As filed with the Securities and Exchange Commission on June 30, 2004
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                       -----------------------------------

                                    FORM 20-F

                       -----------------------------------

[ ]  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
     EXCHANGE ACT OF 1934
                                       OR
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
                                       OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                         Commission file number: _______

                ESPIRITO SANTO CENTRAIS ELETRICAS S.A. - ESCELSA
             (Exact name of Registrant as specified in its charter)


                        ENERGY COMPANY OF ESPIRITO SANTO
                 (Translation of Registrant's name into English)


                          Federative Republic of Brazil
                 (Jurisdiction of incorporation or organization)


                            Rua Sete de Setembro, 362
                    Vitoria, Espirito Santo, Brazil 29015-000
                    (Address of principal executive offices)


                       -----------------------------------


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

 Title of each class:                 Name of each exchange on which registered:
 10% Senior Notes due 2007            Luxembourg Stock Exchange

                     --------------------------------------

               Securities registered or to be registered pursuant
                          to Section 12(b) 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 class of capital or
common stock of Espirito Santo Centrais Eletricas S.A. - ESCELSA as of December
31, 2003.

 Common Shares, without par value......................................4,550,883

         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      [ ]

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

                            Item 17  [ ]     Item 18 [X]


================================================================================


<PAGE>


                                TABLE OF CONTENTS


                                                                            Page

                                     PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS..................1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE................................1
ITEM 3. KEY INFORMATION........................................................1
ITEM 4. INFORMATION ON THE COMPANY.............................................9
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS..........................35
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES............................48
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.....................52
ITEM 8. FINANCIAL INFORMATION.................................................53
ITEM 9. THE OFFER AND LISTING.................................................56
ITEM 10. ADDITIONAL INFORMATION...............................................57
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........67
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES...............69

                                     PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES......................69
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
         HOLDERS AND USE OF PROCEEDS..........................................69
ITEM 15. DISCLOSURE CONTROLS AND PROCEDURES...................................69
ITEM 16. [RESERVED]...........................................................70
ITEM 17. FINANCIAL STATEMENTS.................................................71
ITEM 18. FINANCIAL STATEMENTS.................................................72
ITEM 19. EXHIBITS.............................................................72
ANNEX A--GLOSSARY OF TECHNICAL TERMS.........................................A-1


<PAGE>


                                  INTRODUCTION

         All references in this annual report to:

         o    "we," "our" and "us" are to Espirito Santo Centrais Eletricas
              S.A.-- ESCELSA and its consolidated subsidiaries, including
              Empresa Energetica do Mato Grosso do Sul S.A.-- ENERSUL;

         o    "ESCELSA" are to Espirito Santo Centrais Eletricas S.A.-- ESCELSA
              or to our electricity generation, transmission and distribution
              business in the State of Espirito Santo;

         o    "ENERSUL" are to Empresa Energetica de Mato Grosso do Sul S.A.--
              ENERSUL or to our electricity generation and distribution
              business in the State of Mato Grosso do Sul;

         o    "Brazilian corporate law" are to Law No. 6,404 of December 15,
              1976, as amended by Law No. 9,457, of May 5, 1997 and by Law No.
              10,303 of October 31, 2001;

         o    the "Brazilian government" are to the federal government of the
              Federative Republic of Brazil;

         o    "real," "reais" or "R$" are to Brazilian reais, the official
              currency of Brazil;

         o    "U.S.$," "dollars" or "U.S. dollars" are to United States
              dollars;

         o    "Concessions Law" are to certain laws and regulations adopted by
              the Brazilian federal government in 1995 in order to determine
              the bidding procedures for the granting of concessions in the
              electricity sector, namely Law No. 8,987, of February 13, 1995,
              Law No. 9,074, of July 7, 1995, Law No. 9,427, of December 26,
              1996 and Law No. 10,848, of March 15, 2004, as amended;

         o    "Central Bank" are to Banco Central do Brasil, or the Brazilian
              Central Bank; and

         o    the "notes" are to the 10% Senior Notes due 2007 issued by us.

         As used in this annual report, one kilometer equals approximately 0.621
miles.


                           FORWARD-LOOKING STATEMENTS

         This annual report contains forward-looking statements relating to our
business that are based on our current expectations, estimates and projections.
Words such as "may," "will," "continue," "believe," "expect," "intend," "plan,"
"project," "estimate," "anticipate" and similar words or expressions are used to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve risks and uncertainties that are difficult to
predict. Furthermore, certain forward-looking statements are based upon
assumptions as to future events that may not prove to be accurate. Therefore,
actual outcomes and results may differ materially from those expressed or
implied in such forward-looking statements.

         Neither our independent auditors nor any other independent accountants
have compiled, examined or performed any procedures with respect to the
forward-looking financial information contained herein, nor have they expressed
any opinion or any other form of assurance on such information or its
achievability, and they assume no responsibility for, and disclaim any
association with, such forward-looking financial information.

         Factors that could cause our actual results to differ materially
include, but are not limited to:


         o    general economic, political and business conditions;


                                       i


<PAGE>


         o    electricity shortages;

         o    changes in market prices, customer demands and preferences and
              competitive conditions;

         o    potential disruption or interruption of our services;

         o    management's expectations and estimates concerning future
              financial performance, financing plans and the effects of
              competition;

         o    changes in currency exchange rates;

         o    existing and future governmental regulation; and

         o    other risk factors as set forth under "Item 3D. Key Information--
              Risk Factors."

         We undertake no obligation to update publicly or revise any
forward-looking statements because of new information, future events or
otherwise. In light of these risks and uncertainties, the forward-looking
information, events and circumstances discussed in this annual report might not
occur. Our actual results and performance could differ substantially from those
anticipated in our forward-looking statements.


                 PRESENTATION OF FINANCIAL AND OTHER INFORMATION

         At May 31, 2004, the commercial market rate for purchasing U.S. dollars
was R$3.1291 to U.S.$1.00. The commercial selling rate reported by the Central
Bank is used in this annual report rather than the noon buying rate in New York
City as reported by the Federal Reserve Bank of New York because the noon buying
rate was not consistently reported for reais during the periods shown in this
annual report. See "Item 3A. Key Information -- Selected Financial Data --
Exchange Rates" for information regarding exchange rates applicable to the real
since 1998.

         The selected consolidated financial data at December 31, 2003 and 2002
and for each of the years in the three year period ended December 31, 2003 have
been derived from our consolidated financial statements included elsewhere in
this annual report. The selected consolidated financial data as of December 31,
2001, 2000 and 1999 for each of the years in the two year period ended December
31, 2000 have been derived from our consolidated financial statements that are
not included in this annual report.

         We publish our financial statements in Brazil in accordance with
accounting pratctices in Brazil, or Brazilian GAAP, which differs in certain
significant respects from accounting principles generally accepted in the United
States of America, or U.S. GAAP. Note 29 to our financial statements appearing
elsewhere in this annual report describes the principal differences between
Brazilian GAAP and U.S. GAAP as they relate to us, and provides a reconciliation
to U.S. GAAP of net income and shareholders' equity as of December 31, 2003 and
2002 and for each of the years in the three year period ended December 31, 2003.

         This annual report contains our audited consolidated financial
statements at December 31, 2003 and 2002 and for each of the three years in the
period ended December 31, 2003. On November 25, 1997, ESCELSA paid R$825.9
million to acquire a 55.4% controlling interest (which includes 76.5% voting
interest) in ENERSUL. The results of operations of ENERSUL have been included in
the consolidated results of operations of ESCELSA since November 25, 1997. See
Note 3.2(m) to our financial statements.

         Our financial statements and, unless otherwise specified, all financial
information for periods ending on or before December 31, 2001 included in this
annual report have been restated to recognize certain effects of changes in the
purchasing power of the real due to inflation and expressed in constant reais of
December 31, 2001. This restatement was done using the integral restatement
method (correcao integral) required under Brazilian GAAP through December 31,
2001. See Note 2(c) to our financial statements.


                                       ii


<PAGE>


         Under Brazilian GAAP and Brazilian corporate law, the Unidade Fiscal de
Referencia (the Tax Reference Unit, or UFIR) was used as the index in highly
inflationary times for inflation in the preparation of financial statements for
periods through December 31, 1995. However, a Brazilian law enacted in December
1995 abolished the prior Brazilian price-level restatement system effective
January 1, 1996 for corporate law purposes and for reporting by public
companies, although the Comissao de Valores Mobiliarios (the Brazilian
Securities and Exchange Commission, or CVM) allows companies to prepare
financial statements in accordance with the constant currency method. Financial
statements prepared in constant currency were not and are not used for tax and
other statutory purposes. Since the UFIR is no longer updated, the Ibracon -
Instituto dos Auditores Independentes do Brasil, or the Brazilian Institute of
Accountants, recommended that the Indice Geral de Precos do Mercado (the General
Market Price Index, or the IGP-M), as published by Fundacao Getulio Vargas, a
leading independent Brazilian economic research organization, be used. From
January 1, 1996 to December 31, 1997, and January 1, 1999 to December 31, 2000,
we used the IGP-M to prepare our financial statements in constant currency.

         In July 1997, the three-year cumulative inflation rate for Brazil fell
below 100%. However, for accounting purposes, the constant currency method
continued to be applied through December 31, 2000.

         On March 22, 2001, the Conselho Federal de Contabilidade -- CFC
established that, as of January 1, 2001, inflation accounting is no longer
required under Brazilian GAAP, as long as cumulative inflation over a three-year
period remains under 100%. Therefore, since Brazil's cumulative inflation for
the three-year period ended December 31, 2003 has been under 100%, our financial
statements for the year ending December 31, 2003, 2002 and 2001 are expressed in
nominal reais.


                                      iii


<PAGE>


                                     PART I


ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

         Not applicable.

ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE

         Not applicable.

ITEM 3.  KEY INFORMATION

A.       Selected Financial Data

         We maintain our books and records in reais and prepare our financial
statements in accordance with Brazilian GAAP, which differs in certain respects
from U.S. GAAP. Note 29 to our financial statements included elsewhere in this
annual report sets forth a description of the principal differences between
Brazilian GAAP and U.S. GAAP as they relate to us, and provides a reconciliation
to U.S. GAAP of net income and total shareholders' equity as of December 31,
2003 and for each of the three years in the period ended December 31, 2003.

         The selected financial data as of December 31, 2003 and 2002 and for
each of the three years in the period ended December 31, 2003 have been derived
from, and should be read in conjunction with, our consolidated financial
statements and the notes thereto included elsewhere in this annual report. The
selected consolidated financial data at December 31, 2001, 2000 and 1999 and for
each of the two-years in the period ended December 31, 2000 have been derived
from our audited consolidated financial statements and the notes thereto, which
are not included in this annual report.

         The following table presents a summary of our selected financial data
at the dates and for each of the periods indicated. You should read the
following information together with our financial statements and the notes
thereto included elsewhere in this annual report and with "Item 5. Operating and
Financial Review and Prospects."

<TABLE>
<CAPTION>

                                                            At and for the Year Ended December 31,
                                             ---------------------------------------------------------------------
                                                   2003           2002        2001         2000            1999
                                             ---------------------------------------------------------------------
                                                      (in thousands of reais, except per share amounts)
<S>                                          <C>              <C>         <C>            <C>            <C>
Statement of Operations Data:
Operating revenues:
   Electricity sales to final consumers.....     1,919,531      1,635,340   1,617,617    1,313,126      1,237,819
   Electricity sales to distributors........        30,501         40,357      83,519       42,723         39,072
   Other revenues...........................        90,559         47,581      29,646       32,944         22,149
                                             ---------------------------------------------------------------------
     Total..................................     2,040,591      1,723,278   1,730,782    1,388,793      1,299,040
Value-added taxes on sales..................     (497,979)      (424,140)   (345,297)    (330,229)      (308,558)
                                             ---------------------------------------------------------------------
Net operating revenues(1)...................     1,542,612      1,299,138   1,385,485    1,058,564        990,482
Operating expenses:
   Electricity purchased for resale.........     (791,271)      (709,027)   (675,189)    (500,139)      (501,102)
   Depreciation and amortization............     (157,176)      (173,165)   (149,138)    (140,906)      (129,353)
   Personnel................................     (126,863)      (111,354)   (108,271)    (115,014)      (130,265)
   Regulatory charges.......................     (118,286)      (106,184)    (97,377)     (99,856)       (63,947)
   Materials................................      (20,543)       (16,353)    (20,964)     (17,364)       (22,102)
   Third-party services.....................      (66,741)       (60,415)    (53,640)     (55,834)       (54,091)
   Other expenses...........................      (84,838)       (58,368)    (80,985)     (20,309)       (56,230)
                                                              ----------- -----------    ---------       ---------
     Total..................................    (1,365,718    (1,234,866) (1,185,564)    (951,551)      (957,090)
                                             ---------------------------------------------------------------------
Operating income............................       176,864         64,272     199,921      107,013         33,392
Financial income (loss), net (2)............       137,366      (670,419)   (235,831)     (23,499)      (119,345)
Non-operating expenses, net.................     (153,052)       (74,965)    (24,384)     (13,325)       (14,339)
Income tax and social contribution..........     (115,739)        103,366    (11,012)     (14,228)         69,503
</TABLE>


                                       1
<PAGE>


<TABLE>
<CAPTION>


                                                            At and for the Year Ended December 31,
                                             ---------------------------------------------------------------------
                                                   2003           2002        2001         2000            1999
                                             ---------------------------------------------------------------------
                                                      (in thousands of reais, except per share amounts)
<S>                                          <C>              <C>         <C>            <C>            <C>
Minority participation in (income) losses.         (1,540)         38,833    (10,794)      (3,314)         13,509
                                                 ---------      ---------    --------      -------       ---------
Net income (loss)...........................        43,929      (538,913)    (60,076)       52,647       (17,280)
                                                    ======      =========    ========      =======       ========
Net income (loss) per share(3)..............          9.65       (118.42)     (13.20)      (11.57)         (3.80)

Income (loss) before extraordinary items
and cumulative effect of change in
accounting principles
   Under U.S. GAAP..........................       176,041      (458,796)   (122,169)       12,181       (47,621)

   Extraordinary item, net of tax effect
     of R$5,085 in 1999 under U.S. GAAP.....             -              -           -            -         10,325

Cumulative effect of change in accounting
principle under US GAAP(4)..................             -      (409,953)           -            -              -
                                                 ---------      ---------    --------      -------       ---------
Net income (loss) under U.S. GAAP                  176,041      (868,389)   (122,169)       12,181       (37,296)
Basic and diluted earnings (loss) per share
   under U.S. GAAP(3).......................         38,68       (190.82)     (26.85)         2.68         (8.20)
Income (loss) per share under U.S. GAAP
   before extraordinary item and cumulative
   effect of change in accounting principle
   per share................................         38,68       (100.82)     (26.85)         2.68        (10.46)
Extraordinary item per share................             -              -           -            -           2.26
Cumulative effect of change in accounting
principle per share(4)......................             -        (90.00)           -            -              -

Balance Sheet Data (under Brazilian GAAP):
Current assets..............................       811,882        903,447     731,597      586,659        595,728
Property, plant and equipment (net).........     1,940,019      1,967,475   2,031,235    2,022,502      2,247,062
Total assets................................     4,018,663      4,269,510   3,976,868    3,457,352      3,668,146
Total loans and financing...................     2,188,235      2,560,843   1,744,878    1,421,585      1,459,083
Shareholders' equity........................       557,691        555,782   1,093,825    1,171,979      1,168,472
Number of shares outstanding at year end....     4,550,883      4,550,833   4,550,833    4,550,833      4,550,833
Shareholders' equity under
   U.S. GAAP (As restated in 2000, 1999 and
   1998)....................................       245,354         10,953     923,903    1,059,313      1,047,132
Dividends per thousand share under
Brazilian GAAP..............................          9,23              -           -            -              -
Dividends per share in U.S.$ under
   Brazilian GAAP(5)........................    U.S.$ 3.19              -           -    U.S.$1.45              -

Other Financial Data:
Capital expenditures........................       161,684        187,970     181,065      180,919        214,388
Net cash provided by (used in)(6):
   Operating activities.....................       102,110       (18,558)      54,398      171,051          4,517
   Investing activities.....................      (28,565)      (183,271)   (179,284)    (131,494)          2,939
   Financing activities.....................      (78,088)        219,200     121,777     (42,326)        (8,248)

Operating Data:
Electricity sold (Gwh)(7)
   Industrial...............................         3,399          3,961       3,669        3,979          3,530
   Residential..............................         2,067          1,996       2,055        2,363          2,308
   Commercial...............................         1,301          1,367       1,303        1,403          1,286
     Others.................................         1,948          1,783       1,749        1,871          1,858
                                             ---------------------------------------------------------------------
   Total....................................         8,715          9,107       8,776        9,616          8,982
   Number of customers (thousands)..........         1,582          1,551       1,495        1,406          1,344
Total energy losses (in percentages)........         12.2%          12.8%       11.1%        11.5%          11.6%
Transformer capacity (MVA)..................         4,205          4,297       4,092        4,016          3,893
Transmission lines (in kilometers)..........         8,198         10,196      10,094        9,981          9,751
Distribution lines (in kilometers)..........        74,949         71,948      67,697       57,549         56,437
Number of employees.........................         2,245          2,354       2,466        2,551          2,628
</TABLE>


                                       2
<PAGE>


-----------------
(1)  Net operating revenues represent operating revenues after value-added taxes
     on sales. See "Item 5. Operating and Financial Review and Prospects --
     Operating Results."
(2)  Financial income (expense) represents income earned on investments, net of
     interest, exchange and monetary variation on loans and financing.
(3)  Earnings (loss) per share are computed under Brazilian GAAP based on the
     shares outstanding at the end of each year. Under U.S. GAAP, earnings
     (loss) per share are calculated based on weighted average shares
     outstanding. As there were no changes in shares outstanding during the
     years ended December 31, 2003, 2002, 2001, 2000 and 1999, the weighted
     average shares outstanding was the same as year-end amounts.
(4)  Escelsa adopted SFAS No. 142, "Goodwill and Other Intangible Assets," as of
     January 1, 2002. The adoption of SFAS No. 142 required the Company to
     perform an initial impairment assessment of the goodwill associated with
     the acquisition of Enersul as of January 1, 2002. As a result of this
     assessment, a transitional impairment adjustment of R$409,953 has been
     reflected as cumulative effect of a change in accounting principle.
(5)  Translated from nominal reais into U.S. dollars at the commercial selling
     rates in effect on the dates that distributions were declared during that
     period.
(6)  Net cash calculated under Brazilian GAAP.
(7)  The electricity sold figures include the energy consumed by ESCELSA and
     ENERSUL, in the amount of, respectively, 11 GWh and 6 GWh.



Exchange Rates

         There are two principal legal foreign exchange markets in Brazil:

               o    the commercial rate exchange market; and

               o    the floating rate exchange market.

         Most trade and financial foreign-exchange transactions are carried out
on the commercial rate exchange market. These transactions include the purchase
or sale of shares or payment of dividends or interest with respect to shares.
Foreign currencies may only be purchased in the commercial exchange market
through a Brazilian bank authorized to operate in these markets. In both
markets, rates are freely negotiated but may be influenced by Central Bank
intervention. In 1999, the Central Bank placed the commercial exchange rate and
the floating rate exchange market under identical operational limits, which led
to a convergence in the pricing and liquidity of both markets. Since February
1,1999, the floating market rate has been substantially the same as the
commercial market rate, and the system relying on the foreign exchange rate band
has been eliminated. However, there is no guarantee that these rates will
continue to be substantially the same in the future. Despite the convergence in
pricing and liquidity of both markets, each market continues to be regulated
separately.

         Since 1999, the Central Bank has allowed the real/U.S. dollar exchange
rate to float freely, and during that period, the real/U.S. dollar exchange rate
has fluctuated considerably. In the past, the Central Bank 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 - Risk Relating to Brazil."

         The following tables set forth the commercial selling rate, expressed
in reais per U.S. dollar (R$/US$), for the periods indicated.

<TABLE>
<CAPTION>

                                                           Exchange Rate of Brazilian Currency per US$1.00
Year                                                   Low             High         Average (1)        Year-End
----                                                   ---             ----         -----------        --------
<S>                                                   <C>             <C>             <C>               <C>
1999..........................................        1.2078          2.1647          1.8133            1.7890
2000..........................................        1.7234          1.9847          1.8278            1.9554
2001..........................................        1.9357          2.8007          2.3519            2.3204
2002..........................................        2.2709          3.9552          2.9309            3.5333
2003..........................................        2.8219          3.9930          3.0964            2.8892
</TABLE>


------------------


                                       3
<PAGE>


Source:  Central Bank

(1)  Represents the average of the exchange rates on the last day of each month
     during the relevant period.

<TABLE>
<CAPTION>

Month                                                     Exchange Rate of Brazilian Currency per US$1.00
-----                                                     -----------------------------------------------
                                                                                              Low              High
                                                                                              ---              ----
<S>                                                                                        <C>               <C>
December 2003....................................................................          2.8420            2.9434
January 2004.....................................................................          2.8022            2.9409
February 2004....................................................................          2.9042            2.9878
March 2004.......................................................................          2.8752            2.9410
April 2004.......................................................................          2.8743            2.9522
May 2004.........................................................................          2.8653            3.0277
</TABLE>


------------------
Source:  Central Bank


On June 25, the commercial market rate for purchasing U.S. dollars was R$3.1096
to US$1.00.

B.       Capitalization and Indebtedness

         Not Applicable.

C.       Reasons for the Offer and Use of Proceeds

         Not Applicable.

D.       Risk Factors

         You should consider carefully all the information set forth herein and,
in particular, the special factors applicable to an investment in Brazil and to
an investment in us. In general, investing in the securities of issuers in
emerging market countries such as Brazil involves a higher degree of risk than
investing in the securities of U.S. issuers.

Risks Relating to Our Notes and Us

         The tariffs that we charge for sales of electricity to final customers
are controlled by ANEEL, which is the Brazilian energy sector regulatory agency,
and our operating revenues and our ability to make interest or principal
payments on the notes could be adversely affected if ANEEL's tariff-setting
decisions are not favorable to us.

         Like all utility companies in Brazil, we are subject to extensive
regulation of our tariffs. The tariffs that we charge for electricity to final
customers are determined pursuant to our concession contract with ANEEL and in
accordance with ANEEL's regulatory decision-making powers. Our concession
contract establishes that our tariffs are subject to three types of adjustments.
We may periodically apply for the first type of adjustment, the reajuste, which
offsets the effects of inflation on our tariffs. The second type of adjustment,
the revisao extraordinaria, permits us to request revisions to our tariff rates
from time to time, to pass through significant changes in our cost structure
that we do not control, such as (i) the cost of electricity we purchase, (ii)
charges for the use of transmission and distribution facilities and (iii) taxes,
except for income taxes. In addition, ANEEL has the right, every three years, to
adjust our periodic tariff (revisao periodica). Our concession contract does not
specify the factors on which this periodic tariff review will be based.

         ESCELSA's periodic tariff was increased by 19.89% by ANEEL in August
2001 on a provisional basis, since, up to that date, ANEEL had not regulated the
valuation criteria for determining each distribution companies' asset base.
Later, in 2002, ANEEL regulated the valuation criteria for determining a
distribution company's asset base and set forth that such criteria had to be
used for defining ESCELSA's 2001 tariff review. In accordance with that
criteria, the definitive results of ESCELSA's 2001 tariff review will be
determined upon the final evaluation of


                                       4
<PAGE>


ESCELSA's asset base as of April, 2001 which, although already completed by
ESCELSA, has not been approved yet by ANEEL. Therefore, the results of ESCELSA's
periodic tariff review in 2001 remain provisional. However, since ESCELSA's
periodic tariff review scheduled for 2004 should be affected by the value of our
asset base as of 2001, ANEEL is expected to determine the results of both
periodic reviews at that time. There can be no assurance that, upon ANEEL's
review of the final value of ESCELSA's asset base as of 2001 and as of 2004,
ANEEL will not revise the provisional results of ESCELSA's 2001 periodic tariff
review, nor can there be any assurance that ANEEL will establish the new tariff
review in a manner that will not have a material adverse effect on the financial
condition and business operations of ESCELSA.

         Unlike the most recent concession contracts for distribution companies
such as ENERSUL, ESCELSA's concession contract does not contain a formula to
determine the annual adjustment; therefore such tariff is entirely at the
discretion of ANEEL.

         Since the privatization of ESCELSA, most of the other distribution
companies, including ENERSUL, have been granted concession contracts with
built-in tariff provisions. Under these concession contracts, the annual
adjustment, or reajuste, is determined by a tariff adjustment formula. Although
ESCELSA's concession contract provides for tariff adjustments, it does not
stipulate a formula by which tariff adjustments will occur. ANEEL has adjusted
ESCELSA's tariffs annually in a manner consistent with the terms of later
concession contracts. In 2004, ESCELSA will not undergo an annual adjustment
since it is subject to the periodic tariff review. Although we have no reason to
believe that ESCELSA will be treated differently in the future than the other
privatized distribution companies, ANEEL has substantial discretion, which is
not limited by the terms of ESCELSA's concession contract, to set ESCELSA's
tariffs. As such, there can be no assurance that ESCELSA's tariffs will continue
to be set at rates that are consistent with the terms of the concession
contracts of other distribution companies or will otherwise be set at levels
that will not adversely affect our operating revenues and our ability to make
interest or principal payments on the notes.

         ESCELSA generates a significant portion of its operating revenues from
large industrial customers who may seek alternative energy suppliers upon the
expiration of their contracts with ESCELSA.

         A significant portion of the energy sold by ESCELSA is purchased by
large industrial customers engaged in the mining, steel, chemical, non-metallic
mineral and textile industries. For the year ended December 31, 2003, ESCELSA's
10 largest customers accounted for approximately 33% its revenues and
approximately 20% of the total quantity of electricity it sold. Such contracts
will expire as follows: one in 2004, four in 2005, four in 2007 and one in 2008.
As these customers are considered to be "free consumers" under Brazil's
regulatory initiatives designed to foster competition in the energy sector, they
will be entitled to seek alternative energy suppliers when their contracts with
ESCELSA expire. There can be no assurance that, upon the expiration of their
contracts with ESCELSA, these large industrial customers will be willing to
renew and continue their business with ESCELSA. The loss of large industrial
customers could have a material adverse effect on ESCELSA's operating revenues
and financial condition.

         Initiatives aimed at increasing competition from independent power
producers and self-generators may adversely affect our customer base and
revenues.

         We hold concessions to distribute electricity in 70 of the 78
municipalities in the State of Espirito Santo and in 72 of the 77 municipalities
in the State of Mato Grosso do Sul. Within our concession area we do not face
competition in the distribution of low voltage electric energy to residential,
commercial and industrial customers. However, other electric energy suppliers
are now permitted to compete with us in offering electricity to certain
unregulated consumers that qualify as "free consumers," namely 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 new customers that have entered the
market since July 1995, demand equal to or greater than 3MW that is supplied at
any voltage level. Although, by law, ANEEL has the power to decrease the demand
and voltage level threshold for being a free consumer, it has not done so yet.
While all of our customers meeting the criteria for being considered free
consumers have entered into agreements with us for the supply of energy that
will not expire until 2005, there can be no assurance that upon the expiration
of those contracts, these customers will not consider alternative suppliers of
electrical energy. During 2003, we had 10 customers meet the criteria of "free
consumer," which accounted for approximately 33% of our revenue and
approximately 20% of the total quantity of electricity sold by us. A loss of


                                       5
<PAGE>


business to other energy suppliers serving free consumers located in our
concession area and the implementation of additional regulations aimed at
fostering competition in the energy sector could adversely affect our market
share and operating revenues.

         Electric energy shortages may adversely affect our business and results
of operations.

         Hydroelectric power is a major source of energy for Brazilian industry.
In the recent past, low levels of investment and below average rainfall have
resulted in low levels of critical hydroelectric capacity in Brazil's southeast,
central west and northeast regions and the construction of gas-fired thermal
generation plants has been delayed due to regulatory and other issues. On May
15, 2001, the federal government created the Camara de Gestao da Crise de
Energia Eletrica, or GCE, to regulate and administer a program for the reduction
of energy consumption to avoid interruptions in electricity supply. This
program, known as the Rationing Program, established limits for energy
consumption for industrial, commercial and residential consumers, which ranged
from a 15% to a 25% reduction in energy consumption. The Rationing Program
affected all consumers, including our large industrial and commercial consumers,
and it was terminated in March 2002. However, we cannot assure you that there
will not be another energy shortage and Rationing Program in the future and that
our results of operations will not be adversely affected in that event.

         The Brazilian government has mandated the establishment of a universal
program that requires distribution companies to extend electric service to all
consumers requesting electric service and failure to comply with the
requirements of the program would result in a reduction of our tariffs.

         In April 2003, the Brazilian government began the implementation of a
universal program aimed at ensuring that the entire population has access to
electricity. Under the program, electricity distribution companies will bear the
initial cost of extending energy to unreached consumers. Presently, it is
unclear how, when and to what extent the distribution companies will be
reimbursed for the capital expenditures they must make in order to promote
universal access to energy. See "Item 4. Information on the Company --
Regulation on the Brazilian Sector -- Universal Goals."

         It is also unclear how many consumers would be eligible to make
requests under the universal program within ESCELSA and ENERSUL's market. If we
fail to comply with the target goals set for us under the terms of the universal
program within the time period required, our tariffs would be reduced until we
are compliant with those goals. We are currently evaluating how the requirements
of the universal program will affect us and we cannot assure you that the
universal program will not require us to make capital expenditures that we were
not planning to make.

         The Brazilian government has recently passed laws regarding a new model
for the electricity sector (the "New Model for the Electricity Sector"), aimed
at regulating the supply of electricity in the country. Such laws include Law
No. 10, 848, which established new restrictions on distribution companies'
ability to engage in generation or transmission activities, and will impose
certain changes to our capital and operational structure. Such restrictions may
affect our financial conditions and business operations, as well as our ability
to duly comply with some obligations provided for in the financial instruments
to which we are a party. Additionally, there can be no assurances that once
these laws are duly codified into regulations, that these laws will not
negatively affect our financial condition and business operations.

         On March 15, 2004, new laws were issued in connection with the
regulation of the electricity sector, including Law No. 10,848. The laws detail
the roll out of the New Model for the Electricity Sector, which aim to assure
adequate supply of electric energy, promote low tariffs and ensure availability
of electricity to all consumers. Such laws have yet to be regulated by the
Federal Government. Until such laws are regulated, whether by a presidential
decree or by ANEEL's resolutions, the aspects of their implementation are
uncertain. Therefore, there can be no assurance as to whether, how nor to what
extent, the New Model for the Electricity Sector, once fully regulated by the
Federal Government and effective, can adversely affect the financial condition
and business operations of ESCELSA and ENERSUL.

         Furthermore, Law 10,848 prohibits distribution concessionaires such as
ESCELSA and ENERSUL, from developing activities of generation or transmission of
electric energy, as well as from holding, either directly or


                                       6
<PAGE>


indirectly, interests in any other entity. Companies must comply with these
restrictions within eighteen months after the passage of such legislation on
March 15, 2004. However, this deadline can be extended by ANEEL under
exceptional circumstances. We are currently evaluating whether such prohibitions
will affect us, and if so, to what extent. In the future, we may be required to
implement a corporate reorganization in order to transfer to other companies of
our group, all of our generation and transmission assets, as well as the equity
interest currently held by ESCELSA in ENERSUL. This corporate reorganization may
affect our financial condition and business operations, as well as our ability
to duly comply with some obligations provided for in the financial instruments
to which we are a party. For more information on these new restrictions, see
"Item 4. Information on the Company -- Regulation of the Brazilian Electricity
Sector -- Changes in the Vertical Structure of the Companies of the Power Sector
Agents and Restrictions on Their Activities."

Risks Relating to Brazil

         The Brazilian government has exercised, and continues to exercise,
significant influence over the Brazilian economy. Brazilian political and
economic conditions have a direct impact on our business and the market price of
our notes.

         The Brazilian government frequently intervenes in the Brazilian economy
and occasionally makes drastic changes in policy. The Brazilian government's
actions to control inflation and effect other policies have often involved wage
and price controls, currency devaluations, capital controls and limits on
imports, among other things. See "Item 5. Operating and Financial Review and
Prospects -- Brazilian Economic Environment." Our business, financial condition
and results of operations may be adversely affected by changes in policy
involving tariffs, exchange controls and other matters, as well as other factors
outside of our control such as:

         o    currency fluctuations;

         o    interest rates;

         o    tax policy;

         o    energy shortages and rationing;

         o    inflation;

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

         At the end of 2002, Brazil elected a new president from the Workers
Party, Luiz Inacio Lula da Silva, known as Lula. In the period leading up to,
and subsequent to, his election there was substantial uncertainty relating to
the policies that the new government would pursue, including the potential
implementation of macroeconomic policies that differed significantly from those
of the prior administration. This uncertainty resulted in a loss of confidence
in the Brazilian capital markets, including the steady devaluation of the real
against the U.S. dollar in that period. While the new government has not
departed in any material way from previous policy, there is no certainty whether
these economic policies will continue and whether they will be effective. We
cannot predict what future fiscal, monetary, social security and other policies
will be adopted by President Lula's administration and whether these policies
will result in adverse consequences to the economy and to our business,
operations, financial conditions and the market price of our notes.

         Inflation, and certain governmental measures to curb inflation, may
contribute significantly to economic uncertainty in Brazil and to heighten
volatility in the Brazilian securities markets.

         Since the real's introduction in July 1994, Brazil's inflation rate has
been substantially lower than in previous periods. Inflation itself has, and
certain governmental measures to curb inflation have, in the past had
significant negative effects on the Brazilian economy. Inflation, actions taken
to curb inflation and public speculation about possible future actions have also
contributed to economic uncertainty in Brazil and to heightened volatility in
the Brazilian securities market. Our cash operating expenses are substantially
all in reais and tend to


                                       7
<PAGE>


increase with Brazilian inflation because cost of wages and other operating
expenses generally increase accordingly to consumers' prices. High inflation
generally leads to higher domestic interest rates, and, as a result, our cost of
real-denominated debt may increase. High inflation may adversely affect our
results of operations in other ways. To the extent that the rate of inflation
exceeds the increases in rates that we are allowed to charge our customers, our
operating margins would be adversely affected. In addition, if the rate of
inflation in Brazil is lower than the rate of appreciation of the U.S. dollar
and other foreign currencies against the real, our cost in real terms of paying
interest on our foreign currency denominated debt, including the notes, would be
higher. If the Brazilian government increases interest rates in order to curb
any possible inflation, the increased interest rates could negatively affect
credit purchases by our customers.

         If Brazil experiences substantial inflation again in the future, our
operating expenses and borrowing costs may increase, our profit margins may
decrease and, if investor confidence lags, the price of our notes may fall. If
economic difficulties result from or occur at the same time as inflation, then
our revenues may also be negatively affected.

         Fluctuations in the value of the real against the value of the U.S.
dollar may result in uncertainty in the Brazilian economy and the Brazilian
securities market and could have a material adverse effect on our ability to
make payments of interest and principal on the notes.

         Our ability to meet our U.S. dollar-denominated obligations is affected
by changes in the relative value of the real against the U.S. dollar. As
substantially all of our revenues are real-based, we are required to purchase
U.S. dollars in foreign exchange markets with reais to meet our U.S.
dollar-denominated obligations. Our principal U.S. dollar-denominated
obligations are our interest and principal payments on the notes and payments
for power purchased from ITAIPU (approximately 29% and 25% of the total power
purchased by ESCELSA and ENERSUL in 2003, respectively).

         Devaluations can create additional inflationary pressures in Brazil by
generally increasing the price of imported products and requiring recessionary
government policies to curb aggregate demand. On the other hand, appreciation of
the real against the U.S. dollar may lead to a deterioration of the current
account and the balance of payments, as well as dampen export-driven growth. The
potential impact of the floating exchange rate and of measures of the Brazilian
government aimed at stabilizing the real is uncertain. See "Item 5. Operating
and Financial Review and Prospects -- Brazilian Economic Environment."

         Unless we successfully hedge devaluation risk, any decrease in the
value of the real relative to the U.S. dollar could have a material adverse
effect on our ability to make payments of interest and principal on the notes.
At December 31, 2003, we had approximately US$ 66 million interest rate hedges
in place in connection with the notes.

         In addition, we believe that our concession contracts give us the right
to pass through to our tariffs any increase in the cost of electricity we
purchase from ITAIPU. Currently, any increase in the cost of power purchased
from ITAIPU is passed through to our tariffs pursuant to the CVA tracking
account mechanism (see "Item 4. Information on The Company -- Regulation of The
Brazilian Electric Sector -- Tariffs and Sectorial Charges" for detailed
information regarding the CVA tracking account mechanism). However, if CVA
regulations are modified, we cannot assure we will be able to continue to pass
through the increase of such cost to our tariffs. If we are not permitted to
pass through these increases, any decrease in the value of the real relative to
the U.S. dollar could have a material adverse effect on our financial condition
and results of operations.

         Developments and the perception of risk in other countries, especially
emerging market countries, may adversely affect the market price of Brazilian
securities, including our notes.

         The market value of securities of Brazilian companies is affected to
varying degrees by economic and market conditions in other countries, including
other Latin American and emerging market countries. 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, including
ours. This could adversely affect the trading price of our notes and could also
make it


                                       8
<PAGE>


more difficult for us to access the capital markets and finance our operations
in the future on acceptable terms or at all.

         Restrictions on the movement of capital out of Brazil may hinder the
ability of holders of the notes to receive payments on the notes.

         The Brazilian government may impose temporary restrictions on the
conversion of Brazilian currency into foreign currencies and on the remittance
to foreign investors of proceeds from their investments in Brazil. Brazilian law
permits the government to impose these restrictions whenever there is a serious
imbalance in Brazil's balance of payments or there are reasons to foresee a
serious imbalance. The Brazilian government imposed remittance restrictions for
approximately six months in 1989 and early 1990.

         The Central Bank has authorized the issuance of the notes and issued a
certificate of foreign capital, registration authorizing us to make any payment
under the notes requiring the conversion of reais into U.S. dollars including
any payment made upon enforcement of a judgment against us. However, additional
Central Bank authorization is needed for the payment of the notes upon
acceleration or for certain late payments of the notes generally. These exchange
control regulations generally have not affected repayment obligations of
securities of a type similar to the notes. There can, however, be no assurance
that the Brazilian government will not in the future impose more restrictive
foreign exchange regulations that would have the effect of preventing or
restricting our access to foreign currency that we may require to meet our
foreign currency obligations under foreign currency denominated liabilities,
including the notes.

ITEM 4.  INFORMATION ON THE COMPANY

A.       History and Development of the Company

         Espirito Santo Centrais Eletricas S.A. -- ESCELSA, a Brazilian
corporation (sociedade anonima) with unlimited duration, was incorporated under
the laws of Brazil on July 1, 1968, as a mixed-capital corporation (sociedade de
economia mista) with limited liability. As a Brazilian corporation, we operate
generally under the provisions of the Brazilian corporate law. Our core business
is the planning, construction and operation of systems for electricity
generation, transmission, distribution and the sale of electric energy in the
State of Espirito Santo and in the State of Mato Grosso do Sul through our
subsidiary ENERSUL (see below). As a public concessionaire of electric utility
services, we are subject to regulations established by the Agencia Nacional de
Energia Eletrica, or ANEEL, the Brazilian regulatory agency responsible for
regulating the electric energy sector.

         At the time of our incorporation, we were controlled by Centrais
Eletricas Brasileiras S.A. - ELETROBRAS, a company controlled by the Brazilian
government. In 1995, the Brazilian government began to liberalize, privatize and
deregulate the Brazilian electric energy sector, almost all of which was
government-owned. In July 1995, we became the first government-owned electricity
company to be privatized. In our privatization auction, 50% plus one share of
our common shares were acquired by Iven S.A. and GTD Participacoes S.A., with
ELETROBRAS remaining as minority shareholder until 1997. On January 19, 1996, we
became a public company, registered with the CVM, and presently our shares are
traded on the Sao Paulo Stock Exchange; however, they do not have a significant
public float.

         In 1997, we acquired a 55.4% controlling interest (which includes a
76.50% voting interest) in ENERSUL, an electricity distribution company
privatized by the state government of Mato Grosso do Sul.

         Our registered office is at Rua Sete de Setembro, 362, Centro,
29015-000 Vitoria, Espirito Santo, Brazil and our telephone number is (55-27)
3321-9000. Our agent for service of process in the United States is CT
Corporation, 111 Eighth Avenue, New York, NY 10011.

Capital Expenditures

         We recorded capital expenditures in 2003, 2002 and 2001 of R$161.7
million, R$188.0 million and R$181.1 million, respectively. Our investments in
distribution and sub-transmission lines totaled R$92.1 million in


                                       9
<PAGE>


2003, as compared to R$99.0 million in 2002 and R$122.8 million in 2001.
Investments in expansion and modernization of our generation facilities totaled
R$26.1 million in 2003, as compared to R$33.2 million in 2002 and R$5.6 million
in 2001.

         We have ongoing capital expenditures related to the expansion and
modernization of our transmission, distribution and existing generation
facilities. We expect to invest approximately R$119.4 million for the expansion
and modernization of our distribution lines in 2004, most of which will be
financed with the cash from our operations.

B.       Business Overview

General

         We engage primarily in the transmission and distribution of electricity
in the States of Espirito Santo and Mato Grosso do Sul in Brazil. We provided
approximately 95% and 94% of the electricity distributed in 2003 in the States
of Espirito Santo and Mato Grosso do Sul, respectively. We had net operating
revenues (see "Item 3. Key Information -- Selected Financial Data" for the
definition of net operating revenues) of R$1,542.6, R$1,299.1 million and
R$1,385.5 million in 2003, 2002 and 2001, and a net income of 43.9 million, a
net loss of R$538.9 million and a net loss of R$60.1 million in 2003, 2002 and
2001, respectively. At December 31, 2003, we had assets totaling R$4.1 billion,
and concessions for 11 hydroelectric generation plants in Espirito Santo (no
concessions are required under our concessions contract for Enersul), 8,198
kilometers of transmission lines and sub-transmission lines, 6,552 MVA
transformer capacity and 74,949 kilometers of distribution lines.

ESCELSA

         ESCELSA engages primarily in the transmission and distribution of
electricity in the State of Espirito Santo. ESCELSA distributes electricity to
70 of the 78 municipalities that comprise the entire State of Espirito Santo,
covering an area of approximately 41,372 square kilometers, or 90% of the
geographic area of the State of Espirito Santo. In 2003, ESCELSA supplied 6,898
GWh of electricity and, as of December 31, 2003, had 968,165 customers
representing nearly 3 million people or approximately 94% of the total
population of the State of Espirito Santo. In 2003, industrial, residential,
commercial, rural and other customers, including other distribution companies,
represented 47%, 20%, 13%, 7% and 8%, respectively, of ESCELSA's electricity
distribution sales by volume of electricity sold. As of December 31, 2003,
ESCELSA's 10 largest customers accounted for approximately 33% of our revenues
and approximately 20% of the total amount of electricity sold by ESCELSA.
ESCELSA's primary load center is greater Vitoria, the capital of the State of
Espirito Santo, which represented 26.8% of ESCELSA's entire market in 2003.

         ESCELSA is also engaged in the generation of electricity. All of its
generation capacity is hydroelectric. ESCELSA has concessions for 11
hydroelectric power plants, of which 7 are in operation, and in 2003 they
generated approximately 922 GWh or 11.3% of its total energy needs. In 2003,
ESCELSA purchased a total of 5,976 GWh of electricity, of which 3,680 GWh were
purchased under a long-term contract with Furnas Centrais Eletricas S.A., or
FURNAS, including 1,796 GWh produced by ITAIPU, and 500 GWh were purchased from
other suppliers.

Transmission and Distribution

         General. ESCELSA transmits and distributes electricity, either
generated by it or, more commonly, purchased primarily from FURNAS and ITAIPU,
to a geographic area encompassing 90% of the State of Espirito Santo. At
December 31, 2003, ESCELSA had 46,397 kilometers of power lines, composed of
transmission and distribution lines.

         The following table provides certain information regarding ESCELSA's
transmission and distribution system, as of the dates presented (except for
energy loss data, which is presented for the year ended on that date):


                                       10
<PAGE>


<TABLE>
<CAPTION>

                                                                        December 31,
                                                      -----------------------------------------------
                                                          2003              2002             2001
                                                      ------------      ------------     ------------
         <S>                                            <C>               <C>              <C>
         Kilometers of transmission and
           subtransmission lines
            230 kV..................................       140               140              140
            138 kV..................................     1,502             1,502            1,502
            69 kV...................................       960               945              945
            34.5 kV.................................       413               413              413
         Kilometers of overhead distribution lines
            (11.4 kV to 13.8 kV)(1).................    43,382            42,493           41,699
         Transformer capacity (MVA)
            Transmission............................     2,635             2,638            2,682
            Distribution............................     1,535             1,478            1,408
         Total energy losses (in percentage)(2).....      12.2              11.4             10.4
</TABLE>

--------------

(1)  In 2003, this number was readjusted due to an external audit of our
     electric network registry, which indicated a discrepancy between the number
     of overhead distribution lines recorded on our registry and the actual
     number of overhead distribution lines.
(2)  Technical energy losses from ESCELSA's lines and equipment occur in the
     ordinary course of transmission and distribution of electric energy;
     commercial losses occur as a result of illegal connections.


         Transmission and Subtransmission. At December 31, 2003, ESCELSA's
transmission and sub-transmission system was comprised of approximately 3,015 km
of transmission lines, primarily 138 kV and 69 kV. In addition, ESCELSA had 69
transformer substations, where electric current is transformed into lower
voltages for subsequent distribution, with total transforming capacity of 2,635
MVA. The transmission system is connected to ESCELSA's main load center and to
various connecting points with FURNAS. Of ESCELSA's industrial and commercial
customers, 20 have 69 kV or 138 kV high-voltage electrical energy supplied
through direct connections to ESCELSA's transmission system. Such customers
represented approximately 61% of ESCELSA's total volume of electrical power
sales during 2003, and approximately 44% of ESCELSA's total revenues during that
same period.

         Distribution. At December 31, 2003, ESCELSA's distribution system was
composed of urban and rural distribution networks, which include electric poles
carrying 43,382 km of distribution lines and 38,842 distribution transformers,
with an installed transforming capacity of 1,535 MVA. ESCELSA's distribution
system consists of a widespread network of predominantly overhead lines and
substations having successively lower voltage ranges (13.8 kV and below).
Electricity is supplied to larger industrial customers at a higher voltage and
is supplied to smaller industrial, residential and commercial customers at lower
voltage ranges (13.8 kV and below).

         System Performance. ESCELSA's energy losses increased to approximately
12.2% during the twelve-month period ended December 31, 2003, compared to
approximately 11.4% during the twelve-month period ended December 31, 2002. We
estimate that 44% of ESCELSA's energy loss in 2003 occurred as a result of
illegal connections. The remaining 56% of ESCELSA's energy loss resulted from
standard losses that occur during the ordinary course of energy transmission and
distribution. The energy losses for all distribution companies in Brazil
averaged 17.9%, as calculated by Associacao Brasileira de Distribuidoras de
Energia Eletrica, or the Brazilian Association of Distributors of Electric
Energy in 2003.

         Scheduled interruptions in ESCELSA's services to customers represented
31.0% of all interruptions during 2003. Unscheduled interruptions due to
accidental causes, including lightning strikes, fire, wind and corrosion,
represented 69.0% of all interruptions. In 2003, we invested an additional
R$43.5 million to renovate and improve ESCELSA's transmission and distribution
system, and we expect to invest an additional R$49.9 million for such purposes
in 2004.

         The average duration of interruptions during 2003 was 10.73 hours per
customer, representing a decrease of approximately 26% from 14.53 hours per
customer during 2002. The frequency of interruptions for 2003 was 8.80
interruptions per customer, representing a decrease of approximately 19.6% from
10.94 interruptions per customer during 2002. The average time to respond to
interruptions in customer service increased from 112 minutes for 2002 to 118
minutes for 2003. The number of customer complaints increased by 5.4% in 2003.
The increase of the average time to respond to interruptions and to complaints
was primarily due to the rollout of a new operating


                                       11
<PAGE>


system, Sistema de Operacao de Distribuicao ("SOD"). Under SOD, customer
complaints were only relayed to the customer services center after 3 minutes. In
addition, unfavorable weather conditions in many areas throughout our region,
augmented our response time.

Customers, Analysis of Demand and Tariffs

         Customers. Customers of ESCELSA are classified into five principal
categories: industrial (comprising manufacturing and processing activities),
residential, commercial (including service-oriented businesses, universities and
hospitals), rural and others (primarily other distribution companies and public
and municipal services, such as street lighting). In 2003, industrial,
residential, commercial, rural and other customers represented 47%, 20%, 13%, 7%
and 8%, respectively, of ESCELSA's electricity sales by volume of electricity
sold.

         The principal industries supplied by ESCELSA during 2003 and the
percentage of the total power supplied to all customers, including residential
and commercial customers, were as follows: mining 18%, chemical 6%, steel 6%,
non-metallic mineral 2% and textile industry 1%. In 2003, the 10 largest
customers accounted for approximately 33% of ESCELSA's energy sold by volume.

         Analysis of Demand. The following table sets forth certain information
regarding ESCELSA's customers, energy sales and revenues for the periods
indicated.

<TABLE>
<CAPTION>

                                   Number of
                                    Customers                               Year Ended December 31,
                                  at December       ---------------------------------------------------------------------
                                    31, 2003                2003                     2002                    2001
                                  ------------      ---------------------    --------------------     -------------------
                                                                          (in thousands of reais)
                                                      GWh          R$          GWh        R$            GWh         R$
<S>                                    <C>             <C>      <C>           <C>       <C>             <C>       <C>
Industrial.......................       10,633         2,745      403,215     3,290       406,411       3,051     328,501
Residential(1)...................      764,264         1,195      393,566     1,134       333,358       1,186     298,568
Commercial.......................       85,465           754      220,518       839       194,397         780     150,449
Rural............................       98,947           385       60,958       315        45,282         333      38,479
Other and miscellaneous..........        8,704           492       97,559       459        77,792         430      60,532
SCELSA's own consumption.........          150            11          n/a        10           n/a          10         n/a
Other concessionaires............            2           318       26,194       318        20,839         314      18,861
                                  ------------      --------    ---------    ------     ---------     -------     -------
    Total........................      968,165         5,900    1,202,010     6,365     1,078,079       6,104     895,390
                                  ============      ========    =========    ======     =========     =======     =======
</TABLE>

--------------

(1)  The revenues originated from residential consumers do not include the
     unbilled revenues and the revenues resulting from the government subsidies
     given in connection with services provided to low-income customers.


         For the three-year period ended December 31, 2003, the compound annual
performance rate in the volume of electricity sold by ESCELSA to industrial,
residential and commercial customers was (16.5)%, 5.4%, and (10.1)%,
respectively. During that same period, the compound annual performance rate in
the volume of electricity sold by all Brazilian electricity companies to
industrial, residential and commercial customers was 4.9%, 0.4% and 3.6%,
respectively. The decreases in our compound annual performance rate are due to
the fact that some of our commercial and industrial customers became free
consumers and therefore terminated their respective contracts with us. However,
our compound annual performance rate in connection with our residential
customers was higher than the Brazilian market average.

         Tariffs. ESCELSA's customers are classified according to the voltage
level at which energy is supplied to them. High-voltage customers are classified
as "Group A" customers and low-voltage customers are classified as "Group B"
customers. In addition, Group B customers are further classified as residential,
rural, others and public lighting. According to these groupings, each customer
falls within a certain tariff classification defined by law, although some
flexibility is available according to the nature of each customer's demand.


                                       12
<PAGE>


         In addition to customer-based classifications, ESCELSA's tariffs are
determined on the basis of seasonal variation and time of day. The seasonal
variation and time-of-day criteria are used for the establishment of two
separate tariff systems: (i) the conventional tariff system and (ii) the
hour-seasonal tariff system.

         Conventional Tariff System -- The conventional tariff system does not
take into account any seasonal or time-of-day variations, and is applied both to
Group A and to Group B customers. Group A customers pay for the electricity that
they purchase on the basis of both a "capacity charge" and an "energy charge";
whereas Group B customers, who use the conventional tariff system only, pay just
for energy actually consumed. The capacity charge, expressed in reais per kW, is
based on the higher of (i) contracted firm capacity and (ii) power capacity
actually used. The energy charge, expressed in reais per kWh, is based on the
amount of electricity actually consumed.

         Hour-Seasonal Tariff System -- The hour-seasonal tariff system takes
into account both seasonal and time-of-day variations, and establishes different
rates for different times of day or different seasons in the year. Seasonal
variation refers to the dry season (May through November) and the rainy season
(December through April). Tariffs are higher during the dry season, when
hydroelectric generation capacity tends to be lower. Time-of-day variations
refer to peak hours of demand (any three consecutive hours between 5:00 p.m. and
10:00 p.m., as determined by the concessionaire, except Saturdays, Sundays or
holidays determined by federal law) and to off-peak hours of demand (all other
times). Electricity rates are higher during peak hours of demand. This system
only applies to Group A customers with contracted demand equal to or in excess
of 300 kW. Group A customers that are billed pursuant to the hour-seasonal
tariff system pay for both a capacity charge and an energy charge, which vary
depending on the voltage at which the energy is delivered to such customers.

         The following table details the breakdown of ESCELSA's Group A and
Group B final customers and sets forth the average tariff and certain other
information for 2003:

<TABLE>
<CAPTION>

                                          Average                                  Net              Number of
Group                                    Tariff(1)            Volume             Revenue             Customers
-----                                ------------------    -----------     --------------------- ----------------
                                          (R$/MWh)             (%)                 (%)
<S>                                        <C>                 <C>                 <C>                   <C>
Group A:
  A2-138 kV.....................            96,98               36                  21                        17
  A3-69 kV......................           128,44                -                   0                         5
  A3a-44 kV.....................           123,34                3                   2                        13
  A4 13.8 to 2.3 kV.............           160,64               20                  20                     2.872
                                     ------------------    -----------     --------------------- ----------------
   Subtotal.....................           120,47               59                  43                     2.907
Group B:
  B1-Residential................           252,97               21                  32                   764.178
  B2-Rural......................           158,91                6                   6                    98.687
  B3-Others.....................           261,37               10                  16                   102.172
  B4-Public lighting............           132,93                4                   3                   219
                                     ------------------    -----------     --------------------- ----------------
  Subtotal......................           230,41               41                  57                   965.256
                                     ------------------    -----------     --------------------- ----------------
Total...........................           166,22              100                 100                   968.163
                                     ==================   ============     ===================== ================
</TABLE>
--------------

(1)  The average tariff was calculated net of ICMS effects.

         The tariffs charged by ESCELSA for sales of electricity to final
customers are determined pursuant to the concession contract between ESCELSA and
ANEEL. ESCELSA's concession contract establishes a tariff mechanism with three
types of adjustments:

         o    an annual adjustment to be made in August, which offsets the
              effects of inflation on ESCELSA's tariffs (reajuste);

         o    extraordinary adjustments, which permit ESCELSA to request
              revisions to its tariff rates from time to time, generally to
              pass through significant changes in its cost structure that it
              does not control,


                                       13
<PAGE>


              particularly the cost of electricity it purchases, changes in the
              use of transmission and distribution facilities and taxes, except
              for income taxes (revisao extraordinaria); and

         o    a three-year periodic tariff review by ANEEL (revisao periodica).

