341 
     Eletrobrás (Itaipu)   74,090    71,874 
     CIEN - short-term (Note 21(c)(ii))     63,000 
     CIEN - long-term (Note 21(c)(ii))     62,862 
     Furnas Centrais Elétricas S.A.    30,849    28,730 
     Companhia Hidroelétrica do São Francisco - Chesf    28,430    16,721 
     Companhia Energética de São Paulo - Cesp    9,763    9,588 
     Itiquira Energética S.A.    8,468    7,386 
     Dona Francisca Energética S.A.    4,567    4,413 
     Other concessionaires    36,931    28,250 
     
 
    193,098    294,165 
     
 
Supplies and services         
     Petróleo Brasileiro S.A. - Petrobras (a)   21,031    37,871 
     Petróleo Brasileiro S.A. - Petrobras - long-term (a)       268 
     Petróleo Brasileiro S.A. - Renegotiation (a)   190,394    170,183 
     Other suppliers - current    98,825    74,721 

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Table of Contents

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

    December 31 
     
    2007    2006 
     
     Other suppliers - non-current      899 
     
    310,250    283,942 
     
    556,904    626,431 
     
Suppliers - current    366,510    392,219 
Suppliers - non-current    190,394    234,212 
     

(a) Petróleo Brasileiro S.A. - Petrobras

The amounts owed to Petrobras totaling R$21,031 as of December 31, 2007 (2006 - R$38,139), comprise gas purchases.

The renegotiation obligations with Petrobras, of R$190,394 (R$170,183 in 2006), refer to the accrual for the payment of the amount of gas guaranteed in the original contract signed between COPEL and Compagas, which provided for payment even if the related consumption did not actually take place (take–or-pay terms). The contract also provided for the recovery of gas referring to the amount paid for the seven-year period, which was linked to the equivalent consumption of gas. However, the actual recovery was subject to the normal compliance with the contract, and this was hindered due to the agreement signed between COPEL, Petrobras and Compagas.

On March 7, 2006, through a relevant event notice to the market, COPEL informed that, on the previous day, it signed with Petrobras an agreement to settle the pending issues referring to the gas contract for the Thermoelectric Plant of Araucária, the bases of which had been previously communicated to the market in the relevant event notice of February 24, 2006. The agreement comprised the signing of an Out-of-Court Transaction Contract through which COPEL Geração S.A., with COPEL as joint debtor, acknowledged a debt of R$150,000 with Petrobras, which is the assignee of the credits of Compagas with COPEL Geração, payable in 60 monthly installments as from January 2010, restated by the Special System for Settlement and Custody (SELIC) rate.

On May 30, 2006, COPEL Geração signed a Statement for the Ratification of Mutual Settlement with Compagas in which both parties recognized to each other full, general, irrevocable and irretractable mutual settlement of all obligations and rights arising from the Natural Gas Purchase and Sale Agreement which they had signed on May 30, 2000 and which was rescinded on May 31, 2005. As from the signature of the Out-of Court Transaction Agreement with Acknowledgment of Debt, which was agreed to with Petrobras with the participation of COPEL, nothing remains between the companies to be demanded, on any grounds. There remains the debt therein acknowledged by COPEL Geração in the principal amount of R$150,000 which will be paid by COPEL Geração or by COPEL directly to Petrobras, in the form therein established, with the sole and specific exception of the portion referring to the Distribution Margin of Compagas. Pursuant to the provisions of the Statement for the Ratification of the Mutual Settlement with Compagas, on May 31, 2006, the amount of R$355.929, referring to contract fines related to the gas purchase and transportation, is no longer required, i.e., is considered as fully settled.

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Table of Contents

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

In view of the agreements mentioned above, on May 31, 2006, COPEL recorded in the statement of operations for the year 2006 the reduction in its liabilities, in the amount of R$654,044, of which R$298,115 were classified under Raw material and supplies for electric energy generation, R$283,198 under Discounts obtained and R$72,731 as reversal of Financial expenses relating to charges appropriated in 2006, with a total tax effect expense of R$232,706. In the year 2007, the Company recorded R$20,227 (2006 - R$20,183) under the financial expenses caption, referring to the contractual restatement of the remaining balance.

