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Light S.A.

Financial Statements for the Years Ended December 31, 2006 and 2005 and Independent Auditors Report
Deloitte Touche Tohmatsu Auditores Independentes

(Convenience Translation into English from the Original Previously Issued in Portuguese) INDEPENDENT AUDITORS REPORT To the Shareholders and Board of Directors of Light S.A. Rio de Janeiro RJ 1. We have audited the accompanying individual (Company) and consolidated balance sheets of Light S.A. and subsidiaries as of December 31, 2006, and the related statements of operations, changes in shareholders equity, and changes in financial position for the year then ended, all expressed in Brazilian reais and prepared under the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements.
Our audit was conducted in accordance with auditing standards in Brazil and comprised: (a)

2.

planning of the work, taking into consideration the significance of the balances, volume of transactions, and the accounting and internal control systems of the Company and its subsidiaries, (b) checking, on a test basis, the evidence and records that support the amounts and accounting information disclosed, and (c) evaluating the significant accounting practices and estimates adopted by Management, as well as the presentation of the financial statements taken as a whole. In our opinion, the financial statements referred to in paragraph 1 present fairly, in all material respects, the individual and consolidated financial positions of Light S.A. and subsidiaries as of December 31, 2006, and the results of their operations, the changes in shareholders equity, and the changes in their financial positions for the year then ended in conformity with Brazilian accounting practices. Our audit was conducted for the purpose of forming an opinion on the basic financial statements referred to in paragraph 1 taken as a whole. The accompanying individual and consolidated statements of cash flows are presented for purposes of additional analysis and are not a required part of the basic financial statements in conformity with Brazilian accounting practices. Such information has been subjected to the auditing procedures described in paragraph 2 and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements for the year ended December 31, 2006 taken as a whole.

3.

4.

Light S.A. 5. 6.

The financial statements for the year ended December 31, 2005, were audited by other independent auditors, whose report thereon, dated January 25, 2006, was unqualified. The accompanying financial statements have been translated into English for the convenience of readers outside Brazil.

Rio de Janeiro, February 23, 2007

DELOITTE TOUCHE TOHMATSU Auditores Independentes

Celso de Almeida Moraes Engagement Partner

(Convenience Translation into English from the Original Previously Issued in Portuguese) LIGHT S.A. BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2005 (In thousands of Brazilian reais - R$) Company Notes 12/31/2006 12/31/2005 Consolidated 12/31/2006 12/31/2005

ASSETS CURRENT ASSETS Cash and cash equivalents Accounts receivable - Consumers and distributors Allowance for doubtful accounts Recoverable taxes Inventories Services provided Prepaid expenses Other receivables Total NONCURRENT ASSETS LONG-TERM ASSETS Accounts receivable - Consumers and distributors Recoverable taxes Escrow deposits Prepaid expenses Other receivables Total PERMANENT ASSETS Investments Property, plant and equipment, net Intangible assets, net Deferred charges Total TOTAL NONCURRENT ASSETS TOTAL ASSETS

4 5 5 6

7 8

206 150 56 256 668

1 1

695,108 2,349,471 (579,060) 276,021 11,409 30,294 247,730 54,950 3,085,923

1 1

5 6 7 8

182,913 715,322 133,790 315,959 112,210 1,460,194

9 10 10

1,508,756 1,508,756 1,508,756 1,509,424

34,825 3,696,771 183,113 97,910 4,012,619 5,472,813 8,558,736

1 (continues)

(Convenience Translation into English from the Original Previously Issued in Portuguese) LIGHT S.A. BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2005 (In thousands of Brazilian reais - R$) Company Notes 12/31/2006 12/31/2005 Consolidated 12/31/2006 12/31/2005

LIABILITIES AND SHAREHOLDERS EQUITY CURRENT LIABILITIES Suppliers Payroll Taxes Financial charges Loans, financing and debentures Accrued liabilities Regulatory charges Reserve for contingencies Pension plan and other employee benefits Other payables Total NONCURRENT LIABILITIES LONG-TERM LIABILITIES Suppliers Financial charges Loans, financing and debentures Taxes Regulatory charges Reserve for contingencies Pension plan and other employee benefits Other payables Total DEFERRED INCOME TOTAL NONCURRENT LIABILITIES SHAREHOLDERS EQUITY Capital Accumulated deficit Total TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

11 6 12 12 13 14 16 15

231 6 16 139 522 914

464,972 1,133 257,087 126,706 368,530 36,273 335,306 3,302 74,084 75,391 1,742,784

11 12 12 6 13 14 16 15

29,769 68,132 2,671,406 279,182 109,259 1,241,322 786,863 118,777 5,304,710 2,732 5,307,442

18

1,704,618 (196,108) 1,508,510

1 1

1,704,618 (196,108) 1,508,510

1 1

1,509,424

8,558,736

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

(Convenience Translation into English from the Original Previously Issued in Portuguese) LIGHT S.A. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 (In thousands of Brazilian reais - R$, except earnings per thousand shares) 12/31/2006 Company Consolidated 7,067,976 361,655 567,565 7,997,196

Notes OPERATING REVENUE Electricity sales to final consumers Electricity sales to distributors Other revenues Total Revenue Deductions ICMS (state VAT) Global reserve for reversion quota PIS/COFINS (taxes on revenues) Other Total NET OPERATING REVENUE COST OF SERVICE COST OF ELECTRIC POWER Electricity purchased for resale OPERATING COSTS Personnel Materials Outside services Fuel Usage Quota (CCC/CCE) Reserve for contingencies Depreciation and amortization Other Total GROSS PROFIT OPERATING EXPENSES Selling expenses General and administrative expenses Total 20 20 21

(1,892,362) (76,506) (603,245) (1,976) (2,574,089) 5,423,107

25

(2,862,552) (2,862,552) (160,162) (15,758) (95,693) (425,625) (247,142) (277,942) (35,447) (1,257,769) 1,302,786

23 23 23 23 23 23 23

23 23

(10,143) (10,143)

(446,949) (439,036) (885,985) (continues)

(Convenience Translation into English from the Original Previously Issued in Portuguese) LIGHT S.A. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 (In thousands of Brazilian reais - R$, except earnings per thousand shares) 12/31/2006 Company Consolidated (10,143) (186,536) 416,801 (1,516)

Notes INCOME (LOSS) FROM SERVICES EQUITY IN SUBSIDIARIES FINANCIAL INCOME (EXPENSES) Financial income Financial expenses

26 26

691 (120) 571 (196,108)

415,797 (741,144) (325,347) 89,938

INCOME (LOSS) FROM OPERATIONS NONOPERATING INCOME (EXPENSES) Nonoperating income Nonoperating expenses

27 27

(196,108)

4,942 3,656 8,598 98,536 (249,027) (150,491) (1.12) 133,907,046

INCOME BEFORE TAXESAND MINORITY INTEREST Income and social contribution taxes NET INCOME (LOSS) EARNINGS (LOSS) PER THOUSAND SHARES - R$ Number of shares (thousand) 6

(196,108) (1.46) 133,907,046

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

(Convenience Translation into English from the Original Previously Issued in Portuguese) LIGHT S.A. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (COMPANY) FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 (In thousands of Brazilian reais R$)

Capital BALANCE AS OF JANUARY 1, 2005 BALANCE AS OF DECEMBER 31, 2005 Merger of companies Capital increase Net income (loss) BALANCE AS OF DECEMBER 31, 2006 1 1 1,704,563 54 1,704,618

Treasury shares -

Accumulated deficit (196,108) (196,108)

Total 1 1 1,704,563 54 (196,108) 1,508,510

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

(Convenience Translation into English from the Original Previously Issued in Portuguese) LIGHT S.A. STATEMENTS OF CHANGES IN FINANCIAL POSITION FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 (In thousands of Brazilian reais - R$) Company 12/31/2006 12/31/2005 SOURCES OF FUNDS From operations: Net income (loss) Items not affecting working capital: Depreciation and amortization Adjustment of investment accounted for under the equity method Deferred income and social contribution taxes - long-term Write-off of property, plant and equipment Write-off of deferred charges Reserve for contingencies and other payables Reserve for recoverable tariff margin and adjustment of assets to present value Monetary and exchange variations on long-term items and other From own capital: Capital increase From third parties and controlling shareholder: Loans and financing Financial charges capitalized to the principal Increase in recoverable cost variations - Portion A (CVA) Decrease in investment accounted for under the equity method Transfer from long-term to current assets: Recoverable tariff margin Free energy transactions Other Consolidated 12/31/2006 12/31/2005

(196,108) 186,536 (9,572) 1,704,617 1,704,617 1,695,045

(150,491) 321,081 1,516 4,298 5,661 21,298 420,966 126,304 101,660 852,293 1,704,617 1,704,617 9,126 106,208 22,514 82,756 39,703 16,335 347,139 623,781 3,180,691

TOTAL SOURCES USES OF FUNDS In operations: Increase in noncurrent assets: Prepaid expenses Other Increase in permanent assets: Investment accounted for under the equity method Acquisition of property, plant and equipment and improvements Deferred charges and other investments Transfer from long-term to current liabilities: Loans and financing Other Prior year income Corporate restructuring Unbundling TOTAL USES INCREASE (DECREASE) IN WORKING CAPITAL

1,695,292 1,695,292 (247)

(27) (27) 27

50,591 229,287 301,615 64,122 365,748 264,323 45,616 516,251 1,837,553 1,343,138

(27) (27) 27 (continues)

(Convenience Translation into English from the Original Previously Issued in Portuguese) LIGHT S.A. STATEMENTS OF CHANGES IN FINANCIAL POSITION FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 (In thousands of Brazilian reais - R$) Company 12/31/2006 12/31/2005 REPRESENTED BY WORKING CAPITAL: CURRENT ASSETS At beginning of year At end of year CURRENT LIABILITIES At beginning of year At end of year Consolidated 12/31/2006 12/31/2005

1 668 667 914 914 (247)

1 1 26 (26) 27

1 3,085,923 3,085,922 1,742,784 1,742,784 1,343,138

1 1 26 (26) 27

INCREASE (DECREASE) IN WORKING CAPITAL

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

(Convenience Translation into English from the Original Previously Issued in Portuguese) LIGHT S.A. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (In thousands of Brazilian reais - R$) Company 12/31/2006 12/31/2005 Cash flows from operations: Net income (loss) Items not affecting cash: Allowance for doubtful accounts Provision for (reversal of) losses on recovery of amounts in Allowance for doubtful accounts - free energy Adjustment of regulatory assets and liabilities Adjustment of receivables to present value Depreciation and amortization Interest and monetary variations on noncurrent items, net Equity in subsidiaries Write-off of property, plant and equipment Write-off of deferred charges Deferred income and social contribution taxes Charges and monetary variation on post-employment obligations Reserve for contingencies - long-term liabilities Other (Increase) decrease in assets: Consumers and distributors Recoverable taxes Services provided Rationing program Inventories Regulatory assets (CVA) Escrow deposits Other Increase (decrease) in liabilities: Suppliers Power suppliers Payroll and related charges Taxes Regulatory charges Contingencies Post-employment obligations Other (196,108) 186,536 (9,572) (146) (361) (507) 231 145 16 567 959 (9,120) (26) (26) (26) Consolidated 12/31/2006 12/31/2005 (150,491) 296,769 82,221 88,742 (145,617) 55,153 321,081 329,014 1,516 5,661 21,298 4,298 229,949 343,092 (14,259) 1,468,427 (199,773) 19,722 48,786 47 (672) 365,389 (48,006) (35,785) 149,708 (23,274) (244,081) (5,070) 20,968 48,805 (30,194) (65,656) (21,406) (319,909) 1,298,226 (26) (26) (26) (continues)

NET CASH PROVIDED BY (USED IN) OPERATIONS

10

(Convenience Translation into English from the Original Previously Issued in Portuguese) LIGHT S.A. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (In thousands of Brazilian reais - R$) Company 12/31/2006 12/31/2005 Cash flows from investing activities: Equity in subsidiaries Property, plant and equipment Consumer contributions Deferred charges (1,695,292) (1,695,292) 27 27 Consolidated 12/31/2006 12/31/2005 (312,616) 11,001 (64,122) (365,737) 27 27

Cash flows from financing activities: Capital increase Loans and financing Amortization of loans and financing

1,704,617 1,704,617 205

9,126 (660,060) (650,935) 281,555

CHANGES IN CASH REPRESENTED BY CASH: At beginning of year Corporate restructuring Unbundling At end of period CHANGES IN CASH

1 206 205

1 1

1 413,552 695,108 281,555

1 1

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

11

LIGHT S.A. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 (Amounts in thousands of Brazilian reais R$) 1. OPERATIONS Light S.A. (the Company, formerly Trial Participaes S.A.) was established as a subsidiary of LIGHT Servios de Eletricidade S.A. (Light SESA), on July 27, 1999, and remained as a subsidiary until September 12, 2005, when its shares were sold to LIDIL Comercial Ltda. Light S.A. is engaged in holding equity interests in other companies, as partner or shareholder, and the direct or indirect exploitation, as applicable, of electric power services, including electric power generation, transmission, sale and distribution systems, as well as other related services. In compliance with Law No. 10,848/2004, on September 5, 2005, ANEEL (National Electric Power Agency) approved through Authorization Resolution No. 307/2005 the corporate restructuring project under which Light S.A. became the Light Groups holding company, approved by the Extraordinary Shareholders Meeting held on January 13, 2006. On January 14, 2006, Light S.A. held an Extraordinary Shareholders Meeting to reduce the capital of Light SESA in exchange for the receipt of: (i) all the shares of Light Energia S.A.; (ii) the equity interests held by Light SESA in the companies Lightger Ltda., Lighthidro Ltda., Light Esco Prestao de Servios Ltda., Itaocara Energia Ltda., HIE Brasil Rio Sul Ltda. and Instituto Light Para o Desenvolvimento Urbano e Social; and (iii) cash. After this capital reduction, Light S.A. became the holding company of all the Light Groups operating companies, including the former holding company Light SESA, as shown below: LIGHT - Servios de Eletricidade S.A. distribution of electric power; Publicly-held corporation engaged in the

Light Energia S.A. Engaged in studying, planning, constructing, operating and exploiting electric power generation, transmission and sale systems and related services; Light Esco Prestao de Servios Ltda. Engaged in providing services related to cogeneration, projects, management and solutions, such as efficiency and definition of energy matrixes; Itaocara Energia Ltda. In the preoperating stage, primarily engaged in the exploitation and production of electric power; Lightger Ltda. and Lighthidro Ltda. In the preoperating stage, both to participate in auctions for concession, authorization and permission in new plants;

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Instituto Light The purpose is to increase its participation in social and cultural projects, interest in the cities future and their economic and social development, affirming its vocation to be a socially responsible company. Light Groups concessions, permissions and authorizations: Concessions/authorizations Generation and distribution (direct) Paracambi small hydroelectric power plant (PCH) (indirect) Itaocara hydroelectric power plant (indirect) Date of concession/authorization July 1996 February 2001 March 2001 Expiration June 2026 February 2031 March 2036

2. PRESENTATION OF FINANCIAL STATEMENTS The notes to the financial statements of Light S.A. are not presented comparatively to 2005 because of its start-up as a holding company on January 14, 2006 after the completion of the unbundling process (Note 33). As of December 31, 2005, the captions of the balance sheet account are as follows: Assets Cash and cash equivalents R$ 1 Liabilities and shareholders equity Shareholders equity R$ 1

3. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES The individual and consolidated financial statements are presented in thousands of Brazilian reais and have been prepared in accordance with Brazilian accounting practices established by Law No. 6,404, of December 15, 1976, Law No. 9,457, of May 5, 1997, and Law No. 10,303, of November 1, 2001, the Accounting Manual for Electric Utilities, standards promulgated by the ANEEL, and accounting standards and procedures of the Brazilian Securities Commission (CVM). Additional information is presented in notes to the financial statements, in accordance with instructions contained in ANEEL Official Letter No. 2,396/2006, dated December 28, 2006, CVM/SNC/SEP Official Letter No. 01/2007, dated February 14, 2007, additional provisions of the Brazilian Securities Commission (CVM), and applicable standards established by ANEEL. Through Resolution No. 444 of October 26, 2001, ANEEL introduced the Accounting Manual for Electric Utilities, whose rules set forth in the Chart of Accounts, Accounting Instructions and Financial Reporting Guidelines have been compulsorily adopted by concessionaires and distributors since January 1, 2002.

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Accounting practices: a) Current and long-term assets

Cash and cash equivalents Comprise temporary cash investments stated at cost plus income earned through the balance sheet date, which does not exceed market value. Accounts receivable consumers and distributors Include billed and unbilled electricity sales, plus fine and interest on late payment and renegotiated receivables from consumers and electricity sold to other distributors according to the volumes made available through the CCEE (Electric Power Trade Chamber), and receivables related to different types of regulatory assets. Allowance for doubtful accounts Recorded based on an analysis of receivables from residential consumers overdue for more than 90 days, commercial consumers overdue for more than 180 days, and industrial, rural and public sector consumers overdue for more than 360 days. For a better assessment and judgment of doubtful accounts, it is also based on an individual analysis of the balance of the largest customers, including debts paid in installments and the history of collections. Recording of electric power purchase and sale transactions conducted through the Electric Power Trade Chamber (CCEE) Cost of electricity purchase and revenues from electricity sales to distributors are recognized on an accrual basis according to the data provided by the CCEE, which is responsible for determining the amounts and quantities purchased and sold through the CCEE. Inventories Stated at average cost, which does not exceed market value, less provision for losses, when applicable. Inventory items for use in construction, expansion and substitution of the power grid are classified into property, plant and equipment. Prepaid expenses Consist of costs disbursed but not yet incurred and the CVA (recoverable cost variations Portion A) account and related charges, which will be charged to operations when the related revenue is billed to consumers according to Administrative Rule No. 296 of October 25, 2001 and No. 116 of April 4, 2003, Law No. 10,448 of April 26, 2002 and ANEEL supplementary resolutions (note 7). Other assets Stated at probable realizable values, including, when applicable, monetary variations and income earned through the balance sheet date.