         ESCELSA's periodic tariff was increased by 19.89% by ANEEL in August
2001 on a provisional basis, since, up to that date, ANEEL had not regulated the
valuation criteria for determining each distribution companies' asset base.
Later, in 2002, ANEEL regulated the valuation criteria for determining a
distribution company's asset base and set forth that such criteria had to be
used for defining ESCELSA's 2001 tariff review. In accordance with that
criteria, the definitive results of ESCELSA's 2001 tariff review will be
determined upon the final evaluation of ESCELSA's asset base as of April, 2001
which, although already completed by ESCELSA, has not been approved yet by
ANEEL. Therefore, the results of ESCELSA's periodic tariff review in 2001 remain
provisional. However, since ESCELSA's periodic tariff review scheduled for 2004
should be affected by the value of our asset base as of 2001, ANEEL is expected
to determine the results of both periodic reviews at that time. There can be no
assurance that, upon ANEEL's review of the final value of ESCELSA's asset base
as of 2001 and as of 2004, ANEEL will not revise the provisional results of
ESCELSA's 2001 periodic tariff review, nor can there be any assurance that ANEEL
will establish the new tariff review in a manner that will not have a material
adverse effect on the financial condition and business operations of ESCELSA.

         On December 21, 2001, in order to allow for the recovery from the
consumption losses incurred as a result of the Rationing Program, ANEEL
authorized a 2.9% extraordinary tariff increase for residential, rural and
public lighting customers, with the exception of low income customers, and 7.9%
for all other customer segments. The tariff adjustment is to be applied over a
maximum period of 69 months or such other period as determined by ANEEL,
starting in December 2001 until ESCELSA's stated losses under the Rationing
Program are recovered.

         On August 7, 2003, ANEEL established a 17.30% tariff increase for
ESCELSA's customers, of which approximately 8.96% related to costs not managed
by ESCELSA, such as energy purchased from FURNAS and ITAIPU, as well as RGR,
CCC, or transmission costs. The remaining 8.34% represented costs managed by
ESCELSA that were adjusted to the IGP-M inflation index, partially offset by a
1.89% discount applied to the account for the pass through of productivity gains
related to the growth of ESCELSA's operation through increase in the number of
consumers or in power consumption (the so-called "X factor", that was defined by
ANEEL in 2001 at the time of ESCELSA's second periodic tariff review).

         Since the privatization of ESCELSA, most of the other distribution
companies, including ENERSUL, have been given new concession contracts with
tariff provisions. Under these concession contracts, the annual adjustment is
determined by a tariff adjustment formula. The formula is adjusted annually. See
"Regulation of the Brazilian Electricity Sector - Tariffs and Sectorial
Charges."

         Although ESCELSA's concession contract does not contain the
readjustment formula provided for in the newer concession contracts, in
connection with the second periodic tariff review of ESCELSA's tariffs on August
7, 2001, ANEEL issued Resolution No. 321, in which it defined the mechanism for
adjustments to ESCELSA's tariffs for 2002 and 2003 by adopting the same tariff
adjustment formula contained in the concession contracts of the more recently
privatized companies.

         The more recent concession contracts also state that ANEEL's periodic
tariff review will take into account efficiency gains achieved by the
distribution company, compare the distribution company's tariff with tariffs of
foreign companies and similar domestic companies, and take into account changes
to the cost and market structures of the distribution company. The X factor is a
result of the assessment by the regulator and each utility company of the
appropriate sharing of estimated cost reductions that each concessionaire
expects to achieve by increasing its operations until the next tariff periodic
review. As a result, a distribution company may not be able to retain all of the
efficiencies and savings achieved by it on a going-forward basis. While the
revision based on the X factor is entirely within ANEEL's discretion, ANEEL has
recently set a formula for calculating the X factor, which comprises the sum of
three elements: (1) a discounted cash flow formula, which is based upon
projections of macroeconomic indicators (such as GDP and inflation), assets in
service, efficiency costs, investments and depreciation, number of consumers and
consumption in MWh; (2) a consumer satisfaction survey; and (3) the


                                       14
<PAGE>


variation of labor remuneration, which reflects increases in labor remuneration,
included in Parcel B. In accordance with recent regulation issued by ANEEL, the
value of the X factor will vary in all annual tariff adjustments. On August 7,
2001, ANEEL set the X factor at 1.89% per year, which represents the percentage
discount to be applied to the IGP-M index, which is used to adjust our managed
cost compensation for the 2002 and 2003 tariff adjustments. In August of 2003,
ESCELSA's annual tariffs by class were A2 - 20.85%; A3 - 19.80% ; A4 - 17.44%
and B - 15.38%. The average tariff for all classes was 17.30%.

         Commercial Arrangements. ESCELSA has entered into supply contracts with
Group A customers, which are based on general terms and conditions set forth in
ruling (Portaria) No. 466 of November 12, 1997. These contracts contain minimum
demand clauses that require the customer to pay for either contracted demand or,
if greater, actual capacity used. These contracts have durations of three or
five years, with automatic renewals for equal durations, subject to notice 12
and 18 months, respectively, prior to expiration of the term. Other contracts
have three-year terms, with perpetual rolling one-year renewals. Each such
contract is subject to termination on approximately 18 months notice (if the
contract is not terminated, it automatically extends for one additional year).
During 2003, two of out largest consumers, Companhia Vale do Rio Doce and
Samarco Mineracao S.A., terminated their respective supply contracts and no
longer purchase energy from us. We are not aware of any other large customer
that plans to contract directly with generators other than us or to
self-generate electricity, but there can be no assurance that these contracts
will be renewed in the future, particularly in light of potential increased
competition by generators for free consumers. If any significant customers
choose to become a free consumer and therefore terminate their contracts,
ESCELSA would be entitled, pursuant to Law No. 9,648 of May 27, 1998, to reduce
its purchases from FURNAS by a corresponding volume of electricity. Such
reduction is subject to ANEEL approval. Customers with whom ESCELSA maintained
such contracts during 2003 represented approximately 54.2% of its sales of
electricity (measured in MWh) and 36.4% of its revenues during the period. We
believe that these contracts provide us with a relatively stable source of
revenue.

         On November 29, 2000, ANEEL issued Resolution No. 456, which updated
and consolidated general supply terms and conditions. In the absence of an
agreement between the parties on the duration of supply contracts, the term is
12 months or, if there is a need for capital expenditures by the concessionaire,
24 months. The contract may be automatically renewed for the same period of time
in successive terms, with prior notice of at least 180 days before the
contract's expiration date, subject to refusal of the customer to renew.

         Billing Procedures. The procedure for billing and payment for
electricity supplied is determined by customer category. ESCELSA's industrial
customers are billed on the day of meter reading, with payment required within
five days of the invoice date. ESCELSA's residential customers are billed within
two days of meter reading, with payment required within five days after the
invoice date. Meter readings take place on a monthly basis. Bills are prepared
from meter readings or on the basis of estimated usage. The billing dates of
ESCELSA's customers are staggered throughout each calendar month. ESCELSA may
suspend delivery of electricity to customers if the customer's bill is overdue
and 15 days have passed since notification was sent to the customer. However,
since the services provided by electric distribution companies are considered
essential services, there are precedent court decisions that consider the
suspension of delivery of electricity to be unlawful pursuant to the Brazilian
Consumer Defense Code. Therefore, we may not be able to suspend our services if
a court order prohibits us from doing so. In the event of late payment of
electricity bills, a fine of 2% is charged on the total invoice overdue, as well
as an interest charge of 1% per month. In addition, if such event has resulted
in a service disconnection, a service reconnection fee is also charged.

Purchases of Electricity

         ESCELSA's electricity purchases from FURNAS and ITAIPU represented
approximately 92% of its total volume of purchases in 2003. In 2003, ESCELSA
purchased 3,680 GWh of electricity from FURNAS, 1,796 GWh from ITAIPU (and
billed by FURNAS), and 500 GWh from other suppliers. ESCELSA is one of the 15
electricity companies in the South, Southeast and Midwest regions of Brazil that
are required by law to purchase from ITAIPU a portion of ITAIPU's energy
purchased by Brazil pursuant to a treaty with Paraguay dated April 26, 1973,
based on their respective market shares of the South, Southeast and Midwest
regions taken as a whole. By law, ESCELSA is obligated to purchase approximately
2.5% of the energy purchased by Brazil from ITAIPU until 2023. To defray the
costs associated with financing the ITAIPU project, the concessionaires in
Brazil's South-Southeast-Midwest interconnected power system, including ESCELSA,
are required to purchase ITAIPU's energy at U.S. dollar-


                                       15
<PAGE>


indexed rates fixed to cover operating expenses and payments of principal and
interest on such financing and the costs of transmitting power to their
concession area. As a result, the average rates for the purchase of power
produced by ITAIPU have been above the national average for the bulk supply of
power. As ESCELSA's power needs increase, power supplied by ITAIPU is expected
to represent a smaller percentage of power purchased by ESCELSA. See "--
Regulation of the Brazilian Electricity Sector."

         The following table shows ESCELSA's cost basis for energy purchased
from ITAIPU, FURNAS and other suppliers in 2003:



<PAGE>


                                                           Average
                                             -----------------------------------
                                                           (R$/MWh)
ITAIPU..................................                    106,39
FURNAS..................................                    60,93
Other...................................                    99,25
                                             -----------------------------------
Weighted Average........................                    89,69
                                            ====================================


         The following table shows the total electricity (i) generated or
purchased by ESCELSA and (ii) sold to final customers and other concessionaires
during the periods indicated:

<TABLE>
<CAPTION>

                                                                                       Year Ended December 31,
                                                                                ----------------------------------
Suppliers                                                                          2003          2002       2001
---------                                                                       ----------    ----------  --------
                                                                                               (in GWh)
<S>                                                                               <C>            <C>       <C>
Electricity generated by ESCELSA.......................................             922          1,05        837
Electricity purchased from ITAIPU......................................           1,796          1,74      1,741
Electricity purchased from FURNAS......................................           3,680          5,39      5,386
Electricity purchased from others......................................             500            52        188
Electricity delivered to final consumers...............................           5,582          6,04      5,790
Electricity delivered to other concessionaires.........................             318           318        314
Losses.................................................................             998           838        723
</TABLE>


         In October 1999, ESCELSA entered into a use of transmission system
agreement with the Operador Nacional do Sistema Eletrico (National Electric
System Operator), or ONS, which is the entity that coordinates and controls the
electric energy generation and transmission in the interconnected system, for
the transmission of electricity and connection to the interconnected power
system. ESCELSA and FURNAS are currently operating under an initial contract for
the purchase of electricity that was executed in 1999. See "-- Regulation of the
Brazilian Electricity Sector." The initial contract with FURNAS sets forth
ESCELSA's obligations to purchase specified amounts of electricity generated by
FURNAS, at tariffs set by ANEEL. Under Law No. 9,648 of May 27, 1998, beginning
in 2003, the energy and capacity amounts covered by the initial contracts, like
the one executed between ESCELSA and FURNAS, should be reduced at a rate of 25%
per year until all power purchases and sales are fully released, which would
occur at end of 2006. Despite that, in accordance with Law No. 10,438 of April
26, 2002, FURNAS and ESCELSA may amend their initial contract to avoid the 25%
yearly reductions that started to take place in 2003. Under the New Model for
the Electricity Sector, amendments to the Initial Contracts were made an
exception to the rule that restricts amendments on power purchase agreements
executed before March 15, 2004. See "Item 4. Information on the Company--
Regulation on the Brazilian Sector."

         ESCELSA's electric generation capacity does not affect its commitment
to purchase energy generated by ITAIPU or by FURNAS. ESCELSA has the right to
proportionately reduce purchases from FURNAS if a free consumer terminates its
contract with ESCELSA. Such reduction is subject to ANEEL's approval.

         The tariffs for electricity generated by ITAIPU are established in
accordance with a treaty between Brazil and Paraguay dated April 26, 1973 and
are denominated in U.S. dollars. The tariffs for electricity generated by FURNAS
are established pursuant to regulations implemented by ANEEL and are denominated
in reais. ESCELSA's purchases of electricity generated by ITAIPU are paid for on
the basis of a capacity charge as well as a charge for transmission. ESCELSA's
purchases of electricity generated by FURNAS and other concessionaires are


                                       16
<PAGE>


paid for on the basis of both a capacity charge and an energy charge. See "--
Regulation of the Brazilian Electricity Sector -- Tariffs." Capacity charges of
ITAIPU are indexed to U.S. dollars and converted on the date the payment is made
in reais at the exchange rate published by the Central Bank on the previous day.
The devaluation of Brazil's currency relative to prevailing rates of inflation
affects the price of power generated by ITAIPU, which constituted approximately
29% of the total power purchased by ESCELSA in 2003. We believe that our
concession contract give us the right to pass through to our tariffs any
increase in cost of electricity we purchase from ITAIPU. Currently, any increase
in the cost of power purchased from ITAIPU is passed through to our tariffs
pursuant to the CVA tracking account mechanism. See "Item 4. Information on The
Company - Regulation of the Brazilian Electric Sector - Tariffs and Sectorial
Charges" for detailed information regarding the CVA tracking account mechanism.
However, if CVA regulations are modified, we cannot assure we will be able to
continue to pass through the increase of such cost to our tariffs. If we are not
permitted to pass through these increases, any decrease in the value of the real
relative to the U.S. dollar could have a material adverse effect on our
financial condition and results of operations. See "-- Regulation of the
Brazilian Electricity Sector -- Tariffs and Sectorial Charges -- Parcel A."

Generation

         ESCELSA holds the concession for eleven hydroelectric power plants in
the State of Espirito Santo, of which seven are in operation. The total
installed capacity of the hydroelectric plants is approximately 190 MW. ESCELSA
generated 922 GWh in 2003. The following table sets forth certain information
concerning ESCELSA's power plants.

<TABLE>
<CAPTION>

                                                                  Installed                2003
         Hydroelectric Plants                                     Capacity                Output)
         --------------------                                ------------------       ---------------
                                                                    (MW)                   (GWh)
         <S>                                                        <C>                    <C>
         Mascarenhas....................................            131.0                  745.1
         Suica..........................................             30.6                  109.4
         Rio Bonito.....................................             13.8                   51.8
         Jucu...........................................              4.4                   14.6
         Others.........................................              9.9                    1.1
                 Total..................................            189.7                  922.0
</TABLE>



ENERSUL

         ENERSUL engages primarily in the transmission and distribution of
electricity in the State of Mato Grosso do Sul. ENERSUL provided approximately
94% of the electricity distributed in the State of Mato Grosso do Sul in 2003.
ENERSUL distributes electricity to 72 of the 77 municipalities that comprise the
entire State of Mato Grosso do Sul, covering an area of approximately 329,270
square kilometers, or 92% of the geographic area of the State of Mato Grosso do
Sul. In 2003, ENERSUL supplied 3,350 GWh of electricity and, as of December 31,
2003, it had 613,829 customers, representing nearly 2 million people, or
approximately 95% of the total population of the State of Mato Grosso do Sul. In
2003, residential, industrial, commercial, rural and other customers, including
other distribution companies, represented 31%, 23%, 19%, 10% and 15%,
respectively, of ENERSUL's electricity distribution sales by volume of
electricity sold. ENERSUL's four largest customers accounted for 6.8% of the
volume of ENERSUL's electricity distribution sales in 2003. ENERSUL's primary
load center is Campo Grande, the capital of the State of Mato Grosso do Sul,
which represented approximately 35% of ENERSUL's entire market in 2003.

         ENERSUL is also engaged in the generation of electricity. Its
generation capacity is both hydroelectric and thermal. ENERSUL operates seven
power plants, which in 2003 generated approximately 225 GWh, or 4% of its total
energy needs. In 2003, ENERSUL purchased a total of 3,141 GWh of electricity, of
which 1,853 GWh were purchased under a long-term contract with Tractebel Energia
S.A., or TRACTEBEL, including 732 GWh produced by ITAIPU, and 556 GWh from other
distribution companies.

         Currently, Magistra Participacoes S.A., a wholly owned subsidiary of
ESCELSA, owns 87.9% and 50.6% of the common and preferred shares, respectively,
of ENERSUL.


                                       17
<PAGE>


Transmission and Distribution

         General. ENERSUL transmits and distributes electricity, purchased
primarily from TRACTEBEL and ITAIPU, to a geographic area encompassing 92% of
the State of Mato Grosso do Sul. At December 31, 2003, ENERSUL had 36,750
kilometers of power lines, composed of sub-transmission and distribution lines.

         The following table provides certain information concerning ENERSUL's
transmission and distribution system as of the dates presented (except for
energy loss data, which is presented for the year ended on that date):

<TABLE>
<CAPTION>

                                                                         December 31,
                                                           -------------------------------------------
                                                               2003           2002           2001
                                                           ------------- -------------- --------------
<S>                                                          <C>            <C>            <C>
Kilometers of transmission and sub-transmission lines:
     138 kV(1)........................................        2,859          2,865          2,749
     69 kV............................................          427            423            486
     34.5 kV(1).......................................        1,897          3,908          3,859
Kilometers of overhead distribution lines:
     (11.4 kV to 22 kV)...............................       31,567         29,455         26,028
Transformer capacity (MVA):
Transmission..........................................        1,570          1,615          1,490
Distribution..........................................          812            769            711
Total energy losses (in percentage)(2)................         15.7           15.8           12.7

</TABLE>

-------------

(1)  In 2003, these numbers were readjusted due to an external audit of our
     electric network registry, which indicated a discrepancy between the number
     of 138 kV and 34.5 kV transmission and sub-transmission lines recorded on
     our registry and the actual number of such lines.

(2)  Technical energy losses from ENERSUL's lines and equipment occur in the
     ordinary course of transmission and distribution of electric energy;
     commercial losses occur as a result of illegal connections.


         Transmission. At December 31, 2003, ENERSUL's transmission system was
comprised of 5,183 km of transmission lines, primarily 138 kV, 69 kV and 34.5
Kv. In addition, ENERSUL had 94 transformer substations, where electric current
is transformed into lower voltages for subsequent distribution, with total
transforming capacity of 1,570 MVA. The transmission system is connected to
ENERSUL's main load center, and to various connecting points with TRACTEBEL. Of
ENERSUL's industrial and commercial customers, two have 69 kV and four have 138
kV high-voltage electrical energy supplied through direct connections to
ENERSUL's transmission system. Such customers represented approximately 7.3% of
ENERSUL's total volume of electrical power sales during 2003, and approximately
2.8% of ENERSUL's total revenues during the year.

         Distribution. At December 31, 2003, ENERSUL's distribution system was
composed of urban and rural distribution networks, which include electric poles
carrying 31,567 km of distribution lines and 21,109 distribution transformers,
with an installed transforming capacity of 812 MVA. ENERSUL's distribution
system consists of a widespread network of predominantly overhead lines and
substations having successively lower voltage ranges (13.8 kV and below).
Electricity is supplied to larger industrial customers at a higher voltage and
is supplied to smaller industrial, residential and commercial customers at lower
voltage ranges (13.8 kV and below).

Customers, Analysis of Demand and Tariffs

         Customers. ENERSUL's customers are classified into five principal
categories: residential, industrial (comprising manufacturing and processing
activities), commercial (including service-oriented businesses, universities and
hospitals), rural and others (primarily other distribution companies and public
and municipal services, such as street lighting). In 2003, residential,
industrial, commercial, rural and other customers represented 31%, 23%, 19%, 10%
and 15%, respectively, of ENERSUL's electricity sales by volume of electricity
sold. In 2003, the four largest customers accounted for approximately 6.8% of
ENERSUL's energy sold by volume.

         Analysis of Demand. The following table sets forth certain information
regarding ENERSUL's customers, energy sales and revenues for the periods
indicated.


                                       18
<PAGE>

<TABLE>
<CAPTION>

                                         Number of                    Year ended December 31,
                                         Customers    --------------------------------------------------------
                                        at December         2003              2002                2001
                                          31, 2003    ------------------ ------------------- -----------------
                                        -----------      GWh      R$       GWh        R$      GWh       R$
<S>                                        <C>          <C>     <C>       <C>       <C>      <C>      <C>
Residential(1)......................       503,544        872   267,348     862     214,509    869    190,345
Industrial..........................         4,451        654   115,523     671      90,784    618     71,891
Commercial..........................        53,279        547   156,202     527     120,303    523    100,511
Rural...............................        45,839        291    49,072     276      38,856    251     29,985
Other and miscellaneous.............         6,532        415    74,826     385      59,518    380     50,701
ENERSUL's own consumption...........           184          6       n/a       7         n/a      6        n/a
Wholesale...........................             3         30     4,750      26       3,884     25      3,539
                                        ----------    -------  --------  ------    --------  -----    --------
Total...............................       613,832      2,815   667,721   2,754     527,854  2,672    446,972
</TABLE>

--------------

(1)  The revenues originated from residential consumers do not include the
     unbilled revenues and the revenues resulting from the government subsidies
     given in connection with services provided to low-income customers.

         For the three-year period ended December 31, 2003, the average compound
annual growth rate in the volume of electricity sold by ENERSUL to residential,
industrial and commercial customers was 1.1%, 2.5% and 3.7%, respectively.
During that same period, the compound annual growth rate in the volume of
electricity sold by all Brazilian electricity companies to residential,
industrial and commercial customers was 0.4%, 4.9% and 3.6%, respectively.

         Tariffs. ENERSUL's customers are classified according to the voltage
level at which energy is supplied to them. In addition to customer-based
classifications, ENERSUL's tariffs are determined on the basis of two factors:
(i) seasonal variation and (ii) time of day. For a more detailed description of
these tariff schemes, see "-- ESCELSA -- Customers, Analysis of Demand and
Tariffs -- Tariffs."

         The following table sets forth the breakdown of ENERSUL's Group A and
Group B final customers and sets forth the average tariff and certain other
information for the year ended December 31, 2003.

<TABLE>
<CAPTION>

                                         Average(1)                                  Net             Number of
Group                                      Tariff             Volume               Revenue           Customers
-----                                ------------------  -----------------  ---------------------  --------------
                                          (R$/MWh)              (%)                  (%)
<S>                                        <C>                 <C>                   <C>                 <C>
Group A:
  A2-138 kV.....................            79.91               7                    3                         4
  A3-69 kV......................            76.15               -                    -                         2
  A3a-34.5 kV...................           154.40               7                    5                       274
  A4-13.8 to 22 kV..............           168.98               26                   21                    1,823
                                     ------------------  -----------------  ---------------------  --------------
     Subtotal...................           150.05               40                   30                    2,103
Group B:
  B1-Residential................           251.99               31                   39                  503,503
  B2-Rural......................           168.64               7                    6                    45,618
  B3-Others.....................           278.49               16                   22                   62,475
  B4-Public lighting............           139.51               5                    3                       103
                                     ------------------  -----------------  ---------------------  --------------
      Subtotal..................           239.90               60                   70                  611,726
                                     ------------------  -----------------  ---------------------  --------------
      Total.....................           203.77              100                  100                  613,829
                                     ==================  =================  =====================  ==============
</TABLE>

--------------

(1)  The average tariff was calculated net of ICMS effects.



         The tariffs charged by ENERSUL for sales of electricity to final
customers are determined pursuant to ENERSUL's concession contract, which
establishes a tariff mechanism comprised of three types of adjustments:

         o    an annual adjustment made in April, which offsets the effects of
              inflation on ENERSUL's tariffs (reajuste);

         o    extraordinary adjustments, which permit ENERSUL to request
              revisions to its tariff rates from time to time, generally to
              pass through significant changes in its cost structure that it
              does not control,


                                       19
<PAGE>


              particularly the cost of electricity it purchases, changes in the
              use of transmission and distribution facilities and any taxes,
              except for income taxes (revisao extraordinaria); and

         o    a five-year periodic tariff review by ANEEL (revisao periodica).

         On December 21, 2001, in order to compensate for losses related to the
Rationing Program, ANEEL authorized a 2.9% extraordinary tariff increase for
residential and low-tension rural customers and 7.9% for all other segments,
except for low-income customers. The tariff adjustment is to be applied over a
maximum period of 73 months or such other period as determined by ANEEL starting
in December 2001 until ENERSUL's stated losses under the Rationing Program are
recovered.

         The first five-year periodic revision of ENERSUL's tariffs occurred on
April 7, 2003, pursuant to which ANEEL determined that the average rate that
ENERSUL charges its customers will be increased by 42.26%. Later, on April 7,
2004, due to ANEEL's change in methodology for conducting the periodic tariff
review, ENERSUL's tariff was increased to 43.59%. Of this 43.59% increase,
32.47% corresponded to the percentage increase that would have resulted from an
annual tariff readjustment instead of the five-year tariff review method. The
remaining 11.12% was allocated to annual tariff adjustments for 2004 through
2007, in addition to Parcel B cost adjustments in annual installments of R$28.3
million. On that same occasion, ANEEL changed the previously established "X
factor" applicable to ENERSUL from 2.35% to 1.35%, which was applied to reduce
the IGP-M index in ENERSUL's tariff adjustment in 2004. In accordance with
recent regulation issued by ANEEL, the value of the X factor will vary in all
annual tariff adjustments. Nevertheless, as in the case of ESCELSA, certain
factors used to reset ENERSUL's periodic tariffs are provisional only and, once
definitively set, may result in an adjustment to ENERSUL's periodic tariff that
is adverse to ENERSUL. A decision is still pending on the administrative appeal
submitted by ENERSUL against the provisional results of its 2003 tariff review.
See "Regulation of the Brazilian Electricity Sector -- periodic tariff review."

         The annual tariff adjustment will be applied according to customer
classification as set forth in the table below:


                           Segment Tariff Increase
                           -----------------------
           High Tension                                      Percentage
           ------------                                      ----------
               A2 (between 88 and 138kV) .................    24.80%
               A3 (69kV)..................................    22.76%
               A4 (between 2.3 and 25 kV).................    18.13%
           Low Tension
           -----------
               B (below 2.3kV)............................    16.08%


         The Joint Ordinance dated April 4, 2003 from the Ministries of Economy
and Mines and Energy determined that the balance of the Parcel "A" Cost
Variations Compensation Account - CVA, which is the cost of items not covered by
tariff adjustments, from March 8, 2002 through March 7, 2003, required a tariff
increase of 4.38%, and that such tariff would be applied over a period of 24
months commencing in April 2004.

         Commercial Arrangements. ENERSUL has entered into supply contracts,
which are based on general terms and conditions set forth in Portaria No. 466 of
November 12, 1997, with 800 hour-seasonal customers. These contracts contain
minimum demand clauses that require the customer to pay for either contracted
demand or, if greater, actual capacity used. The contracts have durations of
three years, with no automatic renewals. Tariffs are set pursuant to ENERSUL's
concession contract with ANEEL. In 2003, two of ENERSUL's largest customers,
Mineracao Urucum S.A. and Cia Cimento Portland Itau, did not renew their
respective supply contracts, because such customers fulfilled the requirements
of "free consumers" and chose to generate their own electricity or buy it from
another source. Currently, there is no indication that any customers will refuse
to renew their supply contracts in 2004, but there can be no assurance that this
will happen in the future, particularly in light of the prospect of increased
competition from IPPs for industrial customers. If any significant customer
chooses to become a free consumer and therefore terminates its contract, ENERSUL
would be entitled, pursuant to Law No. 9,648 of 1998, to


                                       20
<PAGE>


reduce its purchases from TRACTEBEL by a corresponding volume of electricity.
Such reduction is subject to ANEEL's approval. Customers with whom ENERSUL
maintained such contracts during 2003 represented approximately 31% of its sales
of electricity (measured in MWh) and 22% of its revenues for the period.

         On November 29, 2000, ANEEL issued Resolution No. 456, which updated
and consolidated general supply terms and conditions. In the absence of an
agreement between the parties regarding the duration of the supply contracts,
the term will be 12 months or, in the event there is a need for capital
expenditures by the concessionaire, 24 months. The contract may be automatically
renewed for the same period of time in successive terms, with prior notice of at
least 180 days before the contract's expiration date, subject to refusal of the
customer to renew.

         Billing Procedures. The procedure for billing and payment for
electricity supplied is determined by customer category. ENERSUL's industrial
customers are billed on the day of meter reading, with payment required within
five days of the invoice date. ENERSUL's residential customers are billed within
two days of meter reading, with payment required within five days after the
invoice date. Meter readings take place on a monthly basis. Bills are prepared
from meter readings or on the basis of estimated usage. The billing dates of
ENERSUL's customers are staggered throughout each calendar month. ENERSUL may
suspend delivery of electricity to customers if the customer's bill is overdue
and 15 days have passed since notification was sent to the customer. However,
since the services provided by electric distribution companies are considered
essential services, there are precedent court decisions that consider the
suspension of delivery of electricity to be unlawful pursuant to the Brazilian
Consumer Defense Code. Therefore, ENERSUL may not be able to suspend services if
a court order prohibits it from doing so. In the event of late payment of
electricity bills, a fine of 2% is charged on the total invoice overdue, as well
as an interest charge of 1% per month. In addition, if such event has resulted
in a service disconnection, a service reconnection fee is also charged.

Purchases of Electricity

         ENERSUL's electricity purchases from TRACTEBEL and ITAIPU represented
approximately 91% by volume of its total purchases in 2003. In 2003, ENERSUL
purchased 2,139 GWh of electricity from TRACTEBEL, 732 GWh from ITAIPU (billed
by Empresa Transmissora de Energia Eletrica do Sul do Brasil S.A. -- ELETROSUL,
or ELETROSUL), and 253 GWh from other distribution companies. ENERSUL is also
required by law to purchase from ITAIPU a portion of ITAIPU's energy purchased
by Brazil under a treaty with Paraguay dated April 26, 1973. By law, ENERSUL is
obliged to purchase approximately 1% of Brazil's energy needs from ITAIPU until
2023. See "-- ESCELSA -- Purchases of Electricity" and "-- Regulation of the
Brazilian Electricity Sector." As ENERSUL's power needs increase, power supplied
by ITAIPU is expected to represent a smaller percentage thereof.

         The following table shows ENERSUL's cost basis for energy purchased
from ITAIPU, TRACTEBEL and ELETROSUL in 2003:


                                                         Average
                                             -----------------------------------
                                                         (R$/MWh)
ITAIPU..................................                  89,34
TRACTEBEL...............................                  54,29
ELETROSUL...............................                  80,04
                                             -----------------------------------
Weighted Average........................                  84,65
                                             -----------------------------------


         The following table shows the total electricity (i) generated or
purchased by ENERSUL and (ii) sold to final customers and other concessionaires
during the periods specified:


                                       21
<PAGE>


<TABLE>
<CAPTION>

                                                                                        Year Ended December 31,
                                                                              ------------------------------------------
                                                                                  2003           2002           2001
                                                                              ------------   ------------   ------------
<S>                                                                              <C>            <C>            <C>
Electricity generated by ENERSUL.........................................          226            129            229
Electricity purchased from ITAIPU........................................          732            710            713
Electricity purchased from TRACTEBEL.....................................        2,139          2,468          1,905
Electricity purchased from other power plants............................          253            252            215
Electricity delivered to final consumers.................................        2,786          2,728          3,062
Electricity delivered to other concessionaires...........................          534            515            390
</TABLE>


          In August 1998, ENERSUL entered into initial contracts with TRACTEBEL
to purchase electricity and with ELETROSUL for the transmission of electricity
and connection to the interconnected power system. See "-- Regulation of the
Brazilian Electricity Sector." These initial contracts, the terms of which are
mandated by federal law, set forth ENERSUL's obligations to purchase specified
amounts of electricity generated by TRACTEBEL. By law, beginning in 2003, the
energy and capacity amounts covered by the initial contracts, like the one
executed between ENERSUL and TRACTEBEL, should be reduced at a rate of 25% a
year until all power purchases and sales are fully released by the end of 2006.
Despite this fact, other federal laws have given TRACTEBEL and ENERSUL the power
to amend their initial contract to avoid the 25% yearly reductions that began to
take place in 2003. Under the New Model for the Electricity Sector, the
restrictions to executing amendments for power purchase agreements executed
before March 15, 2004 does not apply to initial contracts. See "Item 4.
Information on the Company -- Regulation on the Brazilian Sector."

         ENERSUL's generation capacity does not affect its commitment to
purchase energy generated by ITAIPU or by TRACTEBEL. Under Law No. 9,648 of May
27, 1998, ENERSUL has the right to proportionately reduce purchases from
TRACTEBEL if any significant customer chooses to become a free consumer and
therefore terminates its contract with ENERSUL. Such reduction is subject to
ANEEL's approval.

Generation

         Currently, ENERSUL's electricity generation, transmission and
distribution operations are vertically integrated into and directly operated by
ENERSUL. However, pursuant to ENERSUL's concession contract and in accordance
with certain changes in the regulatory framework of the Brazilian electricity
sector, ENERSUL has created ENERSUL Geracao S.A., a wholly owned subsidiary of
ENERSUL, to which it may transfer all of its generation assets.

         ENERSUL currently operates four hydroelectric power plants and three
thermal plants in the State of Mato Grosso do Sul. The total installed capacity
of the power plants is 43.9 MW. ENERSUL generated 225 GWh in 2003.

         The following table sets forth certain information concerning ENERSUL's
power plants.

<TABLE>
<CAPTION>

                                                             Installed                 2003
Hydroelectric and Thermal Plants                             Capacity                  Output
--------------------------------                       ----------------------  ---------------------
                                                                (MW)                   (GWh)
<S>                                                             <C>                    <C>
UHE Mimoso(1).....................................              29.5                   208
UTE Corumba(2)....................................               6.0                     0
UTE Coxim(2)......................................               3.0                     0
UTE Porto Murtinho(2).............................               3.7                    10
Others............................................               1.7                     7
                                                       ----------------------  ---------------------
     Total........................................              43.9                   225
</TABLE>


--------------
(1)  Hydroelectric.
(2)  Thermal.

Competition

         We hold concessions to distribute electricity in 70 of the 78
municipalities in Espirito Santo and in 72 of the 77 municipalities in Mato
Grosso do Sul. Within our concession area, we do not face competition in the


                                       22
<PAGE>


distribution of electric energy to residential, commercial and industrial
customers of low voltage supply. As a result of recent legislation, other
suppliers are now permitted to offer electricity to certain unregulated
electricity customers that meet the regulatory requirements to qualify as "free
consumers" at potentially lower prices than those we currently charge.

         We are required to permit the use of our facilities by other
generation, distribution and transmission companies and free consumers for the
transmission of electricity upon payment of a toll, known as a "wheeling
charge," which is determined according to a method set by ANEEL. In addition,
any consumer may develop self-generation capabilities, although we expect that
only large consumers will consider such an investment. See "-- Regulation of the
Brazilian Electricity Sector -- Legal and Regulatory Framework."

         As a result, free consumers of electricity now have significant
alternatives to purchasing power other than from us. Competition and
self-generation may adversely affect the prices ESCELSA and ENERSUL can charge
certain free consumers and reduce our revenues. ESCELSA currently has ten
customers that meet the criteria to be considered free customers, and ENERSUL
currently has 4 such customers, i.e., they have demand greater than 3MW and are
supplied at a voltage level equal to or greater than 69kV, or they supplied at
any voltage level and entered the market for electricity after July 1995. Free
consumers are entitled to buy from IPPs or any electric energy services
concession, permission and authorization holders. However, among ESCELSA's 10
largest customers, one has a supply contract in place until 2004, four have
until 2005, four have until 2007 and one has until 2008, and among ENERSUL's
four largest customer's, one has a supply contract in place until 2005, two have
until 2007 and one has until 2009. ESCELSA's customers meeting the criteria of
free consumers represented approximately 33% of ESCELSA's total volume of
electrical power sales during 2003, and approximately 20% of ESCELSA's total
revenues during the year. ENERSUL's customers meeting the criteria of free
consumers represented approximately 6.8% of ENERSUL's total volume of electrical
power sales during 2003, and approximately 2.7% of ENERSUL's total revenues
during the year. Although by law, ANEEL may decrease the demand and voltage
levels that must be met by customers in order to be considered free customers,
they have yet to do so.

Raw Material

         ESCELSA uses water as its primary source to produce energy. ENERSUL
owns and operates three thermoelectric plants, each of which consumes fuel oil.
The cost for fuel oil consumption for the year ended December 31, 2003 was R$3.7
million, of which approximately R$3.5 million was reimbursed to us by the CCC
account, which is an account created in 1973 to generate financial reserves to
cover fossil fuel costs in thermal power plants in the event of a rainfall
shortage requiring increased use of thermal plants.


Seasonality

         Our sales of energy are subject to variations depending on the seasons
of the year, since consumers spend more on energy in some seasons than in
others. Because these variations are systematic and already accounted for in our
monthly plans of sales of energy, our results of operations are not affected by
the seasonality.

Concessions

         A concessionaire has certain rights and obligations as a result of
receiving a concession. Concessionaires for generation have the duty to produce
and supply electric energy in accordance with their relevant bid and concession
agreements. Concessionaires for transmission and distribution have the duty to
provide transmission and distribution services from their own assets at
applicable rates to whoever requests these services. We believe that we are in
material compliance with our obligations under our concessions.

         In addition, concessionaires, among other things:

         o    may only charge tariffs that have been approved by ANEEL;


                                       23
<PAGE>


         o    may not transfer, assign, pledge or sell properties and
              facilities used by the concessionaires to perform their duties
              under their concessions without the prior consent of ANEEL;

         o    must operate their facilities in accordance with technical rules
              established by ANEEL;

         o    may not cease providing electricity services that are the subject
              of their concessions other than for non-payment of invoices after
              the consumer has been given prior notice; and

         o    must, at the end of the concession period, in the event of
              non-renewal of their concessions, allow all property and
              facilities used in connection with the concessions to revert to
              the Brazilian government against payment of book value of the
              assets to the concessionaires. See "-- Regulation of the
              Brazilian Electricity Sector" and Note 1 to our financial
              statements included elsewhere in this annual report.

         Our existing distribution concessions were granted pursuant to our
concession contracts. Pursuant to ESCELSA's concession contract, ESCELSA was
granted the right to supply electricity in each of the applicable municipalities
through the year 2025. ESCELSA also currently owns eleven generation plants
pursuant to concessions that were granted through the year 2025. Under ENERSUL's
concession contract, ENERSUL was granted the right to supply electricity in each
of the applicable municipalities through the year 2027 and to produce
electricity through one hydroelectric generation plant for which a concession is
not required due to its low total installed capacity. ENERSUL also currently
owns one generation plant (Mimoso) pursuant to a concession that was granted
through the year 2027. The concession contracts may be renewed at the discretion
of the regulatory authorities.

         According to the terms of the concession contracts, and the Concessions
Law, a concession contract may be terminated due to the occurrence of the
following events: (1) forfeiture (i) if service is being rendered inadequately
or deficiently, based on the rules, criteria, indices and parameters defining
service quality, (ii) for failure to comply with the provisions of law,
regulations or the terms of the concession contract, (iii) for failure to
provide service, except in the event of an act of God or force majeure, (iv) if
the concessionaire no longer has the economic, technical or operating conditions
to maintain an adequate level of services, (v) for failure to timely comply with
any penalties imposed in the event of any infractions, (vi) for failure to
respond to notification by the authorities to regularize service rendering,
(vii) if the concessionaire is sentenced by final and unappealable decision for
tax evasion, including social contribution, (2) the bankruptcy or liquidation of
the concessionaire, (3) annulment due to illegalities found in the bidding
procedures or in the award of the bid, (4) expropriation for reasons of public
interest ("encampacao"), (5) rescission of the contract by the concessionaire in
the case of non-compliance with the contractual provisions by the granting
authority through a specific lawsuit filed for this purpose; and (6) expiration
of the term of the contract. In the case of forfeiture, the concessionaire is
entitled to notification, a right to cure and due process. In the event of an
expropriation, forfeiture or the expiration of the term of the contract, we
would be entitled to be paid the portion corresponding to the investments
attached to revertible assets not yet amortized or depreciated which have been
made for the sole purpose of assuring the continuity and improvement of our
service, less contractual penalties and damages caused by the concessionaire in
case of forfeiture. See "-- Regulation of the Brazilian Electricity Sector." We
are also subject to penalties and fines imposed by ANEEL under certain
circumstances. See "-- Regulation of the Brazilian Electricity Sector."

C.       Regulation of the Brazilian Electricity Sector

         General

         The Brazilian Federal Government is responsible for establishing the
public policy that governs the energy industry. It works in collaboration with a
para-governmental body, known as the National Council for Energetic Policy
("CNPE"), which is composed of various Ministers from Ministries such as Mines
and Energy, Finance, Environment, as well as several scientific scholars.
Through its body, the Ministry of Mines and Energy, the Federal Government
establishes policies to regulate the power sector. ANEEL, an independent
regulatory agency, is responsible for implementing the Federal Government's
policies and directives and for regulating electricity generation, transmission,
distribution and trading activities, managing the contracts involved in the
provision of such


                                       24
<PAGE>


services and regulating the tariffs to be charged, as well as tariffs' review
and adjustment procedures. Besides that, ANEEL is responsible for: (i) upon
Federal Government's request, coordinating, pursuant to pre-determined
guidelines, the bidding process for the granting of new generation, transmission
and distribution concessions, as well as the bidding process relating to the
granting of concessions for the use of potential hydroelectric power; (ii)
solving administrative disputes among utilities, IPP companies, self-producers
and customers; (iii) determining the criteria that will establish the cost of
the transmission of energy; (iv) inspecting, either directly or in cooperation
with state agencies, the electric energy services; (v) establishing, together
with the fossil fuels and natural gas agencies, the parameters for fixing the
transport prices of such fuels; (vi) establishing limits, restrictions and
conditions for the transfer and procurement of concessions, permissions and
authorizations among electric energy sector agents in order to foster
competition among such agents; (vii) establishing and fixing administrative
penalties to be imposed to concessionaires, permissionaires and authorization
holders; (viii) establishing universal goals to be periodically reached by
concessionaires and permissionaires; and (ix) inspecting, limiting or
prohibiting, as the case may be, transactions entered into by and among
concessionaires, permissionaires and authorization holders and those entered
into by and among such agents and their holding and controlled companies.
Recently, upon the issuance of Law No. 10,848 setting the guidelines for the
so-called New Model for the Electricity Sector, some roles were transferred from
ANEEL to the Federal Government, like the authority to (i) terminate
concessions; (ii) execute concession contracts; (iii) grant authorizations; and
(iv) promote public bids for concession grants. Ministry of Mines and Energy was
also granted authority to monitor the safety and the continuity of the energy
supply as well as to define preventing measures to avoid shortage in energy
supply. In addition to this, new entities related to the power industry were
created. The first example is the Monitoring Committee of the Electric Sector,
which is responsible for helping the Ministry of Mines and Energy evaluate the
safety and the continuity of the power supply in all areas of the Brazilian
territory. The second one is the Energy Research Company, which is responsible
for providing the Ministry of Mines and Energy with the technical data necessary
for the strategic planning of the power sector.

         Legal and Regulatory Framework

         In 1995, the Brazilian government began to enact legislation aimed at
stimulating the energy sector and increasing competition. At this time, a
framework was created for granting concessions, particularly within the power
sector.

         A landmark law affecting structural changes in the Brazilian
electricity sector was enacted on February 13, 1995. The law regulated how
concessions and permissions would be granted for public services and how tariffs
would be determined. Under that structure, the system used is referred to as
performance-based regulation whereby (i) there are periodic settings of tariffs
based on cost-of-service principles (through periodic tariff reviews); (ii) once
such tariffs are set, they remain unchanged for a determined period of time
during which they are adjusted yearly for inflation (Parcel B costs) plus
changes in non-controlled costs (Parcel A costs); and (iii) there are profit
incentives to increase efficiency by the utility companies, which in turn, will
share the efficiency gains achieved by the increasing of its operations with
customers (X factor). See "-- Tariffs and Sectorial Charges."

         Another law passed in July 1995, introduced stark changes in the
Brazilian power industry, including: (i) the creation of the Independent Power
Producer (IPP) which, although a generating agent, is subject to the private and
competitive system (in contrast to the public service system applicable to
distribution and transmission companies), and in case of IPPs for thermal
projects, could operate based solely on the authorization of the Federal
Government, a process much simpler than that required for concession (for hydro
projects, besides the authorization, the IPP must sign a contract for the
concession of the use of a public good as well, since hydro resources are deemed
to be public goods under Brazilian law and, as such, unlike the thermal plants,
cannot be given as collateral in financial transactions); (ii) the gradual
release of consumers, the so-called free consumers, to purchase power from IPPs
and, from any concessionaire, permissionaire or authorization holder; (iii) the
authorization to organize consortia for power generation; (iv) the authorization
for the Federal Government to unbundle power companies through corporate
reorganization; and (v) the authorization for the Federal and State Governments
to privatize concurrently with the awarding of new public service concessions or
extensions of existing concessions.

         ANEEL was created in 1996 to set up additional rules governing tariff
policies such as the Brazilian performance-based regulation system and tariff
adjustments and reviews.


                                       25
<PAGE>


         The concept of IPPs was introduced to foster private investment in the
electricity sector. An IPP is a legal entity or consortium holding a concession
or authorization for power generation for sale to (i) public electric energy
providers; (ii) certain large industrial and commercial consumers; (iii)
consumers who have not been supplied by the local distribution concessionaire
for more than 180 days; (iv) certain other consumers upon previous agreement
with the local distribution concessionaire; (v) the so-called free consumers.
Self-generators may, upon ANEEL's prior approval (i) give or exchange energy
with other self-generators within a consortium; (ii) sell excess energy to the
local distribution concessionaire; and (iii) exchange energy with the local
distribution concessionaire to allow for consumption by industrial plants of the
self-generators located in another area of generation.

         The primary objective of that set of legislation was to allow the
Brazilian government to focus on its roles as policy-maker and regulator, while
allowing the private sector to assume the responsibility of operating and
investing in the power sector. On May 27, 1998, the legal foundation for the
competitive trading environment was formed, which included the creation of a
wholesale energy market, or MAE, that replaced the system of regulated
generation prices and tolling supply contracts. The 1998 legislation also
created a new entity called the ONS, which is responsible for coordinating and
controlling the electricity generation and transmission in the interconnected
systems. One of ONS' main goals is to guarantee all participants of the
electricity sector equal access to the Brazilian transmission network on a
non-discriminatory basis.

         Originally, MAE was created as a self-regulatory body. However, in
2001, MAE was restructured and became a private legal entity (i) subject to
ANEEL's authorization, regulation and supervision; (ii) responsible for the
operation of the wholesale energy market; and (iii) responsible for ensuring
that purchases of energy in the spot market are settled and cleared in an
efficient manner.

         MAE's participants are subject to rules contained in MAE's charter and
to applicable ANEEL regulations, including ANEEL's Resolution No. 290, dated
August 3, 2000, that sets forth its rules, which are expected to be fully
implemented by January 1, 2006. Mandatory participants of MAE include: (i) the
generation services concession or authorization holders that have a central
generator with an installed capacity of 50 MW or more; (ii) energy retailers,
including distribution companies, with a market equal or higher than 300 GWh per
year; and (iii) importers or exporters of energy having an available capacity of
50 MW or more. In addition, certain other entities that operate in a smaller
scale have the option to participate in MAE. Free consumers are also allowed to
participate in MAE, as customers. Both ESCELSA and ENERSUL are considered
mandatory participants in MAE. Disputes arising among MAE's participants are
settled through arbitration within the arbitration chamber of MAE. Power trades
under MAE are strictly financial transactions, while ONS is entrusted with the
actual delivery of power, based upon rules that optimize the system's
production. Two types of contracts are executed under MAE: (i) short-term power
purchase and sale agreements (spot market), which are dependent on power
availability in the electrical system; and (ii) long-term power purchase and
sale agreements, which comprise the largest amount of distributors' and traders'
aggregate load. Long-term power purchase and sale agreements prevents
distributors and traders from being fully exposed to price volatility, as is the
case under the spot market. Contracts with terms longer than six months are
considered long-term.

         Energy supply contracts, which must be based on MAE's standard form
agreement, must be registered with MAE. Distributors and energy retailers must
prove, through registration, their compliance with the requirement that 95% of
their contractual obligations to final customers are covered by long-term energy
supply contracts. Registration of energy contracts with the MAE is also designed
to ensure that generation companies do not commit to supplying more than their
maximum available capacity as set by ANEEL.

         Participants of the MAE are subject to penalties in case of
non-compliance with their obligation undertaken with the MAE as well as to the
enforcement of financial guarantees, which must be posted in order to assure the
payment of debts assumed under such transactions. ANEEL has passed guidelines
for the computation of the spot price for energy in the MAE. The spot price is
determined by market conditions and by certain public policy and operational
considerations, including the most efficient use of resources, transmission
restrictions, energy deficit costs, projected energy requirements and
international energy resources provided by international suppliers. Prevailing
spot prices vary in each of the four sub-markets within the wholesale energy
market. Sub-markets take into account restrictions in transmission capacity.
Given the improvements made on the transmission lines during the years 2001 and
2002, which facilitates the transportation of energy, the federal government
determined that the number of sub-markets should be reduced from four to two.
Presently, however, a preliminary injunction granted in a class action against
such measure prevents both ANEEL and the Federal Government from passing
regulation to


                                       26
<PAGE>


enact this reduction. In order to assure that power purchases and sale
operations under MAE would continue in a stable and sustainable manner, the
opening of the wholesale market is occurring gradually. During the transition
period in which the existing generation and distribution agents execute
long-term power purchase and sale agreements ("Initial Contracts"), the purchase
and sale of electric energy is contracted separately from the access to the
transmission and distribution grids. Like existing agreements, the Initial
Contracts are primarily "take or pay" commitments that guarantee stable energy
prices for distribution companies and a steady stream of income for generation
companies.

         Beginning in 2003, the quantities specified under the Initial Contracts
have been reduced at a rate of 25% a year until all power purchases and sales
are fully released, by the end of 2006. As the energy and capacity volumes
covered by the Initial Contracts are reduced, private generation and
distribution companies, subject to certain restrictions described below and the
changes to be implemented under the New Model for the Electricity Sector, also
described further below, may negotiate with any other market participant for the
newly released energy at market prices.

         Since the Rationing Program in 2001, the Federal Government has been
studying alternatives for the energy sector aimed at fostering the system's
expansion, through private and public investments. Some of the proposals
presented by the Committee for Revitalization of the Power Sector have been
consolidated in legislation which is summarized below.

         Power purchase restrictions: In 2002, two laws imposed a series of
restrictions on the manner by which power not sold through Initial Contracts may
be sold and bought by state-owned generation companies and by distribution
companies. Generation companies under the Federal Government control should
negotiate at least 50% of their total energy traded, including the reduced
portion of the Initial Contracts, in public auctions. Public services generation
concessionaires under the control of the State should negotiate the energy they
trade, in a public, transparent and equal fashion, through the auctions. ANEEL
is authorized to intervene in such auctions promoted by federal or state owned
generation companies in order to prevent abusive practices among auction
participants that may affect energy prices, including the fixing of minimum
prices. In addition, generation companies under the control of the federal
government may amend their Initial Contracts to avoid the 25% yearly reductions
that started to take place in 2003 (according to the applicable regulation,
December 31, 2004 is the mandatory final term for such amendments). Under the
New Model for the Electricity Sector described below, amendments to the Initial
Contracts were made an exception to the rule that restricts amendments on power
purchase agreements executed before March 15, 2004. As of January 1, 2003,
distribution companies are also obliged to purchase energy through its own
auctions or through auctions promoted by federal or state owned generation
companies. The rules concerning the obligation to purchase power from public
auctions do not exclude the basic right of distribution companies to purchase
power from affiliated or controlled companies, but such rules are subject to
self-dealing limits established by ANEEL. Pursuant to such rules, distribution
companies which participate in the interconnected system, such as ESCELSA and
ENERSUL, cannot purchase more than 30% of the energy sold to their captive
consumers from their affiliated or controlled companies.

         Creation of PROINFA, CDE and Incentives for Alternative Sources of
Electric Energy: In 2002 new policies were created for alternative power
sources. PROINFA (Program for Incentive of Alternative Sources of Electric
Energy) was created to attempt to increase the participation of electric energy
generated from eolic, biomass and small hydro plants (plants with a determined
specification of reservoir, that has an installed capacity of less than 30MW).
The benefits granted to PROINFA's participants are: (i) assured purchase offer
from ELETROBRAS of a portion of the generated energy; and (ii) the right to a
monthly credit from funds of the CDE -- Account for Energetic Development.
ELETROBRAS has just finished the bidding process to select power providers for
the first phase of PROINFA. However, ELETROBRAS has not started to sell the
power acquired within PROINFA to distribution companies.

         CDE is a sectorial fund aimed at encouraging the universal access to
energy, as well as promoting all alternative sources of energy development,
including PROFINA and power generation from eolic, biomass, small hydro plants,
natural gas and national mineral coal sources. CDE also assists in funding
distribution companies in reaching their universal goals described below. CDE is
funded by: (i) annual payments of UBP (fee for the use of the public good) made
by hydro generators, (ii) penalty fees imposed and charged by ANEEL from
concessionaires, permissionaires and authorization holders, and (iii) quotas
that shall be paid by all agents which supply energy to final consumers,
including distribution companies.


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<PAGE>


         Apart from benefiting from the funds of CDE, the projects falling under
PROINFA's requirements as well as all other projects which power is generated
from eolic, biomass, solar and small hydro plants sources are entitled to a
discount, not less than 50%, on the transportation tariffs, and to the right to
trade energy with consumers not yet considered free consumers as per the current
laws.

         Universal goals: ANEEL has established universal goals to be
periodically reached by concessionaires and permissionaires. Such goals consist
of distribution concessionaires or permissionaires servicing currently
inaccessible areas without any burden/costs to consumers that are supplied at a
voltage level lower than 2.3 kV and whose installed load is lower or equal to
50kW ("Universal Goals Requisites").

          Distribution companies must immediately provide power to consumers
that (i) comply with the Universal Goals Requisites; and (ii) can be reached
upon the extension of distribution lines with voltage level lower than 2.3 kV.

         If an extension of distribution lines with voltage level lower or equal
to 138 kV is required for providing power to consumers that comply with the
Universal Goals Requisites, those consumers will be reached as per the universal
plans submitted to ANEEL by the distribution companies (see below).

         Distribution companies will provide funding, up to a limit to be
defined by ANEEL, for reaching all other consumers that are supplied at a
voltage level higher than 2.3 kV or whose installed load is higher than 50 kW.

         A portion of the CDE fund shall be used for the promotion of the
universal access to energy in rural areas of the Brazilian territory,
specifically the portion derived from the annual payments of UBP (fee for the
use of the public good) and from the penalty fees imposed and charged by ANEEL
from participants of the power industry. In addition to CDE funds, RGR (another
sectorial fund) resources shall be used specifically for the promotion of the
universal access to energy in rural areas.

         In November 2003, the Federal Government established the Universal
National Program - "Light to Everyone" (Programa Nacional de Universalizacao -
"Luz para Todos") aimed at providing access to the public service of electric
energy by all Brazilian rural population until 2008, reaching approximately 2
million new consumers. In addition to CDE and RGR resources, funding from
States, Municipalities and participants of the power industry will be used for
compliance with the universal goal set forth in the Light For Everyone Program.

         Although controversial, ANEEL understands that CDE resources cannot be
applied for the promotion of the universal access to energy in urban areas.
Accordingly, distribution companies were left to grant universal access in such
urban areas with no governmental subsidy. Thus, there is no assurance as to
whether, how nor to when ANEEL will regulate such thing.

         ANEEL's Resolution No. 223, dated April 29, 2003, as amended by
Resolution No. 52, dated March 25, 2004, requires that the distribution
concessionaires and permissionaires present, periodically, plans by which they
intend to achieve universal access to energy by consumers that comply with the
Universal Goals Requisites through capital expenditures without any burden/costs
to those consumers. Concessionaires that fail to timely present their universal
plans to ANEEL will have to service all inaccessible areas comprised within its
concession area without any burden/costs to consumers until compliance with such
obligation. Additionally, concessionaires which fail to comply with the goals
set forth in their approved plans shall be subject to a penalty of a tariff
reduction until such time that they comply with the goals set forth in their
plan. ESCELSA and ENERSUL timely presented their universal plans for 2004. The
universal plans for 2005 until 2008 shall be presented to ANEEL until August 31,
2004, and the universal plans for 2009 to 2015 will be presented until March 31,
2005.