16 Loans and Financing

    December 31 
           
 
    2007    2006 
           
 
    Current portion    Long-term         
         
 
        Accrued             
    Principal    interest    Principal    Total    Total 
           
 
Foreign currency                     
     IDB (i)   17,623    1,185    43,898    62,706    93,464 
     National Treasury Department (ii)   6,441    1,161    70,432    78,034    102,030 
     Banco do Brasil S.A (iii)   3,918    165    3,919    8,002    13,607 
     Eletrobrás        33    38    52 
           
 
    27,987    2,511    118,282    148,780    209,153 
           
 
Local currency                     
     Eletrobrás (iv)   41,405    1,691    272,798    315,894    337,647 
     Eletrobrás - ELEJOR (v)       94,709    94,709    114,469 
     BNDES (vi)   6,328      19,029    25,357    32,143 
     Banco do Brasil S.A. – credit notes (iii)     12,621    329,600    342,221   
     Banco do Brasil S.A. (iii)   137      850    991    1,046 
           
 
    47,870    14,316    716,986    779,172    485,305 
           
 
    75,857    16,827    835,268    927,952    694,458 
           

(i) IDB (Inter-American Development Bank) - consists of a loan for the Segredo Hydroelectric Power Plant and for the Jordão River Diversion Project, received on January 15, 1991, in the amount of US$135,000 thousand. The principal amount, the first installment of which was paid on January 15, 1997, and interest are due semi-annually until 2011. Interest is calculated according to the IDB funding rate, which in the second half of 2007 was 4.16% p.a. The agreement provides for termination in the following cases:

1) Default by the debtor on any other obligation set forth in the agreement or agreements signed with the bank for financing of the project;

2) Withdrawal or suspension of the Federal Republic of Brazil as a member of the Bank;

3) Default by the guarantor, if any, of any obligation set forth in the guaranty agreement;

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Table of Contents

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

 

4) Ratio between current assets and total short-term commercial and bank financing, except for the current portion of long-term indebtedness and dividends to be reinvested, equal to or greater than 1.2; and 

5) Ratio between long-term indebtedness and shareholders’ equity not exceeding 0.9. 

The Company has fully met the contractual conditions. 

Other requirements include: 

• the Company should take proper measures to obtain tariffs which should cover all operating costs; 

• the Company is prohibited from acquiring its own shares and distributing any part of its capital without the bank's prior authorization. 

The Company has met the contractual conditions. 

This agreement is guaranteed by the federal government of Brazil. 

(ii) National Treasury Department (NTD) - the debt classified as National Treasury Department refers to obligations for which terms and payment conditions were established as part of the Brazilian foreign debt restructuring, under Law 4,131/62, of May 20, 1998, in the context of the Brady Plan, is as follows: 

                    December 31 
             
    Maturity    Due    Grace period     Amortization         
Bond type    (years)   date    (years)    (in installments)   2007    2006 
             
                         
Par bond (a)   30    2024    30    One payment at
maturity 
  28,294    34,137 
Capitalization bond (b)   20    2014    10    21 semi-annual    15,703    21,858 
Debt conversion bond (c)   18    2012    10    17 semi-annual    12,133    17,886 
Discount bond (d)   30    2024    30    One payment at
maturity 
  19,755    23,829 
New money bonds (f)   15    2009      17 semi-annual    1,067    2,144 
FLIRB (g)   15    2009      13 semi-annual    1,082    2,176 
             
 
                    78,034    102,030 
             

The annual interest rates and repayments 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)    New Money Bonds - Interest equivalent to semi-annual LIBOR + 7/8 of 1% per year, repayable in 17 semi-annual installments, starting April 2001.