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Light S.A.

b) Permanent assets

Investments Significant investments in subsidiaries are accounted for under the equity method. Other investments are stated at cost, plus monetary adjustment through December 31, 1995, less provision for losses, when applicable. Property, plant and equipment Stated at acquisition or construction cost, plus monetary adjustment through December 31, 1995, including interest and monetary variations on funds borrowed to finance the expansion of electric power services, which are recorded in property, plant and equipment in progress, plus central administration costs, less accumulated depreciation calculated under the straight-line method. Financial charges and monetary and exchange variations As set forth in Instructions No. 6.3.10, item 4, of the Accounting Manual for Electric Utilities, interest and other financial charges and monetary and exchange variations on funds borrowed to finance property, plant and equipment in progress are capitalized and included in the cost of construction of property, plant and equipment. The same procedure was adopted through December 31, 1997 for interest on capital that financed construction in progress, as set forth in legislation applicable to electric utilities. Indirect costs of construction in progress Part of the central administration costs are allocated monthly to property, plant and equipment in progress, based on properly grounded criteria. Special obligations - concession Stated at the amounts received from consumers and government agencies to undertake any projects deemed necessary to meet power demand, and presented as a reduction of property, plant and equipment. Current and long-term liabilities Stated at known or estimated amounts, plus interest and monetary variations incurred through the balance sheet date when applicable. Income and social contribution taxes Calculated at the tax rates prevailing at the balance sheet date and recorded on an accrual basis. Deferred taxes resulting from temporary differences and tax loss carryforwards are recorded in assets and adjusted to the probable realizable value based on projections of future taxable income considered sufficient to offset such tax assets. Pension plan and other employee benefits Costs, contributions and actuarial liability were calculated by independent actuaries at the balance sheet date, using the projected unit credit method, in accordance with CVM Resolution No. 371/2000, and charged to retained earnings in 2001. Monetary adjustment of such balances is charged to operations and the provision classified into liabilities covers the higher of the minimum liability as per CVM Resolution No. 371/2000 or the equalization agreement. Reserve for contingencies Monetarily adjusted through the balance sheet date and recorded based on the legal counsels opinion, for lawsuits in which the risk of loss is probable. 15

Light S.A.

c) Results of operations: Accounted for on accrual basis:

Revenue recognition Service revenues are recognized as earned. Electricity sales to consumers are billed monthly upon the meter reading. Unbilled revenues, relating to the period between the date of the last meter reading and the close of the month, are estimated and recorded as revenue in the month the electric power was consumed. Estimates The preparation of financial statements in accordance with Brazilian accounting practices requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial income (expenses) Consist of interest and monetary and exchange variations on receivables and payables that are monetarily adjusted through the balance sheet date, results of hedge operations that are recorded over the terms of the related contracts, and temporary results recognized in the financial statements through maturity. Foreign currency assets and liabilities are translated into Brazilian reais at the exchange rate reported by the Central Bank of Brazil. The net effect of such adjustments is credited or charged to operations. Earnings (loss) per share Calculated based on the number of shares outstanding at the balance sheet date.

d) Consolidation The consolidated financial statements include the accounts of Light S.A. and its subsidiaries and affiliates (note 9) and have been prepared in accordance with the consolidation standards established by Law No. 6,404/76 and CVM Instruction No. 247/96. Accordingly, intercompany investments, balances and transactions have been eliminated. Since there is no unrealized profit from intercompany transactions, the Companys shareholders equity is equal to the consolidated shareholders equity. The table below shows the reconciliation between the Companys and consolidated loss for the year ended December 31, 2006: Companys loss for the year ended December 31, 2006 Prior year adjustment
(1)

(196,108) 45,617 (150,491)

Consolidated loss for the year ended December 31, 2006

(1) Adjustment related to the new accounting criterion for energy efficiency and research and development programs (Note 13(c)). Reclassification of Account Balances The financial statements of Light S.A and its subsidiaries are presented in accordance with CVM Resolution No. 488, of October 3, 2005. 16

Light S.A.

4. CASH AND CASH EQUIVALENTS 12/31/2006 Company Consolidated Cash on hand Temporary cash investments Total Index Temporary cash investments Overnight (subsidiaries LIR and LOI) Investment funds Other Total CDI CDI Maturity Daily Daily Daily 124 82 206 78,169 616,939 695,108

12/31/2006 Company Consolidated 82 82 1,475 594,039 21,425 616,939

5. ACCOUNTS RECEIVABLE CONSUMERS AND DISTRIBUTORS Consolidated 12/31/2006 CURRENT Billed sales Unbilled sales Renegotiated receivables installment plan Electric power purchase and sale transactions through the CCEE (note 22) Resale and electric network usage charges Tariff recoverable amounts Free energy refund to electric power generation companies (note 30) Extraordinary tariff recovery (note 30) 1,406,770 249,409 382,390 2,038,569 13,177 49,600 27,951 67,914 152,260 310,902 2,349,471 (579,060) 1,770,411 88,974 214,965 28,310 253,768 (185,196) (34,148) (183,760) 182,913

(-) Allowance for doubtful accounts LONG-TERM Renegotiated receivables installment plan Free energy refund to electric power generation companies (note 30) Charges on free energy PIS/COFINS (taxes on revenue) Extraordinary tariff recovery (note 30) (-) Provision for free energy (notes 11 and 30) (-) Allowance for doubtful accounts extraordinary tariff recovery (-) Provision for loss on extraordinary tariff recovery (note 30)

Renegotiated receivables under installment plans with maturities of more than one year bear interest negotiated on a case-by-case basis. 17

Light S.A.

The aging of current and overdue receivables related to electric power sales and renegotiated receivables to be paid in installments as of December 31, 2006 is as follows: Consolidated 12/31/2006 Overdue Up to 90 days + 90 days 148,180 25,395 66,311 380 51,507 25,198 2,010 318,981 401,423 173,378 167,100 419 97,419 51,034 230,260 1,121,033

Current Residential Industrial Commerce, services and other Rural Public sector Public lighting Public service 139,257 27,950 126,062 605 56,143 14,102 74,001 438,120

Total 688,860 226,723 359,473 1,404 205,069 90,334 306,271 1,878,134

The Management of Light SESA successfully concluded in December 2006 an agreement between Light SESA, the State of Rio de Janeiro and CEDAE to convert part of its receivables into ICMS credits and the payment in installments of the remaining receivables collateralized by CEDAEs receivables deposited in a prime bank to guarantee the receipt of overdue receivables and the current flow of electric power supply billings. The balance of current and long-term receivables is as follows: Accounts receivable from CEDAE as of December 31, 2005 Accounts receivable from CEDAE in December 2005 Part of debt offsettable against ICMS credits (1) (note 6(f)) Renegotiated receivables to be paid in installments as of December 31, 2005 Accounts receivable from CEDAE as of December 31, 2006 Renegotiated receivables to be paid in installments in December 2005 Amount paid in 2006 corresponding to 11 installments Installments as of December 31, 2006 negotiated in December 2005 Electric power supplied from Jan to June and in August 2006 Total receivables from CEDAE bills overdue by December 31, 2006 Receivables converted into ICMS credits December 2006 addendum (2) (Note 6(f)) Balance of new installments renegotiated in December 2006 (-) Adjustment to present value Present value of receivables from CEDAE as of December 31, 2006 254,180 (158,995) 95,185 95,185 (22,000) 73,185 61,660 134,845 (43,319) 91,526 (19,980) 71,546

(1) State Draft Bill No. 4,584, of July 26, 2005, and amounts ratified by the General Audit of the State of Rio de Janeiro and the Rio de Janeiro State Court of Auditors (TCE-RJ), to be offset in 60 equal, consecutive installments. (2) Refund as a tax credit, approved by the Rio de Janeiro State Finance Department. 18

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6. TAXES
Company Consolidated Liabilities Assets Liabilities Assets 12/31/2006 12/31/2006 12/31/2006 12/31/2006 CURRENT Income and social contribution tax credits (b) State income surtax (b) IRRF (withholding income tax) ICMS (state VAT) PIS/COFINS (taxes on revenue) PIS/COFINS in installments (d) INSS in installments (d) Prepaid income and social contribution taxes Other Total LONG-TERM Deferred income and social contribution taxes (c) Deferred income and social contribution taxes capital gains ICMS (f) Income and social contribution taxes 2004 and 2005 (e) PIS/COFINS in installments (d) INSS in installments (d) Total 150 150 16 16 36,411 4,162 12,279 24,194 19,726 169,146 10,103 276,021 1,174 7,855 44,449 5,133 6,022 182,960 9,494 257,087

568,176 147,146 715,322

2,187 194,956 38,983 43,056 279,182

(a) Reconciliation of tax charges between effective and statutory rates: Consolidated 2006 Adjusted income before income and social contribution taxes Combined income and social contribution tax rate Income and social contribution taxes at statutory rates Additions and deductions Net income of off-shore companies Offset of tax loss 30% Difference between income and social contribution tax bases Provision for social contribution tax deficiency notice (note 14 (h)) Tax incentives Income and social contribution taxes reported in the statements of operations 98,537 34% (33,503) (272,289) (74,232) 101,955 32,602 (6,595) 3,035 (249,027)

(b) Refer to tax credits available for offset arising from refunds from temporary cash investments and government agencies and final and unappealable judicial decision awaiting payment release. 19

Light S.A.

(c) Deferred tax assets result from tax loss carryforwards and expenses/revenues charged/credited to operations, which will be deducted from/added to taxable income and the social contribution tax basis in subsequent periods. Deferred assets as of December 31 are as follows: Consolidated 2006 ASSETS AND LIABILITIES CURRENT AND LONG-TERM Income and social contribution taxes loss carryforwards Allowance for doubtful accounts Employee profit sharing Reserve for labor contingencies Reserve for tax contingencies Reserve for civil contingencies Other provisions (-) Reserve for realization of deferred tax assets Total Light SESA Income tax and social contribution tax loss carryforwards Light Energia and Light Esco Total Consolidated Reversion of reserve for realization of deferred tax assets (unrecorded) (1) 898,971 234,207 5,123 46,037 225,491 82,917 29,625 1,522,371 (957,886) 564,485 3,691 568,176 294,915

In accordance with CVM Instruction No. 371 of June 25, 2002, the realization of deferred tax assets for a 12-year period, based on expected future taxable income of Group subsidiaries, is as follows: 2007 2008 2009 2010 2011 2012 to 2014 2015 to 2017 2018 (-) Reserve for realization of deferred tax assets Total Light SESA 2007 Light Energia and Light Esco Total - Consolidated Reversion of reserve for realization of deferred tax assets (unrecorded) (1) 335,953 173,284 129,832 138,132 90,271 298,677 334,818 21,404 1,522,371 (957,886) 564,485 3,691 568,176 294,915

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Light S.A.

Based on a technical feasibility study on the projections of the future taxable income of the subsidiary Light SESA, Management estimates offsetting the total tax assets of R$1,522,371 over a maximum period of 12 years. These tax credits do not expire. Since in 2002, Light SESA expected to generate future taxable income in a period of more than 10 years, it decided to adjust the tax credits to their present value as of December 31, 2002. As a result, a provision of R$957,886 was recorded to adjust deferred tax assets and liabilities to their present value, resulting in deferred assets and liabilities of R$564,485. The assumptions adopted by the Companys management for its projections were the expected return as a result of investment decisions, administrative and financial adjustments, corporate restructuring, and the electric power distribution activity. (1) Based on the projections of future taxable income and temporary additions/ deductions, part of this deferred tax asset, adjusted to recoverable value, could be recognized again through the reversal of part of this reserve in the estimated amount of R$294,915. However, since no taxable income has been reported in the last 3 years, the Company decided not to reverse part of the reserve, according to CVM Instruction No. 371/02. (d) Tax Debt Refinancing Program PAES (REFIS II) Law No. 10,684 of May 31, 2003 introduced the Tax Debt Refinancing Program (PAES), designed to settle debts owed by legal entities to the Federal Government, related to taxes administered by the Federal Revenue Service, National Treasury Attorney General, and National Institute of Social Security (INSS). The deadline for opting for the installment plan was July 31, 2003 and was later extended to August 29, 2003. On July 31, 2003, the subsidiary Light SESA filed its application for PAES (No. 200300003672), as confirmed by the Federal Revenue Service, and paid the first installment on the same date. The debt included in PAES was R$51,344 (net of 50% fine reduction), which was under administrative dispute as to the legality of the deduction of RGR (global reserve for reversion quota) and CCC (fuel usage quota) from the PIS and COFINS tax bases. The payment will be made in 120 installments, but the consolidated debt amount has not yet been ratified by the Federal Revenue Service. As of December 31, 2006, the subsidiary has paid 45 installments. The installments were calculated based on the total debt divided by the number of installments, subject to the TJLP (long-term interest rate). The balance as of December 31, 2006 is R$44,116. The Companys subsidiary filed its application for PAES (No. 60.213.452-8) with the INSS on July 31, 2003. The debt included in PAES was R$59,975 (net of 50% fine reduction), which was under judicial dispute seeking recovery of the amounts paid for occupational accident insurance (SAT). Payment will be made in 120 installments and the consolidated debt amount has already been ratified by the INSS. As of December 31, 2006, the subsidiary has paid 45 installments. The installments were calculated based on the total debt divided by the number of installments, subject to the TJLP (long-term interest rate). The balance as of December 31, 2006 is R$49,078. On July 31, 2006, the balance of the remaining PAES installments was monetarily adjusted in the amount of R$20.2 million as mentioned in note 37.

21

Light S.A.

(e) On February 20, 2003, Light SESA filed a petition for an injunction releasing it from the payment of income and social contribution taxes on: (i) Profits earned by the companies LIR and LOI before they are effectively available, in which case sole paragraph, article 74 of Executive Act No. 2,158-35, of August 24, 2001, for the periods from 1996 to 2001, shall not apply; (ii) Profits earned by the companies LIR and LOI before they are effectively available, in which case article 74, heading, of Executive Act No. 2,158-35/01, for calendar year 2002 and following years, shall not apply. Subject to the effects of the decision on injunction No. 2003.51.01.005514-8, which suspended the collection of income and social contribution taxes, the Company is currently awaiting judgment by the Regional Federal Court - 2nd Region of the appeal filed by the Ministry of Finance. Based on this court decision, Light SESA suspended the payment of income and social contribution taxes on taxable income for 2004, 2005 and 2006 resulting from the addition, to the tax basis, of profits earned by companies located abroad. The provision is R$194,956. (f) On July 31, 2006, the Company recognized a provision for adjustment to present value of the ICMS tax credits converted and confirmed by the Rio de Janeiro State Government. As of December 31, 2006, the balance of this provision is as follows: Position of ICMS credits arising from CEDAE debt as of December 31, 2006 ICMS credits arising from CEDAE debt renegotiation (Note 5) 158,995 Amount offset in 2006 (corresponding to 13 installments) (34,449) ICMS credits as of December 31, 2006 renegotiated in December 2005 124,546 Receivables converted into ICMS credits December 2006 (Note 5) Monetary adjustment of 2006 ICMS credits ICMS credits in December 2006 (-) Adjustment to present value Present value of ICMS credits arising from CEDAE debt as of December 31, 2006 43,319 1,952 169,817 (35,172) 134,645

(1)

(2)

(1) Amounts ratified by the General Audit of the State of Rio de Janeiro and the Rio de Janeiro State Court of Auditors (TCE-RJ), to be offset in 60 equal and consecutive installments. (2) Tax credit refund approved by the Rio de Janeiro State Finance Department.

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Light S.A.

7. PREPAID EXPENSES
Company 12/31/2006 CURRENT Recoverable cost variations Portion A (CVA) November 2001 to October 2005 (a) PIS and COFINS (taxes on revenue) IRT (Note 8, item a) Swap option premium Program for Incentive for Alternative Sources of Electric Energy (PROINFA) Financial components IRT (d) Other Total LONG-TERM Recoverable cost variations Portion A (CVA) November 2005 to October 2006 (a) Overall Agreement for Electric Power Sector Portion A (b) (Note 30) System service charges (c) Recoverable costs of purchase of electricity (CVA Energy) Total 56 56 Consolidated 12/31/2006 105,022 68,618 11,059 22,540 38,118 2,373 247,730

6,504 303,344 4,112 1,999 315,959

a) The CVA account consists of variations for the period and SELIC (Central Bank overnight rate) between annual adjustments for tariff for transfer of electric power from Itaipu; tariff for transportation of electric power from Itaipu; Fuel Usage Quota (CCC); Electric Power Development Account (CDE); System service charges (ESS); tariff for use of transmission facilities of the basic electric network and compensation for use of water resources (CFURH). Recoverable Cost Variations Costs of purchase of electricity (CVA Energy) Through Resolution No. 153, dated March 14, 2005, derived from Interministerial Rule No. 361, of November 26, 2004, ANEEL established the criteria and procedures to calculate and transfer the balance of the CVA Energy account to the electric power distribution companies tariffs. The amount for the period from November 2002 to October 2003, as well as the remaining amount for the period from November 2001 to October 2002, which was deferred on April 4, 2003 in accordance with Interministerial Rule No. 116/03, are being recovered over 24 months starting from the tariff adjustment of November 2004. In December 2003, the subsidiary Light SESA entered into a financing agreement with the BNDES (National Bank for Economic and Social Development) under the Exceptional and Emergency Support Program for Electric Power Distribution Concessionaires, to cover the shortage of funds resulting from the above-mentioned deferral of the CVA for the period from November 2001 to October 2003, in the total amount of R$157,663, as follows:

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Light S.A.

