Tax Issues Related to Elektro

Follow up on this issue.

I did not hear from Sergio yet.

I checked CVM Resolution # Oficio/CVM/SEP/GEA-1 number 04/01, dated November 08. (Therefore, the Enron/Dynegy merge date is pure serendipity)

The issue is related to the reverse merger, but it is more complex than we thought.

The Commission ordered Elektro to republish 2001, 1Q2001 and 2Q2002 statements. The Commission argues that:

1) The deferral of income tax and social contribution was not legitimate, as it was based on irrealistic profit assumptions
2) That instructions regarding the term to ammortize part of the reverse merger, issues in 1999, have not been followed (CVM instruction 319/99, which approved the reverse merger)
3) The economic rationale for the ammortization of the larger part of the "premium" paid for Elektro does not hold any longer and that CVM Instruction 349/2001 is not being followed
4) As per Law 6.385/76, Elektro will have to republish the balance sheets/income statements

Elektro has 15 days to appeal

LM