 

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Table of Contents

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

f)    FLIRB - Interest equivalent to from 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 account receivable from its 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$9,246 and R$13,177 as of December 31, 2007 (2006 - R$10,159 and R$14,471), respectively, classified in other non-current assets.

(iii) Banco do Brasil S.A. – (a) consists of a loan in Japanese Yen for the gas thermoelectric substation of the Salto Caxias plant, with repayment in 20 semi-annual installments, beginning March 7, 2000, subject to interest of 6.6% per year. The debt is guaranteed by COPEL's accounts receivable, in case of default; (b) private Credit Assignment Agreement with the Federal Government, through Banco do Brasil S.A., signed on March 30, 1994, repayable in 240 monthly installments based on the Price amortization system starting on April 1, 1994, monthly restated monthly by the TJLP and IGP-M plus interest of 5.098% p.a.; and (c) Credit notes held by COPEL Holding, listed below:

         
    Issue    Due    Interest charges     
Credit Notes    Date    date    paid semi-annually    2007 
         
 
Commercial No. 330,600,129    2007    2014    106.5% of average CDI    29,000 
Industrial No. 330,600,132    2007    2014    106.2% of average CDI    231,000 
Industrial No. 330,600,151    2007    2014    106.5% of average CDI    18,000 
Industrial No. 330,600,156    2007    2014    106.5% of average CDI    14,348 
Industrial No. 330,600,157    2007    2014    106.5% of average CDI    37,252 
         
 
                329,600 
         

As a guarantee, Banco do Brasil was authorized to deduct any amounts credited, on any grounds, to the Company's deposit account to cover, in part or in full, the outstanding balance due under the line of credit. It was also irrevocably authorized, regardless of prior notice, to offset the bank’s receivable, which corresponds to the outstanding balance due under the line of credit, with any credits the Company has or accrues at Banco do Brasil.

(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. Repayment 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. COPEL received the first installment to be applied in the Light for All Program, in the amount of R$12,744, referring to contract ECFS-142/06, signed on May 11, 2006 and totaling R$42,480. These resources are originated from the Global Reversion Reserve (RGR), and have a 24-month grace period and shall be repaid in 120 monthly installments with final maturity date on September 30, 2020. The Company’s revenue is pledged as collateral.

(v) Eletrobrás - ELEJOR - For purposes of presentation of the consolidated financial statements, the amount of the shares to be redeemed by ELEJOR, including interest and monetary indexation, has been reclassified from Non controlling shareholders’ interest to loans and financing, under long-term liabilities.

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Table of Contents

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

This balance consists of 59,900 thousand paid in redeemable preferred shares in ELEJOR held by Eletrobrás, in the total amount of R$59,900, which shall be reacquired by the issuer (ELEJOR) in 32 quarterly installments of 1,871,875 shares, beginning in 24 months after the start-of ELEJOR, which took place on August 31, 2006. Thus, the first payment will be made in September 2008, restated according to the IGP-M plus interest of 12% per year. 15% of the Company’s revenue is pledged as collateral

In August 2007, nine installments of 1,871,875 shares were bought back in advance by ELEJOR, for R$20,385, and financial charges of R$18,725 were paid, in a total amount of R$39,110.

(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 interest of 4% per year, and in the event of TJLP exceeds 6% per year, the surplus will be added to the principal. Tranches B and D are subject to UMBNDES rate plus interest of 4% per year. The Company’s revenue is pledged as collateral.