         Increase of the number of low income residential consumers: currently,
consumers supplied under the single voltage circuit, with monthly consumption
lower than 80 kWh/month or which vary from 80 to 220 kWh/month, to the extent
not excluded from this category for reasons described in relevant ANEEL
Resolutions, are considered low income residential consumers. This new
definition significantly increased the quantity of consumers under this
category, thereby increasing the number of consumers entitled to a lower social
tariff than the one applicable to other residential consumers. This measure may
cause distribution companies to suffer income losses in the event that they are
not fully reimbursed by government subsidies in the form of: (1) funds from the
RGR (Global Reversion Fund) or (2) Low Income Subvention, funds derived from
dividends due by ELETROBRAS (a state-owned holding company which has a
controlling stake in non-privatized generation and distribution companies


                                       28
<PAGE>


and is also responsible for providing funding for the sector) to the Federal
Government in connection with power sales in public auctions.

         Tariff Restructuring: The major captive consumers under Group A tariff
class (those supplied with voltage equal or higher to 2.3 kV, or alternatively,
lower then 2.3 kV in case of underground distribution systems) shall replace
their actual supply contracts which encompass the costs of the purchase of power
and transportation with separate agreements for each of such items. The supply
tariffs to be paid by such consumers, as of the date of the ordinary tariff
review of the distribution companies, will incorporate the growing portions of
the costs of the power available for sale in the market, plus the commercial
costs, sectorial charges, taxes and decreasing portions of tariffs calculated in
accordance with the current tariff structure of the distribution concessionaires
and permissionaires, net the transportation charges. Such measure aims primarily
to eliminate the cross subsidies inherent in the old tariff scheme, by which
residential consumers helped to subsidize the cost of power consumed by
industrial consumers. Under the restructured tariffs, each class of consumer
will pay only for its own relevant costs.

         New Model for the Electricity Sector: In December 2003, the Federal
Government established, through two provisional measures, the New Model for the
Electricity Sector ("New Model") aimed at assuring the supply of electric energy
and promoting low tariffs and the social insertion into the electric sector. The
constitutional grounds of such provisional measures are being challenged before
the Brazilian Supreme Court. A ruling is still pending on this issue.

         Nonetheless, on March, 15, 2004, Congress converted into law, the
provisional measures issued by the President. Such laws only provide the general
guidelines for the implementation of the New Model and the effectiveness of a
majority of the provisions are subject to the issuance of the relevant
regulations by the Federal Government. So far, the Government has issued only a
regulation on corporate governance of the ONS and disclosed, in December 2003,
the technical papers describing the method by which the Government intends to
regulate the most important changes introduced by the New Model. However, such
technical papers are not binding and are not legally enforceable. In many
instances, the technical papers have been superseded by changes made by Congress
while converting the provisional measures into law. Therefore, the disclosure
made below on the New Model is based solely on the federal laws numbers 10,847
and 10,848, and does not incorporate references to the technical papers
mentioned above. Accordingly, at this early stage of implementation of the New
Model, there can be no assurance as to whether, how, nor to what extent, the New
Model, once fully regulated by the Federal Government and effective, can
adversely affect the financial condition and business operations of ESCELSA.
Additionally, since regulations may be changed by means of a mere presidential
decree, the New Model will be subject to political interference. The potential
instability of the regulation related to the New Model represents a relevant
risk factor for ESCELSA's business.

         In any event, Laws nos. 10,847/2004 and 10,848/2004 bring significant
changes to the current model, such as the ones described below:

         Changes in the institutional environment: CNPE was granted authority to
propose (i) bidding process for certain generation projects and (ii) criteria
for the assurance of energy supply. The Ministry of Mines and Energy was granted
authority to monitor the safety and the continuity of the energy supply as well
as to define preventing measures to avoid shortage in energy supply. ANEEL lost
some of its functions, such as the authority to grant concessions. A Monitoring
Committee of the Electric Sector ("CMSE") was created to help the Ministry of
Mines and Energy evaluate the safety and the continuity of the power supply in
all areas of the Brazilian territory. An Energy Research Company ("EPE") was
created to provide the Ministry of Mines and Energy with the technical data
necessary for the strategic planning of the power sector. The Commercialization
Chamber of Electric Energy ("CCEE") was created to succeed MAE as the clearing
entity of the Brazilian power sector.

         Changes in the vertical structure of the companies of the power sector
agents and restrictions of their activities: Distribution companies like ESCELSA
and ENERSUL shall not (i) develop activities of generation and/or transmission
of electric energy; (ii) sell electric energy to free consumers located outside
its concession area; (iii) sell electric energy to free consumers located in its
concession area for prices and conditions different from those applicable to its
captive consumers; (iv) hold, directly or indirectly, equity or interest in any
other entities unless set forth otherwise under its concession contract; (v)
develop activities not related to the concession granted unless exempted by the
applicable laws or by the concession contract. Similarly, generation
concessionaires shall not control nor associate with distribution companies.
Compliance with the above mentioned restrictions are due in


                                       29
<PAGE>


18 months after March 15, 2004. Under exceptional circumstances, ANEEL could
grant another 18 months-term for compliance with such restrictions.

         Changes in the commercialization of electric energy: Under the New
Model, all distribution companies will only be permitted to purchase power under
a pool, in the so-called Regulated Contracted Environment ("ACR"), by means of
bidding procedures to be regulated by ANEEL. The rules regarding power purchases
in the ACR are not applicable to power from (i) distributed generation (i.e.,
small generation plants that are connected directly to the distribution system -
low voltage lines - and are not subjected to ONS' coordination) ; (ii) PROINFA
and (iii) ITAIPU.

         Generators, retailers, energy importers and free consumers will be
allowed to trade power in the so-called Free Contracted Environment ("ACL").

         The distributors' contracting level was increased from 95% to 100%.
Power from (i) contracts executed prior to the enactment of Law No. 10,848/2004;
(ii) distributed generation; (iii) PROINFA; and (iv) ITAIPU shall be considered
for purposes of compliance verification to the 100% contracting level.

         The possibility of entering into self dealing contracts (i.e.,
contracts entered by a distribution company with a seller that belongs to the
same economic group) was eliminated under the New Model.

         Under the ACR, distribution companies shall execute the so-called
Regulated Energy Commercialization Contract ("CCEAR"). Due to the pool
characteristics of the ACR, such contracts shall be entered between each
generator and all distribution companies. The CCEARs are divided in Power
Quantity Agreements and Power Availability Agreements. The basic difference
between the two types is the party that bears the risks of the energy operation:
under the quantity agreements, risk is borne by the generator; under
availability agreements, risk is borne by distribution companies, but in the
latter case the costs associated to such risks will be passed through to the
consumer's tariffs. Distribution companies will have to provide collateral for
the CCEAR executed in the ACR.

         Depending on the source of the power sold in the ACR, there will be
different rules regarding the term of the contract and the beginning of the
power supply. For the energy produced by an existing generation plant, the
so-called "old energy," the power supply shall start 1 year after the bidding
process and the contractual term may vary from 3 to 15 years ("Old Energy
PPAs"). In 2004, 2005 and 2006, exceptionally, power supply may start 5 years
after the corresponding bidding process for the acquisition of old energy. For
the energy produced by new generation plants, the so-called "new energy," the
power supply shall start 3 or 5 years after the bidding process and the
contractual term may vary from 15 to 35 years ("New Energy PPAs"). Additionally,
distribution companies will be allowed to celebrate contracts to adjust their
contracting level to the growth of its market ("Adjustment PPAs"). The amount of
power acquired in such adjustment bidding process shall not exceed 5% of the
distributor load and the maximum supply term is limited to 2 years.

         Law No. 10,848 guarantees that the cost of the power acquired by
distribution companies in the ACR in the case of Old Energy PPAs and New Energy
PPAs, added by applicable sectorial charges and taxes, be passed through to the
consumer's tariffs. By contrast, no such guarantee was clearly given by Law No.
10,848 to the Adjustment PPAs.

         A new entity named Commercialization Chamber of Electric Energy
("CCEE") will succeed MAE as the clearing entity of the Brazilian power sector.
CCEE be also responsible for managing the power commercialization in the ACR and
ACL environments. CCEE will be incorporated as a private legal entity subject to
ANEEL's authorization, regulation and supervision. Concessionaires,
permissionaires and authorization holders within the electric industry as well
as free consumers shall participate of CCEE. The members of CCEE shall provide
funding for its operation. Such cost shall not be passed through to the
consumers' tariffs and therefore will be entirely borne by the agents, such as
ESCELSA and ENERSUL. CCEE's charter shall be published by ANEEL and shall
include arbitration as the applicable dispute resolution mechanism.

         In the event of rationing in a certain region of Brazil, all Power
Quantity Agreements executed under ACR and registered in CCEE which buyers are
located in the region affected by such rationing shall have its energy amounts
reduced in the same proportion of the measured consumption reduction.


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<PAGE>


         Power purchase agreements executed by distribution companies with
related parties prior to the enactment of Law 10,848 will remain valid and
binding to the parties but cannot be amended for the purposes of increasing (i)
the supply term; (ii) energy amounts; and (iii) energy prices.

         Tariffs and Sectorial Charges

         The New Model did not change the previous system of performance-based
regulation to set tariffs. Under such system, once the tariff cap is established
for a determined period, the companies have incentives to reduce costs and
thereby increase profits. A portion of the profits related to the growth of the
company's operation (through increase in the number of consumers or in the power
consumption) will be divided between the company and the consumer, through a
mechanism known as the X Factor. The tariffs of ESCELSA and ENERSUL were
originally set in contracts arising out of privatization and are subject to
rules regarding tariff adjustments and tariff reviews set forth in the
applicable laws and their relevant concession contracts.

         Pursuant to the distribution concession agreements, the supply tariffs
are composed by two parcels, Parcel A and Parcel B.

         Parcel A is composed of the following costs and charges: (i) cost of
the energy purchased for sale, including the one from ITAIPU; (ii) RGR (Global
Reversion Fund); (iii) quotas of Fuel Consumption Account (CCC); (iv) amounts
related to the inspection fee charged by ANEEL; (iv) costs for the exploration
of hydro resources for generation purposes, when applicable; (v) connection and
use of transmission and distribution systems charges; (vi) charges for system
services -- ESS; and (vii) quotas of the Energetic Development Account -- CDE.
Such costs and charges are briefly summarized below:

o    The costs of energy purchased for sale are fully passed through to the
     consumers' tariffs when the power is purchased from ITAIPU or through
     Initial Contracts. All other power purchases contracts executed before Law
     No. 10,848 are limited by the so-called Normative Values, which are
     currently regulated by the relevant ANEEL Resolution. The Normative Values
     used to vary according to the source of the power purchased. Since 2002,
     ANEEL set forth under Resolution No. 248 that all agreements presented for
     registration thereafter would be subject to a Sole Normative Value, which
     is based on the cost of hydro generated power. Another resolution
     (Resolution No. 488) followed which grandfathered certain thermoelectric
     projects included in the Thermal Power Priority Program (Programa
     Prioritario de Termelectricidade -- PPT) despite the fact that they had not
     presented their relevant Power Purchase Agreement, ("PPAs") to ANEEL before
     the issuance of Resolution No. 248 in 2002. These exceptions were permitted
     because such projects were determined to be in an advanced stage of
     implementation according to a test set forth under Resolution No. 488.
     Accordingly, with respect to the projects that succeeded in qualifying
     under the grandfather test, the distribution companies are allowed to pass
     through differentiated costs of purchase of energy to the consumers,
     limited by the Normative Values established by ANEEL. A Presidential Decree
     provided that as of 2004, ANEEL may review the Normative Value as a result
     of the prices of energy purchase of the auctions promoted by the
     distribution companies. In April 2003, ANEEL issued two Technical Notes
     setting forth new criteria for determining the limit of the cost of energy
     acquisitions allowed to be passed through to the consumers' tariffs based
     on the average price reached in auction sales promoted by generation
     companies controlled by the Federal Government (substantially lower than
     the Normative Values previously set). Further, such Technical Notes set
     forth additional restrictions on the power purchase prices related to PPAs
     entered into between affiliated companies. Such Technical Notes encountered
     great criticism, since they purport to apply to PPAs that had already been
     submitted to ANEEL but had not been approved yet at the time such Technical
     Notes were issued, whereas Normative Value regulations clearly set forth
     that, by submitting the PPA to ANEEL, the parties were guaranteed the
     application of the Normative Value criteria in place at the time of
     presentation of the PPA to ANEEL, regardless of the date of approval
     thereof. The cost of the power from Old Energy PPAs and New Energy PPAs
     acquired by distribution companies in the new Regulated Contracted
     Environment - ACR created by Law no. 10,848, added by applicable sectorial
     charges and taxes, shall be passed through to the consumers' tariffs. No
     such guarantee was clearly given by Law No. 10,848 to the Adjustment PPAs.

o    The Global Reversion Fund -- RGR: The RGR is a fund controlled by
     ELETROBRAS designed to provide funds for compensation to concessionaires
     upon the term of their concession. RGR funds are also designed to finance
     projects in the electricity sector and other purposes established by
     applicable law, such as the Low


                                       31
<PAGE>


     Income Subvention. Electric companies are required to contribute to the RGR
     fund each month at an annual rate of 2.5% over the concessionaire's
     investment.

o    Fuel Consumption Account -- CCC: CCC is a fund created to subsidize power
     production financing by thermal plants in Brazil among electric sector
     agents (provided that coal-fired plants are only entitled to its benefits
     when they use domestic coal). The value of each quota, payable monthly by
     all sector's agents which buy, sell, distribute or transmit energy to final
     consumers, including distribution companies, is determined by the sharing
     of the consumption cost of fuels for power generation, excluding any state
     or municipal taxes levied thereon.

o    Inspection fee charged by ANEEL: The inspection fee shall be paid annually
     to ANEEL and corresponds to 0.5% of the economic benefit ascertained by the
     concessionaire, calculated by a specific formula which takes into account
     the following items: (i) annual invoiced energy by the distribution
     companies, expressed in MWh; and (ii) annual average capacity factor of the
     distribution installations, ascertained in accordance with ANEEL's
     criteria.

o    Costs for Use of Hydraulic Resources: The cost for use of hydraulic
     resources corresponds to 6.75% of the value of the energy produced,
     calculated in accordance with the prices of the sale of energy allocated to
     the distribution concessionaires, excluding the sectorial charges linked to
     generation activities, taxes, and compulsory loans, as well as costs
     incurred in the transmission of electric energy.

o    Charges for connection and the use of transmission and distribution
     systems: Transportation charges are divided into two categories: connection
     charges and charges for system use. The connection charges compensate for
     the assets used by the agents for their connection to the transmission or
     distribution systems. Payment of the connection charge and the charge for
     the system use is made directly to the owner of the accessed assets.
     Transmission and distribution systems charges compensate for the use of all
     network and services rendered by the agents and are required for the
     maintenance of such systems. Under the distribution system, the system use
     charge is paid directly to the distribution company accessed. Under the
     transmission system, payment is made to ONS, which is responsible for
     managing the transmission assets of the interconnected system. ONS retains
     only a portion of the payment, since the remainder of it is directed to the
     transmission concessionaires, owners of the transmission assets, which is
     managed by ONS. ANEEL regulates the amount, as well as the calculation of
     the charges for the transmission and distribution systems.

o    Charges for System Services -- ESS: ESS primarily consists of an amount of
     R$/MWh designed to recuperate the costs incurred in maintenance of the
     reliability and stability of the inter-connected system, since such costs
     are not computed in MAE's prices. Such charge is paid by all MAE's
     participants in the consumption category proportionally, thus it is also
     paid by the distribution companies.

o    Quotas of the Energetic Development Account -- CDE: CDE is a fund whose
     main objectives are to promote universal electric energy services and the
     development of all forms of energy, including eolic, biomass, small hydro
     plants, natural gas and national mineral coal sources. CDE is funded by:
     (i) annual payments of UBP (fee for the use of the public good) made by
     hydro generators, (ii) penalty fees imposed and charged by ANEEL from
     concessionaires, permissionaires and authorization holders, and (iii)
     quotas that shall be paid by all agents which supply energy to final
     consumers, including distribution companies.

         Parcel B comprises the difference between (i) the total revenues of the
concessionaires; and (ii) the value of Parcel A, net of the ICMS.

         The distribution concession contracts provide for three types of
protection of the concessionaire's payment through tariff: (i) annual tariff
adjustment; (ii) extraordinary tariff review; and (iii) periodic tariff review.

         The Tariff Adjustment takes place every 12 months except in those years
in which periodic tariff review takes place. During the tariff adjustment
process, the tariffs charged by the concessionaires are merely updated as to (i)
pass through the current costs of the components of Parcel A; (ii) preserve
Parcel B against inflation by indexing it to the IGPM; and (iii) promote the
tariff affordability principle by using the so-called X Factor, whose purpose is
to share with consumers prospective efficiency gains related to the growth of
the companies' operation through increase in the number of consumers or in power
consumption.


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<PAGE>


         The Extraordinary Tariff Review may take place at any time, through
formal request submitted by the concessionaire to ANEEL, when the following
events occur: (i) significant changes in the costs of the concessionaires that
they do not control; (ii) creation, termination or change of any tax, excluding
income tax, or legal charges, especially those comprised in Parcel A of its
revenues; and (iii) unilateral modification to the concession agreement.

         According to ANEEL's interpretation of such mechanism, in order to
obtain such approval, the concessionaire has to prove that its balance sheet was
disrupted as a result of an extraordinary event and, therefore, the concession
agreement needs to be readjusted. ANEEL's requirement become very burdensome,
even for the most common cases for extraordinary tariff review, such as cost
increases related to Parcel A components.

         So as to overcome such problem, the Ministry of Economy and Mines and
Energy created a tracking account named the Compensation Account for the
Variation of the Amounts of Items of Parcel A -- CVA. In accordance with the
system of the CVA, the positive or negative variations of certain costs
encompassed in Parcel A of the distribution concessionaire revenues which occur
after its annual tariff adjustment shall be computed in a tracking account. In
the following annual tariff adjustment, the outstanding amount of the CVA, added
by interest accrued at the SELIC rate, would be offset from the distribution
tariff along the next 12 months subsequent to the adjustment (the portion of the
CVA not immediately offset also accrue interest at the SELIC rate). The costs of
Parcel A subject to the CVA system are: (i) ITAIPU capacity pass-through tariff;
(ii) ITAIPU transportation tariff; (iii) CCC; (iv) use of the transmission
system charges; (v) costs for the exploration of hydro resources; (vi) ESS; and
(vii) CDE. Notwithstanding the aforementioned system, on April 7, 2003, the
Ministries of Finance and of Mines and Energy issued a joint ordinance
postponing tracking account tariff increases for a 1-year period with the
intention of avoiding an additional impact on tariffs in the 4-7% range.
According to this joint ordinance, the passing through of the amount accumulated
on the tracking account to tariffs, previously scheduled to occur from April 8,
2003 to April 7, 2004, will be postponed for one year. This amount, added by the
amount to be accumulated in the twelve following months, shall be recovered over
a 24-month period rather than the usual 12-month period.

         The periodic tariff review takes place normally in intervals that vary
between 3 years (ESCELSA's case) and 5 years (ENERSUL's case). During such
process, ANEEL resets the value of the tariffs charged by the concessionaire,
taking into consideration the changes of the costs structure and market of the
concessionaire, the levels of tariffs observed in similar companies within the
domestic and international markets as well as efficiency and tariff
affordability incentives. The Periodic Tariff Review has two stages, the first
of which is named "Tariff Resetting," which is a comparison between the
"Assessed Revenue" and the "Required Revenue" of the concessionaire. The
Assessed Revenue is the revenue actually obtained by the concessionaire and the
Required Revenue is the revenue considered necessary, according to a methodology
set forth by ANEEL, for the adequate rendering of the distribution service. By
comparing both of them, if the Assessed Revenue is higher than the Required
Revenue, the distribution tariff of the concessionaire will be reduced;
otherwise, it will be increased. The tariff re-setting index is applied on the
very year of the periodic tariff review in lieu of the annual tariff adjustment.
The second stage of the periodic tariff review is the calculation of the X
Factor. The X Factor is the result of the assessment by the regulator and the
utility company of what should be the appropriate sharing of estimated cost
reductions that the concessionaire expects to achieve by increasing its
operations until the next tariff periodic review. ANEEL has recently set a
formula for calculating the X factor, which comprises the sum of three elements:
(i) a discounted cash flow formula, which is based upon projections of
macroeconomic indicators (such as GDP and inflation), assets in service,
efficiency costs, investments and depreciation, number of consumers and
consumption in MWh; (ii) a consumer satisfaction survey; and (iii) the variation
of labor remuneration, which reflects increases in labor remuneration, included
in Parcel B. Such X Factor is applied to reduce the IGP-M in the annual tariff
adjustments following the tariff periodic review. In accordance with recently
regulation issued by ANEEL, the value of the X factor applicable in tariff
adjustments will vary yearly.

         Since ESCELSA's and ENERSUL's privatizations occurred in July 1995 and
November 1997, respectively, rates of ESCELSA and ENERSUL have been set pursuant
to their concession contracts and the rules in connection therewith. ESCELSA has
already been subject to two tariff periodic reviews, and ENERSUL was subject to
only one, which took place in 2003 and against which results ENERSUL submitted
an administrative appeal to the Directors of ANEEL. So far, no decision was
issued as regards such administrative appeal. In all cases, the results of the
periodic tariff reviews are not definitive since ANEEL has not defined (i) the
value of the asset base nor (ii) the depreciation rate for tariff review
purposes. In 2004, the third periodic tariff review of ESCELSA will occur. In
this process, ANEEL is expected to decide on the value of the asset base
applicable to the 2001 tariff


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<PAGE>


review as well as to the 2004 one. See "ESCELSA -- Customers, Analysis of Demand
and Tariffs -- Tariffs" and "ENERSUL -- Customers, Analysis of Demand and
Tariffs -- Tariffs."

D.       Organizational Structure

         As of December 31, 2003, ESCELSA had (i) a 100% stake in Magistra
Participacoes S.A., which is the controlling shareholder of ENERSUL and Castelo
Energetica S.A., a electricity generation company, (ii) a 97.4% stake in TV a
Cabo Vitoria S.A. -- TVIX, a pay TV company, and (iii) a 100% stake in ESCELSA
Participacoes S.A. -- ESCELSAPAR, which is an Internet and other information
technology service provider. All such companies are organized under the laws of
Brazil.

E.       Property, Plant and Equipment

         Our principal properties consist of hydroelectric generation plants,
transmission lines, substations and distribution networks, all of which are
located in the States of Espirito Santo and Mato Grosso do Sul. The net book
value of our total plant, property and equipment at December 31, 2003 was
approximately R$1.7 billion. At December 31, 2003, we had concessions for 11
hydroelectric generation plants, 8,198 km of transmission and subtransmission
lines, 6,552 MVA transformer capacity and 74,949 km of distribution lines. Apart
from the distribution and transmission network, no single property produces more
than 10% of our total revenues. We have rights of way for our transmission and
distribution lines. These rights of way are our assets and do not revert to the
landowner upon expiration of the concession.

         We own 127 administrative properties, including the building housing
our headquarters, and 20 warehouses. There are encumbrances on certain of our
properties in connection with labor lawsuits; however, such encumbrances are not
material to our ability to conduct our business. Pursuant to Brazilian law,
certain other properties and facilities used by us to perform our duties under
the concession contracts cannot be transferred, assigned, pledged, sold or
encumbered by us or a creditor of ours without prior approval from ANEEL.

         We have ongoing capital expenditures related to the expansion and
modernization of our transmission, distribution and existing generation
facilities. We expect to invest approximately R$175 million in the expansion and
modernization of our distribution lines in 2004.

Environment and Resettlement

         Our distribution, transmission and generation activities are subject to
comprehensive federal and state legislation relating to the preservation of the
environment. The expansion of our distribution, transmission and generation
activities, the procedure for constructing generation plants and the
installation of new distribution and transmission lines or substations, require
compliance with a number of environmental safeguards in accordance with the
Brazilian constitution and related federal legislation. First, environmental
impact studies are prepared by outside experts who make recommendations as to
how to minimize the impact of such construction on the environment, except in
the case of the installation of transmission lines that will operate at a
voltage level under 230 kV, and certain other projects, which only require
authorization from the Brazilian environmental regulatory agency, known as
IBAMA. The environmental impact study or IBAMA authorization, as the case may
be, must then be submitted to federal and state government authorities for
analysis and approval. Once approved, the project goes through a three-stage
licensing process, which includes a license to (i) begin construction, (ii)
complete the project, and (iii) operate the hydroelectric plant, transmission
lines or substations.

         In addition, we are mandated by law to devote 0.5% of the total cost of
any investment in new hydroelectric plants to environmental preservation,
through the creation of environmental preservation areas. We also implement
programs to encourage conservation of electricity in order to minimize the
environmental impact of our ongoing operations. We are not aware of any costs or
liabilities relating to environmental matters which would have a material
adverse effect on our financial condition or results of operations.

         Although the Brazilian government grants concessions to construct
hydroelectric plants, it does not grant title to the land underlying the
projects. Areas required for the operation of hydroelectric projects are
expropriated by the Brazilian government pursuant to empowering legislation. The
entities awarded concessions to construct such plants negotiate with the
communities regarding their relocation to other areas and with individual owners
occupying the land to be affected regarding the compensation to be paid to such
individual owners. If the


                                       34
<PAGE>


concessionaire and landowners cannot agree on a price for the land or right of
way, a court-appointed expert will determine the fair market value.

Insurance

         We maintain insurance for losses resulting from fire at our various
substations and power plants, and for equipment losses during transportation. We
do not have insurance coverage for business interruption risk because we do not
believe that the high premiums are justified by the risk of major interruption,
considering the energy available in the interconnected power systems in Brazil.
Our management believes that we maintain insurance that is customary in Brazil
for the type of business in which we are engaged.

ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview

         We had net operating revenues of R$1,542.6 million, R$1,299.1 million
and R$1,385.5 million in 2003, 2002 and 2001, respectively and a net income of
R$43.9 million, a net loss of R$538.9 million and a net loss of R$60.1 million
in 2003, 2002 and 2001, respectively.

         Gross Domestic Product

         The Brazilian economy grew rapidly immediately following the
introduction of the government-sponsored anti-inflationary and economic
stabilization program, the Real Plan, in July 1994, particularly in the consumer
sector. The Real Plan succeeded in lowering inflation and stimulating growth
until 1997. GDP grew in constant terms by 5.9% in 1994, 4.2% in 1995, 2.8% in
1996, 3.0% in 1997 and 0.2% in 1998. The effect was a marked increase in
purchasing power. Beginning in 1996, the Brazilian economy grew at a slower rate
and by late 1998 the Brazilian economy entered a downturn, which was exacerbated
by a significant currency devaluation beginning in mid-January 1999.

         The recovery of the economy in 1999, in the wake of the 48.0%
devaluation of the real against the U.S. dollar and the strong fiscal adjustment
produced by the public sector, led to strengthened consumer confidence. In 2000,
the economy grew at a steady pace of 4.5%. GDP increased by only 1.4% in 2001,
principally as a result of the electric energy shortage in Brazil, decreased
consumer confidence following the Argentina crisis and the September 2001
terrorist attacks. In 2003, GDP increased by only 0.02%, principally as a result
of the maintenance of high interest rates during that period by the Central
Bank, therefore affecting the Brazilian economic growth.

         Inflation

         The reduction and stabilization of inflation following the
implementation of the Real Plan resulted in increased spending on consumer
goods, higher real income growth and increased consumer confidence. Since 1994,
inflation has remained under control, although it increased markedly in the
first half of 1999 due to the devaluation of the real in January 1999.

         During 2002, increased concerns over a weakening Argentine economy,
inflationary pressures, a weakening real, the Brazilian presidential election
and a perceived decrease in confidence in emerging markets by foreign investors,
led the Central Bank to establish, in the end of 2002, a base interest rate of
24.9%. In the beginning of 2003, the Central Bank continued to hold the base
interest rate high, resulting in a record of 26.5% in February 2003. However,
the improved economic environment and the failure to materialize of prevailing
market concerns, led the Central Bank to gradually decreased the base interest
rate which, in December 2003, was fixed at 16.5%.


                                       35
<PAGE>


         The Brazilian general price (IGP-M) and consumer price (IPC) inflation
indices and the devaluation of the real against the U.S. dollar are presented
below:
<TABLE>
<CAPTION>

                                                      2003     2002         2001       2000     1999
                                                      ----     ----         ----       ----     ----
<S>                                                 <C>       <C>          <C>         <C>     <C>
Inflation IGP-M (1).....................              8.7%    25.3%        10.4%       9.9%    20.1%
Inflation IPC (2).......................              8.2%     9.9%         7.1%       4.4%     8.6%
Nominal devaluation of the real
    against the U.S. dollar.............            -18.2%    52.3%        18.7%       9.3%    48.0%
</TABLE>


------------------
(1)  Indice Geral de Precos - Mercado (general price index) compiled by the
     Fundacao Getulio Vargas.

(2)  Indice de Precos ao Consumidor (consumer price index) compiled by the
     Fundacao Instituto de Pesquisas Economicas.


         As of December 31, 2003 and 2002, approximately 94% and 97%,
respectively, of our marketable securities, in the total amount of R$203.1
million and R$306.6 million, respectively, were invested in U.S. dollar-linked
instruments. However, the exchange rate variation has historically impacted our
financial results. In 2002, we had a net financial expense of R$670.4 million,
as compared to a net financial income of R$137.4 million in 2003, which was
principally due to the appreciation of the real against the U.S. dollar of
18.2%. We believe that over the long term, increases in our tariffs in reais
generate cash sufficient to counter currency devaluations affecting our U.S.
dollar-denominated loans, although we cannot assure you that this will continue
to happen.

         Tariffs

         Since their privatization in July 1995 and November 1997, respectively,
the tariffs charged by both ESCELSA and ENERSUL have been determined pursuant to
Law No. 8,987/95 and their respective concession contracts and are subject to
review and approval by ANEEL. See "Item 4B. Information on the Company --
Business Overview -- ESCELSA -- Customers, Analysis of Demand and Tariffs --
Tariffs" and "Item 4B. Information on the Company -- Business Overview --
Regulation of the Brazilian Electricity Sector -- Tariffs."

         Our management believes that our operating revenues and our ability to
make interest or principal payments on the notes are highly dependent on our
tariffs adjustments and reviews approved by ANEEL. In 2003, the tariffs
adjustments were responsible for a significant part of the increase in our
operating revenues. Therefore, if ANEEL's tariff-setting decisions are not
favorable to us, this may have a material effect in our operations and financial
conditions.

         Cost of Electricity Purchased; Electricity Sales

         We purchase energy on the basis of a "capacity charge" and/or an
"energy charge." The capacity charge, based on contracted firm capacity and
charged on a kilowatt basis, is charged without regard to the amount of
electricity actually delivered. The energy charge, expressed in reais per
megawatt-hour, is based on the amount of electricity actually delivered. In the
case of ITAIPU, we purchase electricity on the basis of a capacity charge
expressed in U.S. dollars, plus a "wheeling" (or transportation) charge
expressed in reais. We purchase electricity generated by FURNAS and TRACTEBEL on
the basis of both a capacity charge and an energy charge (which includes
transportation). See "Item 4B. Information on the Company -- Business Overview
-- ESCELSA -- Purchases of Electricity." We generally bill for the electricity
we sell to industrial customers on the basis of a capacity charge and an energy
charge, while other customers are billed only on the basis of an energy charge.
Certain of our large customers incur differing capacity and energy charges
during peak or non-peak hours and during dry or rainy seasons. For a discussion
of our procedures for billing of electricity, see "Item 4B. Information on the
Company -- Business Overview -- ESCELSA -- Customers, Analysis of Demand and
Tariffs."

         The following table sets forth volume and average rate components of
our electricity purchases and sales for the periods indicated:


                                       36
<PAGE>


<TABLE>
<CAPTION>
                                                                         For the Year Ended December 31,
                                                                -------------------------------------------------
                                                                   2003                 2002               2001
                                                                ---------            ---------            -------
<S>                                                             <C>                  <C>                  <C>
Electricity purchased from ITAIPU, FURNAS and
TRACTEBEL:
   Purchases (thousands of reais).................                791,271              709,027            675,189
   Volume (GWh)...................................                  9,104                9,195              8,730
   Average Rate (R$/MWh)..........................                  86.91                77.20              77.41
Electricity Sales:
   Sales to final consumers
      (thousands of reais)........................              1,306,581            1,175,790            973,787
      Volume (GWh)................................                  8,368                8,776              8,437
      Average rate (R$/MWh)(1)....................                 156.14               133.98             115.42
   Sales to other concessionaires
       (thousands of reais).......................                 30,944               24,723             22,398
      Volume (GWh)................................                    348                  344                347
      Average rate (R$/MWh).......................                  88.92                71.87              64.73
   Sales on the Spot Market(2)
       (thousands of reais).......................                      1               15,635             27,550
      Volume (GWh)................................                     62                  676                131
      Average rate (R$/MWh).......................                  62.00                23.13             211.87
</TABLE>

-----------
(1)  Rates for sales to final customers have been computed by dividing (i) the
     corresponding sales to final customers after deduction of value-added taxes
     on sales (ICMS and COFINS) and regulatory assets by (ii) MWh of electricity
     sold.

(2)  They do not include regulatory assets revenue.



Discussion of Critical Accounting Estimates

         In connection with the preparation of the financial statements included
elsewhere in this annual report, we have relied on estimates and assumptions
derived from historical experience and various other factors that we deemed
reasonable and relevant. Although we review these estimates and assumptions in
the ordinary course of business, the portrayal of our financial condition and
results of operations often requires our management to make judgments regarding
the effects of matters that are inherently uncertain on the carrying value of
our assets and liabilities. Actual results may differ from those estimated under
different variables, assumptions or conditions. Note 3 to our financial
statements includes a summary of the significant accounting policies and methods
used in the preparation of our financial statements. In order to provide an
understanding about how management forms its judgments about future events,
including the variables and assumptions underlying the estimates, and the
sensitivity of those judgments to different variables and conditions, we have
included below a brief discussion of the more significant accounting policies
and methods used by us.

         General

         The following discussion should be read in conjunction with our
financial statements included elsewhere in this annual report. Our financial
statements are prepared in accordance with Brazilian GAAP, which differs in
certain significant respects from U.S. GAAP. Note 29 to our financial statements
describes the principal differences between Brazilian GAAP and U.S. GAAP as they
relate to us, and provides a reconciliation to U.S. GAAP of net income and
shareholders' equity. See "Item 3. Key Information -- Selected Financial Data."

         Property, Plant and Equipment

         We record property, plant and equipment at cost and depreciate
property, plant and equipment over its estimated useful life. We may be required
to decrease the estimated useful life of our impacted generation facilities if
we lose a long-term contract at one of our significant generation businesses and
cannot replace it or we experience a significant overabundance of supply and a
sustained, significant decline in market prices in the regions served by our
competitive supply businesses. We may also decrease the estimated useful life of
our impacted distribution facilities if we lose a long-term concession agreement
at one of our growth distribution businesses or large utilities and cannot
replace it. Additionally, we may decrease the estimated useful life of the
affected property, plant and equipment if we incur significant physical damage
or a significant mechanical failure. If we can the useful life of


                                       37
<PAGE>


any of our property, plant and equipment, we plan to base the new life on
engineering studies and our expected usage of the property, plant and equipment.
The estimated remaining useful life of our property, plant and equipment is
approximately 22 years. A significant decrease in the estimated useful life of a
material amount of property, plant and equipment could have a material adverse
effecxt on our operating results in the period in which the estimate is revised
and in subsequent periods.


         Long-Lived Assets.

         We assess long-lived assets for impairment when indicators of
impairment exist. We use estimates of future cash flows based on expected cash
flows from the use and eventual disposition of the assets to test the
recoverability of specific long-lived assets. We have R$389.8 million of
long-lived generation assets and our expected cash flows are based on the
expected output of our generation facilities as well as the terms of our
contractual agreements. We have R$3,004.8 million of distribution long-lived
assets. We consider historical experience as well as future expectations and the
expected future cash flows are based on expected future tariffs and expected
future customer demand in order to determine expected cash flows for businesses
within our large utilities and growth distribution segments. A significant
reduction in actual cash flows and estimated cash flows may have a material
adverse impact on our operating results and financial condition.


         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. We regularly review the deferred tax assets for
recoverability and establish a valuation allowance, as required, based on
historical taxable income, projected future taxable income, and the expected
timing of the reversals of existing temporary differences. Although the
realization of net deferred tax assets is not assured, our management believes
that, except where a valuation allowance has been provided, such realization is
more likely than not to occur. The amount of deferred tax asset considered
realizable could, however, be reduced if estimates of future taxable income
during the tax loss carry-forwards period are reduced.

         Accrual for Contingencies

         We are currently involved in certain legal proceedings. As discussed in
Note 19 to our financial statements, we have accrued our estimate of the
probable costs for the resolution of these claims. This estimate has been
developed in consultation with outside legal counsel handling our defense in
these matters and is based upon an analysis of potential results, assuming a
combination of litigation and settlement strategies. We do not believe these
proceedings will have a material adverse effect on our financial position. It is
possible, however, that future results of operations could be materially
affected by changes in our assumptions, and the effectiveness of our strategies
with respect to these proceedings.

         Allowance for Doubtful Accounts

         We record an allowance for doubtful accounts in accordance with General
Instruction no. 6.3.2 of the Accounting Standards for Public Electric Utilities,
reflecting a conservative position in comparison with ESCELSA's historical
average losses.

         The allowance for doubtful accounts is estimated on the basis of 100%
of reserve on amounts past due over (i) 90 days for residential customers; (ii)
180 days for commercial customers; and (iii) 360 days for other customers. We
continuously monitor collections and payments from customers and review and
refine the estimation process.

         Regulatory Assets

         Low levels of investment and below average rainfall in 2000 and early
2001, as well as growth in demand for energy, resulted in abnormally low water
levels of critical hydroelectric capacity in Brazil's southeast, central west
and northeast regions. In May 2001, the Brazilian federal government announced
several measures in response to these conditions. These measures included:


                                       38
<PAGE>


          o    the creation of the Camara de Gestao da Crise de Energia Eletrica
               (Energy Crisis Committee, or CGE), which required certain
               electricity distributors, including us, to suspend the
               distribution of electricity to new customers (except residential
               and rural customers) and for certain non-essential purposes such
               as nighttime sporting events and advertising use, and to reduce
               distribution for the public lighting areas by 35%;

          o    the reduction of the federal government's electricity consumption
               by 35%, beginning July 1, 2001;

          o    power rationing measures imposed on industrial, commercial and
               residential customers in the most industrialized and heavily
               populated areas of Brazil, beginning on June 1, 2001. These
               measures required most residential consumers to reduce their
               electricity consumption by one-fifth of the average consumption
               in May, June and July 2000. Industrial and commercial consumers
               also had to reduce their consumption by 15% to 25% of the average
               consumption during the same period; and

          o    the payment of bonuses to residential consumers whose energy
               consumption was lower than the requisite target and power cuts
               and surcharges imposed on consumers whose energy consumption
               exceeded the requisite target.

         The power rationing measures ceased on March 1, 2002 in the concession
areas of ENERSUL and ESCELSA.

         On October 17, 2001, the Brazilian federal government established that
electric utility companies, including us, would be reimbursed for expenses
associated with the payment of bonuses to consumers and other costs related to
the Rationing Program that exceeded the surcharges. A law enacted in April 2002
provided that electric power distribution companies in Brazil, such as us, would
be compensated for revenue losses caused by the reduction in amounts of energy
sold due to the Rationing Program. Compensation is to be made by means of an
increase in the energy rate applicable to future power sales (2.9% for
residential, rural and public lighting, except for low income customers, and
7.9% for all other customer segments), up to the maximum compensation term to be
set by ANEEL and provided that the nationwide weighted average of such term for
all distribution companies does not exceed 72 months. However, in order to have
these rights assured, the distribution concessionaire is required to adhere to
the so called Electric Energy Sector Agreement, which contains a number of
actions to be taken by each concessionaire, including but not limited to waivers
of certain rights that they are entitled to pursuant to applicable law
including, inter alia, requests, either in the administrative or judicial
spheres, future or ongoing, for (i) compensation in relation to Parcel A costs
amounts accrued from the date of execution of the concession contract to October
26, 2001; (ii) extraordinary tariff reviews from the execution date of the
concession contract to December 31, 2001; and (iii) the recovery of revenues of
any nature associated with the Rationing Program; as well as execution of
agreements to settle disputes with electricity generators regarding energy
supply during the Rationing Program and amendments to the initial contracts. We
have adhered to the Electric Energy Sector Agreement.

         The law further provides for the Brazilian Economic and Social
Development Bank, or BNDES, to lend the distribution companies an amount
equivalent to up to 90% of their lost revenues so that they will be able to
maintain their account balances as if no Rationing Program had taken place.
BNDES extended a credit line of R$267 million to ESCELSA and ENERSUL to finance
90% of the recovery of losses due to the Rationing Program and Parcel A costs.
The loan provides for repayment in 70 monthly payments in the case of ESCELSA,
and 80 monthly payments in the case of ENERSUL, and accrues interest of 1% per
annum over the SELIC rate. See note 15 to our financial statements included
elsewhere in this annual report.

         The law enacted in April 2002 also provided for compensation for
increases in Parcel A costs from January 1, 2001 to October 26, 2001, the date
on which the CVA tracking account system was set up. Parcel A costs are limited
by the concession contracts to the cost of purchased power and certain other
costs and sectorial charges. Parcel A costs incurred previous to January 1, 2001
are not recoverable. As a result, we have not recognized any regulatory asset
for Parcel A costs incurred prior to 2001. See "--Regulation of the Brazilian
Electricity Sector -- Tariffs and Sectorial Charges" and Note 6.3.1 to our
financial statements included elsewhere in this annual report.

         As a result of the actions taken by the federal government and ANEEL in
2001, we are subject to the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of


                                       39
<PAGE>


Regulation" because the rate-setting structure in Brazil is now designed to
provide for the recovery of our allowable costs incurred as a result of the
Rationing Program. Accordingly, we capitalize incurred costs as deferred
regulatory assets when there is a probable expectation that future revenue equal
to the costs incurred will be billed and collected as a direct result of the
inclusion of the costs in an increased rate set by the regulator. The deferred
regulatory asset is eliminated when we collect the related costs through
billings to customers. ANEEL performs a rate adjustment 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. ESCELSA and ENERSUL recorded deferred regulatory assets of
R$412.2 million at December 31, 2003 that we expect to pass through to our
customers in accordance with and subject to regulatory provisions. The
regulatory assets include R$183.6 million and R$121.2 million at December 31,
2003, for each of ESCELSA and ENERSUL, respectively, for recovery of lost
revenues due to rationing and Parcel A costs incurred during the Rationing
Program. In addition, at December 31, 2003, we recorded deferred regulatory
assets for the cost of energy traded on the spot market, which is energy not
traded pursuant to contracts, or "free energy," during the Rationing Program in
the amount of R$107.4 million.

Recently Issued U.S. GAAP Pronouncements

         SFAS No. 149 - "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities"

         In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities, which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities under SFAS No 133,
accounting for Derivative Instruments and Hedging Activities. SFAS No. 149
clarifies the circumstances under which a contract with an initial net
investment meets the characteristic of a derivative as discussed in SFAS No.
133. In addition, SFAS No. 149 clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. SFAS
No. 149 amends certain other existing pronouncements, resulting in more
consistent reporting of contracts that are derivatives in their entirety or that
contain embedded derivatives that warrant separate accounting. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
relationships designated after June 30, 2003 and is to be applied prospectively.
The adoption of SFAS No. 149 did not result in any impact to our financial
statements.

         SFAS No. 150 - "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity"

         In May 2003 the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
modifies the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. The Statement requires that those
instruments be classified as liabilities in statements of financial position.
SFAS 150 affects an issuer's accounting for three types of freestanding
financial instruments, namely:

     o   mandatory redeemable shares, which the issuing company is obligated to
         buy back in exchange for cash or other assets.

     o   instruments, other than outstanding shares, that do or may require the
         issuer to buy back some of its shares in exchange for cash or other
         assets. These instruments include put options and forward purchase
         contracts.

     o   obligations that can be settled with shares, the monetary value of
         which is fixed, tied solely or predominantly to a variable such as a
         market index, or varies inversely with the value of the issuers'
         shares.


         SFAS 150 does not apply to features embedded in financial instruments
that are not derivatives in their entirety. In addition to its requirements for
the classification and measurement of financial instruments within its scope,
SFAS 150 also requires disclosures about alternative ways of settling those
instruments and the capital structure of entities, all of whose shares are
mandatorily redeemable. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in an


                                       40
<PAGE>


accounting principle for financial instruments created before the issuance date
of the Statement and still existing at the beginning of the interim period of
adoption. Restatement is not permitted. Adoption of this rule did not have any
material impact on the Company's financial statements.

         FIN No. 45 - "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others"

         In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN No. 45"). This interpretation
requires certain disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has
issued. It also requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN No. 45 are effective
for interim and annual periods ending after December 15, 2002. The initial
recognition and initial measurement requirements of FIN No. 45 are effective
prospectively for guarantees issued or modified after December 31, 2002. Based
on an initial assessment of the provisions and requirements of FIN No. 45, our
management believes that the implementation of this statement will not result in
any impact to our financial statements.

         FIN No. 46 - "Consolidation of Variable Interest Entities"

         In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of APB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity' if the equity investors in the entity did not
have the characteristics of a controlling financial interest or did not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 was
effective for all new variable interest entities created or acquired after
January 31, 2003. However, during October 2003, FASB deferred the effective date
of FIN 46 until the end of the first interim or annual period ending after
December 15, 2003. This deferral did not affect the implementation date for many
foreign private issuers, which continued to be the beginning of the first annual
period ending after December 15, 2003.

         In December 2003, FIN 46 was substantially revised and a new
interpretation FIN 46 (revised) was issued. FASB partially delayed FIN 46's
effective date (for most public companies) until no later than the end of the
first reporting period ending after March 15, 2004. The delay notwithstanding,
public companies must apply either FIN 46 or FIN 46R to special-purpose entities
(SPEs) no later than the end of the first reporting period ending after December
15, 2003. For variable interest entities created or acquired prior to February
1, 2003, the provisions of FIN 46 must be applied by foreign private issuers,
like the Company, beginning on the January 1, 2004 income statement for special
purpose entities and on December 31, 2004 for all other types of entities. FIN
46R did not have any impact on the Company's operation in 2003, and it is
expected that it will not have any impact on the Company's operations in 2004.

         SFAS No. 132 (revised) - "Employers' Disclosures about Pensions and
Other Postretirement Benefits - an amendment of FAS Statements no. 87, 88 and
106"

         On December 23, 2003, the FASB issued Statement of Financial Accounting
Standards Nr. 132 (revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits-an amendment of FASB Statements Nr. 87, 88 and
106" (SFAS 132 (revised 2003)). SFAS 132 (revised 2003) is effective for fiscal
years ending after December 15, 2003. There is a provision deferring the
effectiveness of this new rule for foreign plans as from periods ending after
June 15, 2004, which is applicable for the Company. SFAS 132 (revised 2003)
replaces the disclosure requirements in SFAS 87, SFAS 88 and SFAS 106. SFAS 132
(revised 2003) addresses disclosures only and does not address measurement and
recognition accounting for pension and postretirement benefits. SFAS 132
(revised 2003) requires additional disclosures related to the description of
plan assets including investment strategies, plan obligations, cash flows and
net periodic benefit cost of defined benefit pension and other defined benefit
postretirement plans.

         EITF No. 03-01 - "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments"


                                       41
<PAGE>


         In 2003, the Emerging Issues Task Force issued EITF No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." A consensus was reached regarding disclosures about unrealized
losses on available-for-sale debt and equity securities accounted for under FASB
Statements No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and No. 124, Accounting for Certain Investments Held by
Not-for-Profit Organizations. The guidance for evaluating whether an investment
is other-than-temporarily impaired should be applied in other-than-temporary
impairment evaluations made in reporting periods beginning after June 15, 2004.
The disclosures are effective in annual financial statements for fiscal years
ending after December 15, 2003, for investments accounted for under Statements
115 and 124. For all other investments within the scope of this Issue, the
disclosures are effective in annual financial statements for fiscal years ending
after June 15, 2004. The additional disclosures for cost method investments are
effective for fiscal years ending after June 15, 2004. The company does not
expect that the adoption of this EITF will have a material impact on its
financial statements.


A.       Operating Results

         The following discussion should be read in conjunction with our
financial statements included elsewhere in this annual report. Our financial
statements are prepared in accordance with Brazilian GAAP, which differs in
certain significant respects from U.S. GAAP. Note 29 to our financial statements
included elsewhere in this annual report describes the principal differences
between Brazilian GAAP and U.S. GAAP as they relate to us, and provides a
reconciliation to U.S. GAAP of net income and shareholders' equity. See "Item 3.
Key Information -- Presentation of Financial Information."

         The following table sets forth certain of our consolidated income
statement data for the periods indicated.

<TABLE>
<CAPTION>

                                                         For the Year Ended December 31,
                                               ----------------------------------------------------
                                                     2003              2002             2001
                                                     ----              ----             ----
                                                (in thousands of reais, on a consolidated basis)

<S>                                              <C>               <C>             <C>
Operating revenues.......................          2,040,591         1,723,278       1,730,782
Value-added taxes on sales...............          (497,979)         (424,140)       (345,297)
Net operating revenues...................          1,542,612         1,299,138       1,385,485
Operating expenses.......................        (1,365,718)       (1,234,866)     (1,185,564)
Financial expenses, net..................            137,366         (670,419)       (235,831)
Non-operating income expenses, net.......          (153,052)          (74,965)        (24,384)
Minority interest........................            (1,540)            38,833        (10,794)
Income tax and social contribution.......          (115,739)           103,366          11,012
Net income (loss)........................             43,929         (538,913)        (60,076)
</TABLE>


Year Ended December 31, 2003 Compared with Year Ended December 31, 2002

         Operating Revenues

         Our consolidated operating revenues increased 18.4% to R$2,040.6
million for 2003 from R$1,723.3 million for 2002. This increase was due to the
tariff adjustment of 15.97% and 17.30% that took place in August 2002 and in
August 2003, respectively. In addition, some of our largest consumers terminated
their respective supply contracts and no longer purchase energy from us.
However, such fact has not materially impacted our operating revenues, since
these consumers started to pay instead the connection and the use of
transmission and distribution systems fees, which increased 217% to R$54.2
million for 2003 from R$17.1 million for 2002.

         Consolidated operating revenues from sales to other distributors
decreased 24.5% to R$30.5 million in 2003 from R$40.4 million in 2002. These
sales consist of energy sales made to regular customers under long-term
agreements as well as to short-term energy sales made in the wholesale energy
market, MAE. While our revenues resulting from sales to our regular customers
increased 11% in 2003 as compared to 2002, our sales made in the


                                       42
<PAGE>


MAE significantly decreased 99% from R$15.6 million in 2002 to R$1 million in
2003. Such decrease was attributable to the unusually high amount of sales made
in the MAE during 2002 due to the increased availability of Escelsa's excess
energy as a result of the Rationing Program.

         Operating Expenses

         Consolidated operating expenses increased 10.5% to R$1,365.8 million
for 2003 from R$1,234.9 million for 2002, mainly due to the increase of our
operating costs from R$1,170.0 million in 2002 to R$ 1,322.2 million in 2003.
Our managed operating costs, in the amount of R$402.9 million, increased due to
the creation of provisions for contingencies relating to new civil and fiscal
legal proceedings (see "Item 8. Financial Information -- Consolidated Statements
and Other Information - Legal Proceedings"), adjustments on employee benefit
plans, which increased R$83.1 million as a result of syndicate negotiations with
us and R$240.8 million as a consequence of our internal wage readjustment
policy, payments made under ANEEL's preservation energy programs, contributions
to the National Science and Technologic Development Fund (Fundo Nacional de
Desenvolvimento Cientifico e Tecnologico) and the maintenance of a conservative
provision for losses which will be incurred if the Brazilian tax authorities
consider ICMS due in connection with the subvention provided to low income
customers. Furthermore, several non-managed operating costs, in the amount of
R$919.3 million have increased, such as those relating to the energy purchased
for sale, transportation of electric capacity, payments of the quotas of RGR
(Global Reversion Fund), charges for exploration of hydro resources, inspection
fees charged by ANEEL and payments in connection with the quotas of the
Energetic Development Account -- CDE and the Fuel Consumption Account.

         Consolidated expenses for electricity purchased for resale increased
11.6% to R$791.3 million in 2003 from R$709.0 million in 2002. This increase was
mainly due to the raise of 9.2% from R$602.9 million in 2002 to R$658.4 million
in 2003 in the cost of energy purchased by us.

         Consolidated depreciation and amortization expenses decreased 9.2% to
R$157.2 million in 2003 from R$173.2 million in 2002. Basically, the decrease
was related to adjustments of the goodwill amortization rates. In 2003, the
Company adjusted the goodwill related to the acquisition of Enersul. As part of
this process the Company adjusted the amortization rates, recording a positive
effect R$3.3 million. The Company also recorded an adjustment to the accumulated
amortization balance - provision for loss - in the amount of R$124.1 million
recorded as non-operating expenses.

         Consolidated personnel expenses increased 13.9% to R$126.8 million in
2003 from R$111.3 million in 2002. Although the total number of employees
decreased in 2003 from 2,466, as compared to 2,245 in 2003, personnel expenses
increased primarily because (i) of the increase of remuneration for our
employees, the corresponding increase to funds allocated for employee benefit
plans and social taxes, and (ii) a decrease in the allocation by us of expenses
related to the employees' remuneration to our investment accounting item, as a
result of our lower level of investments in 2003.

         Consolidated regulatory charges increased 11.4% to R$118.3 million in
2003 from R$106.2 million in 2002 mainly because of the new requirement in 2003,
to make quota payments to the Energetic Development Account - CDE, which totaled
R$19.8 million. See "Item 4 - Information on the Company - Regulation of the
Brazilian Electricity Sector".

         Consolidated expenses for materials and supplies increased 25.0% to
R$20.5 million for 2003 from R$16.4 million for 2002. This increase was mainly
due the increase of the amount of fuel purchased for our operating fleet and
generation plants, as well as the increase of the price and quantity of raw
materials purchased for use in the electrical system maintenance.

         Consolidated expenses related to services provided by third parties,
increased 10.4% to R$66.7 million for 2003 from R$60.4 million for 2002. This
increase was caused mainly by an increase in the demand for the services related
to our network maintenance, as well as an increase of our client-related
expenses, such as meter-reading, disconnection, reconnection, bill collection
and other new services provided to a larger customer base in 2003.


                                       43
<PAGE>


         Consolidated other expenses increased 45.2% to R$84.8 million for 2003
from R$58.4 million for 2002. This decrease was mainly due to the reversal of
the amount of funds allocated for doubtful accounts as a result of an agreement
with the state government of Espirito Santo, in which they agreed to pay us
R$12.7 million. In addition, such decrease was also a consequence of a decrease
in the costs of services we provided to third parties, particularly, the costs
related to public lightening maintenance.

         Net Financial Income

         We had a consolidated net financial income of R$137.4 million in 2003,
as compared to a consolidated net financial expense of R$670.4 million in 2002.
This result was principally due to the appreciation of the real against the U.S.
dollar of 18.2%, which reduced the amount in reais to be paid under our U.S.
dollar-denominated debt, and therefore causing gains in our hedge agreements.