12/31/2006 Current November 2001 to October 2002 Assets November 2001 to October 2002 Liabilities Long-term November 2002 to October 2003 Assets November 2002 to October 2003 Liabilities Total 20,155 (10,961) 9,194 175,211 (26,742) 148,469 157,663

b) Refers to Portion A for the period from January 1, 2001 to October 25, 2001 to be recovered through the extraordinary tariff recovery established by Executive Act No. 14 of December 21, 2001, as described in note 30. c) System service charges paid to the Electric Power Trade Chamber (CCEE) for the energy delivered but not used, which will be recovered through the next annual tariff adjustments. d) Financial components ratified in the 2006 annual tariff adjustment of the subsidiary Light SESA, through Ratifying Resolution No. 391, of November 6, 2006. ANEEL considered the financial component amount of R$45,484. After amortization through that date, there is a remaining amount of R$38,118, to be amortized through October 2007. 8. OTHER RECEIVABLES Company Consolidated 12/31/2006 12/31/2006 CURRENT Low-income consumers Advances to suppliers and employees Employees temporarily transferred to other companies Public lighting fee Property rental Other Total LONG-TERM PIS and COFINS available for offset (a) Assets and rights for sale Other Total 6 250 256 7,743 13,375 1,324 26,654 1,511 4,343 54,950 100,033 11,534 643 112,210

(a) Other Receivables include the amount of R$100,033 related to the regulatory asset to be recovered in the tariff adjustment, as a result of the tax rate increase and change in PIS and COFINS calculation to the noncumulative criterion, according to Law No. 10,637/02 and Law No. 10,833/03, as amended by Law No. 10,865/04. In accordance with ANEEL Official Letter No. 1,333/2004, this amount will be recovered, after ANEELs validation, in the next annual tariff adjustments in a period not longer than 3 years. On November 7, 2005, ANEEL began to publish the tariff net of PIS/COFINS and ICMS, thus allowing the Company to recognize the effective rate of these taxes. 24

Light S.A.

9. INVESTMENTS Company Consolidated 12/31/2006 12/31/2006 Accounted for under the equity method: Light SESA. Light Energia S.A. Light Esco Prestao de Servios Ltda. Lightger Ltda. Lighthidro Ltda. Itaocara Energia. Instituto Light Subtotal Accounted for at cost monetarily adjusted through December 31, 1995 Leased assets Other Total Information on subsidiaries and affiliates
2006 Ownership interest (%) Paid-up capital Shareholders equity Net income (loss) Advances and loans Light SESA Light SESA Light Energia Light Esco Light Ger Light Hidro 100 4,315,556 1,347,958 (210,323) 100 77,422 147,132 75,254 100 9,427 8,803 1,272 100 2,000 3,289 100 50 50 Instituto Itaocara Light Energia 100 300 4 7 100 2,697 849 7,102

1,347,958 147,132 8,803 3,289 50 849 4 1,508,085 671 1,508,756

3,796 29,796 1,233 34,825

Changes in investments in subsidiaries and affiliates


Itaocara Light SESA Light Energia Light Esco Light Ger Light HidroInstituto Ligh Energia Merger of shares Prior year adjustment(1) Equity adjustment(2) Net income (loss) Balances as of December 31, 2006 1,601,825 (45,617) 2,072 (210,323) 1,347,957 77,422 (5,544) 75,254 147,132 7,584 (53) 1,272 8,803 3,289 3,289 50 50 4 4 849 849 Total 1,691,023 (45,617) (3,525) (133,797) 1,508,084

(1) Adjustment related to the new accounting criterion for energy efficiency and research and development programs (note 13(c)). (2) Refers to the Unbundling Project completed in January 2006 (note 33).

25

Light S.A.

10. PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS


Consolidated 12/31/2006 Average depreciation rate PROPERTY, PLANT AND EQUIPMENT In Service Distribution Land Buildings, construction and improvements Machinery and equipment Vehicles Furniture and fixtures Generation Land Reservoirs, dams and water mains Buildings, construction and improvements Machinery and equipment Vehicles Furniture and fixtures Transmission Land Machinery and equipment Administration Land Buildings, construction and improvements Machinery and equipment Vehicles Furniture and fixtures Sales Land Buildings, construction and improvements Machinery and equipment Vehicles Furniture and fixtures In progress Distribution Generation Administration Sales Total property, plant and equipment Special obligations concession (a) Total property, plant and equipment, net 4.62 Historical cost 6,730,996 5,268,001 59,135 246,586 4,908,168 23,605 30,507 935,176 15,519 426,354 58,890 426,606 4,750 3,057 17,299 203 17,096 292,629 7,455 73,832 118,511 5,084 87,747 217,891 28 2,925 202,487 788 11,663 235,815 135,845 66,406 29,471 4,093 6,966,811 Accumulated depreciation (3,046,540) (2,354,124) (115,351) (2,209,964) (13,743) (15,066) (381,901) (220,642) (27,230) (128,093) (4,186) (1,750) (7,236) (7,236) (145,799) (27,989) (68,047) (3,037) (46,726) (157,480) (1,369) (148,417) (643) (7,051) (3,046,540) Net 3,684,456 2,913,877 59,135 131,235 2,698,204 9,862 15,441 553,275 15,519 205,712 31,660 298,513 564 1,307 10,063 203 9,860 146,830 7,455 45,843 50,464 2,047 41,021 60,411 28 1,556 54,070 145 4,612 235,815 135,845 66,406 29,471 4,093 3,920,271 (223,500) 3,696,771

2.86

1.75

7.83

6.39

26

Light S.A.

Depreciation rate INTANGBLE ASSETS In Service Distribution Generation Administration Sales In progress Distribution Administration Sales Total Intangible Assets, net 20.0% 20.0% 20.0% 20.0%

Historical cost 272,425 171,621 5,799 50,697 44,308 122,353 3,784 112,303 6,266 394,778

Consolidated 12/31/2006 Accumulated depreciation (211,665) (127,565) (4,674) (41,907) (37,519) (211,665)

Net 60,760 44,056 1,125 8,790 6,789 122,353 3,784 112,303 6,266 183,113

In intangible assets, the Light Group records software, depreciated at the rate of 20% per year, and rights of way, which are not depreciated because they relate to the right to use a land strip, usually linked to a Transmission and Distribution Line. a) The balance of special obligations is derived from the Reserve for Reversal recognized until 1971 and was invested until that date in electric utility expansion projects, and from contributions from several consumers to finance the work necessary to meet the electric power demand. Consolidated 12/31/2006 Reserve for reversal Contribution from consumer Investment subsidies Research and development Total 69,934 114,438 37,478 1,650 223,500

The maturity of these obligations is established by the Regulatory Agency, ANEEL, and will be at the end of the concession period, through a reduction in the residual value of property, plant and equipment for the purpose of determining the indemnity to be paid by the Concession Authority to the concessionaire Light SESA. In accordance with articles 63 and 64 of Decree No. 41,019 of February 26, 1957, assets and installation used in the generation, transmission, distribution and sale of electric power are linked to these services and cannot be retired, sold or pledged as mortgage guarantees without the prior and express authorization of the regulatory agency. ANEEL Resolution No. 20/99 regulates the electric power utility concession assets, giving prior authorization for not restricting assets not tied to the concession, when intended for sale, and determining that the proceeds from the sale be deposited in a restricted bank account, and invested in the concession.

27

Light S.A.

b) There are no assets and rights belonging to the Federal Government in use at the Company. c) Property, plant and equipment in progress includes inventories of materials for projects and their amounts as of December 31, 2006 totaled R$33,902 and a provision for inventory loss of R$5,333. 11. SUPPLIERS Company Consolidated 12/31/2006 12/31/2006 CURRENT Energy supply and transmission Foreign currency Itaipu UTE Norte Fluminense (b) Electric network usage charges Electric power purchase transactions through the CCEE (Note 22) System service charges Free energy refund to electric power generation companies (Note 30) Electric power auctions Other Material and services Total LONG-TERM Free energy refund to electric power generation companies (Note 30) (-) Provision for free energy (Notes 5 and 30) 231 231 130,889 67,841 44,643 1,572 2,216 67,914 97,420 4,291 416,786 48,186 464,972

214,965 (185,196) 29,769

(a) Invoices for electric power auctions, Agreement for Electricity Purchase in Regulated Market (CCEAR) and Excess and Shortage Offset Mechanism (MCSD) are issued in Brazilian reais and payable in 3 installments with maturities of 15, 25 and 25 days, representing an average payment term of 25 days. (b) Until August 10, 2006, UTE Norte Fluminense was a related party as a subsidiary of EDF International S.A.

28

Light S.A.

12. LOANS AND FINANCING


Currency Foreign Currency National Treasury (d) Import KFW I and II Import KFW III, IV and V Import Societe Generale II Import BNDES Deutsche Bank (a) JP Morgan Tranches A/B/C (e) Local Currency Eletrobrs Debntures I (c) Debntures IV (c) BNDES onlending BNDES margin recovery (b) Bradesco Tranche A (e) Bradesco Tranche B (e) Ita Tranche A (e) Ita Tranche B (e) Unibanco Tranche A (e) Unibanco Tranche B (e) Swap operations USD USD EURO USD UMBNDES USD USD Beginning date 04/1996 08/1999 11/2000 07/2000 03/1998 2000 07/2005 06/1988 02/1998 06/2005 03/1999 02/2002 07/2005 07/2005 07/2005 07/2005 07/2005 07/2005 10/2005 Maturity date See (d) 02/2008 12/2010 12/2009 04/2010 2010 07/2013 09/2017 01/2010 06/2015 04/2007 11/2007 07/2012 07/2012 07/2012 07/2012 07/2012 07/2012 2005/2007 Interest rate See (d) Libor + 0.6% Libor + 4% Libor + 0.65% UMBNDES+ 4% Libor + 4.35% Libor + 3% 5.00% TJLP + 4% TJLP + 4% TJLP + 4% Selic + 1% CDI +2% CDI +2% CDI +2% CDI +2% CDI +2% CDI +2% 100% CDI Amortization of principal APR/OCT FEB/AUG JUN/DEC JUN/DEC Monthly 2013 See (e) Monthly JAN/JUL Beginning Jul/09 Monthly Monthly See (e) See (e) See (e) See (e) See (e) See (e) On maturity Interest payment APR/OCT FEB/AUG JUN/DEC JUN/DEC Monthly APR/OCT See (e) Monthly JAN/JUL Monthly beginning Jan/06 Monthly Monthly See (e) See (e) See (e) See (e) See (e) See (e) On maturity

Consolidated 12/31/2006 Financial charges Principal Current Long-term Current Long-term Foreign Currency National Treasury (d) Import KFW I and II Import KFW III, IV and V Import Societe Generale II Import Societe Generale III Import BNDES Deutsche Bank (a) JP Morgan Tranches A/ B/ C (e) Local Currency Eletrobrs Debntures I (c) Debntures IV (c) BNDES onlending BNDES margin recovery (b) Bradesco Tranche A (e) Bradesco Tranche B (e) Ita Tranche A (e) Ita Tranche B (e) Unibanco Tranche A (e) Unibanco Tranche B (e) Swap operations Total 3,469 26 3 47 25 6,394 66,394 76,358 303 2,621 5,508 44 1,949 3,390 1,470 3,874 31,189 50,348 126,706 6,719 6,719 23,867 10,273 27,273 61,413 68,132 19,159 711 3,256 4,022 2 1,608 28,758 4,895 15,256 10,466 309,155 339,772 368,530 172,447 356 5,515 8,050 3,751 342,078 730,610 1,262,807 10,090 38,139 808,096 128,779 85,853 55,428 36,952 147,157 98,105 1,408,599 2,671,406

29

Light S.A.

(a) In 2000, the subsidiary LIR ENERGY obtained a loan from Deutsche Bank, in the amount of US$175 million; US$15 million due in 2003, subject to LIBOR + 4.35% per year, payable semiannually, with guarantees provided by Light SESA; and US$160 million due in 7 years, subject to LIBOR + 4.35% per year, with guarantees provided by EDF International S.A. This debt falls due in 2010, although repayment can be accelerated at the discretion of Deutsche Bank in October 2007 and subsequently at certain dates until final maturity. The operation consisted of exchanging receivables, in the amount of US$875 million, from LIR ENERGY (fixed rate notes) and credit notes, in the amount of US$700 million, from Deutsche Bank. The notes cannot be traded by the parties and any operation involving the notes must be approved by Deutsche Bank and LIR ENERGY. During the debt restructuring process of Light SESA, it was agreed that, although this loan is not part of the renegotiated debt, its final maturity would be postponed so that no payment of principal occurs before the final maturity of tranches A, B and C (see item (e) below). (b) On February 7, 2002, Light SESA entered into a financing agreement with the BNDES (National Bank for Economic and Social Development), as authorized by Executive Act No. 14, of December 21, 2001. This financing refers to 90% of the margin losses incurred during the rationing period, approved by ANEEL. Of the total financing, the Company received R$172,344 on February 19, 2002, R$444,198 on August 30, 2002, and R$146,349 on November 5, 2002, subject to SELIC (Central Bank overnight rate) + 1% per year, collateralized by the revenue from electricity sales and payable in 69 monthly and consecutive installments beginning March 15, 2002. (c) Debentures:

Debentures I In 1998, 10,500 nonconvertible debentures issued by the BNDES were subscribed in the amount of R$105,000, and collateralized by revenue from electricity sales to final consumers; Debentures IV 4th issue These debentures are convertible and collateralized by revenue from electricity sales to final consumers. In July 2005, BNDESPAR subscribed to 727,268 debentures in the amount of R$734,929; As of December 31, 2006, minority shareholders had 15,737 subscribed debentures.

30

Light S.A.

(d) The total principal in foreign currency owed by the subsidiary to the National Treasury is composed of the following:
Maturity date (years) 18 15 15 20 30 30 15 Start of amortization Amortization 2004 2001 2003 2004 2024 2024 1999 17 semiannual 17 semiannual 13 semiannual 21 semiannual On maturity On maturity 30 semiannual Annual interest rate % Libor + 7/8 Libor + 7/8 Libor + 13/16 8.00 Libor + 13/16 6.00 6.00 Principal R$ 43,571 5,223 5,301 49,867 58,061 83,210 1,800 (55,427) 191,606

Type Debt conversion bond New money bond FLIRB bond Capitalization bond Discount bond Par bond B.I.B Collaterals (1)

(1) Discount bonds and par bonds are partially guaranteed by collaterals in the amount of R$55,427, with financial institutions. (e) Debt restructuring process of Light SESA:

2007 - the 5th Issue of Debentures of R$1 billion was completed in January 2007, as described in the subsequent events note (note 38), and was used to settle the full amount of Tranches A, B and C renegotiated in 2005. 2005 - creditors whose debts were renegotiated could choose one of two tranche packages: package: (i) Tranches A and B; package (ii) Tranche C. The main conditions for each tranche are listed below:
Tranche A Interest rate R$: CDI+2% p.a. US$: Libor(3m) + 3% p.a. Tranche B R$: CDI+2% p.a. US$: Libor(3m) + 3% p.a. Tranche C

US$: Libor(6m) + 3% p.a. Libor(3m) + 5% p.a. (1) Libor(3m) + 7% p.a. (2) Interest payment Quarterly Quarterly Quarterly (after the end of the grace period) (after the end of the grace period) (after the end of the grace period) Grace period of interest 12 months 33 months 21 months Grace period of 12 months 12 months 12 months principal Total period 7 years 7 years 8 years Capitalized interest 100% of interest accounted for 100% of interest accounted for 33% of interest accounted for until the closing date until the closing date until the closing date (3) Debt percentage 60% of debt of creditors that opted 40% of debt of creditors that opted 100% of debt of creditors that for package (i) for package (i) opted for package (ii) Debt amount R$338.1 million R$225.4 million US$43.0 million US$28.7 million US$277,1 million

(1) Beginning April 1, 2007. (2) Beginning January 1, 2008. (3) The remainder was waived by the creditors.

31

Light S.A.

Schedule of amortization (% of the principal): Months 12 months 30 months 36 months 42 months 48 months 54 months 60 months 66 months 72 months 78 months 84 months 90 months 96 months Total Tranche A 2% 6% 3% 3% 10% 10% 8% 8% 5% 5% 40% 0% 0% 100% Tranche B 2% 0% 0% 3% 10% 10% 8% 8% 5% 5% 49% 0% 0% 100% Tranche C 2% 0% 0% 3% 10% 10% 8% 8% 5% 5% 17% 17% 15% 100%

As of December 31, 2006, the principal of long-term loans and financing matures as follows: Local currency 2008 2009 2010 2011 After 2011 Total Consolidated Foreign currency

Total 85,525 281,196 738,046 319,805 1,246,834 2,671,406

50,235 35,290 159,717 121,479 244,519 493,527 208,089 111,716 746,039 500,795 1,408,599 1,262,807

The principal of loans and financing as of December 31, 2006 was as follows: Foreign Currency USD BNDES basket of currencies Consolidated 12/31/2006 12/31/2006 1,286,206 5,359 1,291,565 99.6% 0.4% 100.0%

Local Currency SELIC CDI (interbank deposit rate) TJLP (long-term interest rate) Other

Consolidated 12/31/2006 12/31/2006 309,155 552,274 871,957 14,985 1,748,371 17.7% 31.6% 49.9% 0.8% 100.0%

32

Light S.A.

The variation, in percentage terms, of major foreign currencies and economic indicators, which are used to adjust loans, financing and debentures, was as follows: 12/31/2006 - % USD EUR UMBNDES IGP-M (general market price index) CDI SELIC 13. REGULATORY CHARGES Consolidated 12/31/2006 CURRENT Fuel Usage Quota CCC (a) Electric Power Development Account CDE (b) Energy Efficiency Program PEE (c) Research and Development Program R&D (c) Energy Research Company EPE (c) National Scientific and Technological Development Fund FNDCT (c) Compensation for use of water resources Transfer of electric power to basic network Global reversion quota RGR Other tariff charges LONG-TERM Use of Public Asset UBP (d) Transfer of electric power to the basic electric network Provision for CVA CCC (fuel usage quota) Other 38,578 15,483 73,456 43,541 22,055 23,358 2,840 25,084 6,103 84,808 335,306 99,137 7,223 408 2,491 109,259 (8,66) 1,85 (8,52) 3,85 15,03 15,07

(a) The fuel usage quota (CCC) was created to promote electric power generation by thermal power plants in the Northern Region. ANEEL Resolution No. 208, of January 31, 2006, set the annual fuel usage quota at R$303,337 for 2006, payable in 12 monthly installments. The unpaid amounts are properly accrued. (b) The Electric Power Development Account (CDE) was established by Law No. 10,438, of April 26, 2002, to promote competitiveness of electricity produced from wind power, small hydroelectric power plants, biomass, natural gas and Brazilian coal, in the areas served by the interconnected electrical systems, and to extend the electric power service throughout Brazil. ANEEL Resolution No. 217, of April 6, 2006, established an annual amount of R$185,793 for the CDE for 2006, which shall be paid in 12 monthly installments. The unpaid amounts are properly accrued.