(a) Maturity of loans and financing

    December 31, 2007 
     
 
    Foreign    Local     
    currency    currency    Total 
       
 
2008    30,498    62,186    92,684 
2009    25,817    43,013    68,830 
2010    22,498    41,758    64,256 
2011    13,721    58,229    71,950 
2012    4,940    51,946    56,886 
Thereafter    51,306    522,040    573,346 
       
 
    148,780    779,172    927,952 
       

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Table of Contents

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

17 Debentures

As of December 31, 2007 and 2006, the debentures balances were as follows:

    December 31 
     
 
    2007    2006 
       
 
    Short-term    Long-term    Total    Total 
         
 
Local currency                 
     Second Issue (a)         637,329 
     Third Issue (b)   147,072    133,360    280,432    425,465 
     Fourth Issue (c)   21,527    600,000    621,527    626,290 
     Elejor (c)   3,228    269,314    272,542    278,501 
         
 
    171,827    1,002,674    1,174,501    1,967,585 
         

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, due and settled on March 1, 2007.

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 million issued in 1997. The debentures are non-convertible into shares and remunerated at 115% of the average daily rate of the CDI, with repayment beginning in 2007 and final maturity in 2009. Interest is paid semi-annually, starting on August 1, 2005, to February 1, 2009.

The debentures of the third issue are secured by the bank account at Banco do Brasil S.A. of COPEL Geração S.A., where the resources from the energy sales agreements are deposited.

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 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.

The Company has fully met the contractual conditions.

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

c) Debentures – Fourth Issue

The issuance of 60 thousand debentures constituted the fourth single issuance carried out by the Company on September 1, 2006, in the amount of R$600,000, completed on October, 6, 2006, with full subscription totaling R$607,899, valid for five years as from date of issuance and with final maturity, in sole series, on September 1, 2011. Debentures are single, non-convertible into shares, book-entry, nominative and without guarantee.

The interest on the nominal value of the debentures is 104% of the One-day Interbank Deposit (DI over) rate, "extra group", stated as a percentage per annum, on the basis of 252 business days, disclosed daily by the Clearing House for the Custody and Financial Settlement of Securities (CETIP) (at the DI rate) and calculated on the compound and cumulative interest method on a pro rata temporis basis for the business days elapsed. The remuneration corresponding to the capitalization period will be due and paid on a semi-annual basis, with the first due date on March 1, 2007 and the last on September 1, 2011. The debentures may not be renegotiated.

The funds obtained from the public distribution of debentures will be used to extend debt maturities through the payment of financial obligations, as well as to the injection of cash. The funds obtained from the Issuance shall be used for the financial settlement of 1/3 of the principal value of the debentures of the 3rd issuance of the Issuer, due on February 1, 2007 and settlement of the principal of the debentures of the 2nd issuance of the Issuer, due on March 1, 2007.

The Company is required to comply with certain covenants measured in accordance with Brazilian GAAP: (i) consolidated EBITDA/consolidated financial expenses equal or higher than 2.0. ; (ii) maximum consolidated net debt/consolidated EBITDA of 4.0; and (iii) maximum consolidated net debt/(consolidated net debt plus shareholders’ equity plus non controlling shareholders’ interest ) of 0.42.

The Company has fully met the contractual conditions.

d) 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 repayment of 660 debentures from the first series starts in May 2009 with final maturity in February 2015, and the repayment of 340 debentures from the second series starts in May 2010 with final maturity 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 for: (i) investments in the Fundão-Santa Clara 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; (v) payment of operating expenses inherent to the issuer's business, including the purchase of power to meet supply obligations; and (vi) financing of the social and environmental programs in connection with the investments in the Fundão-Santa Clara Power Complex.

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Table of Contents

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

Maturity of debentures, as of December 31, 2007:

    Total 
   
 
2008    171,827 
2009    156,148 
2010    42,123 
2011    646,037 
2012    46,037 
Thereafter    112,329 
   
 
    1,174,501 
   

18 Taxes on Sales and Others

    December 31 
     
 
    2007    2006 
     
 
ICMS payable    126,322    116,032 
PIS and COFINS payable    36,295    81,345 
INSS included in REFIS, net of payments (i)   35,068    48,254 
Other    27,111    31,783 
     
 
    224,796    277,414 
     

(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$82,540, 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, 2007, the provision recorded totaled R$35,068 including interest and monetary indexation (2006 - R$48,254).