         Net Non-operating Expenses

         Consolidated net non-operating expense increased 104.1% to R$153.1
million in 2003 from R$75.0 million for 2002 due to the impairment charge of our
goodwill recorded under Brazilian GAAP in the amount of R$ 124.1 million. In
addition, we established in 2002 a provision for losses related to an eventual
divestment of a turbine at the Campo Grande thermoelectric plant in the amount
of R$51.8 million. In 2003, we increased this provision by R$73.7 million, of
which R$21.0 million were recorded in the income statement.

         Income Tax and Social Contribution

         In 2003, we recorded income tax and social contribution expense in the
amount of R$115.7 million, as compared to a credit of R$103.4 million in 2002.
This balance is a result of the the income before taxes of R$161.0 million in
2003, as compared to recorded loss before tax of R$681.1 million in 2002.

         Net Income (Loss)

         Net income under Brazilian GAAP increased to a gain of R$43.9 million
in 2003 as compared to a loss of R$538.9 million in 2002, mainly as a result of
the appreciation of the real against the U.S. dollar of 18.2%. Net income in
U.S. GAAP increased to a income of R$176.0 million in 2003 from a loss of
R$868.4 million in 2002. For a discussion of the principal differences between
U.S. GAAP and Brazilian GAAP, and how the differences affect us, see Note 29 to
our financial statements included elsewhere in this annual report.

Year Ended December 31, 2002 Compared with Year Ended December 31, 2001

         Operating Revenues

         Our consolidated operating revenues decreased 0.4% to R$1,723.3 million
for 2002 from R$1,730.8 million for 2001. The decrease was attributable a
reduction in consumption, primarily by residential customers, due to lower
consumption tendencies developed during the Rationing Program.

         Consolidated operating revenues from sales to other distributors
decreased 51.7% to R$40.4 million for 2002 from R$83.5 million for 2001. The
decrease was due to changes to the range of spot market sales that ENERSUL was
eligible to make to other distributors in 2002.

         Operating Expenses

         Consolidated operating expenses increased 4.2% to R$1,234.9 million for
2002 from R$1,185.6 million for 2001, mainly due to increases in the cost of
electricity purchased for resale, depreciation and amortization expenses and
regulatory charges.


                                       44
<PAGE>


         Consolidated expenses for electricity purchased for resale increased
5.0% to R$709.0 million for 2002 from R$675.2 million for 2001. The increase was
a result of the impact of the tariff increase on energy purchased from FURNAS
and TRACTEBEL and the impact of the devaluation of the real on U.S.-dollar
denominated energy purchase prices from ITAIPU.

         Consolidated depreciation and amortization expenses increased 16.2% to
R$173.2 million for 2002 from R$149.1 million for 2001. This increase was
attributable to the R$127.8 million increase in property, plant and equipment in
service at December 31, 2002 compared to the R$101.1 million increase recorded
at December 31, 2001.

         Consolidated personnel expenses increased 2.9% to R$111.4 million for
2002 from R$108.3 million for 2001, principally because a higher percentage of
personnel expenses were attributable to overhead operations, instead of being
attributable to project costs.

         Consolidated regulatory charges increased 9.0% to R$106.2 million in
2002 from R$97.4 million in 2001 mainly due to the increase to R$74.1 million in
2002 as compared to R$66.7 million in 2001 in contributions we were required to
make to the fuel compensation account, or CCC, in light of increased national
energy consumption stemming from the termination of the Rationing Program.

         Consolidated expenses for materials and supplies decreased 21.9% to
R$16.4 million for 2002 from R$21.0 million for 2001. The decrease was mainly
due to ENERSUL's lower thermoelectric generation, which runs by fuel oil.

         Consolidated expenses related to third-party services increased 12.7%
to R$60.4 million for 2002 from R$53.6 million for 2001. This increase was
caused mainly by increased service for network maintenance as well as increased
client-related expenses, such as meter-reading, disconnection, re-connection and
bill collection from customers as the number of our customers increased and the
range of services they demanded broadened.

         Consolidated other expenses decreased 27.9% to R$58.4 million for 2002
from R$81.0 million for 2001. This decrease was mainly due to the fact that in
2002 there were fewer civil and fiscal operating contingencies for impending
lawsuits than in 2001.

         Net Financial Expenses

         Consolidated net financial expense increased 184.3% to R$670.4 million
in 2002 from R$235.8 million in 2001. This increase was due principally to the
impact of the exchange rate on the foreign currency debt obligations, since the
exchange rate on December 31, 2002 was R$3.5333 to U.S.$1.00 compared to
R$2.3204 to U.S.$1.00 on December 31, 2001.

         Net Non-operating Expenses

         Consolidated net non-operating expense increased 207.4% to R$75.0
million in 2002 from R$24.4 million for 2001. This increase was due to the
provision for losses related to the eventual divestment of a turbine at the
Campo Grande thermoelectric plant, the construction of which was cancelled.

         Income Tax and Social Contribution

         Our income tax and social contribution was a credit of R$103.4 million
in 2002, compared to a credit of R$11.0 million in 2001. This increase was
mainly due to an increase in our losses in 2002.

         Net Income (Loss)

         Net income under Brazilian GAAP increased to a loss of R$538.9 million
in 2002 from a loss of R$60.1 million in 2001 as a result of the reasons
described above. Net loss reconciled to U.S. GAAP increased to a loss of R$868.4
million in 2002 from a loss of R$122.2 million in 2001. For a discussion of the
principal


                                       45
<PAGE>


differences between U.S. GAAP and Brazilian GAAP, and how the differences affect
us, see Note 29 to our financial statements included elsewhere in this annual
report.

B.       Liquidity and Capital Resources

         Our business is capital intensive. In recent years, we have financed
our capital investment program primarily with cash provided by operations,
although it also has used loans to complement its financing requirements,
including a loan by BNDES of 538.8 million, a loan from Banco do Brasil of 29.7
million, and a loan by Eletrobras of 58.4 million.

         In 2003, although we generated enough cash through our operations to
finance new investments, we continued using an investment strategy of financing
our investments through loans. During this period, we generated R$102.1 million
in cash, while its capital investment program required R$161.7 million. A
significant portion of our current liabilities at the end of 2003, in the amount
of R$784.5 million, were represented by long-term loans and financing maturing
in 2003, in the amount of R$349.9 million. In addition, such current liabilities
also consisted of (i) accrued liabilities (including, among other things,
interest, fees, income tax and social contribution), in the amount of R$124.6
million; (ii) obligations owed to FURNAS, TRACTEBEL, ELETROSUL, MAE and ITAIPU
related to purchases of electricity, in the amount of R$152.4 million; and (iii)
regulatory charges payable, in the amount of R$11.6 million.

         We had working capital of R$27.3 million at December 31, 2003, as
compared with working capital of R$166.6 million (reclassified) at December 31,
2002. The decrease in working capital has mainly occurred due to the reduction
of our short-term electricity sales and to the decrease in our cash reserves,
primarily resulting from payments due under the notes, which were previously
done in 2002 through cash reserves generated by us.

         As of December 31, 2003, our total of principal of loan and financing
debt was R$2,188.3 million, of which R$757.9 million, or 34.6%, was in
real-denominated loans and R$1,430.4 million, or 65.4%, was U.S.
dollar-denominated debt. Our U.S. dollar-denominated debt included R$1,245.1
million related to the notes and R$185.3 million related to loans obtained from
other banks. The real-denominated loans included (i) R$535.9 million borrowed
from BNDES (of which, R$229 million was used to finance our capital expenditures
program, R$266.1 million was used to finance the losses from the Rationing
Program (collateralized by the amounts to be collected under the extraordinary
tariff recomposition), and R$41.3 million was used to finance the acquisition of
our participation in ENERSUL), (ii) R$58.4 million borrowed from ELETROBRAS and
(iii) R$162.0 million borrowed to finance our capital expenditures program and
working capital.

         The average cost of our U.S. dollar-denominated debt on December 31,
2003 was 10% per year, plus foreign exchange variation. The average cost of our
real-denominated debt was TJLP (the long-term interest rate) plus 3.7% per year
related to the BNDES financing, while R$865.1 million were indexed to the CDI,
INPC or IGP-M plus 1.6% per year.


                                       46
<PAGE>


         Our debt matures as follows:

<TABLE>
<CAPTION>

                                                                        At December 31, 2003
                                                -------------------------------------------------------------------
                  Maturity                          Local Currency           Foreign Currency            Total
-------------------------------------------     -------------------    -----------------------      ---------------
                                                                          (in thousand of reais)
<S>                                                    <C>                  <C>                       <C>
2004...................................                277,319                 72,648                   349,967
2005...................................                146,617                 37,459                   184,076
2006...................................                121,067                 20,046                   141,113
2007...................................                109,451              1,260,779                 1,370,230
2008...................................                 46,220                  8,507                    54,727
2009...................................                 15,096                  3,992                    19,088
2010...................................                 14,098                  3,387                    17,485
2011...................................                 11,103                  2,836                    13,939
2012...................................                  8,056                  1,936                     9,992
2013...................................                  4,306                    875                     5,181
After 2013.............................                  4,530                 17,907                    22,437
                                                -------------------    -----------------------      ---------------
     Total.............................                757,863              1,430,372                 2,188,235
                                                ===================    =======================      ===============
</TABLE>



         As of December 31, 2003, approximately 93% of our R$188.9 million of
marketable securities were invested in U.S. dollar-linked instruments. We
believe that over the long term, increases in our tariffs in reais generate
sufficient cash to counter currency devaluation affecting our U.S.
dollar-denominated loans, although we cannot assure you of this.

         Over the next several years, we expect that our principal liquidity
requirements will consist of the interest payments on the notes and capital
expenditures, which we plan to finance primarily with cash provided by
operations. In addition, if we incur any additional indebtedness, we will need
to make interest payments, and may need to make principal payments, thereon
during the next several years.

         We have ongoing capital expenditures related to the expansion and
modernization of our transmission, distribution and existing generation
facilities. We expect to invest approximately R$119.4 million in the expansion
and modernization of our distribution system during 2004, primarily with cash
from operations. A portion of this may be financed with additional indebtedness
from various financial institutions, particularly BNDES. Consolidated capital
expenditures in 2003, 2002 and 2001 were as follows:

<TABLE>
<CAPTION>

  Area                                                                   2003            2002            2001
----------                                                          --------------- --------------- ----------------
                                                                                (in thousand of reais)
                                                                    ------------------------------------------------
<S>                                                                    <C>             <C>             <C>
Distribution and transmission...........................               97,010          99,023          122,754
Generation..............................................               42,264          53,056           36,695
Other...................................................               22,410          35,011           21,616
                                                                      -------         -------          -------
     Total..............................................              161,684         187,970          181,065
                                                                      =======         =======          =======
</TABLE>



C.       Research and Development, Patents and Licenses, Etc.

         Research and development costs are not significant and are expensed as
incurred. Law No. 9,991 dated July 24, 2000, determines that distribution
companies must apply, annually, at least 0.75% of their net operating revenues
to research and development in the electric sector and 0.25% to energy
efficiency programs. In the latter case, such amounts can be deducted from the
amounts already spent by the distribution company pursuant to their relevant
concession contracts. Generation companies must apply, annually, at least 1% of
their net operating revenues to research and development in the electric energy
sector, with an exception made for generation companies that produce energy
through alternative sources of energy.


                                       47
<PAGE>


D.       Trends

         ESCELSA's supply contracts with certain of its major customers expire
in 2004, 2005, 2007 and 2008, at which time they will be able to seek
alternative electricity distribution services from our competitors. If these
customers enter into supply contracts with our competitors at that time, our
market share and profit margins may be negatively affected.

E.       Off-Balance Sheet Arrangements

         At December 31, 2003, there are no 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.

F.       Tabular Disclosure of Contractual Obligations

         The following table summarizes the maturity profile of our consolidated
long-term debt, operating leases and other commitments as of December 31, 2003:

<TABLE>
<CAPTION>

                                                      Payments due by period (in thousands of reais)
Contractual Obligations                       Total         Less than 1       1-3 year        3-5 year        More than 5
                                                               year                                             years

<S>                                        <C>                <C>            <C>             <C>               <C>
Long-Term Debt Obligations                 2,064,967          232,030          323,178       1,424,114           85,646
Purchase Obligations(1)                    5,515,775          690,629        1,006,593       1,364,192        2,450,592
Intercompany Loan Obligations(2)              75,600           75,600                -               -                -
Other(3)                                     256,729          141,838          110,592           4,298                -
Total                                      7,950,549        1,112,575        1,505,363       2,792,604        2,536,238
</TABLE>


(1)  The purchase obligations do not include connection, transmission and
     transportation agreements, which amounted approximately R$138 million.
(2)  ESCELSA and its controlled companies have additional intercompany loan
     obligations in the aggregate amount of R$147.1 million, which are not
     illustrated above since the table contains only consolidated long-term
     debt.
(3)  Other includes obligation arising from service agreements.


ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.       Directors and Officers

         We are managed by our board of directors, comprised of at least nine
members, and a board of executive officers comprised of the chief executive
officer and a maximum of five other officers.

         Board of Directors

         Our board of directors generally meets twice every two months. It is
responsible for, among other things, establishing our general business policies
and electing the executive officers and supervising their management.

         Under Brazilian corporate law, each member of the board of directors
must hold at least one of our common shares, may reside outside of Brazil
(provided that the director's empowerment is conditioned upon the appointment of
an attorney-in-fact residing in Brazil and that the relevant power of attorney
remains valid for three years after the officer's term of office has expired),
and is elected by the holders of common shares at the Assembleia Geral, or the
general shareholders' meeting.

         The following matters, among others, require the approval of our board
of directors:

         o    the authorization for the acquisition, sale, any other transfer
              or encumbrance of any fixed assets, as well as for the creation
              of any liens on our real property;


                                       48
<PAGE>


         o    the authorization for the acquisition, sale or any transfer of
              capital stock of another company;

         o    the authorization for the issue of any guarantee to an unrelated
              third party;

         o    the incurrence of substantial indebtedness;

         o    the participation in any public bidding process;

         o    the amendment and termination of a concession contract; and

         o    the disposal or acquisition of any asset that exceeds 5% of our
              permanent assets.

         Members of our board of directors serve a three-year term, and may be
reelected. According to our by-laws, the terms of the current members of our
board of directors expire in April 2005. Set forth below are the names,
positions, dates of birth and brief biographical descriptions of the members of
our board of directors.

<TABLE>
<CAPTION>

Name                                           Member Since       Position            Date of Birth
----                                           ------------       --------            -------------
<S>                                            <C>                <C>                 <C>
Antonio Fernando Melo Martins da Costa..       August 2003        Chairman            December 13, 1954
Antonio Eduardo da Silva Oliva..........       August 2003        Member              February 4, 1946
Joaquim Armando Ferreira da Silva Filipe       August 2003        Member              October  28, 1948
Adir Pereira Keddi......................       March 1998         Deputy Chairman     November 18, 1947
Alcir Augustinho Calliari...............       July 1995          Member              September 14, 1938
Antonio Jose Sellare....................       April 2002         Member              July 19, 1953
Francisco Carlos Coutinho Pitella.......       April 2002         Member              February 9, 1953
Ruth Storch Damasceno(1)................       November 1996      Member              June 25, 1952
</TABLE>

----------
(1)  Ms. Damasceno is the representative of our employees, a board position
     provided for in our by-laws.


         Antonio Fernando Melo Martins da Costa. Besides being the chairman of
ESCELSA's and ENERSUL's board of directors, Mr. Costa is also the chairman of
the board of directors of Bandeirante Energia S.A. and Iven S.A., as well as an
officer of EDP - Gabinete de Ligacao ao Brasil and president of EDP Brasil S.A.
Mr. Costa previously held several positions with international financing
entities such as the general officer of Banco Comercial Portugues manager of AF
Investimentos, president of APFIN, officer of Eureko BV (Holland) and
vice-president of Seguradora PZU (Polonia). He holds a degree in civil
engineering from Faculdade de Engenharia da Universidade do Porto and a master
degree in financial administration from the ISEE - Instituto Superior de Estudos
Empresariais.

         Adir Pereira Keddi. Mr. Keddi was elected deputy chairman of the board
of directors on April 30, 2002 and has been a member of the board of directors
since March 1998. He is an executive officer of Fundacao Vale do Rio Doce de
Seguridade Social. He was previously in the accounting and finance department of
ESSO Brasileira de Petroleo S.A. He holds a degree in economics from Faculdade
Candido Mendes -- Rio de Janeiro and a master degree in financial administration
from the Centro de Extensao e Aperfeicoamento Profissional of Rio de Janeiro --
CEAP-RJ.

         Alcir Augustinho Calliari. Mr. Calliari is an economic consultant at
Brasilconsult. He was previously the chairman of the board of directors,
president and chief executive officer of Banco do Brasil S.A. He holds a degree
in economics from Faculdade de Ciencias Politicas e Economicas de Cruz Alta --
RS, a law degree from Faculdade Nacional de Direito do Rio de Janeiro and a
degree in sociology from Colegio de Filosofia de Iju-Rio Grande do Sul.

         Antonio Jose Sellare. Mr. Sellare is the investor relations director
and chief financial officer of EDP Brasil S.A. and chief financial officer of
Enertrade Comercializadora de Energia S.A. and of Calibre Participacoes S.A. He
is also a member of the board of directors of Bandeirante Energia S.A., the
investor relations director and CEO of Iven S.A. and 135 Participacoes S.A. He
was previously the treasury director of Banco Axial S.A and the chief financial
officer of Organizacoes BMD. He holds a degree in business administration from
Pontificia Universidade Catolica -- Sao Paulo.


                                       49
<PAGE>


         Antonio Eduardo da Silva Oliva. Mr. Oliva is the CEO of ESCELSA and
ENERSUL and a member of the boards of directors of ESCELSA, ENERSUL and
Bandeirante Energia S.A. Mr. Oliva previously was a member of the boards of
directors of EDP Distribuicao - Energia S.A., HIDROCENEL - Energia do Centro
S.A., EM - Eletricidade do Norte S.A. and CENEL - Eletricidade do Centro S.A.,
all companies of EDP group. Mr. Oliva also held a position of executive officer
of Distribuicao Centro de Portugal. He holds a degree in electronic engineering
from Universidade de Lourenco Marques - Mocambique.

         Joaquim Armando Ferreira da Silva Filipe. Mr. Filipe is a member of the
board of directors of ESCELSA and ENERSUL, as well as president of Bandeirante
Energia S.A and vice-president of Iven S.A. He previously was a member of the
board of directors of CERJ and held several executive positions with companies
of EDP group, such as EDP itself and Bandeirante Energia S.A., CEM - Companhia
de Eletricidade de Macau and Distribuicao Centro de Portugal, among others. Mr.
Filipe holds a degree in engineering from Faculdade de Engenharia da
Universidade do Porto.

         Francisco Carlos Coutinho Pitella. Mr. Pitella is the investor
relations director of GTD Participacoes S.A. He was previously a director of
Vale do Rio Doce Aluminio S.A. and a member of the board of directors of Valesul
and Mineracao Rio do Norte. He holds a degree in civil engineering from Escola
Nacional de Engenharia da Universidade Federal do Rio de Janeiro.

         Ruth Storch Damasceno. Ms. Damasceno is the president of CINVES. She
holds a degree in business administration from the Universidade Federal do
Espirito Santo.

Executive Officers

         Our executive officers are elected by the board of directors for a
three-year term, although any executive officer may be removed by the board of
directors before the expiration of his term. Our executive officers, as well as
other officers, are responsible for our day-to-day management.

         Set forth below, are the names, positions, dates of birth and brief
biographical descriptions of our executive officers as of April 29, 2003.

<TABLE>
<CAPTION>

Name                                           Position                       Date of Birth
----                                           --------                       -------------
<S>                                            <C>                            <C>
Antonio Eduardo da Silva Oliva...........      Chief Executive Officer        February 4, 1946
Sergio Pereira Pires.....................      Chief Financial Officer        September 13, 1959
Manuel Fernando das Neves Bento..........      Technical Officer              January 23, 1951
Armando Fernandes Bernardo...............      Commercial Officer             April 21, 1944
</TABLE>


         Antonio Eduardo da Silva Oliva. Mr. Oliva has been the Chief Executive
Officer of ESCELSA since December 2002 and of ENERSUL since January 2003. For
more information on Mr. Oliva's resume, see "Item 6. Directors, Senior
Management and Employees - Board of Directors".

         Sergio Pereira Pires. Mr. Pires has been the chief financial officer of
ESCELSA since June 1997 and of ENERSUL since November 1997. He was previously a
director of Grupo Habitasul and a corporate director of Banco Multiplic. He
holds a degree in economics from the Universidade de Sao Paulo and a master's
degree in finance from the Fundacao Getulio Vargas.

         Manuel Fernando das Neves Bento. Mr. Bento has been the Technical
Officer of ESCELSA since December 2002 and of ENERSUL since January 2003. He was
previously the member of the board of directors of COELCE - Cia Energetica do
Ceara, an alternate member of the board of directors of CERJ-Cia de Eletricidade
do Rio de Janeiro, Technical Vice President of CERJ and Distribution Officer of
CNEL, controlled by EDP Group. He holds a degree in electromechanical
engineering from the Universidade De Lourenco Marques in Portugal.



                                       50
<PAGE>


         Armando Fernandes Bernardo. Mr. Bernardo has been the Commercial
Officer of ESCELSA since October 2002 and of ENERSUL since November 2002. He was
previously the Director of Operations and Investors Relations of Calibre
Participacoes S.A., Technical Director of 135 Participacoes and IVEN S.A., Vice
President of Enercop Servicos Corporativos Ltda., Director of Centro Algarve and
Technical Director of Alentejo. He holds a degree in eletromechanical
engineering from the Instituto Tecnico da Universidade Tecnica de Lisboa.

B.       Compensation

         For the year ended December 31, 2003, the aggregate compensation paid
by us to all directors, executive officers and members of our board of auditors
for services in their respective capacities was approximately R$5 million. At
the annual shareholders' meeting held on March 30, 2004, the shareholders of
ESCELSA determined that an aggregate compensation of R$6.5 million would be paid
to our directors and executive officers for the year ending December 31, 2004.
Neither the members of our board of directors nor our executive officers receive
pension benefits from us. At December 31, 2003, the members of our board of
directors and our executive officers owned an aggregate of nine common shares of
our capital stock.

C.       Board Practices

         According to our by-laws, the terms of the current members of our board
of directors expire in April 2005. Our executive officers are elected for
three-year terms, although any executive officer may be removed by our board of
directors before the expiration of his term. None of the members of our board of
directors or our executive officers is a party to an employment contract
providing for benefits upon termination of employment.

Board of Auditors (Conselho Fiscal)

         Under Brazilian corporate law, the Conselho Fiscal (board of auditors)
is a corporate body independent of management and the company's external
auditors. A Brazilian board of auditors is not equivalent to, or comparable
with, a U.S. audit committee. The primary responsibility of the board of
auditors is to review management's activities and the financial statements, and
report its findings to the shareholders. Under Brazilian corporate law, the
board of auditors may not contain members that are on the board of directors, on
the executive committee, the company's employees, employees of a controlled
company or of a company of the same group, including a spouse or relative of any
member of the company's management. In addition, the Brazilian corporate law
requires the board of auditors to receive as remuneration at least 10% of the
average amount paid to each executive officer. The Brazilian corporate law
requires a board of auditors to be composed of a minimum of three and a maximum
of five members and their respective alternates.

         We have a permanent board of auditors whose members are elected at the
annual shareholders' meeting, with their terms lasting until the next annual
shareholders' meeting after their election. The current members and their
respective alternates were elected by our shareholders on March 30, 2004.

Name                                              Position
----                                              --------
Carlos Roberto Veroneze.....................      Effective member
Dionisio Leonidas de Medeiros Neto..........      Alternate
Waldir Nascimento...........................      Effective member
Licinio de Jesus Ferrari....................      Alternate
Eduardo Soares..............................      Effective member
Flavia Andraus Troyano......................      Alternate


D.       Employees

         At December 31, 2003, we employed 1,305 persons. In 2003, our total
investment in development and training activities amounted to R$518,000,
comprising 71,758 hours of training, with an average of 55 hours of training per
employee.

         The following table sets forth the number of employees for the periods
indicated:


                                       51
<PAGE>


<TABLE>
<CAPTION>

                                                                         At December 31,
                                                        -----------------------------------------------
                                                           2003               2002               2001
                                                        ---------          ---------          ---------
         <S>                                               <C>                <C>               <C>
         Professionals (including engineers,
           accountants, economists and attorneys)...         567               586                659
         Management.................................          89                69                 73
         Operational................................       1,589             1,699              1,734
                                                        ---------          ---------          ---------
           Total....................................       2,245             2,354              2,466
</TABLE>


         Since 1997, part of each employee's compensation is linked to
previously agreed upon goals. The program has presented good results, increasing
productivity and efficiency gains. We provide our employees and their dependents
with medical and dental assistance through a system that uses a network of
accredited doctors and services. We pay the major portion of the costs for these
services, with a smaller amount being paid by the employees. In 2003, we spent
R$5.3 million on this assistance.

         We are sponsors of retirement benefit plans, which are managed by
Fundacao ESCELSA de Seguridade Social - ESCELSOS or ESCELSOS and Fundacao
ENERSUL. ESCELSOS and Fundacao ENERSUL are non-profit entities, whose main focus
is to supplement the benefits provided by the federal social security system to
our employees. The majority of our employees participate in these pension plans.
In 2003, we contributed an aggregate of R$4.1 million to the funds. See Note 24
to our financial statements included elsewhere in this annual report.

         In Brazil, employees have the right to organize unions. Within the
confines of a defined geographic area, employees belonging to any specific
professional category and employees constituting a specific economic category
may each be represented by only one union. Individual unions generally belong to
state-wide union federations, which in turn belong to nationwide union
confederations. ESCELSA's employees are members of the Sindicato dos
Trabalhadores na Industria de Energia Eletrica no Estado do Espirito Santo --
SINDES and ENERSUL's employees are members of the Sindicato dos Trabalhadores na
Industria e Comercio de Energia no Estado de Mato Grosso do Sul -- STICE-MS. We
believe that our relationships with our employees and their respective labor
unions are generally good.

E.       Share Ownership

         As of December 31, 2003, the members of our board of directors and our
executive officers, on an individual basis and as a group, beneficially owned
less than one percent of our common shares. None of the members of our board of
directors or our executive officers holds any options to purchase our common
shares.

ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.       Major Shareholders

         At ESCELSA's privatization auction held on July 11, 1995, 50% plus one
of the common shares of ESCELSA were acquired by Iven and GTD. In August 1999,
EDP -- Eletricidade de Portugal acquired 73% of Iven, and since that date
control of Iven has been shared between EDP and Opportunity Fund.

         GTD is a holding company that invests in Brazil's electricity sector
and is owned by 17 Brazilian pension funds, including Caixa de Previdencia dos
Funcionarios do Banco do Brasil - PREVI, Instituto Aerus de Seguridade Social,
Fundacao de Assistencia e Previdencia Social BNDES - FAPE, Fundacao Telebras de
Assistencia Social - SISTEL, Fundacao Eletrobras de Seguridade Social, Real
Grandeza Fundacao de Previdencia e Assistencia and other foundations.

         The following table sets forth information regarding U.S. security
holders with respect to ownership of our common shares as of December 31, 2003.


                                       52
<PAGE>

<TABLE>
<CAPTION>

                                                                                                       Percentage
Shareholder                                                                     Number of Shares        of Total
-----------                                                                     ----------------        ---------
<S>                                                                                  <C>                  <C>
Iven.....................................................................            2,378,671            52.27%
GTD......................................................................            1,137,709            25.00
Fundacao Central Bank de Previdencia Privada - CENTRUS...................              275,678             6.06
Officers and Directors as a group........................................                    9              *
Others...................................................................              758,766            16.67
                                                                                ----------------        ---------
Total....................................................................            4,550,833           100.0%
                                                                                ================        =========
</TABLE>


----------
*  Less than 1%.

Shareholders' Agreement

         There currently are no shareholder agreements with respect to ESCELSA
in effect.

B.       Related Party Transactions

         Our concession contracts require that we obtain approval from ANEEL
prior to entering into commercial relationships with any of our shareholders.
Our transactions with our affiliates are restricted by the provisions of the
indenture that governs the notes.

         In September 2003, ESCELSA entered into a Contract of Purchase and Sale
of Electrical Energy with Enertrade S.A., a company which is also owned by our
controlling shareholder, EDP. This contract was duly approved by ANEEL, with no
impositions of price caps. For more information on this contract, please see
"Item 10C. Material Contracts -- Contracts for Purchase and Sale of Electric
Energy."

         Magistra, our subsidiary, have entered, from 2000 to 2002, into loan
agreements with ESC 90 Telecomunicacoes Ltda., a company in which ESCELSA holds
49% of total voting equity. The total amount owed by ESC90 to Magistra on
December 31, 2003 was approximately R$75.6, including principal and interests.
However, while R$69.4 million of the debt bear interests at 100% of the CDI rate
under the original loan agreements, the remaining R$6.2 million debt bears
interests at the TJLP plus 4%, since it was later subject to the terms and
conditions of an agreement executed between Magistra and BNDES on November 30,
2000. The total amount of the debt is due in 2004.

         Magistra also financed ENERSUL's operations through loan agreements in
the amount of approximately R$136.1 million on December 31, 2003. All agreements
bear interests at 105% of CDI rate and must be repaid in 2004. In addition,
Enersul guarantees debts in the aggregate amount of R$167.2 in on December 31,
2003 owned by Magistra under credit facility agreements executed with Banco Itau
BBA S.A. on April 11, 2000 and March 30, 2001.

         Castelo Energetica S.A., a wholy owned subsidiary of Magistra, has also
financed some of its operations through credits granted by Magistra. On December
31, 2003, the total amount of such credits was 34.0 million, including principal
and interests, 33.4 million of which bear interests at 100% of the CDI rate
while the remaining 0.6 million debt bears interets of the TJLP rate plus 4%,
since it is also subject to a previous agreement entered into between Magistra
and BNDES on November 30, 2000.

C.       Interest of Experts and Counsel

         Not applicable.


ITEM 8.  FINANCIAL INFORMATION

A.       Consolidated Statements and Other Information

         See financial statements filed with this annual report.


                                       53
<PAGE>


Legal Proceedings

         We are party to certain lawsuits and administrative proceedings before
various courts involving tax, labor and civil matters. The principal lawsuits
currently in process are as follows:

         Tax Litigation

         Brazilian companies are required to pay contributions to the PIS
Program (Program for Social Integration) and COFINS (Program for Financing
Social Security). The rates for these contributions currently are 1.65% (it was
0.65% before November 30, 2002) and 7.6 % (it was 2.0% in 1998 and 1997 and 3.0%
up to January 31, 2004) of the revenues, respectively. ESCELSA and ENERSUL have
filed lawsuits against the Brazilian government questioning the
constitutionality of (i) with respect to COFINS, contributions relating to
non-operational and financial income and (ii) with respect to PIS, the
contributions relating to income related to the sales of energy, and to
non-operational and financial income. As a consequence of a final decision from
STF (the Brazilian Supreme Court) upholding the constitutionality of such
contributions, the deposits made by us in connection with such lawsuits were
converted into payments to the Brazilian government and as from such date we
started to regularly pay the amounts due under PSI and COFINS. On June 12, 2003,
the contingency relating to these lawsuits were extinguished.

         We are also a party to an administrative proceeding filed against the
tax authorities questioning the constitutionality of FINSOCIAL and requesting a
compensation for the amounts paid in connection therewith. The decision on this
proceeding is still pending.

         Also, based on our legal counsel's opinion and on a preliminary
decision upheld by a lower court which guarantees restitution and/or
compensation of amounts overpaid relating to fines on tax and contributions
which payment was made spontaneously and untimely, we compensate amounts
relating to past-due contributions (PIS, COFINS, IRPJ and CSLL). However, we
maintain provisions for such amounts.

         Our management believes that the outcome of these tax-related
proceedings will not have a material adverse effect on our financial position or
results of operations. As of December 31, 2003, we have reserved R$153.5 million
for these contingencies, of which R$97.8 million is deposited in judicial escrow
accounts in connection with these lawsuits.

         Labor Claims

         We are party to several labor-related lawsuits, including a lawsuit
filed by the Sindicato dos Trabalhadores da Industria de Energia Eletrica do
Estado do Espirito Santo -- SINDEES, which is the labor union in the State of
Espirito Santo for the electricity sector, as well as several disputes filed by
employees and former employees related principally to our wage structure,
overtime, hazard conditions and reintegration. As of December 31, 2003, we had
reserved R$27.2 million for labor contingencies, of which R$15.9 million is
deposited in judicial escrow accounts in connection with these lawsuits.

         We believe, based on the judgment of our management and our legal
counsel, that the amount provisioned is sufficient to cover the probable losses
from lawsuits that remain pending, with a range of possible loss 10% higher or
lower than the reserved amount.

         Civil Litigation

         We are party to civil lawsuits and administrative proceedings arising
from the ordinary course of our business. We believe that the ultimate outcome
of these proceedings will not have a material adverse effect on our financial
position or results of operations. As of December 31, 2003, we had reserved
R$16.0 million for civil litigation, of which R$15.5 million is deposited in
judicial escrow accounts in connection with these lawsuits.


                                       54
<PAGE>


         Tariff Litigation

         A number of industrial consumers have brought a lawsuit against ESCELSA
and ENERSUL seeking refunds of amounts paid to ESCELSA and ENERSUL as a result
of rate increases that became effective during an economic stabilization plan in
1986. The lawsuits claim that such increases were in violation of price controls
instituted as part of the economic stabilization plan. Our management believes
that the ultimate outcome of these proceedings will not have a material adverse
effect on our financial position or results of operations. As of December 31,
2003, we had reserved R$6.3 million for these contingencies.

Dividend Policy and Dividend Distributions

         Amounts Available for Distribution

         At each annual shareholders' meeting, the board of directors is
required to recommend how net profits for the preceding fiscal year are to be
allocated. For purposes of Brazilian corporate law, net profits are defined as
net income after income taxes and social contribution taxes for such fiscal
year, net of any accumulated losses from prior fiscal years and any amounts
allocated to employees' and management's participation in our profits. In
accordance with Brazilian corporate law, the amounts available for dividend
distribution are the amounts equal to our net profits less any amounts allocated
from such net profits to the legal reserve.

         We are required to maintain a legal reserve, to which we must allocate
5% of net profits for each fiscal year until the amount of such reserve equals
20% of our paid-in capital. However, we are not required to make any allocations
to our legal reserve in respect to any fiscal year in which it, when added to
our other established capital reserves, exceeds 30% of our capital. Net losses,
if any, may be charged against the legal reserve.

         Mandatory Distribution

         The Brazilian corporate law generally requires that the by-laws of each
Brazilian corporation specify a minimum percentage of the amounts available for
distribution by such corporation for each fiscal year that must be distributed
to shareholders as dividends, also known as the mandatory distributable amount.
Under our by-laws, the mandatory distributable amount has been fixed at an
amount equal to not less than 25% of the amounts available for distribution, to
the extent amounts are available for distribution.

         The mandatory distribution is based on a percentage of adjusted net
income, not lower than 25%, rather than a fixed monetary amount per share. The
Brazilian corporate law, however, permits a publicly held company to suspend the
mandatory distribution of dividends if the board of directors and the board of
auditors report to the shareholders' meeting that the distribution would be
inadvisable in view of the company's financial condition. The suspension is
subject to approval of holders of common shares. In this case, the board of
directors shall file a justification for such suspension with the CVM. Also, a
publicly held company may suspend the payment of dividends exclusively for
purposes of raising funds through the issuance of nonconvertible debentures.
Profits not distributed by virtue of the suspension mentioned above are
attributed to a special reserve and, if not absorbed by subsequent losses, paid
as dividends as soon as the financial condition of such company permits such
payments.

         Payment of Dividends

         We are required by the Brazilian corporate law and by our by-laws to
hold an annual shareholders' meeting by the fourth month after the end of each
fiscal year at which, among other things, the shareholders have to decide on the
payment of an annual dividend. The payment of annual dividends is based on the
financial statements prepared for the relevant fiscal year. Under the Brazilian
corporate law, dividends generally are required to be paid within 60 days
following the date the dividend was declared, unless a shareholder's resolution
sets forth another date of payment, which, in either case, must occur prior to
the end of the fiscal year in which the dividend was declared. A shareholder has
a three-year period from the dividend payment date to claim dividends in respect
of its shares, after which the amount of the unclaimed dividends reverts to us.
The Brazilian corporate law also permits a company to pay interim dividends out
of preexisting and accumulated profits for the preceding fiscal year or
semester, based on financial statements approved by its shareholders.


                                       55
<PAGE>


         Dividend Distributions

         The following table sets forth our historical payments of dividends to
our shareholders.

<TABLE>
<CAPTION>

                                              Period in which profits            Total amount of
               Date of Approval                   were generated                   distribution
         ------------------------------    --------------------------------    ---------------------
         <S>                               <C>                                   <C>
         April 2000...................     Year ended December 31, 1999                 -*
         April 2001...................     Year ended December 31, 2000           R$13.2 million
         April 2002...................     Year ended December 31, 2001                 -*
         April 2003...................     Year ended December 31, 2002                 -*
         April 2004...................     Year ended December 31, 2003          R$ 42.0 million
</TABLE>

-----------------------
*    No dividends were declared for the years ended December 31, 2002, 2001 and
     1999 because we had net losses for such periods.


         The declaration of annual dividends, including dividends in excess of
the mandatory distribution, requires approval by the vote of the majority of the
holders of our common stock. The amount of any distributions will depend on many
factors, such as our results of operations, financial condition, cash
requirements, prospects and other factors deemed relevant by our board of
directors and shareholders.

B.       Significant Changes

         No significant changes or events have occurred after the close of the
balance sheet date at December 31, 2003, other than the events already described
in this annual report.

ITEM 9.  THE OFFER AND LISTING

A.       Offer and Listing Details

         The carrying value of our notes as of December 31, 2003, consisting of
the fair value of the notes based on the bid price as of such date, was
R$1,145.3 million. At December 31, 2003 and May 31, 2004 the notes were trading
at 92.0% and 95% of their face value, respectively.

B.       Plan of Distribution

         Not applicable.

C.       Markets

         Our common shares are traded on the Sao Paulo Stock Exchange in Brazil
and are not traded in the United States. The notes are listed on the Luxembourg
Stock Exchange.

D.       Selling Shareholders

         Not applicable.

E.       Dilution

         Not applicable.

F.       Expenses of the Issue

         Not applicable.


                                       56
<PAGE>


ITEM 10.  ADDITIONAL INFORMATION

A.       Share Capital

         Not applicable.

B.       Memorandum and Articles of Association

         Set forth below is certain information concerning our capital stock and
a brief summary of certain significant provisions of our by-laws and the
Brazilian corporate law. This description does not purport to be complete and is
qualified by reference to our by-laws (an English translation of which has been
filed with the Securities and Exchange Commission) and to the Brazilian
corporate law.

Corporate Purposes

         We are a share company with principal place of business and
jurisdiction in the City of Vitoria, Brazil, governed mainly by our by-laws and
by the Brazilian corporate law.

         In accordance with our by-laws, our main purposes are: (a) to carry out
studies, projects, constructions and operations of production mills,
transmission lines and distribution of electric power, as well as to enter into
trading acts arising from such activities, while retaining the right to
simultaneously join other corporations for the accomplishment of other projects;
(b) to develop activities associated with the rendering of electric power
service, such as multiple use of electric power poles, through assignment to
other users, data transmission through installations while observing relevant
legislation, rendering of operational technical services, maintenance and
planning of third-party electrical installations, optimization services of
energy processes and consumer electrical installations, supply of expensive
assignment lines, land subject to mill exploration, and reservoirs for better
electric power use and supply; (c) to join study groups, syndicates, association
groups or any other entity for research purposes in the energy sector or for the
training of technical personnel which may be deemed necessary, as well as for
the rendering of technical, operational and administrative support services to
electrical power subsidiary companies in the public sector.

Corporate Governance

         We are principally governed by the shareholders, the board of
directors, the board of executive officers and the Conselho Fiscal (board of
auditors). Their roles are defined by Brazilian law and our by-laws, and may be
described generally as follows:

Shareholders Meetings and Voting Rights

         Under the Brazilian corporate law, a general meeting of shareholders,
or a general meeting, is empowered to decide all matters relating to our
business objectives and pass resolutions deemed necessary for our protection and
well-being. Each common share entitles the holder thereof to one vote at
meetings of our shareholders.

         Shareholders voting at a general meeting have the exclusive power,
among others, to:

         o    amend the by-laws,

         o    elect or dismiss members of the board of directors (and those of
              the board of auditors) at any time,

         o    receive the yearly accounts prepared by management and accept or
              reject management's financial statements, including the
              appropriation of net profits and the distributable amount for
              payment of the mandatory dividend and allocation to the various
              reserve accounts,

         o    accept or reject the valuation of assets contributed by a
              shareholder in consideration for the issuance of share capital,
              and


                                       57
<PAGE>


         o    pass resolutions to reorganize our legal form, merge, consolidate
              or split us, dissolve and liquidate us, elect and dismiss our
              liquidators and examine our accounts.

         Shareholders' meetings are usually called by the board of directors
through a notice published in newspapers at least one month prior to the meeting
informing the date and time of the meeting and the proposed agenda. However,
shareholders' meetings may also be called by: (i) the board of auditors,
whenever the board of directors postpones the call for more than 1 month without
any reason in particular, (ii) any shareholder, whenever there is a delay of
more than 60 days in calling the meeting, (iii) shareholders representing at
least 5% of the capital stock, whenever the board of directors does not call the
meeting within 8 days after they have submitted a formal request, or (iv)
shareholders representing at least 5% of the voting capital, or at least 5% of
the non voting shareholders, whenever the board of directors does not call the
meeting within eight (8) days after they have submitted a formal request to the
board of auditors. In any case, the meetings shall be held at company's head
office.

         Shareholders' meetings shall be held on first call with the attendance
of shareholders representing at least 25% of the voting capital, and for the
second call no minimum quorum of shareholders is required. Shareholders'
meetings shall be considered duly called if all shareholders have attended even
if any formality has not been observed.

         According to the provisions of our by-laws, we shall be controlled
either by Brazilian individuals or a company incorporated under Brazilian laws
and maintain our head office and management in Brazil. The shares held by our
controlling shareholders shall not be transferred without the prior consent of
the Federal Government. Any and all transfer of shares that may result in the
transfer of our control to a foreign entity or restrict the control held by
Brazilian individuals or companies shall not be valid and recorded in our book
of shares, unless the above mentioned prior consent has been obtained.

Board of Directors

         The current board of directors is made up of nine members. The by-laws
require that the board of directors shall consist of at least nine members.
Members of the board of directors are elected by the holders of common shares at
the Assembleia Geral or the general shareholders' meeting and are elected for a
period of three years, at the end of which they may be re-elected or replaced.
The aggregate compensation of the members of the board of directors is set at
the shareholders meeting. Under Brazilian corporation law, the maximum
remuneration that members of a board of directors can collect from a corporation
is the lesser of: (i) the annual remuneration of the officers, or (ii) 10% of
the outstanding profit if the by-laws provide the Board members with the right
to participate in company profits and the company has already distributed to the
shareholders the mandatory dividend of 25% of company profits. For the
discussion about the directors' responsibilities and compensation, see "Item 6A.
Directors, Senior Management and Employees -- Directors and Officers - Board of
Directors" and "Item 6B. Compensation."

Corporate governance framework

Good Corporate Governance Practices

         We are governed by our board of directors, board of executive officers
and board of auditors.

         Our board of directors has powers to, among other matters: (i) set our
general business strategy through management goals, (ii) verify the
accomplishment of the goals, the execution of approved programs and the results
obtained, (iii) elect and discharge executive officers, defining their
attributions, (iv) determine our organizational structure, and (iv) approve the
creation of committees and appoint their members. Currently we have two
committees installed:

         o Committee for Corporate Matters, which is responsible for reviewing
           and issuing an opinion on corporate matters.


                                       58
<PAGE>


         o Committee for Financial-Economic Matters, which is responsible for
           reviewing and issuing an opinion on financial-economic matters.

         Our board of executive officers is responsible for the execution of the
business strategy approved by our shareholders and by our board of directors.
Our chief executive officer and the other executive officers are managers of
their corresponding areas and responsible for the choice and attribution of the
staff.

         Our board of auditors is permanently installed, formed by three members
and their alternates elected by our shareholders and with a term of office of
one year. Our board of auditors has powers to review administrative acts and the
financial statements among other attributions.

Market Disclosure Rules

         We have an internal policy for the disclosure of relevant information
and confidentiality that is provided to our controlling shareholders, directors,
officers, members of our board of auditors and certain employees. The policy
shall be formally agreed and accepted upon the signature of a term of adherence
that is filed with us.

         Under the relevant policy, our investors relationship officer is
responsible to inform CVM and the stock exchanges about any relevant act or fact
concerning our businesses and to provide immediate, full and written disclosure
of any relevant information simultaneously to all markets in which our
securities are traded, indicating whenever is possible the amounts involved. Any
relevant information shall be reported to the general public through the
publication in the newspaper in which we usually publish our announcements to
shareholders.

         Any person subject to our policy that has access to any information
considered to be relevant shall immediately inform our investors relationship
officer. Relevant information shall be preferably disclosed before or after the
trading period of the stock exchanges and if the exchanges are not operating
simultaneously, we shall observe the trading period of the Brazilian stock
exchanges.

         All individuals subject to the policy are liable for damages that we or
other individuals have incurred due to any breach or violation of the provisions
set forth in our disclosure and confidentiality policy.

Appointment of Independent Directors

         Under Brazilian corporation law, members of the board of directors and
board of auditors must perform their activities exclusively on the best interest
of the company and shall comply with their duties of diligence and loyalty. An
officer shall not take part in any transaction in which he has interests that
conflict with company's interests and shall be liable for any losses whenever
acts with negligence or fraud, within his attributions or powers or in violation
of law or our by-laws.

Capital Stock and Dividend Policy

         General

         As of December 31, 2003, our capital stock in reais was R$239.141
thousand. Our share capital is comprised of registered common shares, all
without par value. Our share capital consists of a total of 4,550,833 issued
common shares, without par value. Our by-laws authorize our board of directors
to increase our capital stock up to R$1,000,000,000.00, without seeking specific
shareholder approval. The shareholders must approve any further capital increase
at a shareholders' meeting.

         Mandatory Annual Distribution

         Under our by-laws, at least 25% of our adjusted net income for the
preceding fiscal year must be distributed as a mandatory annual distribution, to
be paid out within 60 days of the annual shareholders' meeting in which the
distribution is approved. The Brazilian corporate law permits, however, a public
company to suspend payment of the mandatory distribution (i) if the board of
directors and the conselho fiscal report to the shareholders' meeting


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that the distribution would be incompatible with our financial condition,
subject to approval by the shareholders' meeting or (ii) for purposes of raising
funds through the issuance of nonconvertible debentures. The board of directors
must file a justification for a distribution suspension with the CVM within five
days of the shareholders' meeting. Profits not distributed due to such
suspension must be allocated to a special reserve and, if not absorbed by
subsequent losses, must be paid as dividends as soon as our financial situation
permits such payments. There is no restriction on our repurchase or redemption
of shares while the mandatory distribution is suspended due to duly approved and
justified financial reasons, other than the generally applicable restrictions on
trading by companies with their own shares, as set forth in the Brazilian
corporate law and in the rules and regulations issued by CVM.

         Allocation of Net Income

         At each annual shareholders' meeting, our by-laws require our board of
directors to recommend that net income for the preceding fiscal year from which
income tax and losses carried forward from prior fiscal years have already been
deducted be allocated as follows:

         o    5% for a legal reserve that will not exceed 20% of our paid-in
              capital;

         o    at least 25% for mandatory distribution to shareholders; and

         o    any balance to be allocated in the manner determined by the
              shareholders.

         Under the Brazilian corporate law, payment of the mandatory dividend is
not required if the board of directors has formally declared such distribution
to be inadvisable in view of the company's financial condition and has provided
the shareholders at the annual shareholders' meeting with an opinion to that
effect which has been reviewed by the conselho fiscal and reported to the CVM
prior to such meeting. See "Item 8A. Financial Information -- Consolidated
Statements and Other Information -- Dividend Policy and Dividends -- Mandatory
Distribution."

C.       Material Contracts

Contract for the Installment of Transmission Services

         On October 28, 1999, ESCELSA and ONS entered an agreement to render
transmission of electric energy services, in which ESCELSA grants to ONS
authorizations for the management and coordination of the transmission services
rendered by ESCELSA and to represent the latter before its customers to execute
the contracts for the use of the transmission system. This agreement will
terminate on the date of the expiration of the ESCELSA concession contract.
Under this agreement, ESCELSA is responsible for:

         o    implanting, protecting and maintaining the installations,

         o    reporting to ONS so it may supervise and control the system, and

         o    providing telecommunication services.

         ESCELSA is also responsible for measuring the volume of energy sold to
each customer and for billing such customers for the energy consumed.

Contract for Use of the Transmission System

         On October 28, 1999, ESCELSA and ONS also entered into a contract
providing for the use by ESCELSA of the system of transmission of electric
energy controlled and operated by ONS, for distribution of that electric energy
in its concession area. The term of this agreement is until the expiration of
the concession obtained by ESCELSA. Under this agreement, ESCELSA is required to
provide ONS with the information necessary for the operation of the system.
ESCELSA shall pay ONS a monthly tariff for the use of the transmission system,
including


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<PAGE>


for eventual excess of demand and overloads in the installation and equipments
of ESCELSA, at the amounts established pursuant to regulations implemented by
ANEEL.

Contract for Connection to the Transmission System

         ESCELSA entered into a contract, effective June 10, 1999, with FURNAS,
a transmitter of electric energy, providing for ESCELSA's connection to FURNAS'
transmission system, for the purpose of acting as a distributor of the electric
energy in its concession area. The term of this agreement is until December
2005. Under this agreement, ESCELSA and FURNAS jointly assume responsibility for
the operation and maintenance of installations of connection and/or points of
connection of their property as well as guarantee mutual access to all such
facilities. In addition, this contract imposes responsibility on both parties
for the evaluation of the operative conditions and identification of necessary
adaptations to the facilities. However, it is ESCELSA's sole responsibility to
forecast the load of installations to FURNAS. ESCELSA must pay FURNAS a monthly
tariff for the installation of connection and/or points of connection of FURNAS'
property, for every month of use of that connection, at the amounts established
by ANEEL, in the same proportion.

Contracts for Purchase and Sale of Electric Energy

         ESCELSA entered into an agreement to purchase electric energy and
demand from FURNAS in order to distribute such energy to the public in ESCELSA's
concession area. The contract became effective on August 7, 1999 and continues
in effect until December 31, 2005, throughout which time ESCELSA is required to
purchase certain amounts of electricity generated by FURNAS, at tariffs set by
ANEEL. Under Law No. 9,648 of May 27, 1998, ESCELSA has the right to reduce
purchases from FURNAS if a customer chooses to become a free consumer and
therefore terminates its contract with ESCELSA. Such reduction is subject to
ANEEL's approval.

         ESCELSA and ENERSUL have also entered into Contracts of Purchase and
Sale of Electrical Energy with Enertrade-Comercializadora de Energia S.A., as
amended from time to time, both dated on December 23, 2002. The contracts became
effective from 2003 to 2012 and provide for both ESCELSA and ENERSUL to buy
energy from Enertrade at a determined price and for a set amount. Both
companies' commitment may be increased or reduced, as governed by the contracts.
Since these contracts are related party arrangements, they are subject and were
submitted to ANEEL's approval. In this occasion, ANEEL imposed a price cap
(significantly lower than the Normative Value) as a requisite for the approval
of such contracts. ENERTRADE obtained a preliminary injunction against the price
cap imposed by ANEEL and, as a consequence, it is currently charging ESCELSA and
ENERSUL the power price agreed by the parties under the contracts. In accordance
with the VN methodology, such price should be fully passed through to consumer's
tariffs. However, ANEEL currently allows ESCELSA and ENERSUL only to pass
through to the consumer's tariffs the power cost equivalent to the above
mentioned price cap. Therefore ESCELSA and ENERSUL are actually bearing losses
resulting from the difference between (i) the cost incurred to purchase power
from ENERTADE; and (ii) the cost of power allowed by ANEEL to be passed through
to the consumer's tariffs. These losses in 2003 amounted R$2,014 for ESCELSA and
R$4,961 for ENERSUL, as reflected in the operating expenses.

         On September 26, 2003, ESCELSA entered into another Contract of
Purchase and Sale of Electrical Energy with Enertrade S.A., which established
ESCELSA's obligation to purchase energy from Enertrade at a determined price and
for a set amount as of January 1, 2004 to December 31, 2005. Such amounts can be
reduced or increased within the limits set forth in the contract and in
accordance with its terms and conditions. In addition, Enertrade has the right
to reduce the amount of energy to be provided due to an eventual reduction of
consumers that may have decided to become free consumers. This contract has been
approved by ANEEL on October 21, 2003, as determined by the applicable
regulation. The price for the purchases by ESCELSA will be adjusted annually in
accordance with IGPM index.

         ESCELSA and ENERSUL have each entered into two Purchase and Sale of
Electrical Energy contracts with Enerpeixe S.A. and Enercouto S.A.,
respectively, which have been amended from time to time. The contracts provide
for a relatively small amount of electrical energy to be supplied by Enerpeixe,
S.A. or Enercouto S.A., as the case may be. The terms of the contracts are from
February 6, 2006 to January 31, 2016 in the case of Enerpeixe, S.A. and from
April 1, 2007 to March 31, 2017, in the case of Enercouto, S.A. The price for
such purchases is


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<PAGE>


determined for all four contracts, and will be adjusted annually to reflect
inflationary pressures, using the IGPM index. Both Enerpeixe S.A. and Enercouto
S.A. are indirectly owned by our controlling shareholder, EDP.

Contract to Finance Losses Associated with the Rationing Program

         ESCELSA and ENERSUL entered into contracts, which have been amended
from time to time, with BNDES as Lender to finance the losses they experienced
in connection with the implementation of the Rationing Program. ESCELSA financed
R$166.2 million through a contract dated February 18, 2002, as amended, which
will be repaid in monthly installments as determined by its provisions until
December 15, 2007. ENERSUL financed R$100.8 million, through a contract dated
February 19, 2002, as amended, which will be repaid in monthly installments as
determined by the their provisions until December 15, 2008. ANEEL is also a
party to all these contracts.

Indenture for the Notes

         We entered into an indenture dated as of July 28, 1997 with The Chase
Manhattan Bank, as Trustee, for the issuance of our 10% Senior Notes due 2007 in
the total amount of U.S.$500 million.

Other Material Financial Agreements

         On December 1, 2003, each of ESCELSA and ENERSUL entered into a loan
facility agreement with BNDES in the amount of R$42.7 million and R$24.3
million, respectively, to finance our operations after the delay in applying the
CVA compensation mechanism. Both agreements bear interest at the SELIC rate plus
1% on a monthly basis. However, while ESCELSA's principal payments must be made
as of September 15, 2004 until August 15, 2006, ENERSUL's principal payments are
due as of May 15, 2004 until April 15, 2006, as determined by the provisions
therein.

         On February 21, 2003, ENERSUL entered into a credit facility agreement
with Banco Alfa de Investimento S.A. and Banco Itau S.A., as agents, and BNDES,
as the lender, in the amount of R$36.7 million, to finance the acquisition of
equipaments, the enlargement and modernization of its distribution capacity and
the construction of two energy substations. The loan is divided in three
tranches. According to the provisions therein, two tranches bear interest at the
TJLP rate plus 4% per annum, and will be paid in monthly installments as of
October 15, 2004 until September 15, 2007. The remaining tranche bears interest
at a variable interest rate based on the average cost incurred by BNDES to
borrow in foreign currency plus 4%, and it will be paid in monthly installments
as of November 16, 2004 until October 10, 2007.