33

Light S.A.

(c) Energy Efficiency and Research and Development Program, EPE and FNDCT On December 15, 2005, ANEEL published in the federal official gazette Regulatory Resolution No. 176, of November 28, 2005, clarifying the criteria for use of funds in the Energy Efficiency Program and approving the Energy Efficiency Program Manual. On April 11, 2006, ANEEL also approved the new Manual for the Research and Development Program, which established the same accounting criterion as for the Energy Efficiency Program, i.e., in the same period as net operating revenue. This change in criterion resulted in a prior year adjustment in LIGHT SESA in the amount of R$45,617 (see note 9). Since then, the Company has recorded the cost of its programs on the accrual basis, as shown below: 12/31/2006 Energy Efficiency Program (PEE) 2003/2004 cycle 2004/2005 cycle 2005/2006 cycle 2006/2007 cycle 2007/2008 cycle Research and Development Program (R&D) 2003/2004 cycle 2004/2005 cycle 2005/2006 cycle 2006/2007 cycle 2007/2008 cycle Energy Research Company (EPE) 2004/2005 cycle 2005/2006 cycle 2006/2007 cycle 2007/2008 cycle National Scientific and Technological Development Fund (FNDCT) 2005/2006 cycle 2006/2007 cycle 2007/2008 cycle 1,705 24,100 27,947 15,706 3,998 73,456 1,313 7,170 10,872 19,030 5,156 43,541 4,627 5,186 9,663 2,579 22,055 152 18,050 5,156 23,358

(d) According to the concession agreement No. 12/2001, of March 15, 2001, that regulates the use of the hydroelectric power plant of the Paraba do Sul river, in the municipalities of Itaocara and Aperib, the subsidiary Itaocara Energia Ltda. shall pay the Federal Government, for using the public asset, from the 8th to the 35th year of concession, from the signature of said agreement or while it uses the hydroelectric resources, monthly installments equivalent to 1/12 of the proposed annual payment of R$2,017, subject to the IGP-M variation or to any other index that may substitute it, should such index be abolished.

34

Light S.A.

14. RESERVE FOR CONTINGENCIES Light S.A. and its subsidiaries are parties to various tax, labor and civil lawsuits. Management periodically assesses the risks of these lawsuits and, based on the legal counsels opinion, records a reserve for lawsuits in which the risk of unfavorable outcome is probable. Additionally, these companies do not record assets related to lawsuits with chance of success since they are considered uncertain. For lawsuits in which Light S.A. and its subsidiaries received legal authorization for offset, a reserve was recorded to cover potential losses on offset amounts. In July 2006, Management recognized in Light SESA, in conformity with CVM Resolution No. 489/05, which addresses provisions and obligations, additional and nonrecurrent reserve for contingencies related to civil, tax, social security, and regulatory lawsuits, as well as administrative proceedings in the labor area, in the amount of R$157.8 million, whose likelihood of unfavorable outcome was considered probable (see note 37). Consolidated Current Long-term 12/31/2006 12/31/2006 Labor (a) PIS/COFINS (b) PIS/COFINS RGR and CCC (c) INSS SAT INSS infraction notice (d) INSS offset of credits (e) Law No. 8,200 (f) ICMS (g) Social contribution tax (h) Economic Plan (Plano Cruzado) (i) Civil lawsuits / Special Civil Court (j) (k) CIDE (l) INSS ACT allowance Other (m) (n) Total 597 2,705 3,302 134,807 587,114 4,738 1,753 33,620 79,326 17,959 76,392 25,154 83,795 139,414 4,111 14,715 38,424 1,241,322

a) Light SESA has escrow deposits for labor claims in the amount of R$16,901, recorded in Assets under the caption Escrow deposits. b) Light SESA challenged in court the changes introduced by Law No. 9,718/98 concerning the determination of the PIS and COFINS tax bases, notably the increase in the COFINS tax basis and increase in its tax rate from 2% to 3%. Injunctions and a favorable decision have been obtained. On October 4, 2005, the Federal Regional Court (TRF) issued a decision in favor of the appeal lodged by the Federal Government, and Light SESA lodged an appeal against this decision. The unpaid amounts are accrued and adjusted based on SELIC (Central Bank overnight rate). In December 2002, Light SESA began paying PIS (tax on revenue) on total revenue, in accordance with Law No. 10,637/02, and in February 2004 began paying COFINS (tax on revenue) on total revenue, in accordance with Law No. 10,833/03 as amended by Law No. 10,865/04. 35

Light S.A.

On November 9, 2005, the Federal Supreme Court (STF) judged unconstitutional the increase in the COFINS tax basis, established by Law No. 9,718/98, paragraph 1, article 3, with six votes in favor and four votes against the taxpayers, in the judgment of the leading case. The same thesis applies to PIS. The article declared unconstitutional defined gross revenue as being all revenues earned by the legal entity, irrespective of the type of activity and accounting classification. The reporting judge of proceeding No. RE 357950 understood that the law could not create a new source of funding for social security disregarding what was established by the Federal Constitution before Constitutional Amendment No. 20/98. The amounts accrued until December 2006 are as follows: 1. R$395.0 million related to the increase in the tax basis, which was judged in favor of the taxpayers by the STF in a leading case; and 2. R$192.1 million related to the increase in the COFINS rate from 2% to 3%, which has not yet been judged. Light SESA is awaiting the judgment of Lights lawsuit or a resolution of the Federal Senate, which, based on the STFs decision, would declare the law unconstitutional, thus allowing all companies to reverse said provision related to the increase in the tax basis, according to IBRACON technical bulletin No. 02/06 and CVM Resolution No. 489/05. c) As mentioned in note 6, item d, on July 31, 2003, Light SESA filed an application for PAES, with the resulting inclusion of R$45,219 in the installment payment of tax obligations, established by this program. The amount accrued as contingencies corresponds to the portion not included in PAES. d) In December 1999, the INSS issued infraction notices against the Company on the grounds of joint liability, withholdings on services rendered by contractors, and levy of the social security contribution on employee profit sharing. Based on the legal counsels opinion, Light S.A.s management decided to record a reserve. e) Light SESA challenges the constitutionality of Law No. 7,787/89, which increased the rate of the social security contribution on payroll, understanding that there was a consequent increase in the tax basis in the period from July to September 1989. As per early relief obtained, Light SESA offset the amounts payable (employers share). Based on the legal counsels opinion, Light SESAs management decided to record a reserve for the total amount of the infraction notice issued by the INSS. f) In June 1992, Light SESA filed an ordinary action against the Federal Government for recognition of the inexistence of the obligation to record the monetary adjustment set forth in article 3 of Law No. 8,200/91, when accounting for the difference between the IPC (Consumer Price Index) and the BTNF (National Treasury Bond Index) during calendar year 1990. The Companys request was granted by a decision published in January 1994. An appeal has been lodged by the Federal Government and awaits judgment.

36

Light S.A.

In December 1992, Light SESA filed for a court injunction to ensure the Companys right to fully use the 1991 and 1992 depreciation expenses, without applying the provisions of Law No. 8,200/91, article 3, item I. The injunction was granted. In a decision awarded in April 1997, the proceeding was partially dismissed without prejudice. An appeal has been lodged and awaits judgment. In November 1994, Light SESA received tax deficiency notices, relating to IRPJ (Corporate Income Tax), IRRF (Withholding Income Tax) and CSL (Social Contribution on Profit), in an amount equivalent to 34,385,484.36 UFIRs (official index for inflation adjustments). These notices were challenged and are pending a definitive decision on the lawsuit. Light SESAs management, based on the opinion of its legal counsel and the amounts of the deficiency notices, understands that only part of these amounts represents a risk that requires recognition of a reserve. g) From 1999 to date, several ICMS (state VAT) inspections were conducted at Light SESA by Rio de Janeiro tax authorities. The ICMS tax deficiency notices received to date but not paid are being challenged at the administrative and judicial levels. Based on the opinion of its legal counsel and the amounts of the tax deficiency notices, Light SESAs Management understands that only part of these amounts represents a risk, for which a reserve was recorded. h) In February 2000, Light SESA filed for an injunction, in order to prevent the disallowance of credits arising from adjustments to the Corporate Income Tax Return (DIPJ) for calendar year 1996, thereby ensuring the deduction, from the CSL (Social Contribution on Profit) tax basis, of the interest on capital paid to shareholders in calendar year 1996, as computed for IRPJ (corporate income tax). The requested injunction was granted. In September 2002, a decision was made in favor of the Company, allowing offset of the overpaid CSL. The Federal Government filed an appeal, which has not yet been judged. In July 2001, before the end of the period for review, a tax deficiency notice was issued against Light, in the incorrect amount of R$17,284, since the Federal Revenue Service considered a fine of 75%. The tax deficiency notice should be R$12,382, which monetarily adjusted until December 31, 2006 amounts to R$18,455. This tax deficiency notice was challenged and the decision was partially favorable to the Company, with respect to non-charge of the 75% fine. In July 2001, Light SESA received a tax deficiency notice for not adding to the social contribution tax basis the amounts related to the COFINS provision (Law No. 9,718/98 proceeding) whose payment was suspended. The request for rejection of notice was dismissed and is currently awaiting the judgment of the voluntary appeal lodged in July 2005. The R$6,595 reserve recognized in July 2006 is being adjusted based on SELIC. The updated balance of the reserve as of December 31, 2006 is R$6,699. i) Certain industrial customers have challenged in court the increases in electric power tariff rates approved in 1986 by DNAEE (National Department of Water and Electrical Energy) during the Economic Plan (Plano Cruzado). Based on the opinion of the Companys legal counsel, the accrued amount is sufficient to cover possible losses. There is also a possibility of recovering these possible losses on tariff revisions.

37

Light S.A.

j) There is a lawsuit filed against Light SESA, in which the plaintiff challenges the rescission of a service agreement. This rescission is due to the repeated breach of several contractual clauses. Light SESAs management, based on the opinion of its legal counsel, decided to record a reserve in the amount of R$6,304. k) Civil contingencies comprise lawsuits in which Light SESA is the defendant, related principally to claims involving property damage and pain and suffering, and questioning of amounts paid by consumers. l) In September 2002, Light SESA filed for an injunction, in order to suspend the payment of CIDE (economic intervention contribution) levied on service payments remitted abroad. The injunction was denied and the lower and appellate court decisions were also unfavorable. Light SESA filed an appeal and awaits judgment. Since December 2003, Light SESA has been paying the amounts due. m) At present, Light SESA has four infraction notices issued by ANEEL (AI No. 024/2003, AI No. 009/2005 and AI No. 017/2006 and AI No. 022/2006). Pursuant to the ANEEL regulation, in the case of payment of the fine imposed by ANEEL, the fine shall be adjusted based on SELIC (Central Bank overnight rate) or any other indicator that may substitute it. I) Infraction notice No. 024/2003 was issued on September 18, 2003 and refers to the violation of DEC (Consumer Power Interruption Duration) and FEC (Consumer Supply Interruption Frequency) targets of 9 units in 2001 and 26 units in 2002, including 6 repeaters. The fine imposed by means of this infraction notice amounts to R$1,514. Light SESA, rejecting ANEELs interpretations, filed a defense and the Agencys Attorney partially granted the request by concluding that Light SESA had no liability in relation to one of the violations. Notwithstanding, ANEEL maintained all the fines imposed; therefore, Light SESA filed an appeal against these fines and the fact that not all its allegations were accepted, and is awaiting ANEELs answer. Infraction notice No. 009/2005 was issued on March 15, 2005 alleging that Light SESA formed the subsidiaries LIR Energy Limited and Light Overseas Investments without the previous approval of ANEEL. The fine imposed by means of this infraction notice amounts to R$6,862. Light SESA did not agree with the allegation of ANEEL and presented its counterarguments. Currently Light SESA is awaiting ANEELs answer. Infraction notice No. 017/2006 was issued on June 16, 2006 alleging that Light SESA violated the DEC and FEC targets of 18 units in 2003. The fine imposed by means of this infraction notice amounts to R$1,426. Light SESA did not agree with the allegation of ANEEL and filed an appeal on June 29, 2006. Currently, it is awaiting ANEELs answer to its appeal.

II)

III)

38

Light S.A.

IV)

Infraction notice No. 022/2006 was issued on August 15, 2006 alleging that Light SESA violated the DEC and FEC targets of 16 units in 2004. The fine imposed by means of this infraction notice amounts to R$1,386. Light SESA did not agree with the infraction notice and filed an appeal with ANEEL on August 28, 2006. Currently, it is awaiting ANEELs answer to its appeal.

n) There are other proceedings for which the Companys management and its legal counsel assess the chances of success as probable or possible, as follows: I) The Central Bank, according to normal procedures and based on their preliminary conclusions about the financial operations conducted by Light SESA between 1997 and 1998, for the acquisition of Eletropaulo Metropolitana S.A., which were compliant with legal and accounting principles of Brazilian legislation, sent an official letter to the Federal Revenue Service and the Federal Government Attorney's Office of the State of Rio de Janeiro, which began their respective administrative procedures, as described in items II and III below. After Light SESA provided the required explanations to the Central Bank, the Central Bank fully reinstated the Certificates of Registration for the securities issued abroad in connection with the above-mentioned operations, and considered that the operations were conducted in compliance with Brazilian foreign exchange rules. II) The criminal investigation has been at the MPF (Regional Attorney's Office of the 2nd Region) since May 18, 2005, and the final police report was issued on April 15, 2005 clearing of the charge of financial offense (article 22 of Law No. 7,492/86). Light SESA expects that the MPF is awaiting the final result of the administrative tax proceeding, according to the paragraph below, in accordance with the guideline provided by the Federal Supreme Court in judgment HC 85299/RJ. Regarding the official letter sent to the Federal Revenue Service, on December 14, 2004 the Federal Revenue Service issued a tax deficiency notice against Light SESA in the total amount of R$481,833, related to the income tax levied on interest paid to the subsidiaries Light Overseas Investment Limited (LOI) and LIR Energy Limited (LIR) on securities issued with the benefit of withholding income tax at 0%. On December 1, 2005, Light presented a defense against the tax deficiency notice. The decision of the lower administrative court issued on July 15, 2005 by the 1st Panel of the Federal Revenue Service Office in Rio de Janeiro (Decision 7810) was favorable to the tax deficiency notice. On August 11, 2005, Light SESA filed a voluntary appeal with the Board of Tax Appeals of the Finance Ministry which was judged on October 19, 2006 favorably to Light SESA.

III)

39

Light S.A.

15. OTHER PAYABLES Company Consolidated 12/31/2006 12/31/2006 CURRENT Public lighting fee Other Total LONG-TERM BrasLight deficiency Additional reserve CVM Resolution 371/2000 (a) Other Total 522 522 28,877 46,514 75,391

118,138 639 118,777

(a) Reserve recognized in Light SESA on July 31, 2006 and adjusted in December 2006 based on an actuarial report (notes 16 and 37). 16. PENSION PLAN AND OTHER EMPLOYEE BENEFITS Light SESA sponsors Fundao de Seguridade Social BRASLIGHT, a nonprofit closed pension entity, whose purpose is to provide retirement benefits to the Companys employees and pension benefits to their dependents. BRASLIGHT was formed in April 1974 and has three plans - A, B and C established in 1975, 1984 and 1998, respectively, with about 96% of the active participants of the other plans having migrated to Plan C. Plans A and B are Defined Benefit Plans. Plan C is a hybrid plan, in which the scheduled benefits (non-disability retirement and respective change into pension) during the capitalization period are of the defined contribution type and bear no relation to the official government benefits (INSS), and risk-related benefits (sick pay, disability retirement and pension due to death of active participant, or participant with disability or receiving sick pay) and life annuity benefits, if granted, are of the defined benefit type. The annual costs of defined benefits, borne by both the plan participants and the sponsor, are actuarially determined, and the actuarial method used to determine the contribution level is the capitalization method. To fund the defined contribution benefits, the participant chooses the contribution level and the Company makes the contributions related to such level in accordance with the Regulation of Plan C. On October 2, 2001, the Secretariat for Pension Plans (SPC) approved an agreement for resolving the technical deficit and refinancing unamortized reserves related to the Fundao BRASLIGHT pension plans.

40

Light S.A.

The amounts of R$346,724 for Plans A and B, and R$188,329 for Plan C refer to refinancing of prior commitments assumed with Light SESA and technical deficits recorded through June 30, 2001, and are being amortized in 300 monthly installments beginning July 2001, adjusted based on the IGP-DI (general price index domestic supply) variation (with onemonth lag) and actuarial interest of 6% per annum. The agreement balance as of December 31, 2006 comprises R$557,877 for Plans A and B, and R$303,070 for Plan C, in both cases less amortization in the amount of R$65,656 in 2006, plus monetary adjustment of R$80,035, which corresponds to the variation in the IGPDI (general price index domestic supply) and interest of 6% per annum, totaling R$860,947 as of December 31, 2006 (R$74,084 in Current and R$786,863 in Noncurrent). Following are the components of the December 31, 2006 provision for defined benefit pension plans, other retirement and/or death benefit commitments arising from court decisions or agreements with injured employees, at the present value of actuarial obligations, as well as provisions for voluntary termination plan, and other information required by CVM Resolution No. 371/2000: 2006 Reconciliation of actuarial assets and liabilities Fair value of plan assets Present value of actuarial obligation vested benefits Present value of actuarial obligation unvested benefits Net asset (unfunded liability) Net liability, CVM Resolution No. 371/2000 Adjusted balance recorded, according to the agreement for resolving the technical deficit 976,942 (1,551,542) (404,485) (979,085) (979,085) (860,947) 2007 Expected costs Cost of current service Interest cost Return on investments Expected employee contributions Expected costs Actuarial liability Net liability, CVM Resolution No. 371/2000 opening balance Sponsor contributions Gains and losses related to actuarial deficit Expected cost Net liability, CVM Resolution No. 371/2000 closing balance 1,738 185,034 (102,452) (124) 84,196 2006 (706,632) 64,432 (252,689) (84,196) (979,085)

41

Light S.A.