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Table of Contents

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

19 Regulatory Charges

    December 31 
     
    2007    2006 
     
Energy development account - CDE    14,677    13,258 
Global reversal reserve – RGR    5,403    5,306 
Fuel consumption account – CCC    12,642    33,141 
     
    32,722    51,705 
     

20 Research and Development Programs and Energy Efficiency Programs

ANEEL set forth criteria for the application of funds in Energy Efficiency Programs (EEPs) by power distribution concession and permission holders, pursuant to the regulations issued by the regulatory agency. Under the same resolution, the Manual for the Energy Efficiency Program was approved. ANEEL also approved the Manual for Technological Research and Development Programs in the Power Sector. In October 2006, ANEEL established the criteria and procedures for the calculation, application, and collection by concession, permission, and authorization holders of the funds to be assigned to Energy Efficiency and Research and Development projects, to the National Fund for Scientific and Technological Development (FNDCT), and to the Ministry of Mines and Energy (MME), pursuant to Law No. 9,991/2000.

The changes in these balances are shown below:

    December 31 
     
                Execution of     
                programs     
            Monetary    and     
    2006    Additions    restatement    payments    2007 
           
 
Research and development – R&D                     
 
FNCT    22,058    15,994      (17,895)   20,157 
MME    29,581    7,998      (27,292)   10,287 
R&D - projects    59,881    15,994    6,126    (6,108)   75,893 
           
 
    111,520    39,986    6,126    (51,295)   106,337 
           
 
Energy efficiency program - EEP    62,796    16,361    5,139    (5,353)   78,943 
           
 
    174,316    56,347    11,265    (56,648)   185,280 
           

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

    December 31 
     
                Execution of     
                programs     
            Monetary    and     
    2005    Additions    restatement    payments    2006 
           
 
Research and development – R&D                     
 
FNCT    3,239    35,103      (16,284)   22,058 
MME    61    29,498    22        29,581 
R&D - projects    37,115    22,109    4,105    (3,529)   59,881 
           
 
    40,415    86,710    4,127    (19,813)   111,520 
           
 
Energy efficiency program - EEP    55,455    8,583    6,599    (7,841)   62,796 
           
 
    95,870    95,293    10,726    (27,654)   174,316 
           

21 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, maintains 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 decision.

(a).1 Judicial Deposits

    December 31 
     
    Judicial deposits 
    (non-current assets)
   
    2007    2006 
     
Labor contingencies - a(i)   56,656    68,650 
     
Civil         
     Easements, condemnation and property - a(iv)   10,515    7,149 
     Customers - tariff litigation - a(v)   2,508    1,640 
     Civil and environmental - a(vi)   15,269    13,982 
     
    28,292    22,771 
     
Taxes         
     INSS - a(ix)   25,476    47,934 
Other judicial deposits    10,916    1,599 
     
    121,340    140,954 
     

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Table of Contents

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

(a).2 Provision for Contingencies

<
    December 31 
     
     
    Provision for contingencies (non-current liabilities)
     
                 
    2007    2006 
   
        Judicial    Net    Net 
    Contingencies    Deposits    Provision    Provision 
         
Labor contingencies - a(i)   102,474    (22,382)   80,092    77,321 
Regulatory contingencies - a(ii)   2,169      2,169    2,083 
Civil                 
     Suppliers – a(iii)   49,954      49,954    49,074 
     Easements, condemnation and property - a(iv)   123,153      123,153    15,011 
     Customers - tariff litigation - a(v)   6,523    (96)   6,427    11,033 
     Civil and environmental - a(vi)   16,138    (1,263)   14,875    21,621 
         
    195,768    (1,359)   194,409    96,739 
Taxes                 
     Cofins - a(vii)   171,613      171,613   
     PASEP - a(viii)   14,776    (14,558)   218    218 
     Other - a(ix)   92,488    (26,719)   65,769    46,112 
         
    278,877    (41,277)