D.       Exchange Controls

         Brazilian law provides that, whenever there is a significant imbalance
in Brazil's balance of payments or reasons to foresee such an imbalance,
temporary restrictions may be imposed on the conversion of Brazilian currency
into foreign currencies and on remittances of foreign capital abroad. For
approximately six months in 1989 and early 1990, for example, the Brazilian
government imposed remittance restrictions on all dividend and capital
repatriations that were owed to foreign equity investors and held by the Central
Bank in order to conserve Brazil's foreign currency reserves. These amounts were
subsequently released in accordance with Brazilian federal directives.

         The Central Bank has authorized the issuance of the notes and issued a
certificate of foreign capital registration authorizing us to make any payment
under the notes requiring the conversion of reais into U.S. dollars (including
any payment made upon enforcement of a judgment against us). However, additional
Central Bank authorization is needed for the payment of the notes upon
acceleration or for certain late payments of the notes generally. These exchange
control regulations generally have not affected repayment obligations of
securities of a type similar to the notes. There can, however, be no assurance
that the Brazilian government will not in the future impose more restrictive
foreign exchange regulations that would have the effect of preventing or
restricting our access to foreign currency that it may require to meet its
foreign currency obligations under foreign currency denominated liabilities
(including the notes).


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<PAGE>


         See "Item 3. Key Information -- Exchange Rates" for more information on
exchange rates of the real versus the U.S. dollar.

E.       Taxation

General

         The following is a summary of certain material Brazilian and U.S.
federal income tax consequences resulting from the investment in, and ownership
and disposition of, the notes, but it does not purport to be a comprehensive
description of all the tax considerations that may be relevant to a decision to
invest in, or own and dispose of, the notes. While this description is
considered to be a correct interpretation of existing laws and regulations in
force as of the date of this annual report, no assurance can be given that the
courts or fiscal authorities responsible for the administration of such laws and
regulations will agree with this interpretation or that changes to such laws and
regulations will not occur. The discussion of Brazilian tax matters is based
upon the advice of Ulhoa Canto, Rezende e Guerra -- Advogados, Rio de Janeiro,
Brazil. The discussion of U.S. federal income tax matters is based upon the
advice of Shearman & Sterling, New York, New York.

         Investors and holders of the notes should consult their own tax
advisors as to the Brazilian, U.S. or other tax consequences of the purchase,
ownership and disposition of the notes including the particular tax consequences
to them in light of their particular investment circumstances.

         Although at present there is 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. There can be no assurance, however, as to
whether or when a treaty will enter into force or how it will affect holders of
the notes.

Brazilian Tax Considerations

         Individuals domiciled in Brazil and Brazilian companies are taxed in
Brazil on the basis of their worldwide income (which includes earnings of
Brazilian companies' foreign subsidiaries, branches and affiliates). The
earnings of foreign companies and persons not resident in Brazil in general are
taxed in Brazil when derived from Brazilian sources unless there exists a tax
treaty between Brazil and the country of domicile of the non-resident providing
otherwise.

         Interest, fees, commissions and any other income (which for the
purposes of this paragraph includes any deemed income on the difference between
the issue price of the notes and the price at which the notes are redeemed
("original discount") payable by a Brazilian obligor to an individual, company,
entity, trust or organization domiciled outside Brazil) is subject to income tax
withheld at the source. Brazilian tax laws expressly authorize the paying source
to pay the income or earnings net of taxes and, therefore, to assume the cost of
the applicable tax. The rate of withholding is 15% or such other lower rate as
is provided for in an applicable tax treaty between Brazil and such other
country where the payee has its domicile. Notwithstanding the foregoing,
pursuant to a law dated August 13, 1997, the applicable income tax rate for
negotiable instruments such as the notes was reduced to zero with respect to
payments of interest, fees and commissions made during 1997, provided that such
negotiable instruments have a minimum maturity of 96 months. In accordance with
a law dated January 27, 2000, negotiable instruments such as the notes which are
issued as of January 1, 2000, are no longer eligible for this rate reduction.

         We believe and intend to take the position for Brazilian tax reporting
purposes that, as long as the principal paying agent is located in Japan and
payment to the principal paying agent discharges our obligations to make
payments in accordance with the notes, interest and other income with respect to
the notes will be subject to Brazilian withholding tax at a rate of 12.5% under
the tax treaty in effect between Brazil and Japan. In any event, under the terms
of the notes, we are required to gross up noteholders for any Brazilian
withholding tax, subject to customer exceptions. We have the right to redeem the
notes at par in the event that it is required to gross up for Brazilian
withholding tax at a rate in excess of 15%.

         Any earnings or capital gains made outside Brazil as a result of a
transaction between two non-residents of Brazil with funds not located in Brazil
are not subject to tax in Brazil. In such transactions, the gains obtained by a


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<PAGE>


non-resident in the purchase and sale of the notes to non-residents are not
subject to tax in Brazil. However, any gains obtained by a non-resident in the
sale of the notes to a Brazilian resident may be subject to tax in Brazil.

         On August 15, 1996, the Brazilian Congress approved an Amendment which
created a new temporary tax, the Contribuicao Provisoria sobre Movimentacao
Financeira (the provisional contribution on transfers of value and of credits
and rights of a financial nature, or CPMF). Under the CPMF tax, all financial
debit and money transfers effected as from March 18, 2001, are subject to the
assessment of the CPMF tax at the rate of 0.38%. This contribution has recently
been extended until December 31, 2007 by the Constitutional Amendment No. 42/03.

         Legislation passed on October 31, 1996 imposed a tax on foreign
exchange transactions ("IOF tax") related to the entry into Brazil of proceeds
resulting from foreign loans (including the issue of debt securities such as the
notes). Initially the IOF tax had varying rates depending upon the final
maturity of the transaction. Consequently, in case of early redemption or
payment of the notes a tax at a rate varying from 3% to 0%, depending on the
date of redemption, would have been assessed on the corresponding proceeds.
However the IOF tax is a tax upon the Brazilian issuer (in this case, us) and
will have no effect on the amounts received by the holders of the notes. We thus
would be liable for and would pay the IOF tax as well as any charges imposed by
Brazilian tax authorities on Brazilian issuers. A Decree of December 3, 2002,
increased the IOF tax rate to 5% on foreign exchange transactions resulting from
foreign loans with redemption or payment limit under 90 days and kept the 0% IOF
tax rate on foreign exchange transactions resulting from foreign loans with
redemption or payment limit of or higher than 90 days. There can be no assurance
that the IOF tax rate will not be increased in the future.

         The Federal government also collects the Contribution for the Social
Integration Program - PIS as well as the Social Security Contribution - COFINS.
The PIS contribution is levied on the gross revenue of corporations at the rate
of 1.65% and may be offset against some input credits. The COFINS contribution
is levied on the gross revenue of corporations at the rate of 7.6% and may be
offset against some input credits. As from May 1, 2004, PIS and COFINS also fall
on the importation of goods and services at the rates of 1.65% and 7.6%,
respectively.

         There is no stamp, transfer or other similar tax in Brazil with respect
to the transfer, assignment or sale of any debt instrument outside Brazil
(including the notes).

         The Constitutional Amendment No. 39, dated December 19, 2002,
established that municipalities may impose and collect a contribution for public
lighting. This contribution may be charged on the electricity bill (in which
case the power company acts as a collecting agent).


U.S. Federal Income Tax Considerations

         The following is a general discussion of the principal U.S. federal
income tax considerations relevant to the ownership and disposition of the notes
to U.S. Holders (as defined below) who hold such notes as capital assets
(generally, property held for investment). This summary is based on provisions
of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed U.S. Treasury regulations promulgated thereunder, and administrative
pronouncements and judicial interpretations thereof, all as currently in effect
and all of which are subject to change (possibly with retroactive effect) and to
differing interpretations. This summary does not discuss all aspects of U.S.
federal income taxation that may be applicable to holders of notes in light of
their particular circumstances or to holders of notes subject to special
treatment under U.S. federal income tax law (including, but not limited to, life
insurance companies, dealers in securities, financial institutions, tax-exempt
organizations, partnerships or other entities treated as partnerships for U.S.
federal income tax purposes, persons that hold the notes as part of a
"straddle," "hedge" or "conversion transaction" and persons having a functional
currency other than the U.S. dollar). Holders of notes are urged to consult
their own tax advisers as to the application of U.S. federal tax laws to their
particular situations, as well as any tax consequences arising under the laws of
any state, local or non-U.S. taxing jurisdiction.

         As used herein, the term "U.S. Holder" means a beneficial owner of a
note that is, for U.S. federal income tax purposes, (i) a citizen or resident
alien individual of the United States, (ii) a corporation or other entity
treated as a corporation for U.S. federal income tax purposes created or
organized in or under the laws of the United States or of any state thereof or
the District of Columbia, (iii) an estate the income of which is subject to U.S.
federal income


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<PAGE>


taxation regardless of its source, or (iv) a trust, (A) if a court within the
United States is able to exercise primary supervision over the administration of
the trust and one or more United States persons have the authority to control
all substantial decisions of the trust or (B) that has a valid election in
effect under applicable Treasury regulations to be treated as a U.S. person. If
a partnership (or other entity treated as a partnership for United States
federal income tax purposes) is a beneficial owner of the notes, the treatment
of a partner in the partnership will generally depend upon the status of the
partner and upon the activities of the partnership. A holder of the notes that
is a partnership and partners in such partnership should consult their U.S. tax
advisors.

         Payments of Interest

         Stated interest (and additional amounts, if any) payable on the notes
generally will be includible in the gross income of a U.S. Holder as ordinary
interest income at the time accrued or received, in accordance with such U.S.
Holder's regular method of accounting for U.S. federal income tax purposes. The
amount of income taxable to a U.S. Holder will include the amount of any
Brazilian taxes withheld (as described above under "Brazilian Tax
Considerations") by us in respect thereof. Thus, a U.S. Holder could be required
to report income in an amount greater than the cash it receives in respect of
payments on its notes. Such interest income will be treated as derived from
sources outside the United States.

         Market Discount and Premium

         If a U.S. Holder purchases a note for an amount that is less than its
stated principal amount, such note will be treated as having "market discount"
equal to the amount of such difference (unless such difference is less than a
specified de minimis amount). Unless a U.S. Holder elects to accrue market
discount as described below, such U.S. Holder will be required to treat any
partial principal payment on, or any gain realized on the sale, exchange, or
retirement of, a note having market discount as ordinary income to the extent of
the lesser of (i) the amount of such payment or realized gain or (ii) the market
discount that has not previously been included in gross income and is treated as
having accrued on such note at the time of such payment or disposition. Market
discount on a note, if any, will be considered to accrue on a straight-line
basis during the period from the date of acquisition to the maturity date of the
note, unless the U.S. Holder elects to accrue on a constant yield basis.

         A U.S. Holder may be required to defer the deduction of all or a
portion of the interest paid or accrued on any indebtedness incurred or
maintained to purchase or carry a note having market discount until the maturity
of the note or its earlier disposition. A U.S. Holder may elect to include
market discount in gross income currently as the market discount accrues (on
either a straight-line or a constant yield basis), in which case such U.S.
Holder will not be subject to the rules described above regarding the treatment
of gain upon the disposition of, and the receipt of certain cash payments on, a
note as ordinary income and regarding the deferral of interest deductions on
market discount notes.

         If a U.S. Holder purchases a note for an amount that is greater than
its stated principal amount, such U.S. Holder will be considered to have
purchased the note at a "premium" equal to such excess, and may elect to
amortize such premium, on a constant yield basis, over the remaining term of the
note (subject to special rules concerning early call provisions). If an election
to amortize the premium on a note, if any, is not made, the premium will
decrease the gain or increase the loss otherwise recognized on a taxable
disposition of the note.

         An election to currently include market discount in gross income, or to
amortize premium, once made, applies to all debt obligations acquired, and held
in the case of an election to amortize premium, by the electing U.S. Holder on
or after the first day of the first taxable year to which the election applies
and may not be revoked without the consent of the Internal Revenue Service.

         Sale, Exchange or Retirement of the Notes

         Upon the sale, exchange or retirement of a note, a U.S. Holder
generally will recognize gain or loss equal to the difference, if any, between
the amount realized on the sale, exchange or retirement (other than amounts
attributable to accrued but unpaid interest not previously included in gross
income, which will be taxable as ordinary interest income), and such holder's
adjusted tax basis in the note. A U.S. Holder's adjusted tax basis in a note


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<PAGE>


generally will equal the cost of the note to the U.S. Holder, increased by the
amount of any market discount previously included in gross income, and reduced
by the amount of any premium amortized by the U.S. Holder and by payments (other
than payments of stated interest) previously received by the U.S. Holder, with
respect to such note. Subject to the foregoing discussion regarding the U.S.
federal income tax treatment of notes acquired at a market discount, such gain
or loss recognized by a U.S. Holder on the sale, exchange or retirement of a
note generally will be capital gain or loss and will be long-term capital gain
or loss if the note was held for more than one year at the time of the sale,
exchange or retirement. Certain non-corporate U.S. Holders (including
individuals) can qualify for preferential rates of U.S. federal income tax in
respect of long-term capital gains. The deduction of capital losses is subject
to limitations for U.S. federal income tax purposes. Gain from the sale,
exchange or retirement of a note by a U.S. Holder generally will be treated as
U.S. source income for foreign tax credit purposes.

         Foreign Tax Credit

         Interest income typically is treated as "passive" or "financial
services" income and is considered separately (together with other items of
passive or financial services income) for purposes of applying certain
limitations on the claiming of foreign tax credits under U.S. federal income tax
law. However, if interest income derived by a U.S. Holder in respect of the
notes is subject to Brazilian withholding tax at a rate of at least 5%, then
such interest should represent "high withholding tax interest" to the U.S.
Holder (together with other items of high withholding tax interest), and the
foreign tax credit limitations will apply separately to foreign income taxes
attributable thereto. Subject to such limitations and certain other conditions
(including minimum holding requirements) imposed under the Code, any Brazilian
income taxes withheld from interest income derived by a U.S. Holder in respect
of the notes generally will be eligible for credit against the U.S. federal
income tax liability of the U.S. Holder. A U.S. Holder may not be able to obtain
a foreign tax credit benefit with respect to Brazilian income taxes, if any,
imposed on any gain resulting from a disposition of the notes, as such gain
generally will not constitute foreign source income. In lieu of claiming a
credit for any foreign income taxes paid in a taxable year, a U.S. Holder may
elect to deduct such foreign income taxes in computing its U.S. federal taxable
income. The rules relating to foreign tax credits are complex, and U.S. Holders
should consult their own tax advisors with regard to the availability of a
foreign tax credit and the application of the foreign tax credit limitations to
their particular situations.

         Backup Withholding

         A U.S. Holder may be subject to backup withholding (currently at a rate
of 28%) on payments of principal of, interest on (and additional amounts, if
any), and the proceeds of disposition of, a note. In general, backup withholding
will apply only if a U.S. Holder fails to comply with certain identification
procedures, fails to properly report payments of interest and dividends or
otherwise fails to comply with applicable requirements of the backup withholding
rules. Backup withholding will not apply with respect to payments made to
certain exempt recipients, such as corporations and tax-exempt organizations.
Backup withholding is not an additional tax and may be claimed as a credit
against the U.S. federal income tax liability of a U.S. Holder, provided that
the required information is timely furnished to the Internal Revenue Service.

F.       Dividends and Paying Agents

         Not applicable.

G.       Statements by Experts

         Not applicable.

H.       Documents on Display

         We are subject to the information requirements of the Securities
Exchange Act of 1934, as amended, pursuant to which we file reports and other
information with the Securities and Exchange Commission, or the Commission.
Reports and other information filed by us with the Commission may be inspected
and copies obtained at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's Regional Offices at Northwestern Atrium Center, 500 West
Madison Street,


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<PAGE>


Suite 1400, Chicago, IL 60661-2511 and 233 Broadway, New York, New York 10279.
You may obtain copies of this material by mail from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.

         We also file financial statements and other periodic reports with the
CVM.

         Copies of our annual reports on Form 20-F and documents referred to in
this annual report and our by-laws will be available for inspection upon request
at our headquarters at Rua Sete de Setembro, 362, Vitoria, Espirito Santo,
Brazil 29015-000.

I.       Subsidiary Information

         Not applicable.


ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         As a result of our dollar-denominated, short- and long-term debt, we
are exposed to changes in exchange rates between the real and the U.S. dollar.
We are also exposed to changes in interest rates and inflation rates. Virtually
all of our real-denominated, short- and long-term debt bears interest at
floating rates and the principal amount of some of this debt is also indexed for
inflation.

Foreign Exchange Rate Sensitivity

         All of the amounts below are in thousands of reais, translated at the
commercial selling rate on December 31, 2003 of R$2.8892 to U.S.$1.00.

         Our foreign currency exposure gives rise to market risks associated
with exchange rate movements against the U.S. dollar. Foreign currency
denominated liabilities as of December 31, 2003 include the notes, in the
principal amount of R$1,245.1 million, and other U.S. dollar-denominated
borrowings, in the amount of R$185.3 million, for a total amount of 1,430.4
million. In addition to the principal amount to be paid by ESCELSA in connection
with the notes, ESCELSA is required to make payments of interest on the notes in
the amount of R$124.5 million per year from 2004 to 2007.

         Of the other U.S. dollar-denominated borrowings, in the total amount of
R$185.3 million at December 31, 2003, R$72.6 million were short-term loans and
R$112,7 million were long-term loans. These loans bear interest ranging from
2.5% to 12.5% per annum.

         As of December 31, 2003, approximately 93% of our cash and cash
equivalents, in the total amount of R$188.9 million, were invested in
dollar-linked instruments. We believe that over the long-term, increase in our
tariffs in reais generate cash sufficient to counter currency devaluation
affecting our U.S. dollar-denominated loans, although there can be no assurance
in this regard. We hedge 93% of our marketable securities with U.S.
dollar-linked instruments.

Interest Rate Sensitivity and Sensitivity to Inflation Rates

         We also have loans denominated in reais, which bear interest at
variable rates. The principal amount of certain loans is also indexed to
inflation. In times of high inflation, the Taxa de Juros de Longo Prazo, the
Brazilian long-term interest rate, or TJLP, is generally higher, i.e., the
nominal rates include an inflation factor. The TJLP ranged from 11% to 13% in
2003, with an average of 12% per annum. Our real-denominated loans bear interest
and are indexed as follows:


                                       67
<PAGE>


<TABLE>
<CAPTION>

Lender                     Principal Amount             Interest Rate             Indexation Rate
------                     (in thousand of              -------------             ---------------
                           reais)
                           ----------------
<S>                              <C>                    <C>                     <C>
BNDES.................           136,653                 TJLP + 4.0%                not indexed
BNDES.................           244,745                SELIC + 1.0%                not indexed
Other.................           620,402                  10 - 12%              CDI/IGP-M/INPC/UFIR
</TABLE>



         As demonstrated above, we pay interest on the BNDES loans at the rate
of TJLP plus 3.84% - 4.5% and SELIC plus 1.0% per annum. However, the agreements
with BNDES provide that if the TJLP in a given year is higher than 6% (and,
therefore, the total interest rate would be higher than 10%), we will only be
required to pay interest at the rate of 10% and the excess will be incorporated
into the principal amount of the loan, and amortized over the term of the
agreements. As a result, if the TJLP increased over 6%, there would not be any
impact on the interest payments on the BNDES loans.

<TABLE>
<CAPTION>

                                                      2004     2005     2006     2007    2008  There-after   Total    Fair Value
                                                      ----     ----     ----     ----    ----  -----------   -----    ----------
<S>                                                <C>      <C>       <C>     <C>      <C>       <C>        <C>         <C>
LIABILITIES
(Long Term Debt, including current portion)

Denominated and expressed in US dollars:

                   Fixed Rate:

    Senior Notes
        thousands of US$                            43,096   43,096   43,096  474,054       -        -      603,342     389,513
        Interest rate is 10%

    BRADIES BONDS
        STN-DMLP
        thousands of US$                             5,155    5,016    4,456    3,914   3,801    40,340      62,681      48,511
        Average interest rate
        Libor sem + 7/8 a 13/16 de 1% aa

                   Variable Rate:

    BNDES CAPEX (umbndes)
        thousands of US$                            16,340   17,022    8,295    3,851   2,189     2,517      56,911      45,485
        Average interest rate: umbndes + spread
        Spread  is 4.0 to 4.5%
        UMBNDES on December 31,2003:
    R$ 0,056371/UMB

Other financing
        BBA EIB
        thousands of US$                            11,069   10,470    9,878    9,285   4,756       325      45,783      36,032
        Average interest rate
        Libor trim + 4 a 5% p.a.

Denominated and expressed in Brazilian reais:
</TABLE>


                                       68
<PAGE>


<TABLE>
<CAPTION>

<S>                                                <C>      <C>       <C>     <C>      <C>       <C>        <C>         <C>
                   Fixed Rate:

ELETROBRAS
    thousands of reais                              18,665   10,696    6,893    5,981   4,658    22,269      69,161      54,484
    interest rate range is 5.0% to 10.5%

                   Variable Rate:

BNDES financing (CAPEX)
    thousands of reais                              75,152   80,674   64,351   36,542  19,815    15,783     292,316     186,077
    Average interest rate: TJLP + spread
    Spread range is 3.8% to 4.5%
    TJLP on December 31,2003: 11.0%

BNDES financing (Regulatory)
    thousands of reais                             121,377  102,660   83,711  113,833  27,997         -     449,577     223,793
    Average interest rate: SELIC + spread
    Spread  is 1.0%
    SELIC on December 31,2003: 24.51%

Other financing

    thousands of reais                              54,491   23,990   13,427   13,486   9,011    21,334     135,739      90,378
    Average interest rate
    Spread range is 10.0% to 12.0%
    Considering INPC effective on December
 31, 2003: 10.29%
</TABLE>


ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

         Not applicable.

                                     PART II

ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

         Not applicable.

ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS

         Not applicable.

ITEM 15.  DISCLOSURE CONTROLS AND PROCEDURES

         Our chief executive officer, or CEO, and our chief financial officer,
or CFO, are responsible for establishing and maintaining our disclosure controls
and procedures. These controls and procedures were designed to ensure that
information relating to us required to be disclosed in the reports that we file
under the Securities Exchange Act of 1934, as amended, is recorded, processed
summarized and reported within the time periods specified in the rules and forms
of the SEC. We evaluated these disclosures controls and procedures under the
supervision of our CEO and CFO as of December 31,2003. Based on this evaluation,
our CEO and CFO concluded that our disclosure controls and procedures are
effective in timely alerting them to information required to be included in our
periodic reports to the SEC.


                                       69
<PAGE>


         As of today, there has been no change in our internal control over
financial reporting during the year ended December 31, 2003 that has materially
affected or is reasonably likely to materially affect our internal control over
financial reporting.

ITEM 16.  [RESERVED]


ITEM 16A. Audit Committee Financial Expert

         As of yet, we have not appointed an "audit committee financial expert",
as defined by the SEC. As disclosed in item 16D below, we are in the process of
implementing a fully independent audit committee as a best corporate governance
practice, and presently, our current board of auditors does not follow the
independence requirements of such rule as we are still exempt from the
independence requirements until July 2005 according to Exchange Act Rule 10A-3
(a)(5)(A).


ITEM 16B. Code of Ethics

         We do not currently have a code of ethics, which applies to our
principal executive officer, principal financial officer, and principal
accounting officer and/or controller, or persons performing similar functions.
However, we are in the process of compiling a code of ethics for such officers
that complies with the requirements of U.S. and Brazilian law, which we plan to
implement during the current fiscal year.


ITEM 16C. Principal Accountant Fees and Services

         Deloitte Touche Tohmatsu Auditores Independentes acted as our
independent auditor for the fiscal years ended December 31, 2003 and 2002. The
chart below sets forth the total amount billed to us by Deloitte Touche Tohmatsu
Auditores Independentes for services performed in the years 2003 and 2002, and
breaks down these amounts by category of services:



                                             Total Fees (in thousands of
                                                        reais)
                                           ------------------------------
                                                2003           2002
                                           --------------  --------------

Audit Fees                                 R$        267    R$      254
Audit-Related Fees                         R$         --    R$      --
                                           R$         --    R$      --
Tax Fees
All Other Fees                             R$         --    R$      --
Total                                      R$        267    R$      254


Audit Fees

         Audit fees in the above table are the aggregate fees billed by Deloitte
Touche Tohmatsu Auditores Independentes in connection with the audit of our
annual financial statements, the review of our quarterly financial statements
and statutory audit.

Pre-Approval Policies and Procedures

         The board of directors is responsible, under Brazilian law, to approve
any audit related expenses and fees. We are considering the implementation of a
pre-approval policy to assure that the engagement of the external auditors
preserve their capacity as independent professionals.


                                       70
<PAGE>


ITEM 16D. Exemptions from the Listing Standards for Audit Committees

         We have established yet an audit committee, as defined by the SEC. We
are in the process of creating a fully independent audit committee as a best
corporate governance practice, and presently, our current board of auditors does
not follow the independence requirements of such rule as we are still exempt
from the independence requirements until July 2005 according to Exchange Act
Rule 10A-3 (a)(5)(A).

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

         None.



                                    PART III

ITEM 17.  FINANCIAL STATEMENTS

         We have chosen to provide information under Item 18 in lieu of this
item.


                                       71
<PAGE>


ITEM 18.  FINANCIAL STATEMENTS

         See pages F-1 through F-65, in response to Item 18 of this annual
report.

         a) List of financial statements


<TABLE>
<CAPTION>
                                                                                                                Page
                                                                                                               ------
  <S>                                                                                                           <C>
  Report of Independent Registered Public Accounting Firm.............................................          F-1
  Consolidated Balance Sheets as of December 31, 2003 and 2002........................................          F-2
  Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001..........          F-4
  Consolidated Statements of Changes in Shareholders' equity for the years ended
  December 31, 2003, 2002 and 2001....................................................................          F-5
  Consolidated Statements of Changes in Financial Position for the years ended
  December 31, 2003, 2002 and 2001....................................................................          F-6
  Consolidated Statements of Cash Flows for the years ended
  December 31, 2003, 2002 and 2001....................................................................          F-8
  Notes to the Consolidated Financial Statements for the years ended
  December 31, 2003, 2002 and 2001....................................................................         F-10
</TABLE>


ITEM 19.  EXHIBITS

Exhibit
Number            Description

1.         By-laws in English of Espirito Santo Centrais Eletricas S.A. -
          ESCELSA*

2(c)      Supplemental Indenture dated December 13, 2002 between Espirito Santo
          Centrais Electricas S.A. - ESCELSA and J. P. Morgan Chase Bank*

4(a).1    Purchase and Sale of Electrical Energy, as amended, dated December 23,
          2002 between Espirito Santo Centrais Electricas S.A. - ESCELSA and
          Enertrade-Comercializadora de Energia S.A.**

4(a).2    Purchase and Sale of Electrical Energy, as amended, dated December 23,
          2002 between ENERSUL-Empresa Energetica do Mato Grosso do Sul S.A. and
          Enertrade-Comercializadora de Energia S.A.**

4(a).3    R$166 Million Credit Facility, as amended, dated February 18, 2002
          between Banco Nacional de Desenvolvimento Economico e Social - BNDES
          and Espirito Santo Centrais Electricas S.A. - ESCELSA**

4(a).4    R$101 Million Credit Facility, as amended, dated February 19, 2002
          between Banco Nacional de Desenvolvimento Economico e Social - BNDES
          and Empresa Energetica de Mato Grosso do Sul S.A. - ENERSUL**

4(a).5    R$24 Million Credit Facility dated December 1, 2003 between Banco
          Nacional de Desenvolvimento Economico e Social - BNDES and Empresa
          Energetica de Mato Grosso do Sul S.A. - ENERSUL

4(a).6    R$43 Million Credit Facility dated December 1, 2003 between Banco
          Nacional de Desenvolvimento Economico e Social - BNDES and Espirito
          Santo Centrais Electricas S.A. - ESCELSA


                                       72
<PAGE>


4(a).7    R$36 Million Credit Facility dated February 21, 2003 between Banco
          Alfa de Investimentos S.A., Banco Itau S.A., Banco Nacional de
          Desenvolvimento Economico e Social - BNDES and Espirito Santo Centrais
          Electricas S.A. - ESCELSA

4(b).1    Purchase and Sale of Electrical Energy, as amended, dated December 23,
          2002 between Espirito Santo Centrais Electrica S.A. - ESCELSA and
          Enercouto S.A.**

4(b).2    Purchase and Sale of Electrical Energy, as amended, dated December 23,
          2002 between ENERSUL-Empresa Energetica do Mato Grosso do Sul S.A. and
          Enercouto S.A.**

4(b).3    Purchase and Sale of Electrical Energy, as amended, dated December 23,
          2002 between Espirito Santo Centrais Electrica S.A. - ESCELSA and
          Enerpeixe S.A.**

4(b).4    Purchase and Sale of Electrical Energy, as amended, dated December 23,
          2002 between ENERSUL-Empresa Energetica do Mato Grosso do Sul S.A. and
          Enerpeixe S.A.**

4(b).5    Purchase and Sale of Electrical Energy dated September 26, 2003
          between Espirito Santo Centrais Electricas S.A. - ESCELSA and
          Enertrade S.A.

6.        Computation of earnings per share (See Note 29(b)(7) to our financial
          statements)

8.        List of subsidiaries (See "Item 4D - Organizational Structure")

12.1      Section 302 Certification of the Chief Executive Officer

12.2      Section 302 Certification of the Chief Financial Officer

13.1      Section 906 Certification of the Chief Executive Officer

13.2       Section 906 Certification of the Chief Financial Officer

-------------------------

*    Incorporated by reference to our annual report on Form 20 F for the fiscal
     year ended December 31, 2002.

**   Original Agreement incorporated by reference to our annual report on Form
     20 F for the fiscal year ended December 31, 2002 and amendments filed
     herewith.


                                       73
<PAGE>


                                                                         ANNEX A


                                GLOSSARY OF TERMS


ANEEL.....................................   Agencia Nacional de Energia
                                             Eletrica, the Brazilian Electric
                                             Energy Regulatory Agency,
                                             responsible for regulating the
                                             electric energy sector.

Average Tariff or Rate....................   Total sales revenue divided by
                                             total number of MWh sold for each
                                             relevant period. Total sales
                                             revenue, for the purpose of
                                             computing average tariff or rate,
                                             consists of gross revenues not of
                                             value-added tax (ICMS).

Capacity Charge...........................   The charge for purchases or sales
                                             based on contracted firm capacity
                                             whether or not used.

Distribution..............................   Distribution is the transfer of
                                             electricity from transmission lines
                                             at supply points on the network and
                                             its delivery to customers through a
                                             distribution system. ESCELSA's
                                             distribution system consists of a
                                             widespread network of primarily
                                             above ground networks and lines at
                                             voltages between 11.4kV and 34.5kV.
                                             The electricity is passed through
                                             distribution transformers and is
                                             delivered at a voltage of 127 volts
                                             to customers in residential, small
                                             industrial and commercial segments
                                             as well as to public utilities and
                                             other customers.

Distributors..............................   An organization supplying
                                             electrical energy to a group of
                                             consumers by means of a
                                             distribution network.

Energy Charge.............................   Refers to the variable charge for
                                             purchases or sales based on actual
                                             electricity consumed.

Final Customer or
Final Consumer
(End User)................................   A customer who uses electricity for
                                             its own needs.

Firm Capacity.............................   The amount of electric energy that
                                             can be delivered from a given power
                                             plant with a 95% degree of
                                             certainty (or higher), determined
                                             in accordance with certain
                                             prescribed statistical models.

Gigawatt (GW).............................   1,000,000,000 watts (1,000
                                             megawatts).

Gigawatt-hour (GWh).......................   A gigawatt of power that is
                                             supplied or demanded for a period
                                             of one hour.

Hydroelectric Plant.......................   A generation plant which uses water
                                             power to turn an electric
                                             generator.

Installed Capacity........................   The amount of electric power that
                                             can be delivered from a given
                                             generator at full power under
                                             specified conditions as indicated
                                             by the manufacturer.

Interconnected Power System...............   Systems or networks connected
                                             together by means of one or more
                                             links (lines and/or transformers).


                                       74
<PAGE>


Interruptible Energy......................   The load of certain consumers for
                                             which supply may be interrupted for
                                             a specified period of time as per
                                             contractual agreement.

Kilovolt (kV).............................   1,000 volts.

Kilowatt (kW).............................   1,000 watts.

Kilowatt-hour (kWh).......................   A kilowatt of power that is
                                             supplied or demanded for a period
                                             of one hour.

Load Factor...............................   The ratio, expressed as a numerical
                                             value or as a percentage, of the
                                             consumption within a specified
                                             period (year, month, day, etc.) to
                                             the consumption that would result
                                             from continuous use of the maximum
                                             or other specified demand occurring
                                             within the same period.

Megawatt (MW).............................   1,000,000 watts (1,000 kilowatts).

Megawatt-hour (MWh).......................   A megawatt of power that is
                                             supplied or demanded for a period
                                             of one hour.

MVA.......................................   One million volt-amperes.

Peak Load.................................   The average load (power) during a
                                             time interval of specified duration
                                             occurring within a given period of
                                             time, that time interval being
                                             selected during which the average
                                             power is greatest.

Primary Energy............................   The energy generated by
                                             hydroelectric and thermal plants of
                                             the system in order to meet demands
                                             for firm service plus reserve
                                             requirements.

Secondary Energy..........................   See interruptible energy.

South Region..............................   The States of Parana, Rio Grande do
                                             Sul and Santa Catarina.

Southeast Region..........................   The States of Sao Paulo, Rio de
                                             Janeiro, Minas Gerais and Espirito
                                             Santo.

Substation................................   An assemblage of equipment which
                                             interchanges and/or alters or
                                             regulates the voltage of
                                             electricity within transmission and
                                             distribution system.

Thermoelectric Plant......................   A generation plant which uses
                                             hydrocarbon fuel, such as coal,
                                             oil, diesel, natural gas, as a
                                             source of energy to turn the
                                             electric generator.

Transmission..............................   The transfer of electricity (in
                                             lines with capacity between 750 kV
                                             and 34.5 kV) from generation
                                             facilities to the distribution
                                             system in a charge center by means
                                             of the transmission network.

Unbilled Electricity......................   Electricity which has been consumed
                                             by a customer, but for which a
                                             meter reading has not been taken,
                                             and thus no corresponding invoice
                                             generated.

Volt......................................   Standard unit of electric potential
                                             or electromotive force.

Watt......................................   The basic unit of electric energy.

Wheeling or Transportation................   A transportation charge expressed
                                             in reais.


                                       75
<PAGE>


Item 18.  Financial Statements


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Espirito Santo Centrais Eletricas S.A. - Escelsa
Vitoria - ES, Brazil

(1)  We have audited the accompanying consolidated balance sheets of Espirito
     Santo Centrais Eletricas S.A. - Escelsa (a Brazilian Corporation) and
     subsidiaries ("the Company") as of December 31, 2003 and 2002 and the
     related consolidated statements of operations, changes in shareholders'
     equity and changes in financial position for each of the three years in the
     period ended December 31, 2003. 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.

(2)  We conducted our audits in accordance with the standards of the Public
     Company Accounting Oversight Board (United States). Those standards require
     that we plan and perform the audit to obtain reasonable assurance about
     whether the consolidated financial statements are free of material
     misstatement. An audit 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 financial statement presentation. We believe that our audits
     provide a reasonable basis for our opinion.

(3)  In our opinion, the consolidated financial statements referred to in the
     first paragraph present fairly, in all material respects, the consolidated
     financial position of the Company as of December 31, 2003 and 2002, and the
     results of its operations, changes in its shareholders' equity and changes
     in its financial position for each of the three years in the period ended
     December 31, 2003, in conformity with accounting practices adopted in
     Brazil.

(4)  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 29 to the consolidated financial statements.

(5)  Our audits were conducted for the purpose of forming an opinion on the
     basic financial statements under accounting practices adopted in Brazil
     taken as a whole. The consolidated statements of cash flows for each of the
     three years in the period ended December 31, 2003 are presented for
     purposes of additional analysis and are not a required part of the basic
     financial statements under accounting practices adopted in Brazil. Such
     information has been subjected to the auditing procedures applied in our
     audits of the basic financial statements and, in our opinion, is fairly
     stated in all material respects in relation to the basic financial
     statements taken as a whole.

(6)  As mentioned in Note 5 to the consolidated financial statements, during the
     year 2002 and the first semester of 2003, the Company adjusted the amounts
     related to electric power sale and purchase transactions carried out in the
     Wholesale Energy Market - MAE, accounted for from September 1, 2000 to
     December 31, 2002. These amounts, after adjustments, totaled R$83,700
     thousand in sales of energy and R$56,579 thousand in purchasing of energy
     and system charges. The net amount settled through July 17, 2003 was
     R$19,106 thousand. These amounts were recorded based on figures prepared
     and released by MAE and are subject to changes depending on the decisions
     of the litigation processes under way, filed by certain companies, with
     respect to the interpretation of market rules in effect at the period.



February 12, 2004, except for Note 29 as to which the date is June 25, 2004.


                                      F-1
<PAGE>


        ESPIRITO SANTO CENTRAIS ELETRICAS S.A. - ESCELSA AND SUBSIDIARIES


          CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003 AND 2002

                        (In thousands of Brazilian reais)


                                   A S S E T S


<TABLE>
<CAPTION>

                                                                      2003               2002
                                                                ------------------ -----------------
                                                                                    (reclassified)
<S>                                                                  <C>               <C>
CURRENT:
Cash and banks                                                          15,465            20,008
Marketable securities                                                  203,089           306,620
Accounts receivable                                                    450,709           426,860
Allowance for doubtful accounts receivable                             (40,192)          (37,760)
Other accounts receivable                                               11,182             8,028
Recoverable taxes                                                       38,925            68,543
Deferred income and social contribution taxes                            7,608             3,330
Materials and supplies                                                   4,896             6,174
Escrow deposits                                                          2,629            39,382
Assets held for sale - UTE Campo Grande                                 49,116            25,891
Other credits                                                           22,224            22,121
Prepaid expenses                                                        46,230            14,250
                                                                ------------------ -----------------
                                                                       811,881           903,447
                                                                ------------------ -----------------
NON-CURRENT:
Accounts receivable                                                    295,244           297,544
Tariff bonus and surcharges                                              5,805             9,718
Related companies                                                       76,172            65,505
Escrow deposits                                                        129,194            94,553
Deposits                                                                 6,303             5,956
Debt issuance costs                                                      1,921             2,690
Deferred income and social contribution taxes                          279,052           339,706
Low income consumers                                                         -            18,718
Other credits                                                           23,250            23,897
Prepaid expenses                                                       140,025           110,354
                                                                ------------------ -----------------
                                                                       956,966           968,641
                                                                ------------------ -----------------
PERMANENT:
Investments                                                              2,885             2,159
Goodwill                                                               306,912           427,709
Property, plant and equipment, net                                   1,940,019         1,967,475
Deferred charges                                                             -                79
                                                                ------------------ -----------------
                                                                     2,249,816         2,397,422
                                                                ------------------ -----------------
TOTAL                                                                4,018,663         4,269,510
                                                                ================== =================
</TABLE>



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


                                      F-2
<PAGE>


        ESPIRITO SANTO CENTRAIS ELETRICAS S.A. - ESCELSA AND SUBSIDIARIES


          CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003 AND 2002

                        (In thousands of Brazilian reais)


                                   LIABILITIES


<TABLE>
<CAPTION>

                                                                              2003               2002
                                                                       ------------------- ------------------
                                                                                            (reclassified)
<S>                                                                           <C>                <C>
CURRENT:
Suppliers                                                                       152,435            155,615
Payroll                                                                           4,551              2,968
Accrued interest and fees                                                        67,271             83,836
Loans and financing                                                             349,967            337,125
Accrued taxes and social contributions                                           57,339             48,482
Deferred income taxes                                                            33,384             13,175
Dividends                                                                        42,053                 30
Post-retirement benefits                                                          3,571              2,042
Accrued obligations                                                              24,317             23,735
Regulatory charges                                                               11,637             12,886
Accrual for contingencies                                                             -             39,382
Other accounts payable                                                           38,044             17,520
                                                                       ------------------- ------------------
                                                                                784,569            736,796
                                                                       ------------------- ------------------
LONG-TERM:
Suppliers                                                                        99,441             83,781
Accrued interest and fees                                                            80              3,590
Loans and financing                                                           1,838,268          2.223,718
Post-retirement benefits                                                         30,253             28,212
Deferred income taxes                                                           232,583            211,194
Accrual for contingencies                                                       196,661            166,367
Other accounts payable                                                           73,049             54,341
                                                                       ------------------- ------------------
                                                                              2,470,335          2,771,203
                                                                       ------------------- ------------------
MINORITY INTEREST                                                               206,068            205,729
                                                                       ------------------- ------------------
SHAREHOLDERS' EQUITY:
Capital stock                                                                   239,141            239,141
Capital reserves                                                                311,379            311,379
Income reserves                                                                   1,909                  -
                                                                       ------------------- ------------------
                                                                                552,429            550,520
                                                                       ------------------- ------------------
Credits for capital increase                                                      5,262              5,262
                                                                       ------------------- ------------------
                                                                                557,691            555,782
                                                                       ------------------- ------------------
TOTAL                                                                         4,018,663          4,269,510
                                                                       =================== ==================
</TABLE>



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


                                      F-3
<PAGE>


        ESPIRITO SANTO CENTRAIS ELETRICAS S.A. - ESCELSA AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF OPERATIONS

              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

           (In thousands of Brazilian reais, except per share amounts)


<TABLE>
<CAPTION>

                                                                     2003               2002           2001
                                                             ---------------- ------------------- ---------------
<S>                                                               <C>                <C>             <C>
OPERATING REVENUES:
Electricity sales to final customers                               1,919,531          1,635,340       1,617,617
Electricity sales to distributors                                     30,501             40,357          83,519
Use of transmission and distribution system                           54,259             17,082           1,877
Other revenues                                                        36,300             30,499          27,769
                                                             ---------------- ------------------- ---------------
                                                                   2,040,591          1,723,278       1,730,782
                                                             ---------------- ------------------- ---------------
TAXES ON SALES                                                      (497,979)          (424,140)       (345,297)
                                                             ---------------- ------------------- ---------------
NET OPERATING REVENUES                                             1,542,612          1,299,138       1,385,485
                                                             ---------------- ------------------- ---------------

OPERATING EXPENSES
Personnel                                                           (126,863)          (111,354)       (108,271)
Material                                                             (16,802)           (13,690)        (14,285)
Fuel for electric energy production                                   (3,741)            (2,663)         (6,679)
Third-party services                                                 (66,741)           (60,415)        (53,640)
Electricity purchased for resale                                    (658,457)          (602,912)       (585,287)
Charges for the use of transmission and distribution system         (132,814)          (106,115)        (89,902)
Depreciation and amortization                                       (157,176)          (173,165)       (149,138)
Regulatory charges                                                  (118,286)          (106,184)        (97,377)
Provision for contingencies                                          (23,023)           (10,197)        (29,931)
Other                                                                (61,815)           (48,171)        (51,054)
                                                             ---------------- ------------------- ---------------
                                                                  (1,365,718)        (1,234,866)     (1,185,564)
                                                             ---------------- ------------------- ---------------
INCOME FROM OPERATIONS                                               176,864             64,272         199,921
                                                             ---------------- ------------------- ---------------
FINANCIAL INCOME (EXPENSES), NET                                     137,366           (670,419)       (235,831)
                                                             ---------------- ------------------- ---------------
OPERATING PROFIT (LOSS)                                              314,260           (606,147)        (35,910)
                                                             ---------------- ------------------- ---------------
NON-OPERATING EXPENSES, NET
Provision for loss on goodwill                                      (124,093)                 -               -
Other                                                                (28,959)           (74,965)        (24,384)
                                                             ---------------- ------------------- ---------------
                                                                    (153,052)           (74,965)        (24,384)
                                                             ---------------- ------------------- ---------------
INCOME (LOSS) BEFORE INCOME TAX, SOCIAL                              161,208           (681,112)        (60,294)
   CONTRIBUTION AND MINORITY INTEREST
                                                             ---------------- ------------------- ---------------
INCOME TAX AND SOCIAL CONTRIBUTION
Current                                                              (27,666)            (2,465)         (2,189)
Deferred                                                             (88,073)           105,831          13,201
                                                             ---------------- ------------------- ---------------
                                                                    (115,739)           103,366          11,012
                                                             ---------------- ------------------- ---------------
                                                                      45,469           (577,746)        (49,282)
                                                             ---------------- ------------------- ---------------
MINORITY INTEREST                                                     (1,540)            38,833         (10,794)
                                                             ---------------- ------------------- ---------------
NET INCOME (LOSS)                                                     43,929           (538,913)        (60,076)
                                                             ================ =================== ===============
SHARES OUTSTANDING AT YEAR END                                     4,550,833          4,550,833       4,550,833
                                                             ================ =================== ===============
INCOME (LOSS) PER SHARE - R$ (in Brazilian Reais)                       9.65            (118.42)         (13.20)
                                                             ================ =================== ===============
</TABLE>



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


                                      F-4
<PAGE>


        ESPIRITO SANTO CENTRAIS ELETRICAS S.A. - ESCELSA AND SUBSIDIARIES


           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

                        (In thousands of Brazilian reais)


<TABLE>
<CAPTION>


                                                             Capital       Capital       Income         Retained          Sub
                                                              stock        Reserve       reserve        earnings          total
                                                         -------------- ------------- ------------- ----------------- -------------
<S>                                                           <C>          <C>            <C>            <C>            <C>
BALANCES AT DECEMBER 31, 2000                                 239,141       924,069        3,507                -       1,166,717
Remuneration on construction in progress                            -         2,325            -                -           2,325
Recognition of pension and other postretirement
    obligations under CVM Instruction 371                           -             -            -          (20,403)        (20,403)
Net loss                                                            -             -            -          (60,076)        (60,076)
Absorption of loss for the year                                     -       (76,972)      (3,507)          80,479               -
                                                         -------------- ------------- ------------- ----------------- -------------
BALANCES AT DECEMBER 31, 2001                                 239,141       849,422            -                -       1,088,563
Remuneration on construction in progress                            -           870            -                -             870
Loss for the year                                                   -             -            -         (538,913)       (538,913)
Absorption of loss for the year                                     -      (538,913)           -          538,913               -
                                                         -------------- ------------- ------------- ----------------- -------------
BALANCES AT DECEMBER 31, 2002                                 239,141       311,379            -                -         550,520
Net income                                                          -             -            -           43,929          43,929
Allocation of net income:
    Retention of income reserve                                     -             -        1,909           (1,909)              -
Proposed dividends                                                  -             -            -          (42,020)        (42,020)
                                                         -------------- ------------- ------------- ----------------- -------------
BALANCES AT DECEMBER 31, 2003                                 239,141       311,379        1,909                -         552,429
                                                         ============== ============= ============= ================= =============
</TABLE>



<TABLE>
<CAPTION>

                                                         Credits for
                                                          capital
                                                          increase          Total
                                                         -------------- --------------
<S>                                                           <C>          <C>
BALANCES AT DECEMBER 31, 2000                                 5,262        1,171,979
Remuneration on construction in progress                          -            2,325
Recognition of pension and other postretirement
    obligations under CVM Instruction 371                         -          (20,403)
Net loss                                                          -          (60,076)
Absorption of loss for the year                                   -                -
                                                         -------------- --------------
BALANCES AT DECEMBER 31, 2001                                 5,262        1,093,825
Remuneration on construction in progress                          -              870
Loss for the year                                                 -         (538,913)
Absorption of loss for the year                                   -                -
                                                         -------------- --------------
BALANCES AT DECEMBER 31, 2002                                 5,262          555,782
Net income                                                        -           43,929
Allocation of net income:
    Retention of income reserve                                   -                -
Proposed dividends                                                -          (42,020)
                                                         -------------- --------------
BALANCES AT DECEMBER 31, 2003                                 5,262          557,691
                                                         ============== ==============
</TABLE>



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


                                      F-5
<PAGE>


        ESPIRITO SANTO CENTRAIS ELETRICAS S.A. - ESCELSA AND SUBSIDIARIES


            CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION

              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

                        (In thousands of Brazilian reais)

<TABLE>
<CAPTION>
                                                                          2003           2002          2001
                                                                     ------------- --------------- ------------
                                                                                   (reclassified)
<S>                                                                      <C>           <C>           <C>
SOURCES OF FUNDS
From operations
   Net income (loss)                                                       43,929      (538,913)      (60,076)
   Expenses (income) not affecting net working capital:
   Monetary and exchange variation on long-term liabilities              (335,186)      579,551       174,590
   Depreciation and amortization                                          157,176       173,165       149,138
   Disposal of property, plant and equipment                               10,053        13,736        25,266
   Provision for loss on UTE Campo Grande disposal                         22,802        77,291             -
   Deferred income taxes                                                   78,109      (105,831)      (13,201)
   Regulatory assets                                                            -       (30,771)     (138,591)
   Provision for contingencies                                             30,294        22,347        71,724
   Provision for loss on goodwill                                         124,093             -             -
   Other provisions                                                        11,187         8,755        12,428
   Minority interest                                                        1,540       (38,833)       10,794
   Other                                                                    2,734         4,052           436
                                                                     ------------- --------------- ------------
                                                                          146,731       164,549       232,508
                                                                     ------------- --------------- ------------
From third parties
   Loans and financing                                                    110,834       250,078       124,890
   Obligations related to the concession                                   18,695         6,185        14,773
   Post-retirement benefits                                                 2,041             -         7,629
   Taxes and contributions                                                  3,934             -             -
   Decrease in non-current                                                 37,596             -        49,856
   Tariff bonus and surcharges                                              3,901        24,229             -
   Proceeds from sale of investment                                             -             -         3,718
   Other                                                                   13,318         8,512         5,780
                                                                     ------------- --------------- ------------
                                                                          190,319       289,004       206,646
                                                                     ------------- --------------- ------------
Total sources of funds                                                    337,050       453,553       439,154
                                                                     ------------- --------------- ------------

APPLICATIONS OF FUNDS
   Non current assets                                                      57,477        39,637        51,941
   Property, plant and equipment                                          161,684       187,969       188,349
   Investments                                                                718          (290)            -
   Prepaid expenses                                                        15,856        29,167        86,002
   Transfer from long-term to current liabilities                         197,522       115,148        80,542
   Proposed dividends                                                      43,132         1,491         4,083
   Tariff bonus and surcharges                                                  -             -        34,516
   Related companies                                                            -         3,387        31,878
   Low income consumers                                                         -        18,718             -
   Other                                                                        -           301         2,980
                                                                     ------------- --------------- ------------
Total applications of funds                                               476,389       395,528       480,291
                                                                     ------------- --------------- ------------


INCREASE (DECREASE) IN WORKING CAPITAL                                   (139,339)       58,025       (41,137)
                                                                     ============= =============== ============

                                                                                                    (continues)
</TABLE>


                                      F-6
<PAGE>

<TABLE>
<CAPTION>

                                                                          2003           2002          2001
                                                                     ------------- --------------- ------------
                                                                                  (reclassified)
<S>                                                                      <C>            <C>           <C>
Variation of working capital
Current assets:
Beginning of the year                                                     903,447       731,597       586,659
End of the year                                                           811,881       903,447       731,597
                                                                     ------------- --------------- ------------
                                                                          (91,566)      171,850       144,938
                                                                     ------------- --------------- ------------
Current liabilities:
 Beginning of the year                                                    736,796       622,971       436,896
 End of the year                                                          784,569       736,796       622,971
                                                                     ------------- --------------- ------------
                                                                           47,773       113,825       186,075
                                                                     ------------- --------------- ------------
INCREASE (DECREASE) IN WORKING CAPITAL                                   (139,339)       58,025       (41,137)
                                                                     ------------- --------------- ------------
</TABLE>



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


                                      F-7
<PAGE>



        ESPIRITO SANTO CENTRAIS ELETRICAS S.A. - ESCELSA AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

                        (In thousands of Brazilian reais)


<TABLE>
<CAPTION>

                                                                          2003           2002          2001
                                                                     ------------- --------------- ------------
<S>                                                                      <C>            <C>          <C>
Cash flows from operating activities
Net income (loss)                                                          43,929       (538,913)     (60,076)
Adjustments to reconcile net income (loss) to net cash provided by
   (used in) operating activities
   Monetary and exchange variation on assets and liabilities             (283,447)       577,723      176,462
   Depreciation and amortization                                          156,366        173,165      149,138
   Allowance for doubtful accounts receivable                               7,937          8,982       20,922
   Loss on disposal of property, plant and equipment                       10,053         13,736       25,266
   Provision for contingencies                                             29,784         22,347       71,724
   Losses (gains) accrued on marketable securities                        (37,260)       (38,218)     (12,388)
   Provision for loss on UTE Campo Grande disposal                         22,802         77,291            -
   Provision for loss on investment                                        11,187          8,755       12,428
   Provision for loss on goodwill                                         124,093              -            -
   Regulatory assets                                                      (44,886)       (28,074)    (218,056)
   Minority interest                                                        1,540        (38,833)      10,794
   Deferred income taxes                                                   88,073       (105,831)     (13,201)
   Others                                                                   3,570          3,310       (1,436)
                                                                     ------------- --------------- ------------
                                                                          133,741        135,440      161,577
                                                                     ------------- --------------- ------------
Changes in operating assets and liabilities
   Accounts receivable                                                     36,246       (107,575)     (62,894)
   Marketable securities                                                  114,750        (13,154)      29,232
   Other accounts receivable                                               (2,580)        13,668       (1,934)
   Recoverable taxes                                                       29,618         12,663      (46,976)
   Bonus paid and costs incurred - emergency rationing program              3,901         24,234      (34,516)
   Variation of Parcel A items                                                  -        (17,281)     (86,002)
   Material and supplies                                                    1,279          1,081       (1,519)
   Escrow deposits                                                        (34,641)       (17,944)     (19,203)
   Prepaid expenses                                                       (61,650)       (15,866)      (3,391)
   Suppliers                                                               (2,699)       (23,378)      72,015
   Accrued payroll                                                          1,583            579         (173)
   Accrued taxes and social contributions                                  18,758            311        5,211
   Accrued liabilities                                                         (5)         1,388       11,789
   Regulatory charges payable                                              (1,249)          (929)      (5,202)
   Assets held for sale - UTE Campo Grande                                (46,027)       (23,414)      30,054
   Low income consumers                                                    18,718        (18,718)           -
   Accrued interest and fees                                              (19,306)        26,012       10,887
   Other                                                                   26,423          4,325       (4,557)
                                                                     ------------- --------------- ------------
                                                                          (31,631)      (153,998)    (107,179)
                                                                     ------------- --------------- ------------
Net cash provided by (used in) operating activities                       102,110        (18,558)      54,398
                                                                     ------------- --------------- ------------

                                                                                                    (continues)
</TABLE>



                                      F-8
<PAGE>


<TABLE>
<CAPTION>

                                                                          2003           2002          2001
                                                                     ------------- --------------- ------------
<S>                                                                      <C>            <C>           <C>
Cash flows from investing activities
     Additions to property, plant and equipment                          (161,684)      (187,970)     (181,065)
     Proceeds from sale of investments                                          -            290         3,718
     Additions to investments                                                (718)             -             -
     Net proceeds from marketable securities                              110,934          1,611         1,658
     Related companies                                                      4,208         (3,387)      (18,368)
     Consumers' contributions and donations-special liabilities            18,695          6,185        14,773
                                                                     ------------- --------------- ------------
Net cash used in investing activities                                     (28,565)       757,665      (179,284)
                                                                     ------------- --------------- ------------
Cash flows from financing activities
     Proceeds from new loans and financing                               (269,383)       757,665       354,587
     Repayment of loans and financing                                    (346,367)      (533,099)     (215,031)
     Dividends paid                                                        (1,109)        (5,366)      (17,779)
                                                                     ------------- --------------- ------------
Net cash provided by (used in) financing activities                       (78,088)       219,200       121,777
                                                                     ------------- --------------- ------------
Increase (decrease) in cash and cash equivalents                           (4,543)        17,371        (3,109)
  Cash and cash equivalents, beginning of year                             20,008          2,637         5,746
                                                                     ------------- --------------- ------------
  Cash and cash equivalents, end of year                                   15,465         20,008         2,637
                                                                     ============= =============== ============
  Supplemental cash flows disclosure-
       Taxes paid                                                          18,655          8,100        46,976
       Interest paid, net of interest capitalized                         249,513        207,468       142,342
</TABLE>



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


                                      F-9
<PAGE>


        ESPIRITO SANTO CENTRAIS ELETRICAS S.A. - ESCELSA AND SUBSIDIARIES

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

            (In thousands of Brazilian reais, unless otherwise noted)


1.   THE COMPANY AND ITS OPERATIONS

     a.  The Company

         Espirito Santo Centrais Eletricas S.A. - Escelsa, a Brazilian company
         ("sociedade anonima") located in the city of Vitoria, State of Espirito
         Santo, was incorporated on July 1, 1968, as a partly state-owned
         company ("sociedade de economia mista"), organized under the laws of
         Brazil and controlled by Centrais Eletricas Brasileiras S.A. -
         Eletrobras, a company controlled by the Brazilian Federal Government.
         Iven S.A. and GTD Participacoes S.A. acquired 50% (plus one share) of
         the common shares of Escelsa in the privatization auction held on July
         11, 1995. On January 19, 1996, Escelsa became a registrant with the
         Comissao de Valores Mobiliarios (the "CVM"), the Brazilian Securities
         Commission, and presently, its shares are traded on Brazilian stock
         exchanges in small amounts. The Group Eletricidade de Portugal S.A. -
         EDP, through Iven S.A. controls Escelsa's core business, which is the
         distribution of electric energy in the State of Espirito Santo.