2006 Actuarial assumptions Nominal interest rate (discount) for present value of actuarial obligation Expected rate of return on plan assets Annual inflation rate Rate of salary increase Rate of adjustment for life annuity benefits Capacity factor Turnover rate Mortality table (a) Disability table (plans A/B) Disability table (settled plan C) Mortality table for disabled Active participants Retired participants and pensioners (1) Table with no addition to age Light SESA manages a health care plan for its former employees, which is funded by contributions from beneficiaries and is overseen by representatives of the retirees association and the trade union. Therefore, there is no financial commitment related to this benefit that should be recognized by the Company according to CVM Resolution No. 371/00. a) On July 31, 2006, Light SESA recognized an additional provision in the amount of R$149,914 related to the probable deficit to be determined in the sponsored pension plan (BrasLight) when the AT-83 mortality table is adopted, in conformity with CGPC (Supplementary Pension Management Council) Resolution No. 18 of March 28, 2006, which considers a life expectancy higher than the ones resulting from the UP-94 table, used as of June 30, 2006, and recognizing all actuarial losses (see note 37). As of December 31, 2006, the amount of the provision recognized decreased to R$118,138 considering the positive adjustment of Braslights actuarial liabilities. 10.59% 12.68% 4.33% 4.96% 4.33% 98.0% Based on age AT-83 (1) LIGHT Forte LIGHT Forte IAPB-57 3,989 5,626

42

Light S.A.

17. RELATED-PARTY TRANSACTIONS Significant transactions between related parties consist principally of loan agreements with controlling shareholders, subsidiaries and affiliates (see Note 12), transactions with pension entities (see Note 16), electricity purchase and sale transactions with Companhia Energtica de Minas Gerais - CEMIG, which are conducted under usual market conditions.
Agreements with the same group Original amount Relation with (Objectives and characteristics Item of the agreement Light SESA. (1) R$ thousand Date 1 Strategic agreement Electricity purchase agreement with CEMIG 2 Debt assumption vs. Purchase and sale of assets (a) Payment of a portion of the loans recorded in Light SESA (17.61%) in exchange for the acquisition of assets and rights by Light Energia according to the Unbundling Project (Law No. 10,848 of March 15, 2004). The interest rate is equivalent to a mix of debts to unrelated parties (see note 12). 3 Assumption of postemployment benefit (b) In connection with the Unbundling Project, among the obligations assumed to Light SESA and in exchange for the acquisition of assets and rights related to the electric power generation and transmission activities, Light Energia S.A. also assumed a portion of the agreement made between the distributor and BRASLIGHT for resolving the actuarial deficit. 4 Rental Rental of part of Light SESAs building to Light Energia. The current rental is R$22,000/month. The agreement is derived from the Unbundling Project (Law No. 10,848 of March 15, 2004) and stipulates an annual adjustment base don the IGP-M (general market price index). 5 Loans Agreement between Light SESA and Light Overseas, subject to interest of 10.5% per annum. Agreement between Light SESA and Lir Energy, subject to interest of 11.85% per annum. (a) CEMIG (Part of the controlling group) Expiration date Rescission or termination conditions Remaining balance R$ thousand Date

R$399,029

Jan 2006

Dec 2013

Until the end of the agreement

R$405,439 12/31/2006

Light Energia S.A (Affiliate)

R$524,736

Dec 2005

Jun 2015

R$500,941 12/31/2006

R$836,019 Light Energia S.A (Affiliate) This amount is recorded in Light SESA Dec 2005

Jun 2026

R$17,174 12/31/2006

Light Energia S.A. (Affiliate) Light Overseas (subsidiary) Lir Energy (subsidiary)

R$1,276

Dec 2005

Sep 2010

Until the end of the agreement

R$990 12/31/2006

US$130 mi US$875 mi

Sep 1998 Mar 2008 Nov 1998 Apr 2010

On expiration On expiration

R$288,042 12/31/2006 R$1,912,771 12/31/2006

In connection with the unbundling project, in exchange for the acquisition of assets and rights of the electric power generation and transmission activities, Light Energia S.A. committed to pay, up to the limit of the value of the assets and rights acquired from Light SESA, by the same deadline and at the same rates, debts owed by Light SESA. Therefore, Light SESA remains liable for paying all debts currently owed by it, including those related to the agreements recently renegotiated with the private banks. Light SESA sponsors Fundao de Seguridade Social BRASLIGHT, a nonprofit closed pension entity whose purpose is to provide retirement benefits to the Light Groups employees and pension benefits to their dependents. In connection with the unbundling project, among the obligations assumed to Light SESA and in exchange for the acquisition of assets and rights of the electric power generation and transmission activities, Light Energia S.A. also assumed a portion of the agreement made between Light SESA and BRASLIGHT for resolving the actuarial deficit, having as a basis the benefits payable to active employees, according to the number of employees per activity. The benefits related to inactive employees were maintained with Light SESA. Up to August 10, 2006, UTE Norte Fluminense was a related party as a subsidiary of EDF International S.A. (Note 11).

(b)

(c)

43

Light S.A.

18. CAPITAL AND RESERVES Capital of Light S.A. as of December 31, 2006 is represented by 133,907,046,402 common shares without par value and its capital is R$1,704,618, as follows:
12/31/2006 Shareholders Controlling Group RME Rio Minas Energia Participaes S.A. Lidil Comercial Ltda. Other EDF International S.A. Public Individuals Number of shares 100,719,912,441 5,584,685,448 13,359,172,999 14,243,275,514 133,907,046,402 % Ownership interest 75.22 4.17 9.98 10.63 100.00 12/31/2005 Number of shares 986 % Ownership interest 98.60

14 1,000

1.40 100.00

Light S.A. is authorized to increase its capital by means of a resolution of the Board of Directors, regardless of amendments to the bylaws, up to the limit of R$203,959, exclusively to meet the exercise of the warrants issued, strictly pursuant to the conditions of the warrants (Bylaws, art. 5, paragraph 2). (1) Merger of shares and capital reduction Unbundling In compliance with Law No. 10,848/2004, on September 5, 2005, ANEEL approved through Resolution No. 307/2005 the corporate restructuring project under which Light S.A. became the Light Groups holding company, approved in the Extraordinary Shareholders Meeting held on January 13, 2006. Thus, LIGHT SESA implemented the Unbundling Project so that, in compliance with the above-mentioned law, it is engaged only in the distribution of electric power. After the completion of the Unbundling Project, Light S.A. became the holding company of the Light Group and, on February 22, 2006, its shares began to be traded on the New Market of BOVESPA (So Paulo Stock Exchange), under code LIGT3, in lieu of the shares of the former parent company Light SESA, which are no longer traded on that market. (2) Change in control On August 10, 2006, the shares of Light S.A. and Lidil Comercial Ltda. (Lidil) held by EDF International S.A. (EDFI) were transferred to RME - Rio Minas Energia Participaes S.A (RME). This transaction involved the purchase of 100,719,912,441 common shares of Light and all the shares of Lidil, which holds 5,584,685,448 common shares of Light, resulting in the transfer of a total of 106,304,597,889 common shares of Light, representing at that date 79.39% of Lights total voting capital.

44

Light S.A.

A Stock Sale Agreement was signed on March 28, 2006. The transfer was approved in July by ANEEL and on August 2 by the French government. The total share purchase price was US$319,810 for 106,304,597,889 common shares of Light, or US$3.01 per thousand shares of Light. The price was fully paid in cash by RME on August 10, 2006, concurrently with the actual transfer of the shares. RME is a holding company engaged in investing in companies operating in the electric power industry. Its shareholders are: Companhia Energtica de Minas Gerais CEMIG, Andrade Gutierrez Concesses S.A., Pactual Energia Participaes S.A. and Luce Brasil Fundo de Investimento em Participaes (Luce), which purchased RME shares until then held by JLA Participaes S.A.(JLA). The controlling shareholder of JLA is Luces main shareholder. 19. MANAGEMENT COMPENSATION The compensation of the Companys management in 2006 was R$7,387, and consolidated, R$8,096. 20. ELECTRICITY SALES TO FINAL CONSUMERS AND DISTRIBUTORS Consolidated Number of consumers (1) 2006 Billed sales to final consumers: Residential Industrial Commerce, services and other Rural Public sector Public lighting Public service Own consumption ICMS (state VAT) Unbilled sales Total Sales to distributors Electric power auction Spot market Total Total (1) Unaudited. 3,495,597 13,380 271,568 10,641 8,844 148 1,187 328 3,801,693 3,801,693 1 1 3,801,694 MWh (1) 2006 7,241,956 2,278,417 5,622,310 45,882 1,238,841 743,095 1,021,147 66,908 18,258,556 18,258,556 4,507,462 1,622,471 6,129,933 24,388,489 R$ 2006 2,417,945 399,372 1,748,399 9,741 277,925 122,047 198,035 5,173,464 1,892,362 2,150 7,067,976 245,559 116,096 361,655 7,429,631

45

Light S.A.

21. OTHER OPERATING INCOME Consolidated 2006 Taxed service Income from services provided Leases and rentals Income from network usage 6,711 25,033 28,364 507,457 567,565

22. ELECTRICITY SALE AND PURCHASE TRANSACTIONS THROUGH THE CCEE The balances of electricity spot market sale and purchase transactions carried out through the CCEE (former MAE) are as follows: 01/01/2006 a 12/31/2006 Sale of spot market energy: Balance receivable at beginning of year Balance receivable at end of year (Note 5) System service charges: Balance payable at beginning of year Balance payable at end of year (Note 11) 3,448 13,117 (2,262) (1,572)

Electricity sale and purchase transactions The amounts for 2006 were recorded based on the official data provided by the CCEE (successor of MAE) and were settled on the due dates set by the CCEE. The amounts of the financial settlement through the CCEE received certificates from Independent Auditors attesting to the accuracy of the amounts actually settled between the market agents through the CCEE and compliance of the financial settlement procedures with legal and regulatory requirements and applicable court rulings. Light SESA is not aware of any lawsuit filed to date challenging the amounts of the energy transactions carried out through the CCEE. 23. OPERATING COSTS AND EXPENSES
Consolidated Cost of service Provided Operating expenses Electric to third General and power Operating parties Selling administrative 2,862,552 2,862,552 2,862,552 160,162 15,758 95,693 247,142 425,625 35,447 979,827 277,942 1,257,769 17,143 876 48,590 378,988 347 445,944 1,005 446,949 79,546 1,821 94,016 111,987 109,532 396,902 42,134 439,036

Nature of expense Electricity purchased for resale Personnel and management Materials Outside services Allowance for doubtful accounts Reserve for contingencies CCC (fuel usage quota)/CDE (electric power development account) Other Depreciation and amortization Total

2006 2,862,552 256,851 18,455 238,299 378,988 359,129 425,625 145,326 4,685,225 321,081 5,006,306

46

Light S.A.

24. PROFIT SHARING In 1997, Light implemented a profit sharing plan for employees based on predefined operating and financial targets. As of December 31, 2006, the profit sharing accrued for the Light Group was R$16,495, payable by April 2007. 25. ELECTRICITY PURCHASED FOR RESALE Consolidated 2006 GWh (1) R$ Itaipu UTE Norte Fluminense Other contracts and electric power auctions Recoverable cost variations (CVA) Network usage charges Connection charges National Electric System Operator (ONS) (1) Unaudited. 26. FINANCIAL INCOME (EXPENSES)
INCOME Income from temporary cash investments Swap operations Interest and monetary variation on installment payments Arrears interest on electricity bills Monetary adjustment of CVA and Portion A accounts Monetary adjustment of recoverable tariff margin Monetary adjustment of free energy transactions Other EXPENSES Interest on loans and financing local currency Interest on loans and financing foreign currency Monetary variation local currency Exchange variation foreign currency Capitalization of interest and monetary and exchange variations property, plant and equipment Swap operations Interest and monetary variation on actuarial liability of Braslight Provision for PIS/COFINS on financial income Monetary adjustment of reserve for contingencies Adjustment to present value CEDAE Monetary adjustment of free energy SELIC Monetary adjustment of income and social contribution taxes Other (a) FINANCIAL INCOME (EXPENSES) 2006 Company Consolidated 691 691 (120) (120) 571 64,140 21,848 31,960 69,012 71,909 75,207 58,739 22,982 415,797 (265,556) (129,313) (14,762) 126,890 867 (70,696) (80,035) (186) (120,974) (55,153) (49,391) (16,073) (66,762) (741,144) (325,347)

8,293 6,351 11,648 26,292

730,166 773,901 755,042 242,030 335,776 13,190 12,447 2,862,552

(a) Regulatory liabilities are adjusted based on SELIC (Central Bank overnight rate). 47

Light S.A.

27. NONOPERATING INCOME (EXPENSES) Consolidated 2006 INCOME Gains on sale of assets and rights Other EXPENSE Loss on sale of assets and rights Recovery of share sale expense Recovery of losses on contractual guarantees Other NONOPERATING INCOME (EXPENSES) 28. FINANCIAL INSTRUMENTS The carrying amounts and fair values of financial instruments are as follows: 2006 Company Consolidated Carrying Carrying amount Fair value amount Fair value ASSETS Temporary cash investments (see Note 4) LIABILITIES Loans and financing (see Note 12) 82 82 616,939 616,939 3,456 1,486 4,942 (299) 1,286 5,039 (2,370) 3,656 8,598

3,071,127 3,084,038

Temporary cash investments The carrying amount is a reasonable estimate of fair value. Loans and financing The fair value was calculated at prevailing interest rates for bank financing with similar terms and maturities. Light SESA is engaged in the distribution of electric power in a concession area covering 31 municipalities in the state of Rio de Janeiro. Following are the risk factors to which the Company is subject: Credit risk Pursuant to the electric power sector regulation and the concession agreement, Light SESA is required to supply electricity to all consumers located in the concession area. Under the electric power sector regulation, Light SESA has the right to disrupt supply if consumers fail to pay their bills.

48

Light S.A.

Currency risk Light SESAs indebtedness and results of operations are significantly affected by foreign currency fluctuations on agreements denominated in foreign currency. Considering that a portion of Light SESAs loans and financing is denominated in foreign currency, the company uses derivative financial instruments (swap operations) to hedge against foreign currency fluctuations, which resulted in a loss of R$48,848 in 2006, offset by a decrease in foreign currency-denominated debt. The net balance of swap operations as of December 31, 2006 is negative by R$31,189. Price risk Every year electric power distribution companies request a tariff increase based on nonmanageable cost variations (referred to as Portion A) and the variation of the IGP-M (general market price index) for manageable costs (referred to as Portion B). These requests are reviewed and approved by ANEEL. On a periodic basis, ANEEL performs a tariff revision for the purpose of adjusting the concessionaires tariffs, thus assuring economic and financial balance and reasonable tariffs, by determining the X Factor, which will reduce the IGP-M applied to Portion B. The tariffs under the concession agreement shall assure economic and financial balance for Light SESA. 29. INSURANCE Unaudited Except for transmission and distribution lines, all assets of Light Group are insured for operational risks with all risks coverage. Insurance coverage as of December 31, 2006 is considered sufficient by Management to cover any losses and civil liability, as summarized below: Risk Operational risks Civil liability Directors & Officers (D&O) Effective From To 10/31/06 09/25/06 08/10/06 10/31/07 09/25/07 08/10/07 Insured amount U$1 billion U$10 million U$30 million Premium U$824 thousand U$345 thousand U$195 thousand

49

Light S.A.

30. OVERALL AGREEMENT FOR THE ELECTRIC POWER SECTOR An Emergency Power Rationing Program was created by Executive Act No. 2,198 of August 24, 2001 to reduce power consumption and avoid unplanned interruption in power supply. The average reduction in consumption was estimated at 20%, in relation to the actual consumption for the months of May, June and July 2000. The power rationing program was effective from June 2001 through February 2002, when the government considered the reservoir levels back to normal. In the North region the program was discontinued in January 2002. As a result of the mandatory power rationing implemented by the Brazilian government, the electric power generation and distribution companies experienced a reduction in their profit margins, as their physical and personnel structures could not be reduced in proportion to the consumption reduction quotas imposed by the rationing plan. Thus, they continued incurring fixed costs and financial charges without the corresponding revenue. In addition to the power rationing plan, the distribution companies filed various claims with ANEEL to resolve the economic and financial imbalance of the concession agreements that, according to them, resulted from several events, principally monthly variations in costs referred to as Portion A (nonmanageable costs of distribution companies). In December 2001, the Brazilian government and the electric utilities signed an Overall Agreement for the sector to restore the economic and financial balance of the existing agreements and recover revenues relating to the period the Power Rationing Program was in effect. This Agreement covered margin losses incurred by the electric power distribution and generation companies during the Power Rationing Program, additional costs of Portion A for the period from January 1 to October 25, 2001, costs of electric power purchased through the CCEE from generation companies not committed to initial contracts, called free energy, until December 2001, and substitution of the contractual right set forth in Annex V of the initial contracts (purchase and sale of power) related to the rationing period. The Overall Agreement for the Electric Power Sector also covers the post-rationing period, March to December 2002, to trade the excess energy of the initial contracts for R$73.39 per MWh. The revenue of the distribution and generation companies (free energy) for the rationing period is being recovered by an extraordinary rate recovery (rate increase of 2.9% for residential consumers and 7.9% for all other consumers, except low-income, rural and public lighting categories).

50

Light S.A.

The financial statements as of December 31, 2006 included the following adjustments arising from the agreement: 1. Extraordinary Tariff Recovery approved by ANEEL, composed of loss of revenue (approved by Resolutions No. 480/02, 481/02 and 01/04) and free energy (approved by Resolutions No. 01/04 and 45/04):
2006 Accumulated interest (2) 590,499 230,742 821,241 Provision for loss (term > 74 months) (5) (183,760) (185,196) (368,956) Unamortized, net (6) = (4) - (5) 222,268 97,683 319,953

Assets Loss of revenue power distribution company Free energy power generation company Total

Approved (1) 722,455 289,426 1,011,881

Amortized (3) 906,926 237,289 1,144,213

Unamortized (4) = (1 + 2 - 3) 406,028 282,879 688,909

2.

Variation of Portion A Items (period from January 1, 2001 to October 25, 2001) approved by ANEEL, to be recovered in the required period up to the approved amount:
2006 Approved by Resolutions No. 482/02 and 001/04 (1) 125,695 Accumulated interest (2) 177,649 Accumulated total (3) = (1) + (2) 303,344

Assets Portion A (period from January 1 to October 25, 2001

Amortized (4) -

Unamortized (5) = (3) - (4) 303,344

3.