         The Company also has a wholly-owned subsidiary, Magistra Participacoes
         S.A., which has 87.9% and 50.7% interest in the common and preferred
         shares of Empresa Energetica do Mato Grosso do Sul S.A. - Enersul
         ("Enersul"), respectively. Enersul, an electricity distribution company
         with operations in the state of Mato Grosso do Sul was acquired in a
         privatization bid auction on November 25, 1997. The Company also has a
         97.40% interest in TV A Cabo Vitoria S.A. - TVIX, which was
         incorporated on July 4, 1997 and provides cable TV service to
         condominiums and residences in the municipalities of Vitoria and Vila
         Velha in Espirito Santo. The Company has a 100% participation in
         ESCELSA Participacoes S.A. - ESCELSAPAR, which provides internet and
         information technology services.

         As a result of the discontinuity of services of internet access offered
         by ESCELSAPAR in the State of Espirito Santo and Mato Grosso do Sul, on
         March 31, 2003, the subsidiary signed a "Private Agreement" with
         Universo Online Ltda. - UOL, selling its customers list to UOL.


     b.  Regulatory environment

         As a public concessionaire of electric utility services, Escelsa and
         its subsidiary Enersul are subject to regulations established by the
         Agencia Nacional de Energia Eletrica (the National Agency of Electric
         Power, or "ANEEL"), successor to the "Departamento Nacional de Aguas e
         Energia Eletrica" ("DNAEE"), which is related to the Brazilian Ministry
         of Mines and Energy.

         Escelsa supplies electric energy to over 90% of consumers of the
         Espirito Santo State in a concession area of 41,372 km2 and connected
         13,784 new consumers in 2003 with a total of 968,165 electric energy
         consumers as of December 31, 2003. Escelsa generated from its 7 power
         plants approximately 11.3% of its energy sold. (All information
         unaudited).


                                      F-10
<PAGE>


         The electricity sector in Brazil is regulated by the Brazilian Federal
         Government, acting through the Ministry of Mines and Energy, which has
         exclusive authority over the electricity sector. Regulatory policy for
         the sector is implemented by an autonomous national electric energy
         agency (Agencia Nacional de Energia Eletrica or "ANEEL"). ANEEL is
         responsible for (1) granting and supervising concessions and setting
         electricity tariffs; (2) supervising and performing financial
         examinations of the concessionary companies; (3) issuing regulations
         applicable to the electricity sector; and (4) planning, coordinating
         and executing water resource studies and granting and supervising
         concessions for the use of water resources. The Company's electricity
         business is subject to regulation by the Brazilian regulatory
         authority, ANEEL. Retail electricity sales by the Company are made
         pursuant to provisions of its long-term electricity sales concession
         agreements.

         Pursuant to a concession contract signed by Escelsa on July 17, 1995
         (the "Escelsa Concession Contract"), Escelsa was granted the right to
         supply electricity in 70 of the 78 municipalities that comprise the
         State of Espirito Santo through the year 2025. In 2025, the Escelsa
         Concession Contract may be renewed, at the discretion of the regulatory
         authorities, for an additional 30 years. The Escelsa Concession
         Contract establishes a tariff mechanism with three types of
         adjustments. Escelsa may periodically apply for the first type of
         adjustment, which takes into account the effects of inflation on
         Escelsa's tariffs in order to maintain the "economic and financial
         equilibrium" of Escelsa. The second type of adjustment permits Escelsa
         to request revisions to its tariff rates from time to time, generally
         to pass through significant changes in its cost structure that it does
         not control, particularly the cost of electricity it purchases, that
         affects the "economic and financial equilibrium" of Escelsa. In
         addition, ANEEL has the right, every three years, beginning in July
         1998, to adjust Escelsa's tariffs.

         Escelsa primarily purchases electricity from Furnas Centrais Eletricas
         S.A. - Furnas ("Furnas") (under a long-term electric energy supply
         contract), which represented approximately 82% of its total energy
         sold. From the total energy supplied by Furnas, approximately 29% is
         generated by Itaipu (hydroelectric plant owned by Itaipu Binacional)
         and approximately 71% is generated by its own power plants.

         Pursuant to the Enersul Concession Contract, Enersul was granted the
         right to distribute electricity in 72 of the 77 municipalities in Mato
         Grosso do Sul through year 2027. Supplying electric energy to over 90%
         of the State of Mato Grosso do Sul, with and a concession area of
         329,270 km2, Enersul connected 17,628 new consumers in 2003 with a
         total of 2,816 GWh electric energy consumers as of December 31, 2003.
         Enersul generated from its 4 power plants approximately 4% of its
         energy sold. (All information unaudited).

         In 2027, the Enersul Concession Contract may be renewed, at the
         discretion of the regulatory authorities, for an additional 30 years.
         Enersul also currently owns one-generation plant (Mimoso) owned by
         Enersul pursuant to a concession that was granted through the year
         2027.

         The Enersul Concession Contract establishes a tariff mechanism with a
         tariff adjustment formula (the "Formula"). The Formula is adjusted
         annually and, in the case of significant increases, may be adjusted
         upon request of Enersul. The numerator of the Formula is comprised of
         two components: one related to costs that Enersul does not control and
         should therefore be permitted to pass on to its final customers,
         including the cost of electricity it purchases and certain taxes,
         referred to as Parcel A costs, and the other related to costs for
         transmission, distribution and its own generation, such as depreciation
         and amortization, personnel, materials and third party expenses, that
         are adjusted to protect the utility against the effects of inflation,
         referred to as Parcel B costs. The denominator of the Formula is
         Enersul's annual net revenues. In addition, ANEEL has the right, every
         five years, to adjust Enersul's tariffs to take into account efficiency
         gains achieved by Enersul, technological advances or improvements, a
         comparison of Enersul's tariffs with tariffs of foreign companies and
         the Brazilian economic situation.

         Enersul primarily purchases electricity from Tractabel and Itaipu
         (under a long-term electric energy supply contracts) - approximately
         91% of its total energy needs.


                                      F-11
<PAGE>


         As a result of changes in regulations in December 2001, the pricing
         provisions of the contract are now linked to a tracking account which
         permits accumulation of costs and recovery through future tariffs,
         changes for events such as exchange rate changes between the Brazilian
         real and the U.S. dollar. In addition to the annual adjustment, the
         Company may request additional rate adjustments arising from
         significant events that disrupt the economic and financial equilibrium
         of the business. Other normal, or recurring, events are also included
         as a specific tariff increase and may include normal increases in
         purchased power costs, taxes on revenue generated or local inflation.
         The Company has the burden to prove the impact on its financial or
         economic equilibrium, and there can be no assurance that such
         adjustments will be granted.

     c. Power Rationing and Government Measures to Compensate Electric Utilities

         Low amounts of rainfall in 2000 and early 2001, vigorous growth in
         demand for energy and Brazil's significant dependence on electricity
         generated from hydrological resources resulted in abnormally low water
         levels in many reservoirs that are used to power Brazil's major
         hydroelectric generation facilities. In May 2001, the Federal
         Government announced several measures in response to these conditions.
         First, the President of Brazil passed Provisional Measure No. 2,147 on
         May 15, 2001 (as updated by Provisional Measure No. 2,152-2 on June 1,
         2001), creating the Committee for Management of the Electric Energy
         Crisis. The Energy Crisis Committee resolved on May 16, 2001 to require
         certain electricity distributors, including us, to suspend distribution
         of electricity to new customers (except residential and rural
         customers) and for certain non-essential purposes such as nighttime
         sporting events and advertising use, and to reduce distribution for the
         illumination of public areas by 35%. Second, the President passed
         Decree No. 3,818 on May 15, 2001, requiring the Federal Government to
         reduce its electricity consumption by 35% beginning July 1, 2001.
         Third, on May 18, 2001, the Federal Government announced additional
         power rationing measures to be imposed on industrial, commercial and
         residential customers in the most industrialized and heavily populated
         areas of Brazil beginning on June 1, 2001. These measures required most
         residential consumers to reduce their electricity consumption by 20% of
         the average consumption in May, June and July 2000. Industrial and
         commercial consumers also had to reduce their consumption by 15% to 25%
         of the average consumption during the same period. Further measures
         provided that bonuses would be paid to residential consumers whose
         energy consumption was lower than the requisite target and that power
         cuts and surcharges would be imposed on consumers whose energy
         consumption exceeded the requisite target. ANEEL established specific
         accounts and controls to record the effect of the rationing measures
         relating to the bonus, surcharge and other related costs. The power
         rationing measures ended on March 1, 2002.

         On October 17, 2001, the Federal Government, through Provisional
         Measure No. 4, subsequently approved by Law No. 10,310 of November 22,
         2001, stated that electric utilities, including the Company, would be
         reimbursed for expenses associated with payment of bonuses to consumers
         and other related costs that exceeded the surcharges.

         Based on Resolution GCE no. 117, of February 19, 2002, the Emergency
         Program for Reduction of Electrical Energy Consumption was
         extinguished, being determined that, as from March 1, 2002, the surtax
         charged to customers who have exceeded their consumption quotas is no
         longer applicable, however the bonus regulated by Article 4 of
         Resolution GCE no. 4, of May 22, 2001 was maintained until March 31,
         2002.

         On June 6, 2002, Decree no. 4,261 extinguished the Committee for
         Management of the Electric Energy Crisis - GCE.


                                      F-12
<PAGE>


         The General Electric Energy Sector Agreement, to which the Company
         became a party on December 20, 2001, established mechanisms for
         settling contractual and administrative disputes, thus eliminating the
         threat of judicial or extra-judicial suits over issues arising from the
         electric energy-rationing period. The main points of the Agreement are
         as follows:

         o    Renunciation to any plea or suit;

         o    Purchase agreements for net contractual surpluses;

         o    Agreements for reimbursement of free energy; and

         o    Amendments to the Initial Contracts.

         Based on Provisional Measure no. 14, issued December 21, 2001,
         converted into Law 10,438 on April 26 2002, and on other pertinent
         legislation, the Company calculated the amount of the revenue
         recomposition through an extraordinary tariff applicable to all
         electric energy distribution companies, for the purpose of neutralizing
         the margin losses resulting from the Emergency Program for Reducing
         Electric Energy Consumption - PERCEE, in effect from June 2001 to
         February 2002.

         At the same time, along with the other electric energy distribution
         utilities, the Company calculated the monthly variations in additional
         (Parcel "A") non-managed costs, and listed all the additional energy
         purchase costs in the Wholesale Energy Market - MAE ("Free Energy") to
         be reimbursed to electric generators.

         On March 8, 2002 and May 7, 2002, the Company sent ANEEL its
         calculations of tariff recomposition for 2001 and for January and
         February 2002 for validation. ANEEL declared that the right for
         compensation was conditional upon complete adherence to the General
         Energy Sector Agreement, as allowed in Provisional Measure no. 14/01,
         GCE Resolution 91/01 and ANEEL Resolution 31/02.

         ANEEL Resolutions 480 and 481 (concerning margin losses), 482
         (concerning Parcel "A" costs) and 483 (concerning Free Energy), all
         dated August 29, 2002, approved the amounts of the revenue
         recomposition, for which the following extraordinary electricity
         tariffs were established:

         o    2.9% for residential clients (except low income users), rural
              users and public lighting;

         o    7.9% for all other clients.

         Under the terms of ANEEL Resolution No. 484, also dated August 29,
         2002, the tariff recomposition will take place over a maximum period of
         70 months (82 months - for Enersul), starting after December 2001,
         which was reduced to 69 months (73 months - for Enersul), starting in
         December 2001, and persuant to Aneel's Resolution No. 1 dated January
         12, 2004.

         Studies undertaken by the Company indicate that these assets will be
         fully recovered over the maximum term established, for which reason no
         provision for losses was set-up.

         The Brazilian Economic and Social Development Bank - BNDES - made
         available credit lines to finance 90% of the recoveries of losses from
         the Rationing Program, collateralized by the amounts to be collected
         under the extraordinary tariff recomposition. See Note 17.


                                      F-13
<PAGE>


2.   BASIS FOR PRESENTATION OF THE FINANCIAL STATEMENTS

     a.  Requirements of Brazilian Legislation through December 31, 1995

         Until December 31, 1995, publicly traded companies were required to
         publish financial statements prepared pursuant to two methods: (i) the
         corporate law method, which was valid for all legal purposes, and (ii)
         the constant currency method, pursuant to which publicly traded
         companies presented supplementary price-level adjusted financial
         statements.

         Under the constant currency method, all historical Brazilian real
         amounts were expressed in constant purchasing power at the latest
         balance sheet date. These standards required that all transactions and
         balances recorded in a company's statutory accounts under the corporate
         law method be monetarily restated to reflect the changes caused by
         inflation (as measured by a specified inflation index) from the date
         they occurred or were generated to the latest balance sheet date.
         Accordingly, all relevant non-monetary assets and liabilities and
         shareholders' equity accounts and all components of the statements of
         income, changes in financial position and changes in shareholders'
         equity and the notes thereto were monetarily restated to reflect
         changes in the inflation index to the latest balance sheet date.

     b.  Changes in Legislation Affecting Financial Statements After December
         31, 1995

         On December 26, 1995, the Brazilian government enacted Law no. 9,249
         which eliminated inflation accounting for the effects of inflation as
         from January 1, 1996 for tax and financial reporting purposes. However,
         accounting practices adopted in Brasil ("Brazilian GAAP") continued to
         require inflation accounting up to December 31, 2000.

         On March 19, 1996, CVM issued Instruction no. 248 stating that
         quarterly and annual financial statements should be prepared in
         accordance with the Corporate Law method (which did not account for the
         effects of inflation). However, companies were allowed to present
         supplemental price-level adjusted financial information, in accordance
         with the standards previously adopted. If a company elected to prepare
         price-level adjusted financial statements for use outside Brazil, such
         statements should also be filed with the CVM in Brazil.

         With the change in legislation, CVM did not define a specific index to
         be used for the preparation of optional price-level adjusted financial
         statements. The Brazilian Institute of Independent Public Accountants
         ("IBRACON") recommended that either the IGP-M or the IGP-DI indexes
         computed by the Getulio Vargas Foundation might be used for this
         purpose.

         The Company's management believed that the General Market Price Index,
         or the "IGP-M" index was the most appropriate and consistent measure of
         inflation in Brazil and elected the IGP-M for purposes of remeasurement
         of its financial statements under the constant currency method, as from
         January 1, 1996, through December 31, 2000.

         In March 2001, the "Conselho Federal de Contabilidade - CFC " issued
         Resolution No. 900, which was also approved by the CVM, establishing
         that inflation accounting was no longer required under Brazilian GAAP,
         as from January 1, 2001, as long as cumulative inflation over a
         three-year period remains under 100%. Therefore, since Brazil's
         cumulative inflation for the three-year period ended December 31, 2003
         has been under 100%, no inflation effects were recognized after
         December 31, 2000.


                                      F-14
<PAGE>


     c.  Presentation of Financial Statements

         For Brazilian official financial reporting purposes, the Company
         prepares its financial statements under the corporate law. As explained
         in b. above, no inflation effects were recognized after December 31,
         2000. The accompanying financial statements are a translation and
         adaptation of the financial statements previously published in the
         Portuguese language. Certain reclassifications and changes in
         terminology have been made in relation to the previously published
         financial statements and, additionally, notes have been expanded to
         conform more closely to the reporting practices prevailing in the
         United States of America.

         The reconciliation of shareholders' equity and net income reported
         under the corporate law method and the amounts reflected in the
         accompanying consolidated financial statements for 2003, 2002 and 2001
         are as follows:

         (i)  Shareholders' Equity

<TABLE>
<CAPTION>

                                                                                  2003        2002        2001
                                                                                  ----        ----        ----
         <S>                                                                     <C>         <C>        <C>
         As reported in the corporate law financial statements                    357,929     223,021     731,403

         Accounting for 2000 inflation not allowed
            under corporate law method-
               Investments                                                            234         234         333
               Goodwill - net of amortization                                      71,653      55,243      56,801
               Property, plant and equipment - net of depreciation                518,764     565,292     617,802
               Special liabilities                                                (79,623)    (79,623)    (79,623)
               Provision for loss on goodwill                                    (124,093)          -           -
               Income tax and social contribution effect                         (144,528)   (160,348)   (177,709)
               Minority interest                                                  (42,645)    (48,037)    (55,182)
                                                                                 --------    --------   ---------
         As reported in the accompanying financial statements
            (adjusted for the effects of the price-level changes through
            December 31, 2000)                                                    557,691     555,782   1,093,825
                                                                                  =======     =======   =========


         (ii) Net Income (Loss)

                                                                                  2003        2002        2001
                                                                                  ----        ----        ----

         As reported in the corporate law financial statements                    176,928    (509,252)    (26,136)

         Accounting for 2000 for inflation not allowed
            under corporate law method-
               Investments                                                              -         (99)       (452)
               Goodwill                                                            16,410      (1,558)       (384)
               Property, plant and equipment - net of depreciation                (46,528)    (52,510)    (59,451)
               Provision for loss on goodwill                                    (124,093)          -           -
               Income tax and social contribution effect                           15,820      17,361      19,764
               Minority interest                                                    5,391       7,145       6,583
                                                                                 --------    --------   ---------
         As reported in the accompanying financial statements
            (adjusted for the effects of the price-level changes through
            December 31, 2000)                                                     43,929    (538,913)    (60,076)
                                                                                   ======    ========     ========
</TABLE>


                                      F-15
<PAGE>


3.   SUMMARY OF ACCOUNTING POLICIES

     The Company's accounting policies comply with Brazilian GAAP, which include
     the accounting principles specifically applicable to electric utility
     companies in Brazil as required by ANEEL. Certain accounting policies
     differ from U.S. GAAP. See Note 29 for further discussions of the
     differences and the reconciliation of shareholders' equity and net income
     to U.S. GAAP.

     3.1 - Regulated Accounting Policies

     (a) Regulation - During 2001, the electricity markets in significant
         portions of Brazil experienced rationing, or reduced availability of
         electricity to customers, due to low rainfall, reduced reservoir levels
         and that country's significant dependence on electricity generated from
         hydrological resources. These factors resulted in lower sales for the
         Company. In December 2001, electricity concessionaires including the
         Company reached an industry-wide agreement (the "agreement") with the
         Federal Government that provided resolution to all rationing related
         issues as well as to certain other electricity rate-related issues. The
         rate increase set forth in the agreement will remain in effect over a
         maximum period of 69 months for Escelsa and 73 months for Enersul.

         The agreement also considered the recovery of Parcel A costs, which
         comprise certain costs that each distribution company is permitted to
         defer and pass through to its customers through a future rate
         adjustments. Parcel A costs are limited by the concession contracts to
         the cost of purchased power and certain other costs and taxes. ANEEL
         had granted rate increases to recover a portion of previously deferred
         Parcel A costs. However, due to uncertainty surrounding the Brazilian
         economy, ANEEL had delayed approval of some Parcel A rate increases.
         The agreement provided a tracking account mechanism, previously created
         in October 2001 through Executive Order No. 296 to record the variation
         in the Parcel A costs for rate adjustment calculation purposes. Parcel
         A costs incurred prior to January 1, 2001 are not recoverable through
         the tracking account. As a result, the Company has not recognized any
         regulatory asset for Parcel A costs incurred prior to 2001 (see Note
         6).

         As a result of various actions taken by the Federal Government and
         ANEEL in 2001 (see note 1.c.), the Company capitalizes incurred
         allowable costs as deferred regulatory assets when there is a probable
         expectation that future revenue equal to the costs incurred will be
         billed and collected as a direct result of the inclusion of the costs
         in an increased tariff set by the regulator. The deferred regulatory
         asset is eliminated when the Company collects the related costs
         through billings to customers. ANEEL performs a rate review on an
         annual basis. If ANEEL excludes all or part of a cost from recovery,
         that portion of the deferred regulatory asset is impaired and is
         accordingly reduced to the extent of the excluded cost. The Company
         recorded deferred regulatory assets of R$392,352 at December 31, 2001,
         that it expects to pass through to its customers in accordance with
         and subject to regulatory provisions. The regulatory assets include
         recovery of lost revenues due to rationing of R$213,934 at December
         31, 2001 (R$22,339 during 2002) and Parcel A costs amounting to
         R$63,860 at December 31, 2001 (R$3,956 during 2002). Additionally, the
         Company recorded deferred regulatory assets for the cost of energy
         traded on the spot market (energy not traded pursuant to contracts
         during the rationing period) ("free energy") in the amount of R$84,600
         at December 31, 2001 (R$13,069 and R$14,042 during 2002 and 2003,
         respectively), which will be recovered from consumers through an
         extraordinary rate increase authorized by ANEEL (see Note 6).

     (b) Property, Plant and Equipment - These assets are stated at acquisition
         or construction cost, monetarily adjusted under the constant currency
         method through December 31, 2000. Depreciation is computed on the
         straight-line basis over the estimated useful lives of the assets. On
         January 1, 1998, the Company adopted the new depreciation rates
         established by ANEEL in Resolutions no. 2/97 and 44/99. The interest
         charges, monetary variations and foreign exchange differences accrued
         on loans and financing relating to construction work in progress are
         capitalized. Interest on the shareholders' equity portion of the
         financing of electric energy-related construction work in progress is
         also capitalized based on the "Taxa de Juros de Longo Prazo" - the
         Brazilian long-term interest rate (the "TJLP").


                                      F-16
<PAGE>


     (c) Obligations Related to the Concession - Refer to obligations linked to
         the concession agreement for electric utilities and represent
         basically Federal Union funds, donations requiring no return from the
         donor and subsidies and contributions received from consumers destined
         for investments in the public service of electric energy in
         distribution activity.

         These obligations will be deducted from the residual property, plant
         and equipment balance determined at the end of the concession period.
         As from January 1, 2002, the balance of this account is being
         classified as a deduction to property, plant and equipment.

     (d) Materials and Supplies - Materials and supplies used in operations and
         maintenance are recorded as current assets and those destined for
         construction are included in property, plant and equipment, both based
         on the average acquisition cost.

     3.2 - General Accounting Policies

     (a) Marketable Securities - Are recorded at cost plus accrued income, up to
         the closing date of the balance sheet, with necessary provisions made
         for devaluation to reflect market values, when applicable. Marketable
         securities are mainly represented by U.S. dollar-linked interest
         bearing public treasury notes.

     (b) Accounts Receivable - Accounts receivable include the supply of
         electric energy, both billed and unbilled, to customers as of the
         balance sheet date, accounted for on an accrual basis, and includes
         charges for late payments by customers as well as accounts receivables
         related to the extraordinary tariff recovery related to revenue losses
         during the electric energy rationing period and energy sales on the
         spot market ("MAE").

     (c) Allowance for Doubtful Accounts Receivable - The allowance for doubtful
         accounts receivable is recorded at an amount estimated by management as
         sufficient to cover probable losses and is recognized in accordance
         with General Instruction No. 6.3.2 of the Accounting Standards for
         Public Electric Utilities.

     (d) Investment - The investments in subsidiary companies are stated based
         on the equity method and presented on a consolidated basis in the
         accompanying financial statements. The other investments are stated at
         cost plus monetary restatement, until December 31, 1995, net of
         provision for loss, when applicable.

     (e) Goodwill - Goodwill represents the excess of the purchase price over
         the book value of Enersul, acquired as of November 25, 1997 by
         Magistra, and is being amortized over the term of the concession of
         Enersul - thirty years, since January 1, 1999 (it was being amortized
         in ten years until 1998), based on the proportion of projected net
         income for each of those years.

     (f) 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 adjusted to the
         balance sheet date applying the corresponding index. Transaction gains
         and losses and monetary variation gains and losses are recognized in
         income on a accrual basis, except those related to construction work in
         progress, which are capitalized.

     (g) Income Tax and Social Contribution - Income tax recorded in the results
         for the period is calculated based on taxable income (adjusted net
         income) at a rate of 15% plus 10% on taxable income exceeding R$240.
         Social contribution recorded in the results for the period is
         calculated based on taxable income prior to income tax, at a rate of
         9%. The deferred income tax and social contribution taxes arising from
         temporary differences and tax loss carryfowards are accounted under the
         liability method.


                                      F-17
<PAGE>


     (h) Pension Plans - Escelsa and Enersul maintain separate entities,
         Fundacao Escelsa de Seguridade Social - Escelsos ("Escelsos") and
         Fundacao Enersul, respectively, to administer defined benefit and
         contribution pension funds for their employees (see Note 25). The
         costs associated with pension plans are accrued when the contributions
         to the fund become due and are based on mathematical reserves
         determined by independent actuaries. As per CVM Rule 371 of December
         13, 2000, starting in fiscal year 2002, publicly listed companies are
         required to disclose and recognize all liabilities related to pension
         and other post-retirement benefits. The CVM rule gives companies the
         option to recognize the initial transition obligation as of December
         31, 2001, directly to shareholders' equity. Escelsa and Enersul
         adopted this option.

     (i) Net Income (Loss) per Share - These amounts are calculated based on
         the number of shares outstanding at the balance sheet date.

     (j) Revenue Recognition - Revenue for all services is recognized when
         earned. Billing for residential, industrial and commercial customers
         is performed monthly. Unbilled revenues from the billing date to
         month-end are estimated and recognized as revenue during the month
         service was provided. Revenues from electricity sales to the final
         consumers 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 and are accrued at the end of the month.
         Differences between estimated and actual unbilled revenues, which
         historically have not been significant, are recognized in the
         following month. Value added tax ("VAT"), which is a state tax due on
         the sales to the final consumers, is billed to the consumers and
         recorded as part of gross revenue. The VAT payable to the state is
         recorded as deduction of the gross revenue in a separate line in the
         statement of operations to disclose the net operating revenues.

     (k) Use of Estimates - In preparing financial statements in accordance
         with BR GAAP, the Company's management is required to make certain
         assumptions and estimates with respect to the recording of assets,
         liabilities and transactions. Actual results in the future may differ
         from the estimates included in these financial statements. The most
         relevant estimates contained in the financial statements refer
         primarily to the accounting treatment given to the following:

         o  Amounts related to Electric Power Wholesale Market (MAE) rules;
         o  Allowance for Doubtful Accounts Receivable;
         o  Provision for Contingencies and Pension and Retirement Plans;
         o  Provision for loss - UTE Campo Grande (on the subsidiary
            Enersul);
         o  Recovery of deferred income tax and deferred social contribution
            over fiscal losses;
         o  Recovery of regulatory assets.

     (l) Taxation of transactions in the Electric Power Wholesale Market (MAE) -
         As per the terms of Article 32 of Provisional Measure No. 66 of August
         29, 2002, which became law No. 10,637 of December 30 2002, and of
         Instruction No. 199 of September 12 2002, the concession holder, as a
         participant in the Wholesale Energy Market - MAE, exercised its option
         to adhere to the special regime for PIS tax on revenues booked on
         transactions carried out on MAE. The main impact of this special tax
         regime is on the basis for calculation of tax, based on the Company's
         estimated future profitability and the continued application of the
         0.65% rate.

     (m) Consolidated Financial Statements - The consolidated financial
         statements comprise the balance sheet, the statements of operations and
         changes in financial position of Escelsa and its subsidiaries, Magistra
         Participacoes S.A. ("Magistra"), (holder of CESA and Enersul shares
         which were purchased on November 25, 1997 and Costa Rica Energetica
         Ltda.), TV a Cabo Vitoria S.A. ("TVIX") and Escelsapar. Magistra was
         formed on November 19, 1997, TVIX was formed on July 4, 1997 and
         Escelsapar was formed on August 31, 1999. Costa Rica Energetica Ltda.
         was organized as a result of a project carried out by a consortium
         formed by Enersul (51%) and DM Construtora de Obras Ltda (49%) in 1999.
         The financial statements of the subsidiaries have been included in the
         consolidated statements beginning the date of formation or purchase.
         All significant intercompany transactions and balances have been
         eliminated upon consolidation.


                                      F-18
<PAGE>


     3.3 - Constant Currency Presentation

     In addition to the accounting practices described above, the following
     practices under Brazilian GAAP were adopted in the preparation of constant
     currency financial statements up to December 31, 2000:

     (a) Index - Up to December 31, 1995, the financial statements were
         price-level adjusted based on the variation of the UFIR. As from
         January 1, 1996 through December 31, 2000, the IGP-M was used.

     (b) Non-monetary Assets and Liabilities - Investments, property, plant and
         equipment, special liabilities and shareholders' equity accounts were
         restated from the date the original transaction to December 31, 2000.
         Other non-monetary assets and liabilities and certain receivables and
         payables for which the interest rates include a fixed inflation factor
         were not inflation adjusted because the net effect of the adjustments
         were considered immaterial to the financial position or results of
         operations.

     (c) Income Tax and Social Contribution - The deferred tax effects of the
         restatement of non-monetary assets and liabilities were accrued and
         recognized in results of operations. The deferred tax credit related to
         the restatement of shareholders' equity has been reclassified and
         charged to retained earnings since the credit does not represent an
         actual tax benefit.


4.   MARKETABLE SECURITIES

                                                              December 31,
                                                    ----------------------------
                                                       2003             2002
                                                    ------------     -----------

     Debt securities                                   188,935         296,329
     Other                                              14,154          10,291
                                                    ------------     -----------
     Total                                             203,089         306,620
                                                    ============     ===========


     Debt securities include bonds issued by the Central Bank of Brazil ("Notas
     do Banco Central"), with interest rates ranging from 10.30% per annum to
     10.55% per annum plus exchange variation and maturity dates on October and
     November 2006. As of December 31, 2002, the Company recorded provision to
     reduce cost to the market value of this entire NBC-E portifolio in the
     amount of R$67,516. As of December 31, 2003, the market value exceeded the
     cost plus accrued interest and monetary variation and as a result, the
     Company reversed the provision recorded in 2002.


                                      F-19
<PAGE>


5.   ACCOUNTS RECEIVABLE

     Includes both amounts billed to customers and accrued revenue relating to
     unbilled energy supplied to customers as of the balance sheet date. Fines
     arising from late payments to Escelsa and Enersul by other electricity
     companies are also included.

<TABLE>
<CAPTION>

                                                                      Total
                                                         ---------------------------------
                                                              2003             2002
                                                         ---------------  ----------------
     <S>                                                        <C>               <C>
     FINAL CUSTOMERS:
        Billed                                                  348,714           303,985
        Unbilled                                                391,376           358,468
                                                         ---------------  ----------------
                                                                740,090           662,453
                                                         ---------------  ----------------
     WHOLESALE:                                                   3,374             2,830
        Spot Market - MAE                                         1,469            57,049
        System charges                                            1,020             2,072
                                                         ---------------  ----------------
                                                                745,953           724,404
                                                         ===============  ================
</TABLE>

<TABLE>
<CAPTION>

                                                                                                   Total
                                                            Past-due         Past-due       --------------------
                                              Current    up to 90 days     over 90 days       2003       2002
                                             ----------  ---------------  ----------------  ---------  ---------
     <S>                                       <C>               <C>               <C>       <C>        <C>
     CUSTOMERS:
     Residential                                61,208           32,637             5,582     99,427     82,172
     Industrial                                 45,893            5,632             4,304     55,829     53,925
     Commercial, services and other
        activities                              37,504           12,704             8,943     59,151     47,056
     Rural                                      10,877            4,436             1,134     16,447     13,794
     Public authority:                               -                -                 -
        Federal                                  1,718            1,292             1,017      4,027      4,922
        State                                    3,530              652               306      4,488     18,098
        Municipal                                4,034            3,410             2,806     10,250     10,116
     Public lighting                             6,886            4,662             7,629     19,177     24,866
     Public service                              5,143              117               199      5,459      5,424
     Regulatory assets                               -                -                 -          -          -
         Losses                                 56,271                -                 -     56,271     40,478
         Free energy                             8,359                -                 -      8,359     19,118
     Installment debts                          46,154            1,428             4,173     51,755     24,686
     Tariff recovery                            35,219                -                 -     35,219          -
     Other credits                              17,820            1,014               153     18,987     20,254
                                             ----------  ---------------  ----------------  ---------  ---------
                                               340,616           67,984            36,246    444,846    364,909
                                             ----------  ---------------  ----------------  ---------  ---------
     WHOLESALE:
     Energy supplies - standard                  3,374                -                 -      3,374      2,830
     Energy supplies - short-term                1,469                -                 -      1,469     57,049
                                             ----------  ---------------  ----------------  ---------  ---------
                                                 4,843                -                 -      4,843     59,879
                                             ----------  ---------------  ----------------  ---------  ---------
     Other                                       1,020                -                 -      1,020      2,072
                                             ----------  ---------------  ----------------  ---------  ---------
     TOTAL                                     346,479           67,984            36,246    450,709    426,860
                                             ==========  ===============  ================  =========  =========

     NON-CURRENTASSETS:
     CUSTOMERS:
     Regulatory asset
         Losses                                146,496                -                 -    146,496    169,142
         Free energy                            99,055                -                 -     99,055     78,551
     Energy supplies - short-term                3,068                -                 -      3,068          -
     State VAT (ICMS Vale do Rio Doce)          38,986                -                 -     38,986     28,559
     Other credits                               7,639                -                 -      7,639     21,292
                                             ----------  ---------------  ----------------  ---------  ---------
     TOTAL                                     295,244                -                 -    295,244    297,544
                                             ==========  ===============  ================  =========  =========
</TABLE>


     During the year 2002 and the first semester of 2003, the Company adjusted
     the amounts related to the Wholesale Energy Market - MAE, accounted for
     from September 1, 2000 to December 31, 2002. These amounts, after adjusted,
     totalized R$83,700 in sales and R$56,579 in purchasing and system charges.
     The net amount settled was R$19,106.


                                      F-20
<PAGE>


     The amounts of energy in the MAE and the free energy are subject to changes
     depending on the decisions of the litigation processes under way, filed by
     certain companies, with respect to the interpretation of market rules in
     effect. Such companies, not included in the rationing area, obtained an
     injunction, which annuls Dispatch No. 288 of ANEEL, of May 16, 2002, whose
     objective was to provide companies in the sector with clarification as to
     the treatment and form of application of certain accounting rules included
     in the General Agreement of the Electric Energy Sector. The claim filed by
     such companies involves the commercialization of ITAIPU's quota of energy
     in the Southeast/Center-West of Brazil during the 2001-2002 rationing
     period, when there was a significant discrepancy of prices in the
     short-term energy among the sub-markets.

     Tariff Adjustment

     On April 8, 2003 the first tariff adjustment of Enersul according to the
     concession contract was established by ANEEL at 42.26%.

     This adjustment is provisional and will be recalculated when Aneel approves
     the regulatory remuneration basis, according to the rules established on
     Aneel Resolution No. 493/2002.

     In order to follow the principle of tariff and financial equilibrium, the
     ANEEL Resolution No. 167 of April 7, 2003, provided as follows:

     a)  In the first year, from April 2003 to March 2004 tariffs were
         readjusted based on the adjustment tariff index of 32.59%;

     b)  In the annual tariff adjustment to be approved for the years from 2004
         to 2007, the difference between IRT and RT will be added to Parcel B,
         in four annual amounts.

     Related to item "b" above, ENERSUL recorded during the fiscal year,
     receivables and respective taxes related to the tariff readjustment in the
     amount of R$35,219.

     ANEEL fixed the X factor in 2.35% to be applied each year between 2004 and
     2007 as reduction of the parcel B, of ENERSUL income.


6.   GENERAL AGREEMENT - ELECTRIC ENERGY SECTOR

     The General Electric Energy Sector Agreement, to which the Company became a
     party on December 20, 2001, established mechanisms for settling contractual
     and administrative disputes, thus eliminating the threat of judicial or
     extra-judicial suits over issues arising from the electric energy-rationing
     period. The main points of the Agreement are as follows:

     o  Renunciation to any plea or suit;
     o  Purchase agreements for net contractual surpluses;
     o  Agreements for reimbursement of free energy; and
     o  Amendments to the Initial Contracts.

     Based on Provisional Measure no. 14, issued December 21, 2001, converted
     into Law 10,438 on April 26 2002, and on all other pertinent legislation,
     the Company calculated the amount of the revenue recomposition through
     extraordinary tariff applicable to all electric energy distribution
     companies, for the purpose of neutralizing the margin losses resulting from
     the Emergency Program for Reducing Electric Energy Consumption - PERCEE, in
     effect from June 2001 to February 2002.

     At the same time, along with the other electric energy distribution
     utilities, the Company calculated the monthly variations in additional
     (Parcel "A") non-managed costs, and listed all the additional energy
     purchase costs in the Wholesale Energy Market - MAE ("Free Energy") to be
     reimbursed to electric generators.


                                      F-21
<PAGE>


     ANEEL Resolutions 480 and 481 (concerning margin losses), 482 (concerning
     Parcel "A" costs) and 483 (concerning Free Energy), all dated August 29,
     2002, approved the amounts of the revenue recomposition, for which the
     following extraordinary electricity tariffs were established:

     o  2.9% for residential clients (except low income users), rural users
        and public lighting;
     o  7.9% for all other clients.

     ANEEL Resolution no. 1 dated January 12, 2004 fixed new date to the
     extraordinary recovery tariff - RTE, modifying the period of recovery from
     70 to 69 for Escelsa and from 82 to 73 months for ENERSUL, starting in
     December 2001.

     Studies undertaken by the Company indicate that these assets will be fully
     collected over the maximum term established, for which reason no provision
     for losses was set-up.

     6.1 - Recovery of electric energy consumption losses

     These losses, which are part of the extraordinary tariff recomposition,
     developed as follows during the fiscal year:

<TABLE>
<CAPTION>

                                                                                                   Non-
                      Description                                            Current             current
     ----------------------------------------------                     ------------------  ------------------
     <S>                                                                       <C>                 <C>
     Balance on December 31, 2002                                               40,478             169,142

        Recovery through tariff increases                                      (55,153)                  -
        Transfers                                                               70,946             (70,946)
        SELIC Index adjustment                                                       -              48,300
                                                                        ------------------  ------------------

     Balance on December 31, 2003                                               56,271             146,496
                                                                        ==================  ==================
</TABLE>



     These amounts receivable were included in "accounts receivable" in the
     Company's current and non-current assets.

     6.2 - Free Energy

     Free Energy refers to electric energy that was generated during the
     rationing period and was not part of the initial contracts or any
     equivalent contracts.

     According to the Free Energy Reimbursement Agreement, the electric energy
     generators, based on article 2 of Law 10,438, paid market prices for the
     free energy allocated to them by MAE (MAE prices) for the whole duration of
     the Emergency Program for Reducing Electric Energy Consumption.

     The electric energy distributors, with the collection of the extraordinary
     tariff recomposition, will reimburse the generators for the difference
     between the MAE price and R$49.26 per MWh.

     The amounts of these reimbursements were calculated according to MAE
     settlement accounts and were shared pro rata among electric energy
     distributors, proportionally to each one's consumption of energy in the
     National Interconnected Electricity System. This amount has been billed and
     will be repassed to generators during the term that the extraordinary
     tariff recomposition is in effect (69 months for Escelsa and 73 months for
     Enersul).

<TABLE>
<CAPTION>

                                                                                                   Non-
                      Description                                            Current             current
     ----------------------------------------------                     ------------------  ------------------
     <S>                                                                       <C>                 <C>
     Balance on December 31, 2002                                               19,118              78,551
     Aneel's restatement - Aneel Resolution No. 1/2004                               -              14,042
     SELIC Index adjustment                                                          -              16,055
     Reimbursement to generators                                               (20,352)                  -
     Transfers                                                                  10,292             (10,292)
     Other                                                                        (699)                699
                                                                        ----------------  -------------------
     Balance on December 31, 2003                                                8,359              99,055
                                                                        ================  ===================
</TABLE>


                                      F-22
<PAGE>


     These amounts receivable were included in "accounts receivable" in the
     Company's current and non-current assets, with a corresponding credit to
     "Unbilled revenues". A credit in the same amount was made to an "Energy
     Suppliers" account in the current and long-term liabilities, while a
     corresponding entry was debited to "Energy purchased for re-sale -
     short-term" in the income statement.

     As mentioned in note 6, these amounts may be modified depending on the
     outcome of current judicial processes filed by energy market participants,
     with respect to the interpretation of market regulations in effect.

     6.3 - Variation of Parcel "A" items

     The electric energy distribution concession agreements establish amounts
     for each item of exogenous costs that are part of operating expenses and
     are part of the variable costs, known as Parcel "A" of the "Percentage
     Tariff Increase - IRT" formula as follows:

     o  Pass-through of tariff related to energy purchased from Itaipu
        Binacional;
     o  Pass-through of transport costs for electric energy from Itaipu
        Binacional;
     o  Quota for the Fuel Consumption Account - CCC;
     o  Costs for transmission infrastructure usage on the basic grid;
     o  Compensation for use of water resources;
     o  System's Service Charges - ESS;
     o  Energy purchased as established in the Initial Contracts;
     o  Quota for the Global Reversion Reserve - RGR;
     o  Electric energy service enforcement fee;
     o  Connection charges; and
     o  Energy Development Charges - CDE.

     Provisional Measures no. 2,227 and no. 14 of September 4, 2001 (converted
     into Law no. 10,438 of April 26, 2002), of December 21, 2001 and ANEEL's
     Resolution no. 90 of February 18, 2002, set up a tracking account for
     recording the differences, positive or negative, between the amount of each
     of these items from the date of the last tariff increase to the date it was
     effectively paid.

     The balance of this tracking account is being financially compensated based
     on the SELIC interest rate.

     These amounts are recognized in a "Prepaid Expenses" account under current
     and non-current, with a balancing credit to the appropriate items in
     "Operating Expenses", in the income statement, classified by nature.

     6.3.1 - Parcel "A"

     This amount covers the period from January 1 to October 25, 2001, is part
     of the regulatory assets, and will be received after the collection of the
     extraordinary tariff recomposition for consumption losses and free energy.

                                                                      Non-
                                                                    current
                                                                ----------------

     Balance at December 31, 2002                                     82,203
        SELIC Index adjustment                                        19,837
                                                                ----------------
     Balance at December 31, 2003                                    102,040
                                                                ================

     Aneel's Resolution no. 1, issued on January 12, 2004, modified the
     mechanism for the recovery of Parcel A amounts, establishing that all
     amounts will be recovered without time limitation through extraordinary
     tariff recomposition.


                                      F-23
<PAGE>


     6.3.2 - CVA

     Amounts registered as CVA are cost variations that are not part of the
     extraordinary tariff recomposition, from October 26, 2001 onwards and are
     the following:

                                                        December 31
                                            -----------------------------------
                                                 2003               2002
                                            ----------------   ----------------
     ASSETS

     Current assets
     Prepaid expenses
         CVA                                     78,934              23,643
         (-) CVA Liability                      (33,563)            (10,226)
                                            ----------------   ----------------
                                                 45,371              13,417
         Other                                      859                 833
                                            ----------------   ----------------
                                                 46,230              14,250
                                            ================   ================

     Non-current assets
     Prepaid expenses
         CVA                                     92,711              60,170
         (-) CVA Liability                      (54,726)            (32,019)
                                            ----------------   ----------------
                                                  37,985              28,151
                                            ----------------   ----------------
         Parcel A                               102,040              82,203
                                            ----------------   ----------------
                                                140,025             110,354
                                            ================   ================

     According to the legislation, these amounts are to be amortized by
     adjustments that ANEEL will make at each annual tariff review, according
     to the positive or negative balances accumulated in the tracking account.

     According to Interministerial Ordinance no. 116, of April 4, 2003, the CVA
     approved balance will be included in the energy supply tariff in the 24
     months subsequent to the annual tariff adjustment. These annual tariff
     adjustments will occur in April, 2004 (Enersul) and in August 2004
     (Escelsa).

     CVA                                                             2003
     -----------------------                                     --------------

     Approved by
     ANEEL                                                          74,578
     In process                                                      8,778
                                                                 --------------
                                                                    83.356
                                                                 ==============


7.   LOW INCOME CONSUMERS

     Law No. 10,438, of April 26, 2002 set forth the guidelines for classifying
     the low income residential sub-category, which was defined as a consumption
     unit with monthly consumption of less than 80 kWh. Decree no. 4,336 of
     August 15, 2002 expanded the rules to include units with monthly
     consumption of between 80 and 220 kWh.

     As a result, the Company calculated the loss of revenue at R$49,819
     (R$18,718 in 2002) exclusive of VAT tax.

     In view of the Normative Opinion no. 03/2003, published in the Official
     Gazette of the state of Espirito Santo, on November 24, 2003, approval by
     the Finance Secretariat of that state, which considers as subject to the
     ICMS the amount subsidyed by the Federal Government, in excess of the
     residential consumption exempted from ICMS by the state legislation
     (50Kwh/month), the Company's Administration conservately recorded the tax
     provision of R$10,351 (consolidated - R$13,840) charged to operating
     expenses. 8.


                                      F-24
<PAGE>


8.   RECOVERABLE TAXES

     The credits to be recovered are the following:

<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                                   ---------------------------
           Recoverable taxes                                                             2003         2002
     -------------------------------                                               --------------  -----------
     <S>                                                                                <C>          <C>
     Withholding income tax                                                             22,205       54,009
     Income tax to be recovered                                                          6,613            -
     Social contribution                                                                 3,051        3,812
     VAT taxes to be recovered                                                           3,306        4,612
     Other                                                                               3,750        6,110
                                                                                   --------------  -----------
                                                                                        38,925       68,543
                                                                                   ==============  ===========
</TABLE>



9.   RELATED COMPANIES

<TABLE>
<CAPTION>


                                                                                                 Income
                                             Assets                 Liabilities          -----------------------
                                     -----------------------   -----------------------    Electricity purchased
                                              Loan                  Other debts                for resale
                                     -----------------------   -----------------------   -----------------------
            Company                     2003         2002         2003         2002         2003         2002
     ---------------------           ----------  -----------   ----------   ----------   ----------   ----------
     <S>                                <C>          <C>              <C>         <C>       <C>           <C>
     ESC 90                             75,584       65,039            -            -            -            -


     Enertrade                               -            -            -            -       42,048            -
     Costa Rica                              -            -            -            -        7,223        4,854
     Other affiliate                       588          486           93          137            -            -
                                     ----------  -----------   ----------   ----------   ----------   ----------
                                        76,172       65,525           93          137       49,271        4,854
                                     ==========  ===========   ==========   ==========   ==========   ==========
</TABLE>


     Enertrade

     On December 23, 2002, Escelsa and its subsidiary Enersul signed with Energy
     Trading S.A. - Enertrade, a sale and purchase contract of energy effective
     from January 1, 2003 to December 31, 2012. According to the contract,
     Enertrade sold to Escelsa 11.45MW in 2003 and is committed to sell 52MW as
     from 2004. Regarding Enersul, Enertrade has been selling 35 MW.

     The energy purchased by energy distributors is part of the Parcel "A" of
     the "Percentage Tariff Increase - IRT" formula. According to Brazilian
     rules the energy prices should be established according to the rules on
     Normative Value - VN, applicable at the time the contracts were entered
     into and registered with ANEEL.

     ANEEL did not approve the prices established at the subscription date and
     the difference between approved prices and previous prices in the year 2003
     aggregated R$2,014 for ESCELSA and R$4,961 for ENERSUL, as reflected in the
     operating expenses.

     Escelsa and Enersul claimed from ANEEL the full amount of the contract,
     arguing as follows:

     a) Enersul: (i) the cost of energy purchased limited by the VN (normative
        value) methodology; (ii) the long-term agreement assures stable and
        foreseen prices to customers.

     b) Escelsa: (i) No reference to fair value for long-term contracts (ii)
        the equivalence of contracted price with VN (normative value) - which
        is lower than the marginal expansion marginal cost - and is related to
        the principle of "lower tariff" mentioned in the concession contract;
        (ii) the equivalence of contracted prices with VN (normative value);
        (iii) the long-term agreement assures stable and foreseen prices to
        customers.

     Both companies are waiting for administrative decisions. If unfavorable
     decision are issued the companies may file a legal action.


                                      F-25
<PAGE>


     Costa Rica

     Enersul has a sale and purchase energy contract, recognized by ANEEL, from
     January 3, 1999 for 10.33MW, altered on April 3, 2003, at the price of R$
     89.30 MWh.

     ESC 90

     The consolidated statements show the balance of loans between MAGISTRA and
     ESC 90 as follows:

     a) Interest: TJLP + 4% a.a., maturity November 2004 Balance: R$6,189
        (R$5,338 on December 31, 2002)

     b) Interest: 100% CDI (Interbank Deposit Certificate) Various Maturities:
        up to the end of the fiscal year 2004 Balance: R$69,395 (R$59,701 on
        December 31, 2002).

     Financial income from ESC 90 loans in the amount of R$14,446 (R$10,070 on
     December 31, 2002) is recorded in "other financial income" (guarantees:
     promissory notes equivalent to 125% of the contractual amount).

     The Company does not engage in transactions or agreements with related
     companies under terms or conditions more/less favorable than would be
     exercised with third parties


10.  ASSETS HELD FOR SALE - UTE CAMPO GRANDE

<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                                -------------------------------
                                                                                     2003              2002
                                                                                --------------    -------------
     <S>                                                                          <C>                <C>
     Cost                                                                         122,883            77,719
     Market value adjustment                                                      (73,767)          (51,828)
                                                                                --------------    -------------
     Total                                                                         49,116            25,891
                                                                                ==============    =============
</TABLE>

     During 2003, payments were made by Enersul to complete the construction of
     the UTE Campo Grande's turbine, according to the terms established in its
     supply contracts. The Company recalculated the market value adjustment
     based on the market conditions and the new value allocated on the turbine
     construction.

     In view of the decision of Company's management to sell these assets, an
     appraisal was undertaken of all the costs incurred with the project,
     including the thermoelectric plant itself, substations and associated
     distribution lines, for the purpose of accounting for these as part of
     current assets, and a provision was recorded to reduce the book value of
     the assets to the market value. The Company expects to sell the asset
     during 2004.


11.  ESCROW AND OTHER DEPOSITS

<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                                 ------------------------------
                                Type                                                 2003             2002
     ------------------------------------------------------------                -------------    -------------
     <S>                                                                            <C>              <C>
     Current
     Escrow deposits                                                                  2,629           39,382
     Noncurrent assets                                                                    -                -
     Escrow deposits (see note 20)                                                  129,194           94,553
     Escrow deposits - National Treasury Department                                   6,303            5,956
                                                                                 -------------    -------------
                                                                                    135,497          100,509
                                                                                 -------------    -------------
                                                                                    138,126          139,891
                                                                                 =============    =============

</TABLE>


                                      F-26
<PAGE>


12.  PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>

                                                                                       December 31,
                                                                             ----------------------------------
                                                                                   2003               2002
                                                                             ----------------   ---------------
     <S>                                                                        <C>               <C>
     IN SERVICE:
        Generation                                                                 291,662           288,069
        Transmission                                                                19,645            19,178
        Distribution                                                             2,865,620         2,794,503
        Administration                                                             338,461           329,530
                                                                            ----------------   ---------------
                                                                                 3,515,388         3,431,280
     (-) Accumulated depreciation                                               (1,551,716)       (1,413,215)
                                                                            ----------------   ---------------
                                                                                 1,963,672         2,018,065
                                                                            ----------------   ---------------
     UNDER CONSTRUCTION:
        Generation                                                                  98,210            62,473
        Transmission                                                                 5,069             1,796
        Distribution                                                               139,199           141,411
        Administration                                                              21,069            12,235
                                                                            ----------------   ---------------
                                                                                   263,547           217,915
                                                                            ----------------   ---------------
                                                                                 2,227,219         2,235,980
     (-) Obligations related to the concession                                    (287,200)         (268,505)
                                                                            ----------------   ---------------
     Total                                                                        1,940,019         1,967,475
                                                                            ================   ===============
</TABLE>


     Obligations related to the concession are comprised of the following
     balances:

<TABLE>
<CAPTION>

                                                                                      December 31,
                                                                            ---------------------------------
                                                                                  2003              2002
                                                                            ---------------   ---------------
     <S>                                                                         <C>               <C>
     Consumers' contributions                                                    249,899           255,366
     Other                                                                        37,301            13,139
                                                                            ---------------   ---------------
     Total                                                                       287,200           268,505
                                                                            ===============   ===============
</TABLE>


     Consumers' contributions consist of assets provided to the Company by
     certain residential, rural and industrial customers to facilitate
     connection or in case of low return on the investment by the Company.

     On February 13, 1995, Law no. 8,987 was enacted, changing the regulations
     for public service concessions for generation, transmission and
     distribution of electric energy. On July 7, 1995, Law no. 9,074 was
     enacted, establishing rules for the renewal and approval of concessions.
     The principal aspect of such laws that may affect the Company is the fact
     that concessions for the generation, transmission and distribution of
     electric energy will last a sufficient period to amortize the investments,
     limited to 35 and 30 years, respectively. These concessions may be extended
     for one period of up to the same duration, at the discretion of the
     regulatory authorities.

     On July 11, 1995, the date of Escelsa's privatization, a new concession
     contract was signed, which granted the right to generate, transmit and
     distribute electric energy in virtually all of the State of Espirito Santo
     through the year 2025. In the event of a change of control, Escelsa must
     continue to observe all the conditions established in the contract.

     On November 19, 1997, the date of Enersul's privatization, a new concession
     contract was signed, which granted the right to generate, transmit and
     distribute electric energy in virtually all of the State of Mato Grosso do
     Sul through the year 2027. In the event of a change of control, Enersul
     must continue to observe all the conditions established in the contract.

     In January 1998, Escelsa and Enersul implemented the new depreciation rates
     determined by ANEEL Resolution no. 002/97. Due to the new depreciation
     rates, Escelsa's average annual rates changed from 3.4% to 4.5%, and
     Enersul's average annual rates changed from 3.3% to 5.0%.