Amounts approved by ANEEL, consisting of transfer of free energy, relating to purchase of power through the Wholesale Energy Market (MAE) during the Rationing Program period. The transfer is equivalent to 1/3 of the revenue from the extraordinary tariff recovery.
2006 Approved by Resolutions No. 001/04 and 045/04 (1) 289,426 To be To be Provision transferred, Accumulated Accumulated net Amortized transferred total for loss interest (2) (3) = (1) + (2) (4) (5) = (3) - (4) (6) (7) = (5) - (6) 230,742 520,168 237,289 282,879 (185,196) 97,683

Liabilities Transfer of free energy power generation company

The subsidiary Light SESA reviewed its revenue projections and based on the new projected market, not considering the collection of the Extraordinary Tariff Recovery from Free Consumers due to the non-approval by ANEEL after a public hearing, it was determined that recovery would not be possible within 74 months, which resulted in a provision for loss, net of deferred tax credits, of R$183,760. In addition, there is an allowance for doubtful accounts, in long-term, in the amount of R$34,148 for the unbilled (unamortized) balance of the Extraordinary Tariff Recovery.

51

Light S.A.

The migration of potentially free consumers to the free market has a significant impact on the collection of the Extraordinary Tariff Recovery, since this tariff increase is not included in the tariffs for free consumers through TUSD (distribution system use tariff). Understanding that, during the rationing, all captive consumers, including free consumers, must share the costs of the Emergency Power Rationing Program, ANEEL held a Public Hearing (AP044/05), on April 10, 2006, to discuss the collection of the Extraordinary Tariff Adjustment from the free consumers but has not yet approved this collection. The provision was reviewed and maintained until a final and irrevocable decision is made with respect to the terms and amounts for the recovery of losses incurred during the rationing period. Pursuant to Circulars No. 2,212/05 and No. 074/06-SFF/SER/ANEEL, the extraordinary tariff recovery balance was adjusted based on SELIC + 1% per annum, in the same manner as for financial costs of financing from the BNDES. 31. STATEMENTS OF OPERATIONS BY COMPANY
2006 Light SESA OPERATING REVENUE Electricity sales to final consumers Electricity sales to distributors Other revenues REVENUE DEDUCTIONS ICMS (state VAT) Global reserve for reversion quota PIS (tax on revenue) PIS - CVA Amortization COFINS (tax on revenue) COFINS - CVA - Amortization Other NET OPERATING REVENUE OPERATING COSTS Personnel Materials Outside services Energy purchased Depreciation Fuel Usage Quota (CCC/CDE) Reserves Other INCOME (LOSS) FROM OPERATIONS EQUITY IN SUBSIDIARIES FINANCIAL INCOME (EXPENSES) Financial income Financial expenses NONOPERATING INCOME (EXPENSES) Nonoperating income Nonoperating expenses INCOME BEFORE TAXES Social contribution tax Income tax NET INCOME (LOSS) 7,766,172 7,067,976 111,652 586,544 (2,554,503) (1,892,362) (67,465) (89,889) (11,020) (413,332) (78,699) (1,736) 5,211,669 (4,907,648) (223,391) (17,087) (224,414) (2,866,914) (295,176) (425,625) (732,110) (122,931) 304,021 5,592 (290,279) 447,638 (737,917) 8,375 4,719 3,656 27,709 (66,497) (171,535) (210,323) Light Energia 271,607 268,232 3,375 (18,954) (9,041) (1,766) (8,147) 252,653 (131,122) (23,405) (1,275) (11,933) (41,007) (25,137) (6,007) (22,358) 121,531 (35,928) 6,321 (42,249) 223 223 85,826 (3,523) (7,049) 75,254 Light SA (10,143) (8,915) (83) (1,032) (113) (10,143) (186,536) 571 691 (120) (196,108) (196,108) Other 5,074 5,074 (632) (70) (322) (240) 4,442 (3,050) (1,140) (10) (920) (768) (212) 1,392 289 314 (25) 1,681 (118) (305) 1,258 Eliminations (45,657) (18,229) (27,428) (45,657) 45,657 45,369 288 179,428 (39,167) 39,167 179,428 Consolidated 7,997,196 7,067,976 361,655 567,565 (2,574,089) (1,892,362) (76,506) (91,725) (11,020) (421,801) (78,699) (1,976) 5,423,107 (5,006,306) (256,851) (18,455) (238,299) (2,862,552) (321,081) (425,625) (738,117) (145,326) 416,801 (1,516) (325,347) 415,797 (741,144) 8,598 4,942 3,656 98,536 (70,138) (178,889) (150,491)

52

Light S.A.

32. NEW CRITERIA FOR CLASSIFICATION OF CONSUMER UNITS INTO LOWINCOME RESIDENTIAL CLASS Law No. 10,438, of April 26, 2002, set new criteria for classification of consumer units into low-income residential class and ANEEL Resolution No. 514, of September 16, 2002, set the accounting procedures and the criteria for recovery of revenues through tariffs of electric power distribution companies. The effects of the application of the new classification criteria as of December 31, 2006 relating to the loss of revenue are estimated at R$261,364. The consumer refund obligation is estimated at R$16,055. Through several Resolutions (the last of which is No. 3, of January 3, 2007), ANEEL approved the amount of R$245,310, relating to loss of revenue in the period from May 2002 to November 2006. As of December 31, 2006, Light SESA has been refunded R$240,740, which is derived from charges included in the concessionaires tariffs, such as the RGR (Global Reserve for Reversion Quota). 33. UNBUNDLING CHANGES IN THE ELECTRIC POWER SECTOR MODEL LAW No. 10,848 OF MARCH 15, 2004 Pursuant to Law No. 10,848, of March 15, 2004, concessionaires, permittees and other authorized distribution companies that operate in the National Interconnected System (SIN), such as Light SESA, cannot be engaged, among other, in the generation and transmission of electric power or hold investments in other companies. Thus, Light SESA implemented the Unbundling Project so that, in compliance with the above-mentioned law, it is engaged only in the distribution of electric power. The Unbundling Project resulted in the creation of the holding Light S.A. Thus, Light S.A. holds: (a) all shares of Light SESA, which remains engaged in the distribution of electric power; (b) all shares of Light Energia, which is engaged in the generation and transmission of electric power; and (c) other equity interests previously held by Light SESA, except for the investments in Light Overseas Investments Limited and LIR Energy Limited, which are based abroad. After the completion of the Unbundling Project, Light S.A. became the holding company of the Light Group and, on February 22, 2006, its shares began to be traded on the New Market of BOVESPA (So Paulo Stock Exchange), under code LIGT3, in lieu of the shares of the former parent company Light SESA, which are no longer traded on that market.

53

Light S.A.

The structure of the Light Group, after the completion of the unbundling project, is as follows:
Minority Shareholders Lidil EDFI

LIGHT S.A.

LIGHT ENERGIA

LIGHT SESA

Light Esco

Lightger

Itaocara

Other

Light Overseas

LIR Energy

54

Light S.A.

The structure of the Light Group, after the completion of the unbundling project and the sale to RME, is as follows:
RME EDFI Minority Shareholders

Lidil Comercial

LIGHT S.A.

LIGHT Energia S.A.

LIGHT SESA

LIGHT Esco Ltda

Lightger

Itaocara

Other

Light Overseas

LIR Energy

LIGHT S.A. - Holding LIGHT Servios de Eletricidade S.A. - Distribution Light Energia S.A. - Generation and T ransmission Light Esco Ltda - Energy Sales and Services Light Overseas and LIR Energy - Off-shores

34. ELECTRIC POWER AUCTION Based on the new model for the electric power sector established by Law No. 10,848, of March 15, 2004, and Decree No. 5,163, of July 30, 2004, the distribution companies can no longer utilize their own production to meet the market demand and shall buy all the electric power required at auctions that will take place on a regular basis. Thus, Light SESA had to participate in the first power auction held by the Ministry of Mines and Energy as a seller of the power produced by its plants. At the auction held on December 7, 2004, average 380 MW and 130 MW were sold under agreements with maturities of 8 years for supply starting in January 2005 and 2006, respectively. These amounts represent 95% of the power available for sale by Light SESA (guaranteed power). On October 11, 2005, the subsidiary Light Energia S.A. participated in the third power auction and sold average 12 MW under agreements with maturities of 3 years for supply starting in January 2006. The power amount sold at that auction is equivalent to the first auctions amount whose contracts were rescinded through the MCSD (Excess and Shortage Offset Mechanism). This mechanism was established by the new model for the electric power sector and is designed to reduce the level of purchases by the distribution companies with the withdrawal of free consumers and reduction of their captive market. 55

Light S.A.

35. TARIFF ADJUSTMENT In November 2005, Light SESA obtained an average adjustment of 10.81%, after the validation of the definitive Remuneration Basis related to the 2003 Tariff Revision. This percentage consists of: -1.06% economic adjustment permanently included in tariffs, negative because of the exclusion of PIS and COFINS from the tariff basis; and 11.86% related to financial compensation, mainly derived from the validation of the definitive Remuneration Basis. This financial compensation was only effective for the tariff in the period from November 2005 to October 2006.

Thus, for the November 2006 adjustment, Light SESAs tariffs started at a level 11.86% lower than the tariffs effective until then. On November 7, 2006, Light SESAs tariffs were adjusted by 11.69%, pursuant to ANEEL Resolution No. 391. This adjustment was calculated as follows: 6.29% permanently included in tariffs, reflecting the changes in nonmanageable costs (power purchase, transmission, and industry charges) and adjustment of manageable costs based on the IGP-M, less the X Factor; and 5.4% referring to new financial compensation basically related to past costs not yet included in tariffs. Tariff adjustment - 2006 Structural IRT Financial Compensation CVA Other Total Note: IRT = Tariff Adjustment Index CVA = Recoverable cost variations Portion A Due to the full amortization of the financial compensation of 11.86% from the 2005 adjustment, the average effect on the tariffs charged from end consumers was -0.1%. The 2006 adjustment was within the limits estimated by Light SESA, considering the stable macroeconomic scenario (IGPM variation in the period was 3% and the US dollar - 5%). Note that the effect of the new financial compensation had a R$45 million positive impact on income before taxes for 2006, because it had not been accounted for until approval by ANEEL, pursuant to asset recognition accounting standards. 6.29% 2.42% 2.98% 11.69%

56

Light S.A.

36. SERVICE AND COMMERCIAL MANAGEMENT SYSTEM With a commitment to quality service and exceed the markets and customers expectations, Light SESA invested more than R$100 million in a new Service and Commercial Management System (CCS-SAP). This system became operational in March 2006, covering in the first phase all medium and high-tension customers (industrial, commercial, public sector and public service) and a low-tension pilot area located in Itagua. The second phase of the transition started in September 2006, covering low-tension customers totaling 100% of the customers served by Light SESA. Migration was completed in early October 2006 and the system is already in production. Coupled with other actions implemented, this system will introduce a new concept, enabling greater efficiency, security and practicality in customer services and prevention of default and losses of energy. 37. SIGINIFICANT EVENT Significant event notices published on August 10, 2006 a) Change in control In compliance with CVM Instruction No. 358, of January 3, 2002, the Management of Light S.A. and Light SESA announced to their shareholders, the CVM, the So Paulo Stock Exchange (BOVESPA) and the market in general the transfer, at that date, of the shares of Light and Lidil Comercial Ltda. held by EDF International S.A. to RME - Rio Minas Energia Participaes S.A. This transaction involved the purchase of 100,719,912,442 common shares of Light and all the shares of Lidil, which holds 5,584,685,447 common shares of Light, resulting in the transfer of a total of 106,304,597,889 common shares of Light, representing at that date 79.39% of the total voting capital of Light. The total share purchase price was US$319,809,871.91 for 106,304,597,889 common shares of Light, or US$3.01 per thousand shares of Light. The price was fully paid in cash by RME on that date, concurrently with the actual transfer of the shares. The Stock Purchase Agreement was signed on March 28, 2006, on the condition that RME agree to conduct a public offering of Lights outstanding shares, pursuant to Law No. 6,404/76, CVM Instruction No. 361/2002, and the New Market Regulations to ensure to Lights other shareholders equal treatment as EDFI. Also at that date, an Addendum to the Stock Purchase Agreement was signed establishing that should RME sell shares of Light directly or indirectly purchased from EDFI within 1 year from that date, RME must pay EDFI 50% of the gain on the sale of those shares, under the Agreement addendum.

57

Light S.A.

In compliance with CVM Instruction No. 358, Light declares that it has no intention to cancel its registration as a publicly-held company within 1 year, and that a shareholders agreement entered into by and between RMEs shareholders is filed at the Companys head office. RME is a holding company, headquartered in the city and state of Rio de Janeiro, at Avenida Rio Branco, 123, sala 1901 (part), enrolled with the National Register of Legal Entities (CNPJ/MF) under No. 07.925.628/0001-47 engaged in investing in companies operating in the electric power industry. Its shareholders are: Companhia Energtica de Minas Gerais CEMIG, Andrade Gutierrez Concesses S.A., Pactual Energia Participaes S.A. and Luce Brasil Fundo de Investimento em Participaes (Luce), which purchased RME shares until then held by JLA Participaes S.A.(JLA). Luces main shareholder is the controlling shareholder of JLA. Light S.A. is a holding company, indirectly engaged in electric power generation, transmission and distribution in part of the state of Rio de Janeiro. Thus, for RME the purchase of Light S.A. is an opportunity to invest in a market with a high growth potential, which currently is the third largest electric power distribution market in Brazil. b) Recognition of reserve for change in control In compliance with CVM Instruction No. 358, of January 3, 2002, the Management of Light S.A. and Light SESA announced to their shareholders, the CVM, the So Paulo Stock Exchange (BOVESPA) and the market in general that the Board of Directors of Light SESA, whose decision was confirmed by the Board of Directors of Light, elected at that date, decided to recognize a reserve of approximately R$443.7 million in the statement of operations for the period (July 31, 2006) of Light SESA, with the consequent impact on Light. We describe below the main components of the reserve recognized in the statement of operations for the period: R$ million 1. Recognition of additional reserve for contingencies related to civil, tax, social security, and regulatory lawsuits, as well as administrative proceedings in the labor area, in conformity with CVM Resolution No. 489/05, whose likelihood of unfavorable outcome was considered probable. 2. Adjustment of the recording method of the remaining installments of the Tax Debt Refinancing Program (PAES), as of July 31, 2003. 3. Accrual of the actuarial deficit, basically reflecting the effects of adopting the AT-83 mortality table, in conformity with CGPC Resolution No. 18, of March 28, 2006. 4. Adjustment to present value of receivables payable in over 24 installments, without interest or monetary adjustment, from public service customers. 5. Adjustment to present value of tax credit payable in over 24 installments, without interest or monetary adjustment, converted and approved by the Rio de Janeiro State Government. 6. Allowance for doubtful accounts 7. Recognition of deferred charges

157.8 20.2 149.9 14.2 45.5 35.4 20.7 58

Light S.A.

38. SUBSEQUENT EVENTS a) 5th Issue of Debentures R$1 billion In January 2007, Light SESA completed the R$1 billion fund raising with the 5th issue of simple debentures in the market, with final maturity in 2014. The transaction was underwritten by Ita BBA, with the participation of Bradesco, Unibanco, Citibank and BNP Paribas. This issue was intended to reduce foreign exchange exposure, lower costs, and loosen the package of covenants and guarantees of previous transactions, improving Light SESAs indebtedness. Of the total funds raised, R$633 million was used to settle the entire debt represented by the Credit Agreement in Brazilian reais entered into with Banco Ita S.A., as the agent of the loan in Brazilian reais, Bradesco, Ita BBA, and Unibanco on July 12, 2005; R$367 million was used to settle part of the debt represented by the Amended and Restated Indenture entered into with the Issuer, Light S.A., JP Morgan Chase Bank NA and JP Morgan Trust Bank Ltd on March 15, 2006. The remaining amount represented by the Amended and Restated Indenture, of approximately R$466 million, was repaid by the Issuer using own funds. Consolidated Debt (Principal) Amortization Schedule (Date Dec 06) Amounts in R$ million:
700.0 600.0 500.0 400.0 300.0 200.0 100.0 2007 359.2 28.6 14.8 339.8 26.9 69.8 2008 24.4 136.5 2009 243.1 234.8 334.8 10.9 6.9 452.5 89.2

384.8

2010

2011

2012

2013

After 2013

Local Currency

Foreign Currency

Note 1: Considers the 5th issue of debentures / Prepayment of A/B/C Tranches in R$ and US$ Note 2: Maturity of Deutsche Bank CLN in 2003

b) Capital reduction

Light S.A. At the Extraordinary Shareholders Meeting held on February 16, 2007, the shareholders of Light S.A. approved the "Capital Reduction proposal based on the deficit accumulated through the period ended September 30, 2006", in the amount of R$288,323, and Capital is now R$1,416,369 (133,913,456,422 registered common shares without par value). After the Extraordinary Shareholders Meeting that approved the capital reduction on February 16, 2007, there are earnings of R$92,215 at that date. 59

Light S.A.

Light SESA. At the Extraordinary Shareholders Meeting ("ESM") held on February 16, 2007, the shareholders of LIGHT S.E.S.A. approved the "Capital Reduction proposal based on the deficit accumulated through the period ended September 30, 2006", in the amount of R$3,042,717, and Capital is now R$1,272,912 (133,913,456,421 common shares without par value). After the Extraordinary Shareholders Meeting that approved the capital reduction on February 16, 2007, there are earnings of R$67,842 at that date.

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Light S.A.

(Convenience Translation into English from the Original Previously Issued in Portuguese) FISCAL COUNCILS REPORT In accordance with laws and the Companys bylaws, the Fiscal Council of LIGHT S.A. has examined the Annual Management Report and the Financial Statements for the year ended December 31, 2006. Based on the examinations performed, the Report of the Independent Auditors Deloitte Touche Tohmatsu, dated February 23, 2007, and the information and clarifications received during the year, the Fiscal Council is of the opinion that the aforementioned documentation is appropriate for appreciation at the Annual Shareholders Meeting. Rio de Janeiro, February 26, 2007 Eduardo Grande Bittencourt Ari Barcelos da Silva Aristteles Luiz Menezes Vasconcellos Drummond Beatriz Oliveira Fortunato Isabel da Silva Ramos Kemmelmeier

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Light S.A.