                                      F-27
<PAGE>


     In accordance with ANEEL Resolution no. 044 of March 17, 1999, the main
     rates of depreciation per macro area of activity are as follows:

<TABLE>
<CAPTION>

                                                                                                 Annual
                                                                                          depreciation rate (%)
                                                                                        -------------------------
     <S>                                                                                         <C>
     GENERATION
     General equipment                                                                           10.0
     Water intake equipment                                                                       3.7
     Water intake structure                                                                       4.0
     Reservoirs, dams and piping                                                                  2.0
     Turbine                                                                                      2.5
     TRANSMISSION
     System controller                                                                            2.5
     General equipment                                                                           10.0
     System structure                                                                             2.5
     Switches                                                                                     4.3
     DISTRIBUTION
     Capacitors                                                                                   6.7
     Distribution key                                                                             6.7
     System controller                                                                            5.0
     System structure                                                                             5.0
     Tension regulator                                                                            4.8
     Transformer                                                                                  5.0
     COMMERCIALIZATION                                                                            4.0
     CENTRAL MANAGEMENT
     Machines and equipment                                                                      10.0
     Buildings and improvements                                                                   4.0
     Vehicles                                                                                    20.0
</TABLE>

     The following amounts of interest expense and inflationary effects were
     capitalized in Property, Plant and Equipment:


<TABLE>
<CAPTION>

                                                                            2003          2002          2001
                                                                         ----------    ----------     ----------
     <S>                                                                  <C>            <C>           <C>
     Interest on loans and financing                                       287,802       254,148       176,083
     (-) Transfer to property, plant and equipment                          (7,003)      (18,047)      (14,633)
                                                                         ----------    ----------     ----------
     Net                                                                   280,799       236,101       161,450
                                                                         ==========    ==========     ==========


                                                                            2003          2002          2001
                                                                         ----------    ----------     ----------
     Exchange rate and monetary variation effects                         (287,051)      601,940       193,409
     (-) Transfer to property, plant and equipment                          (2,001)       (6,218)       (4,902)
                                                                         ----------    ----------     ----------
     Net                                                                  (289,052)      595,722       188,507
                                                                         ==========    ==========     ==========
</TABLE>


     Assets related to the concession

     According to the Decree no. 41,019 of February 26, 1957, assets used in the
     production, transmission and generation of energy are related to these
     services, cannot be sold, removed, added or given in guarantee without
     previous authorization of the regulatory agency.

     ANEEL Resolution no. 2099 establishes procedures to sell the assets
     considered unserviceable to the concession and determines that the sold
     amount should be deposited into a bank account linked to the concession.
     13.


                                      F-28
<PAGE>

13.  GOODWILL

     On November 25, 1997, the Company paid R$825,937, to acquire a 55.4%
     controlling interest (76.5% voting interest) in Enersul. The difference
     between net assets acquired and the purchase price was recorded as
     goodwill. The goodwill recorded by the wholly-owned subsidiary MAGISTRA was
     generated by the difference between the amount paid and the book value of
     Enersul stocks, acquired on November 25, 1997, was based on the Enersul's
     future profitability and is being amortized proportionally to the company's
     projected results, over the term of Enersul's concession, which is 30 years
     beginning January 1, 1998.

     In 2003, the Company recorded a provision for loss in the amount of
     R$124,093.

<TABLE>
<CAPTION>

                                                                                         December 31,
                                                                                 -----------------------------
                                                                                      2003           2002
                                                                                 --------------  -------------
     <S>                                                                           <C>             <C>
     Goodwill                                                                       458,516        479,751
     Accumulated amortization                                                       (27,511)       (52,042)
     Provision for loss                                                            (124,093)             -
                                                                                 --------------  -------------
                                                                                    306,912        427,709
                                                                                 ==============  =============


14.  SUPPLIERS

                                                                                         December 31,
                                                                                 -----------------------------
                       CURRENT                                                        2003           2002
     --------------------------------------------                                --------------  -------------
     Electricity suppliers:
     Furnas                                                                          34,108         35,210
     Itaipu                                                                          36,832         35,884
     Tractebel                                                                       12,816         12,086
     Eletrosul                                                                        1,682          1,515
     ONS (*),MAE (**) and ASMAE (***)                                                18,812         24,385
     Free Energy                                                                      8,359         19,118
     Other                                                                           15,016         11,692
                                                                                 --------------  -------------
                                                                                    127,625        139,890
     Material and service suppliers                                                  24,810         15,725
                                                                                 --------------  -------------
     Total                                                                          152,435        155,615
                                                                                 ==============  =============


                      LONG-TERM
     --------------------------------------------
     Electricity suppliers:
     Free energy                                                                     99,055         78,551
     Other                                                                              386          5,230
                                                                                 --------------  -------------
     Total                                                                           99,441         83,781
                                                                                 ==============  =============
</TABLE>

     (*)   Operator of the National Electric System;
     (**)  Brazilian Spot Market;
     (***) Brazilian Spot Market Administrator.




                                      F-29
<PAGE>



15.  LOANS AND FINANCING

     15.1 - Description

<TABLE>
<CAPTION>

                                                        2003                                 2002
                                          ---------------------------------    ---------------------------------
                                           Interest                             Interest
           DESCRIPTION                     and Other   Current   Long-          and Other   Current   Long-
                                           Charges                Term          Charges                Term
----------------------------------        ---------------------------------    ---------------------------------
<S>                                 <C>       <C>       <C>      <C>               <C>      <C>       <C>
Local Currency:

  ELETROBRAS - ESCELSA              (b)            -      2,142      4,421              -     2,096       6,076
  ELETROBRAS - ENERSUL              (b)          248     13,452     38,455            253    11,394      48,041
  BNDES - ESCELSA                   (c)          496     37,744     83,001          2,787    40,647     149,396
  BNDES - MAGISTRA                  (d)          484     41,283          -            961    39,220      39,220
  BNDES - ENERSUL                   (e)          240     13,717     43,437            264    13,032      54,298
  BNDES - ENERSUL                   (e)            1        327          -              5       934         311
  BNDES - Rationing losses          (f)        1,150     43,335    200,124            716    33,197     195,157
  BNDES - CESA                      (g)          142      1,992     29,879            126         -           -
  BNDES - CVA                       (h)            -      6,681     15,955              -         -           -
  BNDES - ALFA                      (i)           83      1,609     17,703              -         -           -
  BANCO DO BRASIL - FCO             (j)          572        278     29,722            573         -      30,000
  BANCO Pactual                     (l)            -     75,409          -              -         -           -
  BANCO Pactual                     (l)            -     15,135          -              -         -           -
  BANCO DO BRASIL                   (l)            -        122          -            296    27,500           -
  BANCO ALFA                        (l)            -          -          -            756    33,300           -
  BBVA                              (l)           39     20,000          -              -     3,980           -
  OTHER                             (l)          116      4,093     17,847            391    10,701      18,172
                                          ---------------------------------    ---------------------------------
TOTAL                                          3,571    277,319    480,544          7,128   216,001     540,671
                                          ---------------------------------    ---------------------------------

Foreign Currency:

  SENIOR NOTES                      (a)       57,068          -  1,245,124         69,791         -   1,522,704
  NATIONAL TREASURY - STN           (m)          400      3,218     36,732            551     1,668      48,856
  BBA - EIB                         (n)          152      8,510     30,416            259     9,636      47,603
  Banco BBA - FMO                   (n)          331      5,383      8,124            535     4,410      11,568
  BNDES                             (c)          201     11,158     18,138              -         -           -
  BNDES - CESA                      (g)          195        408      7,509            179         -      39,589
  BNDES - ALFA                      (i)          121        281      4,779              -         -           -
  BRADESCO                          (o)          587     19,839          -          1,009    24,014           -
  UNIBANCO                          (p)        4,557     16,322          -              -         -      12,727
  ITAU                              (q)            -          -          -            579    16,570           -
  BBV                                             88      7,529      6,902             58    15,742           -
  BBA                                              -          -          -          3,747    49,084           -
                                          ---------------------------------    ---------------------------------
                                              63,700     72,648  1,357,724         76,708   121,124   1,683,047
                                          ---------------------------------    ---------------------------------

                                              67,271    349,967  1,838,268         83,836   337,125   2,223,718
                                          =================================    =================================
</TABLE>


a)   Senior Notes refer to the overseas funding transaction, through the
     issuance of "Senior Notes", with a principal balance on December 31, 2003
     of R$1,245,124 or US$430,958 thousand. The securities mature in 2007, and
     carry an interest rate of 10% per annum, which is payable every six months
     on January 15 and July 15 of each year. On May 21, 1998, ESCELSA registered
     the Senior Notes with the SEC - Securities and Exchange Commission, in the
     United States of America, as per the Securities Act of 1933.

     The indirect controlling shareholder EDP-Eletricidade de Portugal S.A. made
     a public offer for the acquisition and request of renunciation related to
     the notes, and acquired the principal amount of US$205,796 thousand,
     effective December 23, 2002. Before making such an offer, EDP held a total
     of US$151,575 thousand in Notes representing approximately 35% of the total
     issuance. Thus EDP became the holder of a total of US$357,371 of Notes,
     representing around 83% of the total issuance.

     With the success of the request of renunciation, ESCELSA carried out the
     elimination of all the rights inherent to the issuance.


                                      F-30
<PAGE>


b)   The financing from ELETROBRAS is being used to finance the Generation and
     Distribution Program. Monthly amortization is scheduled through May 15,
     2022 with monetary correction and interest rates varying between 5% and 12%
     per annum.

c)   The BNDES financing obtained by ESCELSA is being used for the transmission
     and distribution programs. The loan interest rate is based on the Long-term
     Interest Rate (TJLP), plus spread of 3.85% per annum, with a 12-month grace
     period and 84 monthly amortization payments beginning November 15, 1999 and
     extending through October 2006.

d)   The financing from BNDES for the subsidiary MAGISTRA was related to the
     acquisition of ENERSUL's controlling shares. The loan interest rate is
     based on the Long-term Interest Rate (TJLP), plus a spread of 4% per annum,
     and 11 semi-annual amortization payments beginning November 15, 1999 and
     extending through November 2004.

e)   The BNDES financing obtained by ENERSUL is being used to finance the
     1998-2000 Investment Program. The loan interest rate is based on the
     Long-term Interest Rate (TJLP), plus a spread of 3.85% per annum, with a
     24-month grace period and 78 monthly amortization payments beginning
     September 2001. The BNDES financing used for the construction of the
     Imbirucu Substation has an interest rate of TJLP plus spread of 4.0% per
     annum, with 51 monthly amortization payments beginning February 2000 and
     extending through April 2004.

f)   The BNDES financing obtained by ESCELSA and ENERSUL is being used for
     finance 90% of the recoveries of losses incurred by the Company during the
     Energy Rationing Program, collateralized by the amounts to be collected
     under the extraordinary tariff recomposition. The loan interest rate is
     based on the SELIC, plus spread of 1.0% per annum and 69 (ESCELSA) and 82
     (ENERSUL) monthly amortization payments beginning March 2002.

g)   The BNDES financing obtained by CESA is being used for the small
     hydroelectric power plants. The loan interest rate is based on the
     Long-term Interest Rate (TJLP) and basket currency of the BNDES, plus
     spread of 4.5% per annum, with a 30-month grace period and 96 monthly
     amortization payments beginning July, 2004 and extending through July 2013.

h)   The BNDES financing obtained by ESCELSA and ENERSUL is being used to supply
     the lack of funds of beneficiary resulting from the adjourning of the
     application of the mechanism of compesation. The loan interest rate is
     based on SELIC plus spread of 1% with 24 monthly amortization payments
     September, 2004 and extending through August 2006.

i)   Financing from BNDES and Banco Alfa was secured to acquired equipment and
     modernize the capacity of energy distribution. The interest rate is TJLP
     plus spread of 4.0% per annum with 36 monthly amortization payments
     beginning October 2004 extending through November 2007.

j)   The Banco do Brasil financing obtained by ENERSUL, with funds from the
     Midwest Constitutional Financing Fund (FCO), is being used for the 2001
     Investment Program. The interest rate is 11.20% per annum with 108 monthly
     amortization payments starting December 2004 and extending through November
     2013.

l)   Financing from Banco Pactual, Banco do Brasil and BBVA was secured to
     amortize mutual obligations with MAGISTRA and for investments in the UTE
     Campo Grande, at a rate of 110% to 115% of CDI, or CDI plus 1.85% p.a.

m)   Financing from National Treasury STN-DMLP was secured for the Distribution
     Lines and Substation Investment Program at an interest rate of 5.2% to 8.2%
     per annum, indexed to the foreign exchange rate to United States Dollars.


                                      F-31
<PAGE>


n)   Financing from Banco BBA-EIB Creditanstalt S.A for ENERSUL's Distribution
     Program carries an interest rate linked to quarterly LIBOR plus a spread of
     4% to 5% per annum, with a grace period of 36 months and 11 semi-annual
     amortization payments starting June 2003 and ending March 2009. BBA secured
     an external line of credit with Netherlands Development Company - FMO,
     supported by Resolution 2770 from BACEN. The line carries an interest rate
     of 8.90% per annum and is foreign exchange rate indexed to United States
     Dollars with amortization payments scheduled to begin March 2002, ending
     September 2007. The BBA-FMO financing is compensated against currency
     fluctuations through the utilization of swap contracts.

o)   Financing from Bradesco for ENERSUL was secured to cover payments to
     suppliers at an interest rate of 6.5% to 6.9% per annum, indexed to the
     foreign exchange rate to United States Dollars, with liquidation in
     November of 2004. The financing is compensated against currency
     fluctuations through the utilization of swap contracts.

p)   Long-term financing from Unibanco for ENERSUL was secured mainly to cover
     payments to suppliers at an interest rate of 10.85% to 11.40% per annum,
     indexed to the foreign exchange rate to United States Dollars, with a
     lump-sum payment in March 2004. The financing is compensated against
     currency fluctuations by way of swap contracts.

q)   Financing from ITAU was secured mainly to cover payments to suppliers at an
     interest rate of 1.50% per annum, indexed to the foreign exchange rate to
     United States Dollars, with a lump-sum payment in June 2003. The financing
     is compensated against currency fluctuations by way of swap contracts.

     15.2 - Guarantees

     The loans due to ELETROBRAS, BNDES and Banco do Brasil - FCO are guaranteed
     by accounts receivable. The ENERSUL loans from Secretaria do Tesouro
     Nacional-STN are guaranteed by direct debt, receivables, the government of
     the State of Mato Grosso do Sul and part in cash deposit. Other loans are
     covered by promissory notes in guarantee. Magistra's loan payable to BNDES
     is guaranteed by ENERSUL shares on escrow.

     15.3 - The breakdown of the principal of the loans and financing by
     currency:

<TABLE>
<CAPTION>

                                                                                       December 31,
                                                                              -------------------------------
                                                                                     2003            2002
                                                                              ---------------- --------------
        <S>                                                                         <C>            <C>
        Local currency                                                                757,863        796,261
        Foreign currency                                                            1,430,372      1,764,582
                                                                              ---------------- --------------
        Total                                                                       2,188,235      2,560,843
                                                                              ================ ==============
</TABLE>


     15.4 - Percentage variation of the main indicators used for indexing the
     loans and financing are as follows:

<TABLE>
<CAPTION>

              Currency and indicators                                               2003            2002
        -------------------------------------                                 ---------------   ------------
        <S>                                                                       <C>              <C>
        US$ x R$                                                                  (18.23%)         52.27%
        IGP-M                                                                       8.70%          25.30%
        INPC                                                                       10.38%          14.74%
        TJLP                                                                       11.00%          10.00%
        SELIC                                                                      23.38%          19.13%
        UMBNDES                                                                   (15.69%)         55.92%
        CDI                                                                        23.28%          24.83%
</TABLE>


                                      F-32
<PAGE>



     15.5 - Maturities of short and long-term installments are due as follows:

<TABLE>
<CAPTION>

                                                                              December 31, 2003
                                                                  -------------------------------------------
                                                                                   Currency
                                                                  -------------------------------------------
            Maturity                                                  Local        Foreign        Total
        ------------------                                        ------------- -------------- --------------
        <S>                                                          <C>          <C>          <C>
        2004                                                         277,319         72,648       349,967
        2005                                                         146,617         37,459       184,076
        2006                                                         121,067         20,046       141,113
        2007                                                         109,451      1,260,779     1,370,230
        2008                                                          46,220          8,507        54,727
        2009                                                          15,096          3,992        19,088
        2010                                                          14,098          3,387        17,485
        2011                                                          11,103          2,836        13,939
        2012                                                           8,056          1,936         9,992
        2013                                                           4,306            875         5,181
        After 2013                                                     4,530         17,907        22,437
                                                                  ------------- -------------- --------------
        Total                                                        757,863      1,430,372     2,188,235
                                                                  ============= ============== ==============
</TABLE>


        Financial income (expense) consists of the following:

<TABLE>
<CAPTION>

                                                                               December 31,
                                                              -----------------------------------------------
                                                                   2003            2002            2001
                                                              --------------- ---------------  --------------
        <S>                                                       <C>             <C>             <C>
        Interest expense                                          (280,799)       (236,101)       (161,450)
        Net gain (loss) on exchange rate variations and
            monetary variation                                     282,282        (532,660)       (130,955)
        Gain (loss) on derivative contracts                         (2,176)         11,515           1,059
        Regulatory assets - SELIC Index adjustments                102,306          56,712               -
        Interest income - other                                     35,753          30,115          55,515
                                                              --------------- ---------------  --------------
        Total                                                      137,366        (670,419)       (235,831)
                                                              =============== ===============  ==============
</TABLE>


16.  FINANCIAL INSTRUMENTS

     The Company's business entails the distribution and sale of electric energy
     for customers within its concession area - the state of Espirito Santo and
     the state of Mato Grosso do Sul - and therefore significant financial
     instruments are related to the following transactions:

     o  Balances of non-current accounts receivable and long-term accounts
        payable related to the extraordinary tariff recomposition and
        therefore not subject to adjustments to market value;
     o  Investments in short term mutual funds and/or fixed income investments
        recorded at approximate market value as they are recorded with accrued
        interest on a pro-rata basis;
     o  Equity participation in other companies are in most cases shares that
        are not publicly traded;
     o  Loans payable by the Company are mainly long-term, and are from
        specific funding sources.

     16.1 - Exchange Rate and Interest Risks

     The book value of the principal financial instruments held by the Company
     are:

<TABLE>
<CAPTION>

                                                                                           December 31
                                                                                   ----------------------------
                                                                                       2003           2002
                                                                                   -------------  -------------
     <S>                                                                              <C>            <C>
     Marketable securities                                                              203,089        306,620
     Loans and financing - long-term                                                  1,838,268      2,223,718

</TABLE>

     A portion of the loans and financing is comprised of financing from
     government entities ELETROBRAS and BNDES.


                                      F-33
<PAGE>


     As the market rate (or opportunity cost of capital) is set by these
     government entities, taking into consideration the risk premium relative to
     the sector's activities and that in the absence of other financing sources
     or other market options and/or means to estimate the market value of such
     options in light of the Company's business or sector-specific
     circumstances, the market value of these domestic loans shall correspond to
     their book value, as shall other financial assets and liabilities.

     As mentioned in Note 15, foreign currency financing was obtained (in U.S.
     dollars), and the indebtedness and earnings were significantly impacted by
     the foreign exchange risk. Such risk may cause the Company to incur losses
     due to foreign currency exchange fluctuations, which may increase
     liabilities denominated in foreign currency.

     The net exposure to foreign currency risk related to the principal of the
     Senior Notes as of December 31, 2003 and December 31, 2002 is shown below:

<TABLE>
<CAPTION>

                                                           Book value                     Fair value
                                                   ----------------------------  -----------------------------
                                                       2003           2002           2003           2002
                                                   -------------  -------------  -------------  --------------
     <S>                                             <C>            <C>            <C>              <C>
     Senior Notes                                    1,245,124      1,522,704      1,145,514         944,076
     U.S. dollar assets                               (191,277)      (296,329)      (208,755)       (296,329)
                                                   -------------  -------------  -------------  --------------
     Net Exposure                                    1,053,847      1,226,375        936,759         647,747
                                                   =============  =============  =============  ==============
</TABLE>


     The method used to determine the fair value of the Senior Notes obligation
     was the average market price, as of December 30, 2002, as per the
     security's trading activity at the end of each fiscal period, as provided
     by a transaction report in New York, USA, prepared by Salomon Smith Barney.
     For the U.S. dollar assets, the contract market price at the end of the
     fiscal period was used, which is equal to book value.

     In addition, the Company held 48 derivatives contracts (swaps) to reduce
     its foreign currency exposure, which resulted in charging to the income
     statement losses of R$15,981. These contracts are signed based on the
     market rates in effect on the subscription date and comprise 45 contracts
     US$ (spreads from 0.15% to 11.55%) X CDI (spreads from 0.95% to .3.25%) and
     3 contracts US$ (spreads from 10.85% to 11.40%) X IGP-M (spreads from
     11.70% to 12.01%). The maturity dates will occur from January 21, 2004 and
     September 4, 2007.

     The loans and financing of the companies in the ESCELSA group were obtained
     at the usual rates and charges in the Brazilian and the international
     markets for funding of investments in the electric energy sector in their
     concession areas of the electric energy public service.

     For the remaining contracts, given the specific nature of these
     transactions and the unavailability of information for determining a market
     value for this type of financial instrument in a cost effective manner, and
     taking into consideration the risk to the Company, its strategy and debt
     management practices, Management estimates that the market values of these
     instruments are equal or very close to their book values.

     16.2 - Credit Risk

     There is a possibility that the Company may incur losses due to non-payment
     by its customers. To mitigate this risk, the Company maintains the right to
     cut-off the supply of electric energy in the event that a customer fails to
     make payment in accordance with the time-periods defined by legislation and
     specific regulations. An allowance for doubtful account receivable is
     established in an amount deemed sufficient by Management to cover probable
     accounts receivable risks.


                                      F-34
<PAGE>


17.  REGULATORY CHARGES

     a. Regulatory Charges Liability

<TABLE>
<CAPTION>

                                                                                       December 31,
                                                                               -----------------------------
                                                                                   2003            2002
                                                                               -------------   -------------
        <S>                                                                       <C>              <C>
        Compensation for usage of water resources                                    398              443
        Global Reversion Reserve Quota - RGR                                       6,027            5,809
        Fuel Consumption Account - CCC                                             1,740            6,527
        Energy Development Charges - CDE                                           3,240                -
        Fiscalization Fee - ANEEL                                                    232              107
                                                                               -------------   -------------
        Total                                                                     11,637           12,886
                                                                               =============   =============
</TABLE>

     b. Regulatory Charges Expense

<TABLE>
<CAPTION>

                                                                                    December 31,
                                                                        --------------------------------------
                                                                           2003         2002         2001
                                                                        -----------  ------------ ------------
        <S>                                                              <C>           <C>          <C>
        Compensation for usage of water resources                          2,726         2,609        1,525
        Fiscalization fee - ANEEL                                          2,496         2,130        2,574
        Global Reversion Reserve Quota - RGR                              28,609        27,384       26,598
        Fuel Consumption Account - CCC                                    64,682        74,061       66,680
        Energy Development Charges - CDE                                  19,773             -            -
                                                                        -----------  ------------ ------------
        Total                                                            118,286       106,184       97,377
                                                                        ===========  ============ ============
</TABLE>

     c. Global Reversion Reserve Quota - RGR

        The global reserve for reversion quota (the RGR Fund) is a reserve
        fund managed by Eletrobras, as agent for the Brazilian government,
        designed to provide funds for payments to concessionaires upon
        expiration of their concessions. In these events, the concessionaire
        is paid an amount equal to the net book value of its net assets. Until
        December 31, 1995, each concessionaire was required to pay an amount
        equal to 3% of its assets in service to the RGR Fund, limited to 12%
        of total operating revenues less value-added tax on sales to final
        consumers.

        On January 3, 1996, Decree no. 1,771 decreased the RGR rate to 2.5% of
        assets in service, limited to 3% of total operating revenues less
        value-added tax on sales to final customers.

     d. Fuel Consumption Account - CCC

        The fuel compensation account represents contributions made by the
        Company to finance the cost of fuel used in the thermoelectric energy
        generating process in the Brazilian energy system.

     e. Energy Development Charges - CDE

        CDE was created to boost the competitiveness of the energy generated
        from different sources, such as eolic, small hydroelectrics, organic
        fuel, natural gas and national coal, in the Brazilian energy system
        area.


                                      F-35
<PAGE>


18.  DEFERRED INCOME TAXES

     a. Computation of Income Tax Liability

        Taxable income is determined by adjusting income before taxes, mainly
        for permanent differences and the effects of temporary differences.
        Tax loss carryforwards and social contribution negative basis, when
        available, do not expire and may be used to offset up to 30% of the
        taxable income in each year. Income tax liability is then determined
        by applying the statutory rate to taxable income. In periods when
        income tax computations result in tax losses, the Company recognizes
        tax credits on such tax losses. Brazilian tax law does not allow
        filing of consolidated tax returns.

     b. Deferred Tax Liability

        The composition deferred tax liability is as follows:

<TABLE>
<CAPTION>

                                                                                      December 31,
                                                                               -------------------------------
                                                                                   2003             2002
                                                                               -------------    --------------
        <S>                                                                      <C>               <C>
        Deferred income and social contribution tax on:
        Inflationary profits                                                            -             7,642
        Price level adjustments up to 2000 (a)                                    170,804           186,624
        Exchange variation (b)                                                     53,499                 -
        RTE and MAE effects on Enersul (c)                                         41,664            30,103
                                                                                ------------    --------------
        Total                                                                     265,967           224,369
        Current                                                                   (33,384)          (13,175)
                                                                               -------------    --------------
        Long-term                                                                 232,583           211,194
                                                                               =============    ==============
</TABLE>

        (a)  The balance represents income tax liabilities computed on the
             income tax and social contribution in respect of the increase in
             shareholders' equity due to the recognition of the effects of
             inflation on non-monetary assets and is all long-term.

        (b)  As from January 1, 2003 the revenues/expenses generated by
             Brazilian Real valuation/devaluation have been considered
             taxable revenues/deductible expenses when effectively realized.
             The effects of this practice were recorded on deferred tax
             liability account. If Company decides to revert this tax practice
             all unrealized effects will be recognized immediately.

        (c)  The subsidiary Enersul, based on Opinion SRF no. 26, of September
             2002 and decisions of the Federal Revenue Agency, claimed the
             right to defer taxes on RTE (recovery of rationing losses and
             free energy) as well as spot market - MAE. Through notification
             no. 005, of January 15, 2004, the Company was informed of
             Decision no. 03 103/2003 from Federal Revenue in Campo Grande -
             MS, approving the request for deferral.

     c. Deferred Tax Asset
<TABLE>
<CAPTION>

                                                                                      December 31,
                                                                            ---------------------------------
                                                                                 2003              2002
                                                                            ---------------   ---------------
        <S>                                                                     <C>               <C>
        Tax loss carryforward (1)                                               193,856           253,072
        Deductible temporary differences (1)                                     66,528            63,688
        Deferred income and social contribution tax on
            price-level adjustments up to 2000                                   26,276            26,276
                                                                            ---------------   ---------------
        Total                                                                   286,660           343,036
        Current                                                                  (7,608)           (3,330)
                                                                            ---------------   ---------------
        Long-term                                                               279,052           339,706
                                                                            ===============   ===============
</TABLE>
------------------
(1)  These amounts are presented net of valuation allowance.

        As a result of the rules established by CVM Instruction no. 371, of
        June 27, 2002, the Company has recorded a valuation allowance for
        deferred income taxes in the amount of R$136,069 at December 3, 2003
        (R$115,236 at December 31, 2002).


                                      F-36
<PAGE>


        Income tax and social contribution at statutory rates are reconciled
        to the amount reported as income tax expense (income) in these
        financial statements as follows:
<TABLE>
<CAPTION>

                                                                                 December 31,
                                                                    ---------------------------------------
                                                                       2003          2002         2001
                                                                    ------------ ------------ -------------
        <S>                                                            <C>         <C>            <C>
        Income (loss) before income tax, social contribution and
           minority interest                                           285,301     (681,112)      (60,294)
        Statutory combined rates                                            34%          34%           34%
                                                                    ------------ ------------ -------------
        Income tax expense (benefit) at statutory rate                  97,002     (231,578)      (20,500)
        Reversal of tax loss carryforward                                    -            -         4,778
        Amortization of goodwill                                        (1,120)       3,571           893
        Remuneration of construction work in progress                        -          885         1,543
        Price-level adjustment - Goodwill                                    -          530           129
        Valuation allowance                                             20,833      115,236             -
        Others                                                            (976)       7,990         2,145
                                                                    ------------ ------------ -------------
        Total expense (benefit)                                        115,739     (103,366)      (11,012)
                                                                    ============ ============ =============
</TABLE>

        Tax credits classified as current and non-current assets, generated
        by tax losses, negative basis of social contribution and other
        amounts that constitute temporary adjustments for reduction of future
        taxation, were recorded based on Company's estimated future
        profitability, considering that the realization period will not
        exceed 10 years.



19.  ACCRUAL FOR CONTINGENCIES

<TABLE>
<CAPTION>

                                                                     December 31,
                                           ------------------------------------------------------------------
                                                        2003                               2002
                                           --------------------------------    ------------------------------
                                                                 Escrow                             Escrow
                                              Accrual           Deposits          Accrual          Deposits
                                           ---------------   --------------    ------------     -------------
     <S>                                          <C>              <C>             <C>               <C>
     Long-term:
       Labor claims                                27,166           15,916          20,941            12,596
       Civil litigation                            16,013           15,485          36,852             6,282
       Tax litigations                            153,482           97,793         108,574            75,675
                                           ---------------   --------------    ------------     -------------
     Total                                        196,661          129,194         166,367            94,553
                                           ===============   ==============    ============     =============
</TABLE>

     Management believes that the recorded accruals are sufficient to cover
     probable losses from litigations. Based on the opinion of the Company's
     legal counsel, all litigations were provided for where the probability for
     loss was estimated as probable. Furthermore, there are labor, civil and
     tax cases outstanding which total R$39,963, for which the probability of a
     loss was estimated possible or remote and no accruals were recorded in the
     financial statements.

     Labor Contingencies

     Refer to the various labor claims against the Company which claim payment
     of overtime, hazardous work conditions, re-integration, among other items.

     Civil

     The civil contingencies include suits in which the Company is a defendant,
     primarily related to moral and material damages claims, and other claims
     challenging amounts paid by customers for tariff increases based on DNAEE
     Ordinances 38 and 45 of January 27, 1986 and March 4, 1986, respectively,
     during the Cruzado Plan.


                                      F-37
<PAGE>


     Tax Litigations

     The Company is also a party to an administrative suit with the Federal
     Revenue Agency, pending final decision, for compensation of amounts
     overpaid related to FINSOCIAL, due to the discussion on the
     constitutionality of the Decrees - Law no. 2,445/88 and 2,499/88.

     There is also a preliminary decision in a lower court, which guarantees
     restitution and/or compensation of amounts overpaid related to fines on
     tax and contributions spontaneously and untimely paid. The fines exemption
     is being requested based on article 138 of the National Tax Code - CTN.
     Based on its legal counsel; the Company compensated the amounts related to
     past-due contributions (PIS, COFINS, Income tax and Social Contribution),
     as per Article 66 of Law no. 8,383/91. Conservatively, the Company
     maintained provisions for amounts corresponding to the above-mentioned
     taxes and contributions.


20.  SHAREHOLDERS' EQUITY

     a. Capital Stock

        Escelsa, as stated in its by-laws, is authorized to operate with
        capital of up to R$1,000,000, of which R$239,141 (R$153,947 per
        corporate law) was subscribed as of December 31, 2003. The total
        number of outstanding capital shares as of December 31, 2003, 2002
        and 2001 is 4,550,833 common shares, with no par value. The following
        table sets forth information with respect to ownership of Escelsa's
        common shares.

<TABLE>
<CAPTION>

                                                       Quantity            Quantity              % of
                      Shareholders                     of shares       of shareholders        ownership
        ------------------------------------------  ---------------- ---------------------  ---------------
        <S>                                            <C>                   <C>                 <C>
        Iven S.A.                                      2,378,671               1                  52.27
        GTD Participacoes S.A.                         1,137,709               1                  25.00
        Fundacao Banco Central - CENTRUS                 275,678               1                   6.06
        Other                                            758,775             202                  16.67
                                                    ---------------- ---------------------  ---------------
        Total                                          4,550,833             205                 100.00
                                                    ================ =====================  ===============

</TABLE>

        In October 1994, Iven acquired 20% of ESCELSA common shares from the
        State Government. On July 10, 1995 Iven and GTD entered into a
        shareholders' agreement when they purchased, in a consortium, 50%
        (plus one share) of the voting stock of Escelsa. Shares purchased by
        GTD and Iven pursuant to the privatization of Escelsa may not be sold
        without the prior authorization of ANEEL. The shareholders' agreement
        expired in the year 2002. In addition, over a period of time, Iven
        has acquired approximately 8% of the ESCELSA shares in the market to
        increase its total participation to 52.27%.

        On October 10, 2002, the EDP Group, acting through IVEN, exerted
        control over ESCELSA - Espirito Santo Centrais Electricas, S.A.
        ("ESCELSA").

     b. Capital Reserves

<TABLE>
<CAPTION>

                                                                                      December 31,
                                                                           ---------------------------------
                                                                                2003               2002
                                                                           ----------------    --------------
        <S>                                                                    <C>                <C>
        Remuneration on construction work in progress                          163,750            163,750
        Donations and subsidies                                                 28,720             28,720
        Recoverable rate deficit - CRC account                                 118,909            118,909
                                                                           ----------------    --------------
        Total                                                                  311,379            311,379
                                                                           ================    ==============
</TABLE>

        Remuneration on construction work in progress is the value resulting
        from the calculation of interest on funds invested in construction
        work in progress, which may be used to increase capital or absorption
        of losses.

        Donations and subsidies represent mainly property donated by the
        Brazilian government.


                                      F-38
<PAGE>


        Recoverable rate deficit (CRC) represents compensation for a rate of
        return lower than the Brazilian national average for years prior to
        1993. The CRC was applied to reduce payables to Furnas, Eletrobras
        and others, and the remaining portion was exchanged for government
        securities. These offsets were credited directly to shareholders'
        equity.


21.  OPERATING REVENUES

<TABLE>
<CAPTION>

                                                                           Year ended December 31,
                                                                ----------------------------------------------
                                                                               Gross revenues
                                                                 ----------------------------------------------
                                                                     2003           2002            2001
                                                                --------------- -------------- ---------------
     <S>                                                           <C>            <C>            <C>
     Electricity Sales to final customers:
        Residential                                                  655,738        541,232        489,655
        Industrial                                                   497,835        495,885        399,578
        Commercial, service and other activities                     371,322        311,053        250,407
        Rural                                                        109,741         81,197         68,622
        Miscellaneous                                                170,372        136,423        111,095
        Regulatory assets                                             49,263         35,410        298,533
                                                                --------------- -------------- ---------------
                                                                   1,854,271      1,601,200      1,617,890
        Unbilled revenues                                             34,159         15,422           (273)
        Unbilled revenues - low income consumers                      31,101         18,718              -
                                                                --------------- -------------- ---------------
                                                                   1,919,531      1,635,340      1,617,617
     Wholesale                                                        30,501         40,357         83,519
     Other                                                            90,559         47,581         29,646
                                                                =============== ============== ===============
                                                                   2,040,591      1,723,278      1,730,782
                                                                =============== ============== ===============
</TABLE>


<TABLE>
<CAPTION>

                                                                            Year ended December 31,
                                                                  --------------------------------------------
                                                                       Quantities (GWh) (a) (unaudited)
                                                                  --------------------------------------------
                                                                      2003           2002            2001
                                                                  -------------- --------------  -------------
     <S>                                                                <C>            <C>            <C>
     Electricity Sales to final customers:
        Residential                                                     2,068          1,996          2,055
        Industrial                                                      3,399          3,961          3,669
        Commercial, service and other activities                        1,301          1,367          1,303
        Rural                                                             675            592            584
        Miscellaneous                                                     924            847            826
                                                                  -------------- --------------  -------------
                                                                        8,367          8,763          8,437
     Wholesale                                                            349            344            339
                                                                  -------------- --------------  -------------
                                                                        8,716          9,107          8,776
                                                                  ============== ==============  =============

     Number of customers in thousands (b)                               1,582          1,551          1,495

</TABLE>


     (a)  Includes 2,816 GWh in 2003, 2,754 GWh in 2002 and 2,672 GWh in 2001
          related to Enersul (all unaudited data).


                                      F-39
<PAGE>


     (b)  Includes 613 thousand in 2003, 597 thousand in 2002 and 572 thousand
          consumers in 2001 related to Enersul (all unaudited data). ESCELSA has
          entered into supply contracts with Group A customers, which are based
          on general terms and conditions set forth in Ordinance No. 466 of
          November 12, 1997. These contracts contain minimum demand clauses that
          require the customer to pay for either contracted demand or, if
          greater, actual capacity used. These contracts have durations of three
          or five years, with automatic renewals for equal durations, subject to
          notice 12 and 18 months, respectively, prior to expiration of the
          term. Other contracts have three-year terms, with perpetual rolling
          one-year renewals. Each such contract is subject to termination on
          approximately 18 months notice (if the contract is not terminated, it
          automatically extends for one additional year). During 2003, two of
          our largest consumers, Companhia Vale do Rio Doce and Samarco,
          terminated their respective supply contracts and no longer purchase
          energy from us. We are not aware of any other large customer that
          plans to contract directly with generators other than us or to
          self-generate electricity, but there can be no assurance that these
          contracts will be renewed in the future, particularly in light of
          potential increased competition by generators for free consumers. If
          any significant customers fail to renew or choose to terminate their
          contracts, ESCELSA would be entitled, pursuant to Law No. 9,648 of May
          27, 1998, to reduce its purchases from FURNAS by a corresponding
          volume of electricity. Such reduction is subject to ANEEL approval.
          Customers with whom ESCELSA maintained such contracts during 2003
          represented approximately 54.2% of its sales of electricity (unaudited
          data - measured in MWh) and 36.4% (unaudited data) of its revenues
          during the period. We believe that these contracts provide us with a
          relatively stable source of revenue.

           Enersul has entered into similar contracts with its five largest
           customers, which accounted for approximately 8.9% of Enersul's energy
           sold by volume during 2003.


22.  TAXES ON SALES

<TABLE>
<CAPTION>

                                                                                December 31,
                                                             --------------------------------------------------
                                                                  2003             2002              2001
                                                             ---------------  ----------------  ---------------
     <S>                                                         <C>               <C>              <C>
     Value-added tax on sales to final consumers                 412,498           358,175          284,722
     Other taxes on sales                                         85,481            65,965           60,575
                                                             ---------------  ----------------  ---------------
     Total                                                       497,979           424,140          345,297
                                                             ===============  ================  ===============
</TABLE>

     Other taxes on sales include PIS and COFINS paid to the Federal
     Government. The PIS contribution is levied on the gross revenue of
     corporations at the rate of 1.65% and may be offset against input credits.
     The COFINS contribution is levied on the gross revenue of corporations at
     the rate of 3.0%. As from February 2004 the COFINS rate was increased to
     7.6% and the amount calculated over gross revenue may be offset against
     input credits.


23.  NON-OPERATING EXPENSES, NET

     Other non-operating expenses comprised of the provision for loss on
     goodwill and substantially of the provision to reduce the assets held for
     sale of UTE Campo Grande to their market value in the amount of R$21,939
     (R$51,927 in 2002) and of disposal of property, plant and equipment.


24.  PENSION PLANS AND OTHER BENEFITS TO EMPLOYEES

     a.   Parent Company - Escelsa

          The Company is the sponsor of Fundacao Escelsa de Seguridade Social -
          ESCELSOS, a nonprofit organization, whose main purpose is to
          complement the benefits granted by the official social security
          system of Federal Government to the Company's employees through two
          benefit packages: A Defined Benefit Plan (Plan I) and a Defined
          Contribution Plan (PLAN II). These benefit plans are based on
          mathematical reserves calculated actuarially according to the
          capitalization policy, which is revised annually.


                                      F-40
<PAGE>


          The table below shows the number of participants in each plan type:

<TABLE>
<CAPTION>

                                                                        Plan I         Plan II         Total
                                                                       ----------     ----------     ----------
          <S>                                                              <C>          <C>            <C>
          Contributing participants                                         30          1,393          1,423
                                                                       ----------     ----------     ----------
          Receiving participants
              Retirees                                                     631            133            764
              Pension beneficiaries                                        120              9            129
                                                                       ----------     ----------     ----------
                                                                           751            142            893
                                                                       ----------     ----------     ----------
          Total                                                            781          1,535          2,316
                                                                       ==========     ==========     ==========
</TABLE>

          As a sponsor, the Company matches monthly contribution from the
          members of ESCELSOS Foundation, corresponding to the amount
          established in each plan, limited to 7% of the total payroll. For
          2003, ESCELSA contributed R$2,690 compared to R$2,529 in 2002.

          As per CVM Ruling 371 of December 13, 2000, starting in fiscal year
          2001, publicly listed companies are required to record and disclose
          all liabilities related to benefit payments to ex-employees, based on
          rules set forth by NPC Bulletin 26 from IBRACON.

          To meet this requirement, ESCELSA commissioned an independent
          actuarial study to evaluate such benefits, with the following
          results:

          The actuarial assumptions used for the study were:

<TABLE>
<CAPTION>

                                                                      2003                       2002
                                                              ------------------------   -----------------------
          Indicators                                               Nominal rates             Nominal rates
          ------------------------------------------          ------------------------   -----------------------
          <S>                                                      <C>                       <C>
          Discount rate                                                   10,76% p.a.               11,30% p.a.
          Expected return on assets                                       12,82% p.a.               11,30% p.a.
          Future salary growth                                             6,08% p.a.                6,58% p.a.
          Growth rate of pension plan benefits                              4,0% p.a.                 5,0% p.a.
          Growth rate of medical costs                                     8,16% p.a.                9,20% p.a.
          Inflation                                                         4,0% p.a.                 5,0% p.a.
          Capacity factor - Salaries                                             100%                      100%
          Capacity factor - Benefits                                              98%                       98%

          Demographic Indicators
          ------------------------------------------
          Life expectancy reference                                 GAM - 71 Modified         GAM - 71 Modified
          Invalid mortality reference                                        RRB 1944                  RRB 1944
          Invalid incidence reference                                        RRB 1944                  RRB 1944
          Rotation reference                                       Actuary experience        Actuary experience
</TABLE>


          The actuarial valuation indicated that in the Defined Benefit Plan
          the fair value of assets exceeds the current actuarial liabilities,
          as shown bellow:

<TABLE>
<CAPTION>

                                                                                         2003          2002
                                                                                      -----------   -----------
          <S>                                                                           <C>           <C>
          Actuarial liabilities current value, totally or partially covered             (87,234)      (80,465)
          Fair value of plan assets                                                     130,910       108,634
                                                                                      -----------   -----------
          Funded status                                                                  43,676        28,169
                                                                                      ===========   ===========
</TABLE>


          The Company's management, based on conservatism, decided not to
          record the asset, because the effective reduction of the Sponsor's
          contributions was not assured, nor the future reimbursement.


                                      F-41
<PAGE>


          The actuarial valuation resulted in the identification of the
          following post-employment benefits, which were charged net of income
          tax and social contribution to the shareholders' equity, as of
          December 31, 2001:

          o    Coverage of medical and dental expenses, medicines, health
               insurance and, in cases of confirmed special dependence,
               equivalent to 50% of the Company wage floor;

          o    Early retirement allowance ("AIA"), which is due to employees,
               hired until 12/31/1981, payable upon the termination of the
               contract, regardless the reason for the dismissal. The "AIA"
               assures the payament of a lump sum, individually calculated for
               each employee, considering the proportionally of contribution
               time to the INSS until 10/31/1996, the remuneration and the
               benefit paid by the INSS on 10/31/1996.

          The actuarial liabitity recognized in the Company's financial
          statements as of December 31 is as follows:

<TABLE>
<CAPTION>

                                                                                       2003          2002
                                                                                   ------------- -------------
          <S>                                                                        <C>           <C>
          Present value of actuarial obligations - fully uncovered                   (53,575)      (47,337)
          Net value of recognized losses                                              19,751        17,083
                                                                                   ------------- -------------
                                                                                     (33,824)      (30,254)
                                                                                   ============= =============
</TABLE>

          The amount of actuarial losses in excess of 10% of the present value
          of actuarial obligation will be annually amortized over a period
          equivalent to the average running time of work for employees
          participating in the plan.

          The movement in the actuarial liability recognized in the 2003 balance
          sheet is summarized as follows:

<TABLE>
<CAPTION>

                                                                     Current        Long-term         Total
                                                                    -----------    -------------    ----------
          <S>                                                          <C>              <C>           <C>
          Balance as of December 31, 2002                               2,042           28,212        30,254
          Current service cost                                              -              647           647
          Interest cost                                                     -            5,112         5,112
          Amortization of losses                                            -              897           897
          Benefit payments                                             (3,086)               -        (3,086)
          Transfer to current liabilities                               4,615           (4,615)            -
                                                                    -----------    -------------    ----------
          Balance as of December 31, 2003                               3,571           30,253        33,824
                                                                    ===========    =============    ==========

</TABLE>

          The amounts related to medical benefits, life insurance and allowance
          for incentive to retirement, to be recognized in the 2004 results are
          as follows:

<TABLE>
<CAPTION>

          <S>                                                                                            <C>
          Current service cost                                                                             725
          Interest cost                                                                                  5,507
          Amortization of actuarial losses                                                               1,100
                                                                                                      ---------
          Total                                                                                          7,332
                                                                                                      =========
</TABLE>

     b.   ENERSUL

          The subsidiary Enersul is the sponsor of FUNDACAO ENERSUL, a nonprofit
          civil organization, whose main purpose is to complement the benefits
          granted by the official security to the Company's employees through
          two benefit packages: the initial Plan, in operation since 1989 as a
          "defined benefit plan" and the Benefits Plan II, that commenced
          operations in May 2002, and is structured as a Defined Benefit for the
          Risk Benefits, including permanent disability retirement and surviving
          spouse pension, and as a Defined Contribution for the Programmed
          Benefits, including the Normal and Early Retirements.


                                      F-42
<PAGE>


          The number of participants in each type of Plan is as follows:

<TABLE>
<CAPTION>

                                                                          Plan I       Plan II      Total
                                                                        ------------ ------------ ------------
          <S>                                                               <C>            <C>       <C>
          Contributing participants                                           4            933         937
          Receiving participants
              Retirees                                                      257              5         262
              Pension beneficiaries                                          65              -          65
                                                                        ------------ ------------ ------------
                                                                            322              5         327
                                                                        ------------ ------------ ------------
          Total                                                             326            938       1,264
                                                                        ============ ============ ============
</TABLE>

          The number of active participants is comprised of 647 participants who
          migrated from Plan I and of 286 new participants.

          In the capacity of sponsor, ENERSUL contributes with a monthly amount
          proportional to the contribution made by the FUNDACAO ENERSUL
          participants in compliance with the rules of each benefit plan. The
          maximum percentage for contribution by the Company for both plans is
          7% of payroll. For 2002, ENERSUL contributed with R$1,442 (R$1,481 in
          2002).

          As determined by Resolution CVM no. 371/2000, of December 13, 2000, as
          from January 1, 2002, liabilities arising from post employment
          benefits have to be accounted for by publicly-held companies, based on
          the regulations set-forth by Statement NPC no. 26, of IBRACON.

          In order to meet such requirement, ENERSUL engaged independent
          actuaries, to conduct an actuarial evaluation of those benefits, based
          on the Projected Credit Unit method.

          As a result of such evaluation, the following benefit plans were
          identified:

          o    ENERSUL Employees Pension Plan
          o    Benefit Plan II

          The actuarial assumptions used for the study were:

<TABLE>
<CAPTION>

                                                                       2003                      2002
                                                             ------------------------  -----------------------
          Indicators                                              Nominal rates            Nominal rates
          --------------------------------------             ------------------------  -----------------------
          <S>                                                     <C>                      <C>
          Discount rate                                                 10.76 % p.a.             11.30 % p.a.
          Expected return on assts                                      11.96 % p.a.             11.30 % p.a.
          Future salary growth                                           6.08 % p.a.              8.15 % p.a.
          Growth rate of pension plan benefits                            4.0 % p.a.               5.0 % p.a.
          Inflation                                                       4.0 % p.a.               5.0 % p.a.
          Capacity factor - Salaries                                            100%                     100%
          Capacity factor - Benefits                                             98%                      98%

          Demographic Indicators
          --------------------------------------
          Life expectancy reference                                GAM - 71 Modified        GAM - 71 Modified
          Invalid mortality reference                                       RRB 1944                 RRB 1944
          Invalid incidence reference                                       RRB 1944                 RRB 1944
          Rotation reference                                      Actuary experience       Actuary experience
</TABLE>


                                      F-43
<PAGE>


          The actuarial valuation indicated that in the Benefit Plan, the fair
          value of assets exceeds the current actuarial liabilities, as shown
          below:

<TABLE>
<CAPTION>

                                                                                       2003          2002
                                                                                   ------------- -------------
          <S>                                                                        <C>            <C>
          Net present value of actuarial liabilities                                 (53,412)       (51,875)
          Fair value                                                                  85,885         68,728
                                                                                   ------------- -------------
          Subtotal                                                                    32,473         16,853
          Net actuarial gains                                                        (16,428)          (881)
                                                                                   ------------- -------------
                                                                                      16,045         15,972
                                                                                   ============= =============
</TABLE>

          Conservatively, ENERSUL management decided not to record this surplus.

          The fair value of assets used for calculating the result of the
          actuarial evaluation does not include values, in the amount of
          R$19,780, deriving from confession of indebtedness, to be received
          from ENERSUL. Should this right of the Fundacao be taken into
          account, unrecognized assets in the balance sheet would increase to
          R$35,825.

          The movement in the actuarial surplus in 2003 is summarized as
          follows:

<TABLE>
<CAPTION>

                                                                                         2003         2002
                                                                                     ------------- ------------
          <S>                                                                          <C>          <C>
          Surplus at beginning of year                                                 15,972        36,298
          Revenues for the period                                                       1,449         1,571
          Effect of migration to Plan CD                                                    -       (22,184)
          Actual contributions of the Company in the period                                20           718
          Transfer from the employer's fund to Plan II                                 (1,396)         (431)
                                                                                    ------------- ------------
          Surplus at end of the year                                                   16,045        15,972
                                                                                    ============= ============
</TABLE>


25.  MANAGEMENT'S REMUNERATION

     Personnel expenses include the amount of R$5,041 (R$3,036 in 2002) for the
     entity, which refer to Management's remuneration.


26.  INSURANCE (Unaudited)

     The following is a breakdown by risk-type and by validity of the principal
     insurance policies:

<TABLE>
<CAPTION>

                                                           Escelsa                          Enersul
                                                 -----------------------------   ------------------------------
                                                   Amount         Amount of         Amount         Amount of
     Risk                        Validity        of coverage       premium       of coverage        premium
     ---------------------    ---------------    ------------   --------------   -------------   --------------
     <S>                      <C>                     <C>                 <C>          <C>                <C>
     Specific equipment       02/24/2003 to
                                02/24/2004           301,023              431         112,837              139
     Third party              02/24/2003 to
     liability                  02/24/2004               600               70             300               40
</TABLE>


                                      F-44
<PAGE>


     Specific equipment

     The insurance policies cover the generating stations and the substations,
     specifying the principal items of equipment, the amounts for which they
     were insured and the maximum reimbursement. Basic insurance coverage
     includes events such as fire, lightning and any kind of explosion, plus
     additional coverage against possible electrical damage, sundry risks and
     risks for electronic and computing equipment.

     Third party liability

     This covers involuntary personal or material damage suffered by third
     parties as a consequence of the Company's productive and/or commercial
     activities.


27.  NATIONAL PROGRAM OF UNIVERSALIZATION

     Through Decree no. 4,873, of November 2003, the Federal Government set up
     the National Program of Universalization - "Light for Everybody", in order
     to provide access to the electric energy public service to the Brazilian
     rural population by 2008. The amount of participation of the
     concessionaires, as agents to implement the projects, are not defined, and
     will be covered by an agreement to be entered into between the Minas and
     Energy Ministry and the State Government with the intervenience of ANEEL
     and Eletrobras. Accordingly, currently there are no bases to evaluate the
     impact of this Program on the Company's business.


28.  THE ELECTRIC SECTOR NEW MODEL

     The Federal Government through the Minas and Energy Ministry, presented to
     the community the concepts of the Brazilian electric sector reform,
     especially in the institutional model, culminating with the Enactment of
     Provisional Measures 144 and 145, of December 10, 2003.

     The related highlights are as follows:

     o    Transfer of ANEEL responsibilities to the Minas and Energy Ministry;

     o    Creation of the Energy Research Company - EPE, the Elective Sector
          Monitoring Committee - CMSE and the chamber of Electric Energy
          Commercialization - CCEE, entities to promate the planning and
          monitoring of the expansion of the generation and transmission,
          besides the market administration;

     o    Definition of regulations for commercializing electric energy, with
          emphasis on: (i) expansion of the supply (new generation projects) by
          means of actions; (ii) free contracting (ACL) and regulated
          contracting (ACR); (iii) distribution activity geared to service lines
          and network and sale of energy to captive consumers; (iv) restrictions
          to contracts between related parties; and (v) new regulations for the
          categorization of free consumers.

     It is necessary to wait for the definitive approval of the legislation, as
     well as the ensuing regulation to evaluate the new environment in which
     the sector will operate, and the risks and opportunities for the Company's
     operations.


                                      F-45
<PAGE>


29.  SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN GAAP AND
     U.S. GAAP RELATED TO THE COMPANY

     29.1 - Description of the GAAP Differences

     The Company's accounting policies comply with Brazilian GAAP. A summary of
     the differences between Brazilian GAAP and U.S. GAAP is provided below:

     a.   Regulated Accounting Principles

          The Company adopted the accounting principles established by ANEEL for
          electric utilities in Brazil.

          a.1 - Applicability of Statement of Financial Accounting Standards
                ("SFAS") No. 71, "Accounting for the Effects of Certain Types
                of Regulation"

          As a result of various actions taken by the Federal government and
          ANEEL in 2001, the Company is subject to the provisions of SFAS No.
          71, "Accounting for the Effects of Certain Types of Regulation"
          because the rate-setting structure in Brazil is now designed to
          recover the Company's allowable costs. Accordingly, the Company
          capitalizes incurred costs as deferred regulatory assets when there is
          a probable expectation that future revenue equal to the costs incurred
          will be billed and collected as a direct result of the inclusion of
          the costs in an increased tariff set by the regulator. The deferred
          regulatory asset is eliminated when the Company collects the related
          costs through billings to customers at increased rates. ANEEL performs
          a rate review on an annual basis. If ANEEL excludes all or part of a
          cost from recovery, that portion of the deferred regulatory asset is
          impaired and is accordingly reduced to the extent of the excluded
          cost.

          During 2001, the electricity markets in significant portions of Brazil
          experienced rationing, or reduced availability of electricity to
          customers, due to low rainfall, reduced reservoir levels and that
          country's significant dependence on electricity generated from
          hydrological resources. These factors resulted in lower sales for the
          Company. In December 2001, the companies reached an industry-wide
          agreement (the "agreement") with the Brazilian government that
          provided resolution to all rationing related issues as well as to
          certain other electricity tariff related issues. The tariff increase
          will remain in effect for approximately 6 years. The amounts in the
          Shareholder's equity and Net income reconciliation represent the
          revenues, which have been reversed out of revenues reported for
          Brazilian GAAP purposes, considering the 24 month period for
          recoverability established in the Emerging Issues Task Force ("EITF")
          No. 92-7, "Accounting by Rate Regulated Utilities for the Effects of
          Certain Alternative Revenue Programs". Based on this, the Company only
          recognizes 24 months of revenues as of the end of any reporting period
          until the total amount of related revenues has been recognized.

          a.2 - Capitalization of Interest Costs Relating to Construction in
                Progress

          Under Brazilian GAAP, the Company capitalizes both interest costs of
          borrowed funds and imputed interest on shareholders' funds applied to
          construction in progress. For U.S. GAAP reconciliation purposes, the
          capitalized imputed interest on shareholders' funds applied to
          construction in progress was reversed. Only interest on borrowed funds
          remains capitalized and the depreciation was computed using the rates
          applicable to the corresponding class of property, plant and
          equipment. However, the basis of calculation differs from the
          Brazilian GAAP. Under U.S. GAAP, in accordance with the provisions of
          SFAS No. 34 - Capitalization of Interest Costs, interest incurred on
          borrowings is capitalized to the extent that borrowings do not exceed
          construction in progress. The credit is a reduction of interest
          expense. Under U.S. GAAP, the amount of interest capitalized excludes
          the foreign exchange gains and losses on foreign currency borrowings.
          The U.S. GAAP differences between the accumulated capitalized interest
          on disposals and in accumulated amortization on disposals relate to
          the differences between capitalized interest and related accumulated
          amortization under Brazilian and U.S. GAAP which is included in the
          net book value of disposed property, plant and equipment.


                                      F-46
<PAGE>


<TABLE>
<CAPTION>

     Brazilian Regulated Accounting                                             2003         2002        2001
     ------------------------------                                          -----------  ----------- -----------
         <S>                                                                 <C>           <C>        <C>
         U.S. GAAP difference (BR capitalized interest, net of                  2,167        5,944           -
            disposals in US GAAP differences)

         Effect of amortizations, net of disposals, in US GAAP difference      16,737       12,625      17,956
                                                                             -----------  ----------- -----------

         U.S. GAAP difference - total                                          18,904       18,569      17,956
                                                                             ===========  =========== ===========



     Interest on Loans                                                          2003         2002        2001
     -----------------                                                       -----------  ----------- -----------

     Capitalized interest difference

          U.S. GAAP capitalized interest:
              Interest capitalized during the period                           28,620       27,399      27,671

         Less BR capitalized interest:
              Interest capitalized during the period                          (9,004)     (24,265)    (19,535)
                                                                              -----------  ----------- -----------

         U.S. GAAP difference - subtotal                                       19,616        3,134       8,136

         Effect of disposals in US GAAP difference                            (3,102)      (2,419)     (3,597)
\                                                                             -----------  ----------- -----------

         U.S. GAAP difference - subtotal                                       16,514          715       4,539

         Effect of amortizations, net of disposals, in U.S. GAAP
         difference                                                          (13,436)      (9,159)    (16,252)
                                                                             -----------  ----------- -----------

         U.S. GAAP difference - total                                           3,078      (8,444)    (11,713)
                                                                             ===========  =========== ===========
</TABLE>


     a.3 - Obligations Related to the Concession

     Under Brazilian GAAP, the Company records special liabilities, representing
     consumers' contributions to the cost of expanding power supply systems, as
     liabilities and includes the related asset in property, plant and
     equipment, subject to depreciation over the applicable useful lives. Under
     U.S. GAAP, contributions received from customers are considered
     reimbursement for construction costs and are credited against the cost of
     the related fixed assets. For U.S. GAAP reconciliation purposes, special
     liabilities are amortized using the depreciation rates applicable to the
     corresponding class of property, plant and equipment acquired with such
     consumers' contributions.


                                      F-47
<PAGE>


     b.   General Accounting Principles

          b.1 - Pension and Other Benefits

          Under Brazilian GAAP, until December 31, 2001, pension plan and other
          benefits were recognized on a cash basis. As per CVM Rule 371 of
          December 2000, starting in fiscal year 2002, publicly listed companies
          must record and are required to disclose all liabilities related to
          benefit payments to ex-employees, based on rules set forth by NPC
          (Accounting Rules and Procedures) Pronouncement No. 26 from IBRACON,
          which are substantially similar to SFAS No. 87 and No. 106 rules.
          Alternatively, companies were granted the option to amortize such
          initial transition obligation as of December 31, 2001, directly to
          shareholders` equity, which Escelsa has adopted. SFAS No. 87,
          "Employers' Accounting for Pensions" and SFAS No. 106, "Employers'
          Accounting for Post-retirement Benefits Other Than Pensions" that
          require recognition of costs on a more comprehensive accrual basis. In
          addition, U.S. GAAP requires the recognition of either an asset or a
          liability, as appropriate, for the difference between projected
          benefit obligations (as defined in SFAS No. 87 and SFAS No. 106) and
          plan assets. Such assets must be stated at fair value, as adjusted for
          certain reconciling items.

          b.2 - Purchase Accounting

          Under Brazilian GAAP, purchases of the majority of the shares of
          another company are recorded at the book value, restated for inflation
          in consolidation up to December 31, 2000. The difference between the
          purchased company's net assets and the purchase price is recorded as
          goodwill and amortized over the concession term of the purchased
          company. The purchaser is permitted to defer amortization of goodwill
          for several months until the acquired company is integrated. In
          addition, Brazilian GAAP permits amortization of goodwill based on
          projections of future profitability.

          Under U.S. GAAP, the assets and liabilities of the purchased company
          must be recorded at fair value, and any difference between the fair
          value of net assets including intangible assets and the purchase price
          is recorded as goodwill.

          Certain adjustments subsequent to the purchase must be recorded as an
          adjustment to goodwill under U.S. GAAP. During 1998, Enersul reversed
          the valuation reserve related to the deferred tax asset for unused tax
          loss carry forwards. All of these loss carry forwards related to
          periods prior to the purchase date. Under U.S. GAAP, such reversal of
          the valuation reserve was recorded as a reduction of goodwill.

          The fair value of fixed assets of Enersul under U.S. GAAP totaled
          R$855,705 compared to book value of R$941,299 under Brazilian GAAP.
          The Company reverts the effects of the additional depreciation charged
          to operations under BR GAAP in the U.S. GAAP reconciliation (see
          reversal of depreciation - fair value fixed asset in the U.S. GAAP
          reconciliation).

          b.3 - Amortization of Goodwill

          As permitted under Brazilian GAAP, the Company is amortizing goodwill
          over the 30 year concession period based on the proportion of
          projected net income for the period subsequent to the purchase of
          Enersul.

          Under U.S. GAAP, until December 31, 2001, the straight-line method of
          amortization was used over a 30-year period. The amount of goodwill
          amortized under Brazilian GAAP was reversed out of results of
          operations and shareholders' equity and goodwill calculated in
          accordance with purchase accounting under U.S. GAAP was charged
          against operations and accumulated amortization was charged against
          shareholders' equity. Escelsa adopted SFAS No. 142, "Goodwill and
          Other Intangible Assets," as of January 1, 2002. The adoption of SFAS
          No. 142 required the Company to perform an initial impairment
          assessment of the goodwill associated with the acquisition of Enersul
          as of January 1, 2002. The Company compared the estimated fair value
          of Enersul to the carrying value of the net assets of Enersul. Fair
          value was derived using discounted cash flow analyses. As a result of
          this analysis, the transitional impairment adjustment of R$409,953 has
          been reflected as cumulative effect of a change in accounting
          principle. In 2003, under Brazilian GAAP the Company recorded a
          provision for loss on goodwill in the amount of R$124,093 and,
          consequently, reduced to R$285,500 the impairment adjustment for U.S.
          GAAP purpose. As of December 31, 2003, the Company has no goodwill
          recorded in its financial statements under U.S. GAAP. Since the
          amortization and/or write-off of goodwill is non-deductible for
          Brazilian tax purposes no tax effect was recognized as a result of
          this impairment charge.


                                      F-48
<PAGE>


          b.4 - Income Taxes

          Under Brazilian GAAP, deferred income tax liabilities are recognized
          based on the amount of future expected taxes to be paid. Deferred
          income tax assets related to deductible temporary differences
          (expenses that are accrued but not deductible until future periods) or
          tax loss carryforwards are recognized when there is a reasonable
          certainty the Company will generate profits against which it can
          offset such an asset.

          Under U.S. GAAP, deferred income tax assets related to deductible
          temporary differences or tax loss carry forwards are recognized and a
          valuation reserve is not recorded if it is more likely than not that
          such assets will be realized.

          The reversal of the valuation reserve related to the deferred tax
          assets of Enersul for unused tax loss carry forwards was recorded as a
          credit to statement of operations for the year ended December 31, 1998
          for Brazilian GAAP. For U.S. GAAP the reversal of this reserve was
          recorded as a reduction of the goodwill on the purchase of Enersul.
          For Brazilian GAAP, the reversal totaled R$129,933. For U.S. GAAP, the
          valuation reserve was R$104,734 (R$63,479 net of the minority
          interest), as the deferred tax asset had been offset by deferred tax
          liabilities mainly related to the basis difference between Brazilian
          GAAP and U.S. GAAP.

          b.5 - Impairment of Long-lived Assets

          Under Brazilian GAAP, the carrying value of fixed assets is written
          down to realizable values when it is estimated that such assets will
          not be realized through normal depreciation or disposition without
          loss to the company.

          Under U.S. GAAP, the Company follows SFAS No. 144 - "Accounting for
          the Impairment or Disposal of Long-lived Assets". Under SFAS No. 144,
          whenever events or changes in circumstances indicate that the carrying
          value of long-lived assets may not be recoverable, the Company
          performs calculations of undiscounted cash flows expected to be
          derived from assets in service to determine whether impairment has
          occurred. In the event such cash flows are not expected to be
          sufficient to recover the recorded value of the assets, such assets
          are written down to their estimated fair values based on discounted
          cash flow analyses. No provision was required for U.S. GAAP
          reconciliation purposes.

          b.6 - Statements of Cash Flows

          Brazilian GAAP does not require the presentation of a statement of
          cash flows as required by U.S. GAAP. Changes in working capital are
          presented in the statement of changes in financial position. U.S. GAAP
          requires the presentation of a statement of cash flows describing a
          company's cash flows from operating, financing and investing
          activities.

          b.7 - Earnings per Share

          Brazilian GAAP permits earnings per share to be calculated based on
          the number of shares outstanding at year-end. Under U.S. GAAP, the
          earnings per share calculation takes into account share equivalents
          and the number of shares is computed on a weighted average basis. In
          addition, U.S. GAAP requires the computation of diluted earnings per
          share, when dilutive potential common shares exist, which is not
          required under Brazilian GAAP. Since there were no changes in the
          number of outstanding shares for the years ended December 31, 2003,
          2002 and 2001, the weighted average shares outstanding for U.S. GAAP
          purposes was the same as the year end amounts. There were no dilutive
          potential common shares. Therefore diluted earnings per share are not
          shown.

          b.8 - Financial Statement Note Disclosures

          Brazilian GAAP generally requires less information to be disclosed in
          the notes to the financial statements than U.S. GAAP.

          The additional disclosures required by US GAAP, which are relevant to
          the accompanying financial statements, are included in Note 29.3.


                                      F-49
<PAGE>


          b.9 - Net Income before Taxes and Minority Interest

          Under U.S. GAAP, this line item would not be permitted in the income
          statement. The line under Brazilian GAAP is intended to measure
          operations before these items.

          b.10 - Accounting and reporting of investments in marketable
          securities

          Under accounting practices adopted in Brazil, investment in marketable
          securities are generally carried at cost, plus interest income earned
          less provisions, when applicable, charged to the statement of
          operations to reduce its carrying value to market value. Gains are
          recognized in the balance sheet and income statement only when
          realized.

          Under U.S. GAAP, these investments would be classified as available
          for sale in accordance with SFAS 115, "Accounting for Certain
          Investments in Debt and Equity Securities". Unrealized holding gains
          and losses are excluded from earnings and reported in other
          comprehensive income until realized, net of related income tax effects
          in accordance with SFAS 109, "Accounting for Income Taxes". As of
          December 31, 2003 and 2002, the Company has an unrealized holding gain
          amounting to R$20,908 (R$13,799 net of income taxes) and an unrealized
          holding loss of R$67,516 (R$44,561 net of income taxes), respectively.
          In 2001, these amounts were not significant. Certain investments in
          securities classified in available for sale were sold in 2003. Total
          proceeds of these sales amounted to R$131,287 and respective realized
          gain amounted to R$2,502 (R$1,651 net of income taxes). The cost of
          these sales was determined based on specific identification of
          securities sold. As a result of that, the Company recorded a
          reclassification adjustment to avoid double counting in comprehensive
          income item that are displayed as part of net income for 2003 that
          also had been displayed as part of comprehensive income in 2003 or
          earlier periods.

          b.11 - Accounting for financial instruments

          Under Brazilian GAAP, derivatives are recorded at net settlement price
          as determined on each balance sheet date.

          Under U.S. GAAP, effective January 1, 2001, all derivative financial
          instruments must be reported at fair value on each balance sheet date
          and classified as either a derivative asset or liability. Also under
          U.S. GAAP, the requirements for a derivative instrument to qualify for
          hedge accounting and deferral of gains and losses are more restrictive
          than under Brazilian GAAP. In the reconciliation of differences
          between BR GAAP and U.S. GAAP (note 29.2) the Company recorded gains
          in the amount of R$6,228 in 2003 and losses of R$9,295 in 2002, due to
          derivatives fair value adjustments.

          b.12 - Absorption of loss

          Under BR GAAP, losses may be absorbed against capital reserves. As
          shown in the consolidated statements of changes in shareholders'
          equity, the Company absorbed losses against capital reserves in the
          amount of R$538,913 in 2002.

          Under U.S. GAAP, this accounting treatment is only permitted under
          reorganization or fresh start accounting. This GAAP difference has no
          net income or equity effect.

          b.13 - Dividends

          Under Brazilian corporate law, proposed dividends are accrued for in
          the consolidated financial statements in anticipation of their
          approval at the Shareholders' Meeting.

          Under U.S. GAAP, dividends are not accrued until they are formally
          approved by the Shareholders' General Meeting.


                                      F-50
<PAGE>


          b.14 - Net operating revenue

          Net operating revenue under Brazilian GAAP differs from U.S. GAAP on
          the recognition of net revenues from value added and other sales
          taxes, as presented below:

<TABLE>
<CAPTION>

                                                                      2003            2002           2001
                                                                ---------------- -------------- ---------------
          <S>                                                        <C>            <C>            <C>
          Net revenue under BR GAAP                                  1,542,612      1,299,138      1,385,485
          Value added and other sales taxes                            497,979        424,140        345,297
                                                                ---------------- -------------- ---------------
          Net revenue under U.S. GAAP                                2,040,591      1,723,278      1,730,782
                                                                ================ ============== ===============
</TABLE>


          b.15 - Nonoperating expenses

          Under accounting practices adopted in Brazil, nonoperating expense
          includes certain items that would be classified within operating
          expenses for U.S. GAAP purposes. These items amounted to R$153,052,
          R$74,965 and R$24,384 for the years ended December 31, 2003, 2002 and
          2001, respectively.

     29.2 - Reconciliation of Differences Between Brazilian and U.S. GAAP

     a. Shareholders' Equity

<TABLE>
<CAPTION>

                                                                                       As of December 31,
                                                                                    ---------------------------
                                                                                       2003           2002
                                                                                    ------------    -----------
        <S>                                                                          <C>             <C>
        As reported on the accompanying Brazilian GAAP financial statements           557,691         555,782
        Different criteria for-
        Regulatory asset                                                              (69,525)        (82,660)
         Capitalization of interest during construction-
              Reversal of interest capitalized under-
                 Brazilian regulated accounting                                      (395,713)       (397,880)
                 Capitalization of interest                                           339,094         322,580
                 Depreciation of interest capitalized, net                             55,262          51,961
        Reversal of depreciation - Fair value of the fixed asset                       24,785          19,663
        Cumulative depreciation of special liabilities                                111,306          98,803
        Reversal of pension and other postretirement obligations - CVM 371-
           Note 24                                                                     33,824          30,254
        Pension and postretirement benefits SFAS 87 and SFAS 106 adjustment           (39,808)        (41,485)
        Accumulated amortization of goodwill                                          (28,254)        (40,230)
        Reversal of valuation allowance related to tax loss carryforwards of
           Enersul                                                                   (129,933)       (129,933)
        Fair value of derivatives                                                       6,228          (9,295)
        Unrealized holding gains on available for sale investments                     20,909               -
        Impairment of goodwill                                                       (285,500)       (409,593)
        Effects of income tax on the adjustments above-
           Deferred Income tax liability                                             (201,079)       (177,909)
           Deferred Income tax asset                                                  171,716         180,649
        Minority interest                                                              32,331          40,246
        Reversal of dividends                                                          42,020               -
                                                                                    ------------    -----------
        Shareholders' equity according to US GAAP                                     245,354          10,953
                                                                                    ============    ===========
</TABLE>


                                      F-51
<PAGE>


     b. Net Income (Loss)

<TABLE>
<CAPTION>

                                                                             Year ended December 31,
                                                                    -------------------------------------------
                                                                        2003            2002            2001
                                                                    -------------   ------------    -----------
        <S>                                                             <C>           <C>            <C>
        As reported on the accompanying Brazilian Gaap financial
           statements                                                    43,929       (538,913)       (60,076)

        Different criteria for-
          Regulatory asset                                               13,135         21,080       (103,740)
          Capitalization of interest                                     18,681          6,659          4,539
          Depreciation of capitalized interest                            3,301          3,466          1,704
          Reversal of depreciation - Fair Value of Fixed Asset            5,122          4,257         15,406
          Amortization of special liabilities                            12,503         12,405         10,166
        Reversal of pension and other postretirement obligations -
           CVM 371                                                        3,570           (197)             -
        Pension and postretirement benefits SFAS 87 and
            SFAS 106 adjustment                                           1,677        (14,365)         8,088
        Amortization of goodwill                                         11,976         12,061        (12,793)
        Provision for loss on goodwill                                  124,093              -              -
        Fair value of derivatives                                        15,523         (9,295)             -
        (Reversal of) Unrealized holding losses on
            available-for-sale investments                              (67,516)        67,516              -
        Effects of income tax on the adjustments above-
           Deferred Income tax liability                                (16,061)       (12,046)       (11,220)
           Deferred Income tax asset                                     14,022        (18,465)        31,565
        Minority interest                                                (7,915)         7,041         (5,808)
                                                                    -------------   ------------    -----------
        Net income (loss) under US GAAP before cumulative effect
            of a change in accounting principle                         176,041       (458,796)      (122,169)
        Cumulative effect of SFAS 142 adoption                                -       (409,593)             -
                                                                    -------------   ------------    -----------
        Net income (loss) under US GAAP                                 176,041       (868,389)      (122,169)
                                                                    =============   ============    ===========

        Net income (loss) under US GAAP before cumulative effect
            of a change in accounting principle                           38.68        (100.82)        (26.85)
        Cumulative effect of SFAS 142 adoption                                -         (90.00)             -
                                                                    -------------   ------------    -----------
        Net income (loss) under US GAAP                                   38.68        (190.82)        (26.85)
                                                                    =============   ============    ===========

        Weighted average shares outstanding                           4,550,833      4,550,833       4,550,833
                                                                    =============   ============    ============

        Shareholders' equity under US GAAP as of beginning
            of the year                                                  10,953        923,903       1,059,313
        US GAAP net income (loss) for the year                          176,041       (868,389)       (122,169)
        Other comprehensive income:
            Unrealized holding losses on available-for-sale
            investments, net of deferred income taxes                    60,011        (44,561)              -
            Less: reclassification adjustment for gains included
            in net income                                                (1,651)             -               -
        Dividends                                                             -              -         (13,241)
                                                                    -------------   ------------    ------------
        Shareholders' equity under US GAAP as of the end of the         245,354         10,953         923,903
            year
                                                                    =============   ============    ============

</TABLE>

<TABLE>
<CAPTION>

                                                                               Year ended December 31,
                                                                       ----------------------------------------
                                                                           2003          2002         2001
                                                                       -------------- ------------ ------------
       <S>                                                                <C>         <C>          <C>
       Comprehensive income (loss) under FAS No. 130:
       US GAAP net income (loss)                                          176,041     (868,389)    (122,169)
          Unrealized gains (losses) on available-for-sale investments,
          net of deferred income taxes                                     60,011      (44,561)            -
          Less: reclassification adjustment for gains included in net
          income, net of deferred income taxes                             (1,651)             -            -
                                                                        -------------- ------------ ------------
       Total comprehensive income                                         234,401     (912,950)    (122,169)
                                                                       -------------- ------------ ------------

       Accumulated other comprehensive income (loss) as of
          the end of the year                                              13,799      (44,561)            -
                                                                       ============== ============ ============
</TABLE>


                                      F-52
<PAGE>


     29.3 - Additional Disclosures Required by US GAAP

     a.   Pension Funds - Escelsa

          Escelsa adopted SFAS No. 87 on December 31, 1994. Prior to such date,
          the application of SFAS No. 87 was not feasible due to the lack of
          sufficient information for prior years. The unrecognized net
          transaction obligations for the pension and retirement plans detailed
          below were amortized on a straight-line basis over 15 years as from
          December 31, 1988. The amortization from December, 31, 1988 through
          December 31, 1994 was recorded directly to equity in the opening
          balance sheet under U.S. GAAP and was approximately R$16,486 (funded
          pension plan) and R$5,711 (retirement indemnity program).

          a.1 - Funded Pension Plan

          Until May 31, 1998, Escelsa sponsored only a defined benefit pension
          plan covering all employees, with benefits based on salary and social
          security benefits. On June 1, 1998, Escelsa introduced a defined
          contribution plan to which employees could voluntarily transfer. The
          plan's assets are invested in a separate fund administered by an
          independent legal entity called Escelsos. Contributions are made both
          by the sponsor and the participants based on an actuarial study
          prepared by an internal actuary. This study is conducted according to
          prevailing Brazilian regulations, as determined by the Social Security
          authorities, and is aimed to provide enough funds to cover future
          benefit payments. The fund's assets comprise principally time
          deposits, equity securities, government securities and real estate.

          Based on the report prepared by independent actuaries, the funded
          status and the amounts recognized in U.S. GAAP for Escelsa only
          (excluding Enersul) for the above plan, calculated according to SFAS
          No. 87, are as follows:

<TABLE>
<CAPTION>

                                                                                      As of December 31,
                                                                                  ---------------------------
                                                                                     2003            2002
                                                                                  ------------    -----------
          <S>                                                                       <C>            <C>
          Actuarial present value of benefit obligations-
          Vested benefit obligation                                                 (81,820)       (76,585)
          Non-vested benefit obligation                                              (4,994)        (3,435)
                                                                                  ------------    -----------
          Accumulated benefit obligation                                            (86,814)        (80,020)
          Effect of future projected salary increases                                  (420)          (445)
                                                                                  ------------    -----------
          Projected benefit obligation                                              (87,234)       (80,465)
          Plan assets at fair market value                                          130,910        108,634
                                                                                  ------------    -----------
          Funded status                                                              43,676         28,169
          Unrecognized net transition obligation, being amortized
               over 15 years from December 1988                                           -            231
          Unrecognized net gain                                                     (37,646)       (27,051)
                                                                                  ------------    -----------
          Prepaid pension cost liability                                              6,030          1,349
                                                                                  ============    ===========
</TABLE>


          The net periodic pension cost (as defined under SFAS No. 87) includes
          the following elements excluding Enersul:

<TABLE>
<CAPTION>

                                                                            Year ended December 31,
                                                                  ---------------------------------------------
                                                                     2003            2002             2001
                                                                  -----------    -------------    -------------
          <S>                                                      <C>              <C>               <C>
          Net periodic pension cost-
             Service cost-benefits earned during the period            254              303              344
             Interest cost on projected benefit obligation           8,702            4,352            3,523
             Amortization of net transition obligation                 231              267              225
             Actual return on assets                               (17,332)         (17,940)          (4,156)
             Net deferral                                            5,425           11,837           (1,007)
             Amortization of net gains                              (1,547)          (2,546)          (2,951)
             Employee contributions                                    (45)             (57)            (131)
                                                                  -----------    -------------    -------------
             Net periodic pension cost under US GAAP                (4,312)          (3,784)          (4,153)
             Additional credit under US GAAP                          1,316           2,279            4,560
                                                                  -----------    -------------    -------------
             Amount recorded under Brazilian GAAP                   (2,996)         (1,505)              407
                                                                  ===========    =============    =============
</TABLE>


                                      F-53
<PAGE>


          The assumptions used were:
<TABLE>
<CAPTION>

                           Assumptions                                         2003         2002       2001
          --------------------------------------------                       --------     --------   --------
          <S>                                                                  <C>         <C>           <C>
          Discount rate                                                        10.76%      11.30%        6%
          Rate of increase in compensation levels                              6.08%       6.58%         3%
          Expected long-term rate of return on assets                          12.82%      11,30%        6%
          Benefit increase                                                     4.00%       5.00%         0%
          Inflation                                                            4.00%       5.00%         0%
</TABLE>

          In 2003 and 2002, the assumptions are presented as nominal rates and
          in 2001 they were shown as real rates.

          a.2 - Retirement Indemnity Program

          In addition to benefits provided under Escelsa's funded pension plans,
          Escelsa sponsors an unfunded retirement indemnity program called AIA
          that provides a lump sum amount at retirement to employees who joined
          Escelsa before December 31, 1981. The funded status and the net
          periodic pension cost for this program under SFAS 87, as identified in
          the report prepared by the independent actuaries, are given below. The
          same assumptions used for the funded pension plan were used.

<TABLE>
<CAPTION>

                                                                                  As of December 31,
                                                                         ------------------------------------
                                                                            2003         2002          2001
                                                                         ---------    ---------     ---------
          <S>                                                            <C>          <C>             <C>
          Funded status-
              Actuarial present value of benefit obligations-
                 Vested benefit obligation                                (5,453)      (4,343)        (3,493)
                 Non-vested benefit obligation                            (1,710)      (1,678)        (2,651)
                                                                         ---------    ---------     ---------
              Accumulated benefit obligation                              (7,163)      (6,021)        (6,144)
              Effect of future projected salary increase                  (1,262)      (1,410)          (816)
                                                                         ---------    ---------     ---------
              Projected benefit obligation                                (8,425)      (7,431)        (6,960)

              Unrecognized net transition obligation, being
               amortized over 15 years from December 31, 1988                  -           972         1,903
              Unrecognized prior service cost                             (2,502)      (3,038)        (3,238)
              Unrecognized net (gain)                                     (2,042)      (3,496)        (3,323)
                                                                         ---------    ---------     ---------
              Accrued pension cost liability                             (12,969)     (12,993)       (11,618)
                                                                         =========    =========     =========

</TABLE>


          The net periodic pension cost (as defined under SFAS 87) includes the
          following elements:

<TABLE>
<CAPTION>

                                                                              Year ended December 31,
                                                                         ------------------------------------
                                                                           2003          2002          2001
                                                                         ---------    ---------     ---------
          <S>                                                               <C>         <C>           <C>
          Net periodic pension cost-
              Service cost-benefits earned during the period                 213          262           297
              Interest cost on projected benefit obligation                  731          451           468
              Amortization of net transition obligation                      972        1,129           952
              Amortization of net gain                                      (406)        (536)         (214)
              Amortization of prior service cost                            (536)        (372)         (452)
                                                                         ---------    ---------     ---------
              Net periodic pension cost                                      974          934         1,051
              Additional credit (expense) under US GAAP                      (30)        (221)          242
                                                                         ---------    ---------     ---------
              Amount recorded under Brazilian GAAP                           944         (713)        1,293
                                                                         =========    =========     =========

</TABLE>


                                      F-54
<PAGE>


<TABLE>
<CAPTION>

          Assumptions used were:

                         Assumptions                                        2003         2002          2001
          -------------------------------------------                    ---------    ---------     ---------
          <S>                                                              <C>          <C>             <C>
          Discount rate                                                    10.76%       11.30%          6%
          Rate of compensation increase levels                              6.08%       6.58%           3%
          Benefit increase                                                  5.00%       5.00%           0%
          Inflation                                                         4.00%       5.00%           0%

</TABLE>

          In 2003 and 2002, the assumptions are presented as nominal rates and
          in 2001 they were shown as real rates.

          a.3 - Postretirement Benefits Other Than Pension

          In terms of postretirement benefits other than pension, Escelsa
          provides medical and life insurance benefits to retired employees for
          the remainder of their lifetime. The funded status and the net
          postretirement benefit cost for this program under SFAS 106, as
          identified in the report prepared by the independent actuaries, are
          given below:

<TABLE>
<CAPTION>

                                                                                 As of December 31,
                                                                          ------------------------------------
                                                                             2003         2002         2001
                                                                          ---------    ---------     ---------
          <S>                                                              <C>          <C>          <C>
          Funded status-
          Accumulated postretirement benefit obligation in excess of
            plan assets                                                    (46,522)     (41,093)     (21,707)

          Unrecognized net loss from experience different than
            assumed                                                         25,356       24,257        6,739
          Unrecognized net prior service cost                               (1,642)      (1,969)      (2,081)
                                                                          ---------    ---------     ---------
          Accrued liability                                                (22,808)     (18,805)     (17,049)
                                                                          =========    =========     =========
          The net postretirement benefit cost, as defined under SFAS 106,
          includes the following elements:

                                                                                  Year ended December 31,
                                                                          ------------------------------------
                                                                             2003         2002         2001
                                                                          ---------    ---------     ---------
          Net postretirement benefit cost-
             Service cost-benefits earned during the period                    415          461          440
             Interest cost on projected benefit obligation                   4,519        1,495        1,327
             Net loss                                                        1,483          388          400
             Prior service cost                                              (327)        (327)         (276)
                                                                          ---------    ---------     ---------
             Net post retirement benefit cost                                6,090        2,017        1,891
             Additional credit (expense) under US GAAP                       (378)        (131)           17
                                                                          ---------    ---------     ---------
             Amount recorded under Brazilian GAAP                            5,712        1,866        1,908
                                                                          =========    =========     =========



          Assumptions used were:

                         Assumptions                                        2003         2002          2001
          -------------------------------------------                    ---------    ---------     ---------
          Discount rate                                                      10.76%       11.30%        6%
          Health care cost trend rate                                         8.16%        9.20%       N/A
          Annual increase in employer annual fixed payment to retirees
              related to medical and life insurance benefits (R$134.40)       4.00%         5.0%        0%
          Inflation                                                           4.00%         5.0%        0%

          In 2003 and 2002, the assumptions are presented as nominal rates and
          in 2001 they were shown as real rates.
</TABLE>


                                      F-55
<PAGE>


          On March 31, 1997, Escelsa modified the health care plan to express
          benefits as a fixed monthly value indexed for inflation. Therefore,
          the health care cost trend rate no longer affects the liabilities of
          the plan.

          a.4 - Additional information

          Information required by Financial Accounting Standards Board Statement
          no. 132 is as follows:

<TABLE>
<CAPTION>

                                                                                Retirement        Other postretirement
                                                          Pension plan           indemnity              Benefit
                                                      --------------------  --------------------  --------------------
                                                        2003       2002       2003       2002       2003       2002
                                                      ---------  ---------  ---------  ---------  ---------  ---------
          <S>                                         <C>        <C>        <C>        <C>        <C>        <C>
          Change in benefit obligation-
              Benefit obligation at beginning of
                 the year                              80,465     70,491      7,431      7,683     41,093     23,962

              Service cost                                254        303        213        262        415        461
              Interest cost                             8,702      4,352        731        451      4,519      1,495
              Actuarial loss (gain)                     5,182     11,733      1,048       (200)     2,582     17,207
              Benefit payments                         (7,369)    (6,414)      (998)      (765)    (2,087)    (2,032)
                                                      ---------  ---------  ---------  ---------  ---------  ---------
              Benefit obligation at end of year        87,234     80,465      8,425      7,431     46,522     41,093
                                                      =========  =========  =========  =========  =========  =========


          Change in plan assets-
              Fair value of plan assets at
                 beginning of the year                108,634     96,709          -          -          -          -
              Actual return on plan assets             29,239     17,940          -          -          -          -
              Employer contributions                      369        356          -          -          -          -
              Plan participants' contribution              37         43          -          -          -          -
              Gross benefits paid                      (7,369)    (6,414)         -          -          -          -
                                                      ---------  ---------  ---------  ---------  ---------  ---------
              Fair value of plan assets at
                 end of year                          130,910    108,634          -          -          -          -
                                                      =========  =========  =========  =========  =========  =========

          Funded status-
              Funded status at end of year             43,676     28,169     (8,425)    (7,431)   (46,522)   (41,093)
              Unrecognized net actuarial (gain)       (37,646)   (27,051)    (2,042)    (3,496)    25,356     24,257
                 loss
              Unrecognized prior service cost               -          -     (2,502)    (3,038)    (1,642)    (1,969)
              Unrecognized transition obligation            -        231          -        972                     -
                                                      ---------  ---------  ---------  ---------  ---------  ---------
              Net amount recognized at end of year      6,030      1,349    (12,969)   (12,993)   (22,808)   (18,805)
                                                      ---------  ---------  ---------  ---------  ---------  ---------
          Amounts recognized in the statement
              of financial position consist of-
                 Accrued benefit asset (cost)           6,030      1,349    (12,969)   (12,993)   (22,808)   (18,805)
                                                      ---------  ---------  ---------  ---------  ---------  ---------
          Net amount recognized at end of year          6,030      1,349    (12,969)   (12,993)   (22,808)   (18,805)
                                                      =========  =========  =========  =========  =========  =========

</TABLE>

          Plan Assets (all information unaudited)

          At December 31, 2003 and 2002 the net asset of Escelsos were
          R$242,633, and R$192,182, respectively, representing an increase of
          26%.

          ESCELSOS's investments must meet the requirements of Resolution No.
          1,321, of September 25, 2003, as follows:

               o  Fixed Income -- up to 100% in Federal Government Securities;
               o  Variable Income -- 50%;
               o  Real Estate -- 8%; and
               o  Loans -- 15%.


                                      F-56
<PAGE>


          According to ESCELSOS's investment strategy, the plan's assets must
          meet the following allocation:

               o Fixed Income - limited from 65% to 100%;
               o Variable Income: 15% to 35%;
               o Real Estate 0% to 5%; and
               o Loans 0% to 10%.

          The strategy meets the investment policy approved by the investment
          committee, the executive directors and the ESCELSOS's advisory board.
          The Plan's Actuarial Target is INPC plus 6% per year (INPC - National
          Consumer Price Index). ESCELSOS's adopted a moderate approach. The
          investments held cover future obligations, in accordance with
          actuarial studies.

          The expectation for the benefit plan results is INPC plus 6% per year.
          The guiding principles are those established in the investment policy,
          as explained above. In the past, the ESCELSOS's strategy accepted
          higher levels of risks , with nearly 40% of its assets invested in
          fixed income, . The portfolio has changed very little. Currently, the
          investment allocation is:

          2003
<TABLE>
<CAPTION>

                               Defined Benefit          Defined              Medical
                                    Plan          Contribution Plan           Plan                 Total
                              -----------------   -------------------    ---------------     ------------------
          <S>                    <C>       <C>       <C>         <C>     <C>        <C>       <C>         <C>
          Fixed income           68,905     80%      120,945      80%    3,364.6     96%      193,214      85%
          Equity securities      15,387     18%       27,008      18%      148.0      4%       42,543       8%
          Real estate             1,227      1%        2,154       1%          -      0%        3,381       5%
          Beneficiary loans       1,268      1%        2,226       1%          -      0%        3,495       2%
                              ---------    ----      -------     ----    -------    ----     --------     ----
          Total                  86,787    100%      152,333     100%    3,512.6    100%      242,633     100%
                              =========    ====      =======     ====    =======    ====     ========     ====


           2002

                               Defined Benefit          Defined              Medical
                                    Plan          Contribution Plan           Plan                 Total
                              -----------------   -------------------    ---------------     ------------------
          Fixed income           57,418     80%       94,650      80%      3,036     97%      155,104      81%
          Equity securities      11,347     16%       18,706      16%         95      3%       30,148      15%
          Real estate             1,380      2%        2,274       2%          -      0%        3,654       2%
          Beneficiary loans       1,237      2%        2,039       2%          -      0%        3,276       2%
                              ---------    ----      -------     ----    -------    ----     --------     ----
          Total                  71,382    100%      117,669     100%      3,131    100%      192,182     100%
                              =========    ====      =======     ====    =======    ====     ========     ====
</TABLE>

          In 2000, 2001 and 2002, ESCELSOS failed to achieve its actuarial
          target, mainly due to the poor performance of the stock market, which
          fell successively in those years (2000 - 10.34%, 2001 - 9.80% and 2002
          -17.78%).In 2003, the stock market recovered part of previous losses
          with a positive performance of 97.11%.

          In 2003, plan investments achieved an internal level of return of
          30.49%, for the Defined Benefit Plan, and 29.38% for the Defined
          Contribution Plan, surpassing the average Actuarial Target by 12.68%.

          Despite financial market fluctuations, the administrators of ESCELSOS
          adopted a more conservative approach for 2004, aiming at exceeding the
          Actuarial Target (INPC + 6%) to maximize the profitability of plan
          assets.


                                      F-57
<PAGE>


     b.   Pension Funds - Enersul

          b.1 - Funded Pension Plan

          Until May 31, 2002 the Company was sponsoring only a defined benefit
          pension plan covering all employees, with benefits based on salary and
          social security benefits. On June 1, 2002, the Company introduced a
          hybrid plan (Plan II) to which employees could voluntarily transfer.
          Most participants from Plan I (defined benefit plan) migrated to the
          hybrid plan, however, there were employees who were not participants
          of Plan I (DB Plan) and chose to participate of the new hybrid plan
          (Plan II). In this report we show the effect of those who migrated and
          of those who joined the DC Plan directly. Part of the surplus of DB
          Plan existing at the beginning of the Plan II is being used by the
          company to reduce its contributions to this Plan. This procedure was
          approved by the SPC (government agency).

          The plan's assets are invested in a separate fund administered by an
          independent legal entity called FUNDACAO ENERSUL.

          Contributions are made both by the sponsor and the participants based
          on an actuarial study prepared by an independent actuary. This study
          is conducted according to prevailing Brazilian regulations, as
          determined by the Social Security authorities, and is intended to
          provide enough funds to cover future benefit payments. The fund's
          assets comprise principally time deposits, equity securities,
          government securities and real estate.

          Based on the report prepared by independent actuaries, the funded
          status and the amounts recognized in the Company's balance sheet for
          the above plan, calculated according to SFAS 87 are presented below.

<TABLE>
<CAPTION>

                                                              12.31.2003   12.31.2002   05.31.2002   12.31.2001
                                                             ------------ ------------ ------------ ------------
          <S>                                                    <C>          <C>          <C>          <C>
          Funded status-
          Actuarial present value of benefit obligations-
             Vested benefit obligation                           (48,820)     (45,218)     (41,669)     (36,850)
             Non-vested benefit obligation                        (4,422)      (6,002)      (5,531)     (14,195)
                                                             ------------ ------------ ------------ ------------
          Accumulated benefit obligation                         (53,242)     (51,220)     (47,200)     (51,045)
            Effect of future projected salary increase              (170)        (655)        (604)      (8,055)
                                                             ------------ ------------ ------------ ------------
            Projected benefit obligation                         (53,412)     (51,875)     (47,804)     (59,100)
            Plan assets at fair market value (1)                  85,885       68,728       64,222       91,983
                                                             ------------ ------------ ------------ ------------
          Plan assets in excess of projected benefit              32,473       16,853       16,418       32,883
            obligation
          Unrecognized net transition obligation, being
            amortized over 15 years from December 31, 1989         1,237        1,931        2,336        3,844
            Unrecognized net loss (gain)                         (43,771)     (29,820)     (30,867)     (32,653)
                                                             ------------ ------------ ------------ ------------
            Accrued pension cost liability                       (10,061)     (11,036)     (12,113)       4,074
                                                             ============ ============ ============ ============

</TABLE>

          (1)  The plan assets shown above correspond to the market value of
               assets net of receivables for sponsor contributions, payable
               benefits and contingency funds to cover potential cost associated
               with additional medical, benefits plan administration and
               employee loans and participant's account balance transferred to
               the Hybrid Plan.


                                      F-58
<PAGE>


          The net periodic pension cost (as defined under SFAS 87) includes the
          following elements:

<TABLE>
<CAPTION>

                                                                                    As of December 31,
                                                                           ------------------------------------
                                                                              2003         2002         2001
                                                                           ----------   ----------   ----------
          <S>                                                                <C>           <C>          <C>
          Net periodic pension cost-
             Service cost-benefits earned during the period                      427          891        1,646
             Interest cost on projected benefit obligation                     5,673        4,665        3,559
             Actual return on assets                                         (15,111)      (6,681)      (4,321)
             Amortization of net transition obligation                           694          942        1,143
             Net deferral                                                      7,603            -         (969)
             Net (gain) loss                                                  (1,596)      (1,930)      (1,508)
             Employee contributions                                              (41)        (446)      (1,038)
                                                                           ----------   ----------   ----------
             Net periodic pension cost under US GAAP                          (2,351)      (2,559)      (1,488)
             Additional credit under US GAAP                                     902          988        3,269
                                                                           ----------   ----------   ----------
             Amount recorded under Brazilian GAAP                             (1,449)      (1,571)       1,781
                                                                           ==========   ==========   ==========

          The assumptions used were:

                         Assumptions                                          2003         2002         2001
          --------------------------------------------------------         ----------   ----------   ----------

          Discount rate                                                       10.76%       11.30%         6%
          Rate of increase in compensation levels                              6.08%        8.15%         3%
          Expected long-term rate return on  assets                           11.96%       11.30%         6%
          Benefit increase                                                     4.00%        5.00%         0%
          Inflation                                                            4.00%        5.00%         0%

</TABLE>


          In 2003 and 2002, the assumptions are presented as nominal rates and
          in 2001 they were shown as real rates.




                                      F-59
<PAGE>


          b.2 - Additional Information

          Information required by Financial Accounting Standards Board Statement
          no. 132 is as follows:

<TABLE>
<CAPTION>

                                                                                          Pension plan
                                                                                  ------------------------------
                                                                                     2003              2002
                                                                                  ------------     -------------
          <S>                                                                      <C>               <C>
          Change in benefit obligation-
               Benefit obligation at the beginning of year                          51,875            65,237
               Service cost                                                            427               891
               Interest cost                                                         5,673             4,665
               Actuarial (gain)                                                       (475)            5,436
               Curtailments                                                              -           (11,460)
               Settlements                                                               -            (9,322)
               Gross benefit payments                                               (4,088)           (3,572)
                                                                                  ------------     -------------
               Net benefit obligation at end of year                                53,412            51,875
                                                                                  ------------     -------------

          Change in plan assets-
               Fair value of plan assets at beginning of year                       68,728           101,535
               Actual return of plan assets                                         22,619            15,058
               Employer contributions                                                   20               718
               Settlements                                                          (1,396)             (431)
               Gross benefit payments                                                    -           (44,960)
               Plan participants' contribution                                           2               380
               Gross benefit paid                                                   (4,088)           (3,572)
                                                                                  ------------     -------------
               Fair value of plan assets at end of year                             85,885            68,728
                                                                                  ------------     -------------

          Funded status-
              Funded status at end of year                                          32,473            16,853
              Unrecognized net actuarial (gain)                                    (43,771)          (29,820)
              Unrecognized net transition obligation                                 1,237             1,931
                                                                                  ------------     -------------
              Net amount recognized at end of year                                 (10,061)          (11,036)
                                                                                  ------------     -------------
          Amounts recognized in US GAAP consist of-
              Accrued benefit cost                                                 (10,061)          (11,036)
                                                                                  ------------     -------------
              Net amount recognized at end of year                                 (10,061)          (11,036)
                                                                                  ============     =============


  </TABLE>

          Plan Assets (all information unaudited)

          At December 31, 2003 and 2002, the net assets of Fundacao Enersul were
          R$137 million and R$167 million, respectively, representing an
          increase of 22%.

          The Fundacao Enersul's investments must meet the legal requirements
          established by the Brazilian Central Bank, in Resolution No. 3,121
          dated September 25, 2003.


                                      F-60
<PAGE>


          The table below shows the breakdown of Fundacao Enersul investments.
          These investments are contemplated in the entity's 2004-2008
          investment policy, which has been duly approved by the Foundation's
          Advisory Board and submitted to the brazilian regulatory agency - the
          Secretary for Private Social Security (SPC).

          2003

<TABLE>
<CAPTION>

                               Defined Benefit          Defined              Medical
                                    Plan          Contribution Plan           Plan                 Total
                              -----------------   -------------------    ---------------     ------------------
          <S>                    <C>       <C>       <C>         <C>     <C>        <C>       <C>         <C>

          Fixed income           58,361     91%       73,573      91%      1,155    100%      133,089      91%
          Equity securities       3,390      5%        4,273       5%         .-      0%        7,663       5%
          Real estate               933      1%        1,177       1%          -      0%        2,110       1%
          Beneficiary loans       1,585      3%        1,999       3%          -      0%        3,583       3%
                              ---------    ----      -------     ----    -------    ----     --------     ----
          Total                  64,269    100%       81,022     100%      1,155    100%      146,445     100%
                              =========    ====      =======     ====    =======    ====     ========     ====


          2002

                               Defined Benefit          Defined              Medical
                                    Plan          Contribution Plan           Plan                 Total
                              -----------------   -------------------    ---------------     ------------------

          Fixed income           30,558     71%       59,157      81%      1,049    100%       90,764      77%
          Equity securities       7,431     17%       14,076      19%          -      0%       21,507      18%
          Real estate             2,121      5%           .-       0%          -      0%        2,121       2%
          Beneficiary loans       3,029      7%           .-       0%          -      0%        3,029       3%
                              ---------    ----      -------     ----    -------    ----     --------     ----
          Total                  43,139    100%       73,233     100%      1,049    100%      117,421     100%
                              =========    ====      =======     ====    =======    ====     ========     ====

</TABLE>
          Despite financial market fluctuations, the administrators of the
          Fundacao Enersul adopted a conservative approach for 2004, aiming at
          exceeding the Actuarial Target (INPC + 6%) to maximize the
          profitability of plan assets.

          The guiding principles are those established in the investment policy,
          as explained above. In 2000, 2001 and 2002, the Fundacao Enersul
          failed to achieve its actuarial target, mainly due to the poor
          performance of the stock market, which fell successively in those
          years.


                                      F-61
<PAGE>


     c.   Concentration of Credit Risk

          Credit risk with respect to customer accounts receivable is
          diversified. The Company continually monitors its customer accounts
          receivable and limits its exposure to bad debts by curtailing service
          if any invoice is one month overdue. Exceptions comprise supply of
          electricity that must be maintained for reasons of safety or national
          security.

     d.   Fair Value of Financial Instruments

          Cash and cash equivalents are stated at cost plus accrued interest
          which approximate their fair value. Except for the senior notes issued
          by the Company, the carrying value of Escelsa's other financial
          instruments, in reais, approximates fair value reflecting the
          short-term maturity, frequent repricing or estimated market value
          (when lower than cost) of these instruments.

          With respect to the senior notes issued by the Company, whose carrying
          values as of December 31, 2003 and 2002 are R$1,245,124 and
          R$1,522,704, respectively, their fair value, based on the bid price as
          of December 31, 2003 and 2002 are R$1,145,514 and R$944,076,
          respectively.

          Based on interest rates currently available to Escelsa for other bank
          loans with similar terms and average maturities, the fair value of
          other long-term debt at December 31, 2003 and 2002 approximates its
          carrying value.

          Fair value estimates are made at a specific date, based on the
          financial instruments. These estimates are subjective in nature and
          involve uncertainties and matters of significant judgment and,
          therefore, cannot be determined with precision. Changes in assumptions
          could significantly affect the estimates.

     e.   Impairment of long-lived assets

          The Company reviews the carrying value of property, plant, and
          equipment for impairment whenever events and circumstances indicate
          that the carrying value of an asset may not be recoverable from the
          estimated future cash flows expected to result from its use and
          eventual disposition. In cases where undiscounted expected future cash
          flows are less than the carrying value, an impairment loss is
          recognized equal to an amount by which the carrying value exceeds the
          fair value of assets. The factors considered by management in
          performing their assessment include current operating results, trends,
          and prospects, as well as the effects of obsolescence, demand,
          competition, and other economic factors.

          No impairment has been recorded in the consolidated financial
          statements for the years ended December 31, 2003 and 2002 for long
          lived assets.


                                      F-62
<PAGE>


     f.   Segment reporting

          The Company operates basically in one significant segment since most
          of its operating revenues are derived from the sale of electricity to
          the final customers in the states of Espirito Santo and Mato Grosso do
          Sul.

     g.   New accounting pronouncements

          SFAS No. 149 - "Amendment of Statement 133 on Derivative Instruments
          and Hedging Activities"

          In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
          133 on Derivative Instruments and Hedging Activities, which amends and
          clarifies accounting for derivative instruments, including certain
          derivative instruments embedded in other contracts, and hedging
          activities under SFAS No 133, accounting for Derivative Instruments
          and Hedging Activities. SFAS No. 149 clarifies the circumstances under
          which a contract with an initial net investment meets the
          characteristic of a derivative as discussed in SFAS No. 133. In
          addition, SFAS No.149 clarifies when a derivative contains a financing
          component that warrants special reporting in the statement of cash
          flows. SFAS No. 149 amends certain other existing pronouncements,
          resulting in more consistent reporting of contracts that are
          derivatives in their entirety or that contain embedded derivatives
          that warrant separate accounting. SFAS No. 149 is effective for
          contracts entered into or modified after June 30, 2003 and for
          relationships designated after June 30, 2003 and is to be applied
          prospectively. The adoption of SFAS No. 149 did not result in any
          impact to our financial statements.

          SFAS No. 150 - "Accounting for Certain Financial Instruments with
          Characteristics of Both Liabilities and Equity"

          In May 2003 the FASB issued SFAS 150, Accounting for Certain Financial
          Instruments with Characteristics of both Liabilities and Equity. SFAS
          150 modifies the accounting for certain financial instruments that,
          under previous guidance, issuers could account for as equity. The
          Statement requires that those instruments be classified as liabilities
          in statements of financial position. SFAS 150 affects an issuer's
          accounting for three types of freestanding financial instruments,
          namely:

          o    Mandatory redeemable shares, which the issuing company is
               obligated to buy back in exchange for cash or other assets.
          o    Instruments, other than outstanding shares, that do or may
               require the issuer to buy back some of its shares in exchange for
               cash or other assets. These instruments include put options and
               forward purchase contracts.
          o    Obligations that can be settled with shares, the monetary value
               of which is fixed, tied solely or predominantly to a variable
               such as a market index, or varies inversely with the value of the
               issuers' shares.

          SFAS 150 does not apply to features embedded in financial instruments
          that are not derivatives in their entirety. In addition to its
          requirements for the classification and measurement of financial
          instruments within its scope, SFAS 150 also requires disclosures about
          alternative ways of settling those instruments and the capital
          structure of entities, all of whose shares are mandatorily redeemable.
          SFAS 150 is effective for financial instruments entered into or
          modified after May 31, 2003, and otherwise is effective at the
          beginning of the first interim period beginning after June 15, 2003.
          It is to be implemented by reporting the cumulative effect of a change
          in an accounting principle for financial instruments created before
          the issuance date of the Statement and still existing at the beginning
          of the interim period of adoption. Restatement is not permitted.
          Adoption of this rule did not have any material impact on the
          Company's financial statements.


                                      F-63
<PAGE>


          FIN No. 45 - "Guarantor's Accounting and Disclosure Requirements for
          Guarantees, Including Indirect Guarantees of Indebtedness of Others"

          In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
          Accounting and Disclosure Requirements for Guarantees, Including
          Indirect Guarantees of Indebtedness of Others" ("FIN No. 45"). This
          interpretation requires certain disclosures to be made by a guarantor
          in its interim and annual financial statements about its obligations
          under certain guarantees that it has issued. It also requires a
          guarantor to recognize, at the inception of a guarantee, a liability
          for the fair value of the obligation undertaken in issuing the
          guarantee. The disclosure requirements of FIN No. 45 are effective for
          interim and annual periods ending after December 15, 2002. The initial
          recognition and initial measurement requirements of FIN No. 45 are
          effective prospectively for guarantees issued or modified after
          December 31, 2002. The implementation of this statement did not result
          in any impact on our financial statements.

          FIN No. 46 - "Consolidation of Variable Interest Entities"

          In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"),
          Consolidation of Variable Interest Entities, an Interpretation of APB
          No. 51. FIN 46 requires certain variable interest entities to be
          consolidated by the primary beneficiary of the entity' if the equity
          investors in the entity did not have the characteristics of a
          controlling financial interest or did not have sufficient equity at
          risk for the entity to finance its activities without additional
          subordinated financial support from other parties. FIN 46 was
          effective for all new variable interest entities created or acquired
          after January 31, 2003. However, during October 2003, FASB deferred
          the effective date of FIN 46 until the end of the first interim or
          annual period ending after December 15, 2003. This deferral did not
          affect the implementation date for many foreign private issuers, which
          continued to be the beginning of the first annual period ending after
          December 15, 2003.

          In December 2003, FIN 46 was substantially revised and a new
          interpretation FIN 46 (revised) was issued. FASB partially delayed FIN
          46's effective date (for most public companies) until no later than
          the end of the first reporting period ending after March 15, 2004. The
          delay notwithstanding, public companies must apply either FIN 46 or
          FIN 46R to special-purpose entities (SPEs) no later than the end of
          the first reporting period ending after December 15, 2003. FIN 46R did
          not have any impact on the Company's operations in 2003 and it is
          expected that it will not have any impact on the Company's operations
          in 2004.

          SFAS No. 132 (revised) - "Employers' Disclosures about Pensions and
          Other Postretirement Benefits - an amendment of FAS Statements no. 87,
          88 and 106"

          On December 23, 2003, the FASB issued Statement of Financial
          Accounting Standards no. 132 (revised 2003), "Employers' Disclosures
          about Pensions and Other Postretirement Benefits-an amendment of FASB
          Statements No. 87, 88 and 106" (SFAS 132 (revised 2003)). SFAS 132
          (revised 2003) is effective for fiscal years ending after December 15,
          2003. SFAS 132 (revised 2003) replaces the disclosure requirements in
          SFAS 87, SFAS 88 and SFAS 106. SFAS 132 (revised 2003) addresses
          disclosures only and does not address measurement and recognition
          accounting for pension and postretirement benefits. SFAS 132 (revised
          2003) requires additional disclosures related to the description of
          plan assets including investment strategies, plan obligations, cash
          flows and net periodic benefit cost of defined benefit pension and
          other defined benefit postretirement plans. The Company has provided
          for the disclosures required by SFAS 132 (revised 2003) in those
          financial statements.


                                      F-64
<PAGE>


          EITF No. 03-01 - "The Meaning of Other-Than-Temporary Impairment and
          Its Applications to Certain Investments"

          In 2003, the Emerging Issues Task Force issued EITF No. 03-1, "The
          Meaning of Other-Than-Temporary Impairment and Its Application to
          Certain Investments." A consensus was reached regarding disclosures
          about unrealized losses on available-for-sale debt and equity
          securities accounted for under FASB Statements No. 115, Accounting for
          Certain Investments in Debt and Equity Securities, and No. 124,
          Accounting for Certain Investments Held by Not-for-Profit
          Organizations. The guidance for evaluating whether an investment is
          other-than-temporarily impaired should be applied in
          other-than-temporary impairment evaluations made in reporting periods
          beginning after June 15, 2004. The disclosures are effective in annual
          financial statements for fiscal years ending after December 15, 2003,
          for investments accounted for under Statements 115 and 124. For all
          other investments within the scope of this Issue, the disclosures are
          effective in annual financial statements for fiscal years ending after
          June 15, 2004. The additional disclosures for cost method investments
          are effective for fiscal years ending after June 15, 2004. The Company
          does not expect that the adoption of this EITF will have a material
          impact on its financial statements.


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