BOARD OF DIRECTORS MEMBERS ALTERNATES Wilson Nlio Brumer Flavio Decat de Moura Djalma Bastos de Morais Joo Batista Zolini Carneiro Eduardo Borges de Andrade Celso Fernandez Quintella Ricardo Coutinho de Sena Paulo Roberto Reckziegel Guedes Gilberto Sayo da Silva Ana Marta Horta Veloso Alessandro Monteiro Morgado Horta Bruno Constantino Alexandre dos Santos Aldo Floris Lauro Alberto de Luca Sergio Landau Alfredo Salomo Neto Raphael Hermeto de Almeida Magalhes Ruy Flaks Schneider Luiz Anbal de Lima Fernandes Almir Jos dos Santos Jos Luiz Silva Carmen Lcia Claussen Kanter EXECUTIVE BOARD Jos Luiz Alqures Chairman Ronnie Vaz Moreira Vice President of Finance Roberto Manoel Guedes Alcoforado Director Ana Silvia Corso Matte Director Leonardo Lins de Albuquerque Director Paulo Henrique Siqueira Born Director Paulo Roberto Ribeiro Pinto Director FINANCE SUPERINTENDENCE Marcos Amin Telles ACCOUNTANT Finance Superintendent Luciana Maximino Maia ACCOUNTANT Accounting Manager

62

Administration Report 2006


February 26, 2007

Corporate Profile
Light S.A. (Light) is a 100 year-old company whose history is closely linked to the industrialization of Rio de Janeiro and So Paulo. The company is engaged in providing services in the generation, transmission, distribution and sale of electric power as well as corelated activities. The company serves 3.8 million consumers and is responsible for 72.0% of the electric power consumed in the state of Rio de Janeiro, a densely packed market that is predominately residential and commercial. The companys generating facilities have excellent levels of performance and the overall quality of electric power supply from Light, measured according to the DEC and FEC indices, places the company among the six best distributors of its size in Brazil. Lights distribution service concession area contains unique characteristics that impose great challenges on the Company, related principally to non-technical losses and payment defaults. On August 10, 2006 Rio Minas Energia Participaes S.A. (RME) assumed control of Light after acquiring 79.4% of the common shares of EDF International S.A. (EDF), introducing new managers and encouraging the renovation of the Companys corporate culture. The controlling shareholders of Light are well known for their competence and their knowledge of the electric power industry in Brazil and have assumed the commitments established under the Bovespa Novo Mercado, through which the Companys shares are traded as LIGT3.

Map of the Concession Area

Letter from the Chairman of the Board of Directors


Dear Sirs: We submitted the Management Report, the Financial Statements for the year ended December 31, 2006 and Independent Auditors Report to appreciation of customers, shareholders, suppliers, financial community and society. On August 10, 2006 Rio Minas Energia Participaes S.A. (RME) assumed control of Light after acquiring 79.4% of the common shares of EDF International S.A. (EDFI). RME is controlled by four groups - Companhia de Energia de Minas Gerais (CEMIG), AG Concesses, Pactual Energia and Luce Brasil FIP which all hold equal 25% stakes in the Company. The controlling group has credibility and recognized experience and knowledge of the Brazilian Electric energy sector. The change in Lights ownership control in August 2006 brought not only a new group of shareholders but also a plan for the transformation of the Company and a strategic plan with a detailed description of its activities through 2010. In this report, we will describe these activities, which are based on the past achievements of Light and are focused on the opportunities that have already been identified for maximizing the value and exploiting the Companys strengths. Our mission is to make Light a company that is respected and admired for the excellence of the services it provides, for the value it creates for its shareholders and for building an excellent place to work. To accomplish this we will strengthen the Companys traditional businesses and prepare it to launch an aggressive plan of expansion of its activities. To meet these objectives, we have put emphasis on the Corporate Governance structure implemented by the controlling shareholders, which is consistent with the best practices in the market, and we presented a Transformation Plan to our employees that is worthy of their complete support, reinforcing the idea that people who have ideals, who are motivated and are clear about their mission are able to overcome enormous challenges. Our Transformation Plan is composed of two parts: the first recognizes that the Company has an organization and projects that are being well executed, that deserve support and improved. This part we call Continuation and Renovation. The second part consists of 14 projects that will change the way business is conducted and will create the conditions to put Light move forward into the future, as we anticipate in our planning. The Transformation Projects are classified into four groups: Loyal Clients (the market), Efficient Engine (the product), Results (value to the shareholder), and Commitment to the Future (perpetuation). With these projects, we intend to take action in every dimension necessary to transform our corporate culture, promoting our values and making the Company an excellent place to work. We know that our employees are the most important agents in the transformation process and from the very first day, when we described a summary of the Plan to our 12,000 direct and indirect employees, we have dedicated ourselves to earning the unqualified respect and unrestricted cooperation of them all.

Although it has been only a short time since the beginning of its implementation, we can highlight some of the Transformation Plans achievements in 2006. Right from the start we have concentrated our efforts on activities and attitudes that lead to the more efficient use of the Companys resources. The Executive Board was installed in a common meeting room, facilitating the close interaction between its members and speeding up decision making. We concentrated our efforts on eliminating budgetary excesses and unwanted benefits and concentrated the teams efforts on adding value. We reduced the fleet of vehicles by 8% and renegotiated 20% of the total value of contracts for the supply of goods and services. In addition, we set up a Purchasing Desk to guarantee greater cost control efficiencies. We proceeded to issue R$ 1.0 billion in debentures, concluded last January, that was critically important in permitting us to prepay other debts, reducing our financial costs, exposure to exchange rate risk and giving the Company greater operational autonomy. Regarding achievements that contribute to improved earnings, it is important to highlight the satisfactory tariff adjustment that was awarded in November 2006. Because of the Companys total commitment to the process of cultural transformation, we initiated the Face-to-Face Program to promote quarterly meetings between managers and their subordinates, creating a relationship forum for the discussion of results and the progress of projects. The program also opened up a direct channel of communication between employees and the President. Our results improved in 2006. Net revenue totaled R$5.4 billion, increasing 11.0% over 2005. Earnings before interest, taxes, depreciation and amortization (EBITDA) were R$738 million, declining 3.7% compared to the previous year, and the loss of R$150 million during the year, were both impacted by non-recurring provisions of R$444 million that occurred when the new ownership group took control. If the were not for these adjustments, EBITDA would have increased by 40.5% and net profits by 20.5% in comparison to the previous year. The price performance of our shares during the period, which was significantly higher than Bovespas overall and electric energy sector indices for the year, represent recognition of the market regarding our activities. Great challenges lie ahead. The socio-economic situation in the Companys concession area suffers the impact of critical factors such as economic stagnation and a culture of informality that creates for Light a high level of past due accounts and non-technical losses. The urban violence in the area makes dealing with these problems difficult. Other challenges are the question of the long-term supply of electric power and the need to automate and upgrade the technology of certain elements in the distribution network. On the other hand, Light has important strengths and opportunities. Our employees take great pride in the Company. We have an extensive underground network and now a powerful system of commercial management. The financial environment has improved and inflation continues at low levels. We perceive opportunities in the lack of infrastructure investment in Brazil and the expansion of production in Rio de Janeiro and Esprito Santo. We should stress that large public or private investments such as the new petrochemical complex in Itabora, the Siderrgica do Atlntico (a steel company) in Itagua, the Pan American games

in Rio de Janeiro and the new Rio de Janeiro ring road should have a positive effect on our market. To confront the challenges and take advantage of the opportunities they present, we have prepared a 2007 2010 Strategic Plan that includes the actions to meet the needs of our business and the expectations of stakeholders. We are dealing with the changes to Light in an integrated manner and we are developing the projects in great detail: with action plans, implementation deadlines and expected results. We believe that the ways in which I, my Vice President Ronnie Vaz Moreira and my colleagues on the Executive Board, Roberto Alcoforado, Leonardo Lins de Albuquerque, Paulo Born, Paulo Roberto Ribeiro Pinto, Ana Silvia Matte, Mozart Vitor Serra and Luiz Cludio Cristfaro, are dealing with theses questions, along with the complementary competence of the controlling shareholders and the dedication of our employees, will help the Company achieve its ambitious goals. I would also like to express our confidence and hope that the Federal and State governments taking office on January 1, 2007, working together with municipal administrations, will achieve their goals of a return to national and regional economic growth with the preservation of economic stability. We trust that a cycle of economic and social development and respect for the public good is beginning in Rio de Janeiro, where our concession area is concentrated. We want to express appreciation to our customers, to the regulatory agency ANEEL, to the legislative assembly, the government of the state of Rio de Janeiro and to the mayors and legislative bodies in our concession area, to our shareholders, to the journalists who cover our activities and to our employees for the support that they have offered us throughout the year. Cordially, Jos Luiz Alqures President and CEO

Corporate Governance and Management


Lights management model incorporates the most recent changes in direction to align the interests of the controlling shareholders among themselves and with the executives of the Company all with the primary objective of increasing Lights value. More than simply the appropriate level of control and supervision, this governance model allows the Company to improve its agility, both in taking decisions as well as implementing them. The model clarifies the role of each part of the organization and has four levels: 1. The Shareholders Forum this includes the Controlling Shareholders Forum, the General Meeting and the Fiscal Council. Note that the Controlling Shareholders Forum holds regular meetings to promote understanding, to improve relations and the coordination of decisions among the Controlling Shareholders. The objective is to articulate the long-term vision of the Company.

Governance

2. Interface Forums include the Board of Directors and the Auditing, Finance, Human Resources, Corporate Governance and Management Committees. The Board of Directors is composed of 11 members who serve 2-year terms. Eight members

represent shareholders interests, two are independent representatives and one member represents the employees. The Board of Directors meets at least once per month and the decisions are made, in principle, by consensus, or if there is no consensus, by a majority vote. The members of the Board of Directors are members of the specialized committees. 3. Executive Board composed of the President and CEO, by the Executive Directors and by the Light Institute for Economic and Social Development. The Executive Board is made up of the Vice President for Finance and Investor Relations, and by the Customers, Concession Development, Personnel, Energy and the Environment and Corporate Governance departments, the Light Institute and by Legal Department. The Communication and Internal Auditing Departments have direct reporting relationships to the Office of the President. 4. Consumers Council - is a forum determined by Agncia Nacional de Energia Eltrica (ANEEL), to guarantee that the activities of the Company are in line with the needs of the customers.

Executive Board

Board of Directors
Board of Directors Members Wilson Nlio Brumer (Chairman) Djalma Bastos Morais Eduardo Borges Andrade Ricardo Coutinho Sena Gilberto Sayo da Silva (Vice Chairman) Alessandro Monteiro Morgado Horta Aldo Floris Srgio Landau Jos Luiz da Silva Rapahel de Almeida Magalhes (Independent) Luiz Anbal de Lima Fernandes (Independent) Alternates Flavio Decat Moura Joo Batista Zoilini Carneiro Celso Fernandez Quintella Paulo Roberto Reckziegel Guedes Ana Marta Horta Veloso Bruno Constantino Alexandre dos Santos Lauro Alberto de Luca Alfredo Salomo Neto Carmen Lucia Claussen Kanter Rui Flaks Schneider Almir Jos dos Santos

Fiscal Council
Fiscal Council Members Beatriz Oliveira Fortunato Ari Barcelos da Silva Eduardo Grande Bittencourt Isabel da Silvia Ramos Kemmelmeier Aristteles Luiz Menezes Vasconcellos Drumond

Alternates Eduardo Gomes Santos Ricardo Genton Peixoto

Executive Board
Executive Board Jos Luiz Alqures Ronnie Vaz Moreira Paulo Henrique Siqueira Born Ana Silvia Corso Matte Leonardo Lins de Albuquerque Roberto Manoel Guedes Alcoforado Paulo Roberto Ribeiro Pinto

President & CEO Director Vice President of Finance and Investor Relations Director of Development of the Concession Directorof Personnel Director for Energy and the Environment Director for Clients Director Corporate Management

Code of Ethics
In concert with the process of transformation of the Company, Light revised its code of ethics to consolidate the values and concepts that are essential to improving relations with clients, shareholders, suppliers, the Government and Society. The new version of the Companys Code of Ethics is available for viewing on the Companys website: www.light.com.br.

The Transformation Plan


The Transformation Plan is based on the recognition that there are organizations and projects that are well executed and which should be supported and occasionally improved through specific actions. The projects included in this stage are referred to as Continuity with Renovation. In a second stage, called Transformation, the Company created 14 Special Projects that make use of the four dimensions of the Balanced Scorecard:

the market (Loyal Customer), the product (An Efficient Machine), shareholder value (results), and perpetuity (Commitment to the Future).

These projects were prepared between August and December 2006, based upon a detailed analysis of the Companys activities. They will produce a substantial improvement in performance, modernizing work methods, instilling great confidence in the team and increasing the recognition of society regarding Lights performance.

Operating Context
The Economic Environment
During 2006, the Brazilian real appreciated against the dollar but without appreciable volatility. The commercial rate for the dollar closed the year quoted at R$2.14 for a devaluation of 8.7% in relation to the real, having therefore, a favorable impact on that part of the Companys debt subject to exchange rate variation. Inflation as measured by the IGP-M, the index used to adjust Lights tariffs, was 3.9% per year. The moderate behavior of inflation made it possible for the Central Bank to gradually reduce the level of interest rates. In December 2006, the SELIC basic interest rate was 13.3% per year, substantially lower than the interest rate at the end of the previous year of 18.0% per year. The reduction in interest rates was beneficial to the Company in that it allowed it to reduce the cost of its debt. Nevertheless, Light continued to be affected by the unique factors that characterized its concession area. The state of the Rio de Janeiro, the second-largest GDP in the country, grew at rates much higher than Brazil as a whole; however, this phenomenon is closely linked to the oil industry. Lights concession area, consisting of the metropolitan region and municipality of Rio de Janeiro, benefited little from the increase in economic activity in other parts of the state. To the contrary, the municipality and the metropolitan region suffered a decline in their respective internal products, having a strong impact on Lights business activities, such as, for example: the absence of new consumers with high demand; an increase in the rate of unemployment; an increase in the number of the informal economy; high rates of energy theft and past due accounts; an increase in urban crime, making it harder to track down energy theft. In addition, Light was confronting a large volume of past due accounts in the public sector because existing legislation does not permit energy distributors to cut the supply of power to installations that provide an essential public service. The federal, state and municipal governments, including the balance due from public service concessionaires, owed Light R$578 million at December 31, 2006. Faced with this situation, Light opted for a pro-active program with regard to the issues that affect its business. This posture can be summarized in a few points: the reestablishment of a commercial relationship with the communities with a large percentage of overdue accounts and the attempt to resolve back debts in a way that the monthly flow of receivables is preserved; the implementation of efforts to improve the regulation of the electric power sector and for raising awareness on the part of public authorities about the issues and problems in this concession area;

the taking of decisive action to create a change in thinking, participating in community educational activities and intensifying direct contact with public administrators; the striving for improvement of internal processes to maximize the return on operations. As a result of this activity, a significant portion of the past due accounts was renegotiated between August 1 and December 31, 2006, a process that was accelerated early in 2007. Seek the expansion and diversification of its business

Operating Performance
An understanding of the operating performance of the Company must take into consideration the context in the concession area. The Light Group engages in three different types of businesses: distribution, carried out by Light Servios de Eletricidade S.A. (Light SESA); generation, carried out by Light Energia S.A. (Light Energia); and energy sales the and infrastructure services carried out by Light Esco Prestao de Servios Ltda. (Light Esco). Since the beginning of 2006, as a result of the process of deverticalization mandated by Law 10.848/2004 that prohibits electric power distribution companies from engaging in generation activities as well less participating in other corporations, each of these activities is performed by a subsidiary company.

Services of Energy Distribution


Light SESA is the company that provides electric power distribution services and is responsible for the principal source of revenue for the Group. Revenues from the sale of energy are based on the captive market, which is made up of consumers whose consumption unit has contracted demand of less than 3MW. In its concession area, residential and commercial customers predominate. In 2006, Light billed 18,260 GWh from the sale of power to the captive market, a reduction of 4.6% in comparison with 2005. This decline occurred as a result of the migration of industrial customers from consumption class A2 and A4 the (customers served by high tension lines 88 to 138 kV and 2,3 kV to 25kV respectively) to the free market, as well as by the impact both the reduction in the number of days billed and temperatures below the historical average.

Energy Consumption

Electric Energy Consumption


GWh
8,000 6,000 4,000 3,445 3,143 2,000 0 Residential Industrial Commercial Others 6,610 7,225 7,243

5,665

5,235

5,622

2004

2,278

2005

2006

On December 31, 2006, Light had 3,801,692 consumer units in its network, an increase of 0.7% compared to the year before. The P2 Project Selling More and Better one of the special projects in the Transformation Plan, was started with the objective of increasing the Companys revenues both in regulated, as well as non-regulated markets. The project surveyed initiatives that will be implemented throughout 2007. Among these, we should mention a supply of tariff products destined for large customers and the sale of advertising space on monthly bills, the vehicle fleet, the web site and billboards; more intensive efforts to sell power outside the concession area and providing technical consulting services to large customers. The quickwins highlights of this project are the first contracts for sale by Light Esco to free market customers outside the concession area a total of 20 MW over a five-year period. Tariffs The tariffs that Light charges its customers are adjusted every year in November. The rate adjustment contains a permanent component that reflects the variations in costs that are beyond the control of Management (purchase of power, transmission and sectorial fees) and the adjustment of manageable costs by the IGP-M reduced by Factor X. To this adjustment may be added another component not permanently included in the tariffs that corresponds to occasional related financial costs and other issues. Active participation in this process is designed to ensure that the adjustment incorporates the full variation in those costs over which the Company has no control. In November 2005, after the final validation of the Regulatory Remuneration Base(BRR) referring to the Tariff Revision both 2003, Light obtained an average adjustment of 10.81%. This percentage was composed of:

2,858

3,105

3,116

- 1.06% flow of the economic adjustment permanently incorporated into the tariffs, negative because of the removal of PIS and COFINS taxes from the tariff base; and 11.86% referring to additional financial costs, whose principal origin was the validation of the final BRR. This amount of additional financial costs was applied only to the tariffs for the period November 2005 October 2006. Therefore, for the readjustment of November 2006, Lights tariffs start from a level 11.86% lower than the tariffs applied up to that time. On November 7, 2006 Lights tariffs were readjusted by 11.69% in accordance with ANEEL Resolution n 391. This percentage was composed of: 6.3% => Incorporated permanently in the tariffs, reflecting the variation in nonmanageable costs (purchase of power, transmission and sectorial fees) and the adjustment of manageable costs by the IGP-M derived from Factor X; and 5.4% =>to cover additional financial costs related essentially to past issues still not included in the tariffs.

Tariff Adjustment
Tariff Readjustment - 2006
Structural IRT

6,29% 2,42% 2,98% 11,69%

Financial Additional CVA Others Total


Note: IRT = Tariff Readjustment Index

CVA = Installment A Value to Compensate for Account

Because the additional financial costs of 11.86% were completely amortized by the adjustment of 2005, the average impact of the tariff adjustment applied to final consumers was -0.1%. The 2006 adjustment was within the range anticipated by the Company, taking into account the stable macroeconomic environment (changes in the IGPM during the period were 3%, while the dollar declined by -5%).

Past Due Accounts


During recent years Light has been faced with high levels of past due accounts. In part, this is due to the economic and social issues in its concession area already described above. However, the Company has also been subjected to losses due to the failure the public authorities and public services providers to pay their past due accounts. The largest debt is owed by Supervia, which has a debt of R$159 million with unpaid bills dating from 2002. CEDAE renegotiated its debt in December and no longer appears as a debtor of the Company.

The risk of failure to pay of the Company measured by the Allowance for Doubtful Accounts over gross income was 4.2% in 2006. The Company has been working continuously to improve its ability to combat past due accounts. A new billing and customer management system that went into effect in October 2006, CCS - SAP, not only improved the quality control of billing, but also permits greater efficiency in collection an important tool for the development of more effective actions. The objective of the special project in the Transformation Plan P3 100% Receivables is to increase the ability to attack past due accounts. This project provides the processes, the strategies for collection and policies for negotiation of open accounts. As a result of this review, the Project evolved into an action plan which will be implemented during 2007. The principal measures that the company will adopt over the course of this year are: (i) (ii) the negation of low tension clients in the SPC; the centralization of previously decentralized collection efforts through a contact center cell that will conduct differentiated collection actions regarding the 30,000 largest low tension clients; the change in the timetable of collection activities; the change in the rules governing installation payments; the maximizing of cut-offs in the supply of energy; the application of more incentives to external collections.

(iii) (iv) (v) (vi)

In addition to the initiative involving the Companys internal processes, Light will act jointly with the regulatory agencies to make them aware of the need to change the regulations of the sector to allow the distributors to react more quickly to past due customers. At the same time, the Company will seek support in the judicial and political segments, to make them aware of the need for conditions for applying effective instruments against customers who fail to pay and motivating the public authorities to be an example for society by keeping their accounts up-to-date. The Company will make regular visits to strengthen the relationship with larger customers and will introduce new technology make sure that their procedures are more agile, effective and less expensive. The directors and superintendents participate in collection actions and the attempt to and convince customers of the importance of keeping their part of the bargain: to pay their arrears.

Energy Losses
The electric power distribution business involves energy losses. These losses are both technical and non-technical in nature. An informality culture exists in the Companys concession area that translates into tax evasion, nonpayment of debt and non-payment to public service concessionaires and cable TV networks, along with the widespread practice of energy theft.

The index of total losses at December 2006 on a 12-month moving average was 25.5% of own load (that is, with respect to energy distributed to captive customers), and 19.8% of grid load (with respect to the total energy transported on its network). The verified growth in losses of own load compared to December 2005 (23.6% 12-month moving average) was severely impacted by the following features: the lower number of billing days in 2006 compared to 2005 (two days less of high tension billing and three days less in low tension billing); the migration of customers from the captive market to the free market, and area of activity of Light Esco; a reduction, beginning in September, in the pace of the energy recovery activities due to the implementation and stabilization of the new commercial management system. The P4 project of the Transformation Plan No energy theft connections - contains a set of actions developed at three levels: raising the awareness of internal and external publics through communication campaigns; the institutional articulation with government agencies involved (legal system, police, and other concessionaires) and the technical activities such as changes in standards and operations. With regard to administrative losses, the goal is to eliminate them as much as possible by improving procedures. The work on this project during 2006 established a set of actions that will be implemented in 2007. These actions will be directed at informal energy theft on various fronts simultaneously. They are: regular tracking of losses; inspection practices (the way of using the Companys own labor force as opposed to outsourced employees, dealing with clandestine connections); issues related to normalization (measurement equipment, closing and locking procedures, the use of seals and systematic monitoring); negotiation of collection in the case of fraud. In addition, Light will use various communications actions, such as linking the campaigns with a partnership proposal with the customer, releasing information about citizenship activities through all volunteer projects, investments and energy efficiency, and an approximation with the judiciary through seminars about energy recovery, payment defaults and other relevant points.

Energy Balance
Energy Balance The chart below shows the amount in GWh and the percentages of energy flows between sources and end users supplied by Light.

DISTRIBUTION ENERGETIC BALANCE - GWh


Position: January-December 2006 PROINFA 83,0 CCEAR Light Energia 313,8 ITAIPU (CCEE) 8.287,5 Auctions (CCEE) 11.251,7 NORTE FLU (CCEE) 6.351,0 Others(*)
(CCEE)

0,3%

Residential 7.243,0
74,5% 97,9%

39,7%

1,3%

33,1%

Own load Light 24.510,7

Billed Energy 18.259,6

Industrial 2.278,4 Commercial 5.622,3

12,5%

30,8%

Required energy (CCEE) 25.028,5


45,0%

25,5%

Losses of Energy 6.251,1

Others 3.115,9

17,1%

25,4%

2,1%

Basic netw. losses Adjustment

517,9 (0,0)

-5,0%

-1.258,4
(*) (**)

Others= Purchase in Spot - Sale in Spot. Load Adjustment = Internal Light Generation Consumption.

Note: At Light S.A., there is Intercompany Power purchase/sale elimination

Highlights of the above table: (i) the supply contract with Termeltrica Norte Fluminense from which the Company acquires 25.4% of its electric power; (ii) the current levels of energy losses (6.251 GWh); and (iii) the preponderance of residential and commercial consumers where the tariff charged is higher than in other segments. Energy Billed In 2006, the captive electric power market served by Light consumed 18,260 GWh, 4.6% less than the previous year (-879 GWh). This decline was caused mostly by migration of free consumers (seven industrial and three commercial), by the reduction in the number of days billed and by the average temperature in the region. Climate factors, such as lower temperatures recorded at certain times of the year compared to 2005, such as during the second quarter (-1.9 C), had a negative impact on results for the year.

Own Load During 2006, Lights load was 24,511 GWh, a decline of 2.1% compared to 2005.

Customer Service One of the most important actions undertaken in 2006 was the startup of the customer sales management system including the SAP billing module, the Customer Relationship Management System (CRM) and the Data Warehouse (DW) where R$105 million was invested from 2004 to 2006. This was the largest migration of a consumer base ever carried out in the Brazilian power sector. The Client Management System has modern tools for customer relationship, permitting personalized products in addition to increasing the accuracy and speed of services through increased availability of information. Specifically, this system makes possible: increased control and speed in providing services in the field (new connections, reconnections, meter exchange, control of inspection for abnormalities, etc.); consolidation of the channels of communication (agencies, telephone hotlines, virtual agencies and an ombudsman); better knowledge about the customer profile to improve services (history of consumption, billing, contacts and the quality of service); larger service offering. In 2006, Light continued to modernize and standardize its commercial branches, a project begun in 2004. The new agencies offer an environment that is much more practical, modern and innovative. The branches in Itagua, Volta Redonda, Copacabana and Belford Roxo were entirely refgurbished, and new branches were opened in Ilha do Governador, Carmo and Paty do Alferes. These inaugurations reflect the Companys policy with regard to increasing the points of contact and personal service. From 2004 to 2006, Light increased the number of agencies available to the population from 24 to 33, spread around 31 municipalities in the concession area, investing more than R$3 million in the project In addition to improvements at the commercial branches, Light invested in other channels to speedily and comfortably service its customers: the Virtual Branch, Disque-Light and Emergency channels, all functioning 24 hours a day. These channels offer full comfort, safety and ease of use without customers having to leave their homes of cities in which they reside. The results of these activities are monitored by means of satisfaction surveys conducted by the Brazilian Association of Electric Energy Distributors (ABRADEE) and by Light itself.

ABRADEE Survey

Survey

Indicator

Result 74.7% in 2006 against 70.6% in 2005 74.3% in 2006 against 66.9% in 2005 71.5% in 2006 against 66.6% in 2005 74.1% in 2006 against74.5% in 2005 83.8% exceeding internal goal

ABRADEE Survey* Customer service ABRADEE Survey* Ease of Access (contact) ABRADEE Survey* Speed of Customer Service ABRADEE Survey* Perceived Quality (ISQP) Light Survey Satisfaction of Customers who requested Service

* Survey done by Instituto Vox Populi

The P1 project of the Transformation Plan Customers: to Know Them is to Serve Them Better developed a relationship model for clients that in addition to ensuring and increasing satisfaction, supports the efforts to increase sales. The project redesigned the principal commercial services (new subscribers, customer service, meter reading and collection, service interruptions and collections); identified opportunities for rapid implementation and profit (quickwins); established a set of indicators for monitoring performance; and developed a new service policy to be implemented during 2007. Quality of Services In 2006, Light implemented a new policy for the maintenance of the electric power network through a new set of more closely focused activities and a better asset management system. In 2006 alone, R$116 million was invested in improving the quality of services provided. Of particular note were the funds invested in providing service to new subscribers; the replacement of equipment in the energy distribution grid; and the modernization of Distribution Management System (SGD) technology. The new SGD features permit acquisition of new data more rapidly and improve information quality. The maintenance activities combined with greater speed in dealing with problems that come up in the network contributed to the improvement in the the Companys quality indicators. By the end of the year, the quality of supply indicators ELC (Equivalent Length of Interruption) and the EFC, (Equivalent Frequency of Interruption) were 8.0 hours and 6.3 interruptions, respectively confirming the downward trend that has been observed in recent years, showing the evolution of the quality of the services provided by Light.

ELC and EFC


Equivalent Length of Interruption - ELC (average in hours)
18 15 12 9 6 3 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 10,5 6,8 7,4 10,1 8,7 8,3 8,8 8,2 16,5 15,1

Equivalent Frequency of Interruption - EFC (average number of interruptions)


18 15 12 9 6 3 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 14,7 14,3 9,9 6,6 6,5 7,0 6,2 6,3 7,7 6,4

Thus if we compare the results for 2006 with the results from 1997, the year the Company was privatized, we observe a reduction of 50% in the ELC and 56% in the EFC. In comparison with 2005, the reduction was 7% in the ELC and 17% in the EFC, results that will certainly keep Light very well positioned in ANEELs ranking of the largest power distributors in the country with regard to quality indicators. Among distributors with more than one million customers, Light is the third ranked with regard to the duration of interruptions (ELC and its ranks sixth on the frequency of interruptions index (EFC).

Generation
Through its Light Energia subsidiary, Light generates power at dams along the Paraba do Sul and Ribeiro das Lages Rivers, using power plants located in the states of Rio de Janeiro and So Paulo. The maximum power potential of the Light Generating System is 855 MW. The system is made up of five generating plants, two elevating plants and other hydraulic structures such as reservoirs, dams, canals, dikes, tunnels, spillways, forced conduits and water switches, which also represent investments made in generation by the Company.

Sales and Infrastructure Services


Light Esco conducts the sale of electric power. It is a company specializing in integrating energy solutions when acting as a partner with power plants to find the best alternatives for the acquisition and optimization of energy use. Its activities are subdivided into two segments; sale of energy on the free-market from alternative/incentive energy sources; and infrastructure services. In the sale energy, Light Esco acts as a trader, broker, consultant and customer representative in negotiations for the purchase of energy. As an infrastructure service provider, Light Esco provides energy consulting, project and assembly services for energy efficiency, cold water and infrastructure projects. Light Esco is an important part of the competitive dynamic of the Company since it can compete for sales to free market customers outside Lights concession area. The loss of income by Light SESA from the migration of large consumers to the free market was partially offset by Light Esco, since its sales in the free market increased by 11.7% in 2006, an

increase of 485 GWh. In addition, Light Esco won two new customers outside the Light SESA concession area. As part of the development of the P2 project of the Transformation Plan - Selling More and Better - the Company intends to expand its range of services to include the location of generators, solar heating and property security. In 2006, the customers to whom Light Esco provides services in the free market purchased a total volume of 880 GWh, reaching 128 MW on average in December 2006.

Capital Expenditures
In 2006 Lights capital expenditures totaled R$322 million, distributed as shown in the following chart:
Investment in Aquisitions & Improvements on Fixed Asset
322.3 19.1

276.7

196.1 5.6 75.0

230.0

7.1 66.1

2005 Administration Commercialization

2006 Distribution Production

Distribution The main distribution of the investments were: the loss combat program (R$85 million), new customer connections (R$71 million) and network and transformer maintenance (R$28 million). Administration The Companys main investment in 2006 was the continuation of the implementation of the customer commercial management systems SAP customer management module, begun in 2004, with R$40 million invested in 2006 and a total of R$105 million invested in the process over the past three years.

Workplace Safety
Light has been making substantial progress in improving the performance of dangerous business activities where the preservation of life and the physical integrity of its employees,

the employees of its partners and members of society are of paramount importance. The following actions in 2006 were designed to meet this objective. 1) Workplace Safety Management Audits, a specific program for the methodological and systemic control and monitoring of the degree of compliance with prevention practices, were conducted, both for our own as well as the teams of outsourced companies. Six (6) audits were carried out of our own operating area groups, encompassing 32 Emergency Service teams. A total of 24 (twenty-four) audits of outsourced companies were conducted involving 114 teams. 2) A Committee was created for the implementation of actions designed to satisfy new Regulatory Rule 10 Electricity Service and Installations Safety. This committee is made up of representatives from the following areas: Superintendency of the High Tension Operation and Maintenance System; Power Plant Superintendency; Technical Superintendency; Department of Safety and Occupational Medicine. 3) Some 382 safety inspections were conducted of operating teams and buildings. The Workplace Safety Inspection Program is designed to identify eventual non-compliance with workplace safety legislation, regulations and practices in advance, proposing the necessary corrective measures and thus contributing to the maintenance of a preventive culture within the Company, reducing the risk of accidents. In 2006, the frequency rate of Lights workplace accidents with lost time was 2.93, a reduction over 2005s rate of 3.75. It should be noted that this indicator has been lower than the industry average, as shown the following chart.
Typical accidents wiht leave Frequency Rate
9.48

Light

electric sector average

6.77

7.47 6.00 6.04 5.42 5.82 5.42 5.26

5.04

5.11

5.12

5.36 4.52 3.45 4.31 4.78 3.71 2.93 1.98 3.75

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Regulatory Frontiers

Because it operates in a highly regulated sector where a number of decisions by the regulatory agency can have a substantial impact on its business, Light must be pro-active with regard to industry regulation. The P11 Concession Added Value project is one of the elements of the Companys Transformation Plan, which is designed to guarantee the sustainability and strengthening of the concession and to obtain better results (risk and return) for shareholders. It will transform Light into one of the benchmark companies for the improvement of the Brazilian electrical sectors legal and regulatory framework and should ensure that the Company takes full advantage of the conditions established in the regulation of the sector and its concession contract. Towards this goal, over the next few years the Company will focus on the Second Cycle of Tariff Reviews, the Annual Tariff Adjustment Process and a number of critical issues related to improving the regulatory environment. Lights Periodic Tariff Review takes place at an interval of every five years, as established in its concession contract, and is designed to guarantee tariff price moderation as well as to incorporate efficiency incentives. The process results in the definition of the base tariff for the next five years, in which a new value is established after analysis of all efficient costs, prudent investments (Regulatory Compensation Base) and the Companys market. Besides deciding on the tariff, the Review process determines the Factor X, designed to allow consumers to share in power distribution companies productivity gains. Lights next Tariff Review will occur in November 2008, with the process of the exchange of information with ANEEL beginning in January of the same year. The Company is preparing itself for this process, seeking financial balance of the concession through recognition of its specifics in the new tariff as well as tariff moderation for end consumers. As explained in the section on Tariffs, Lights rates to end-users are adjusted annually in November. The tariff adjustment contains a component that is permanently incorporated into the rates that reflects the variation of non-manageable costs (power purchases, transmission and sectorial charges) and the updating of manageable costs by the IGP-M, developing Factor X. Another component not incorporated into the rates that corresponds to eventual additional financial expenses related to other questions can be added. The active participation in this process is meant to ensure that the adjustment incorporates the full variation of costs that are not manageable by the Company. With regard to improving the regulatory environment, the Company intends to engage the regulatory agency to make it aware of the need to adopt different criteria that satisfy the specific characteristics of its concession area. On the other hand, the Company will more systematically analyze the operating procedures that have been adopted, ensuring that they are constantly adjusted to existing regulations and subsequent changes in order to minimize problems during the regular inspections to which it is routinely submitted by the regulatory agency.

In addition, it should be noted that despite the fact that the Federal government requires the participation of the Company in the Light for Everyone Program, the number of new subscribers that have resulted is not significant compared to the current universe of its consumers, because Lights concession area already has a high electric energy penetration rate. Nevertheless, in 2006 the Company connected nearly 1,000 new customers in inland sections of the state and the Baixada Fluminense area, investing approximately R$7 million and contributing to the social and economic development of these regions.

Financial Comments and the Capital Markets


Financial Performance
Lights economic-financial performance in 2006 improved over the previous year, mainly due to the rate adjustment implemented at the end of 2005. However, the Company set aside non-recurring provisions totaling R$444 million during the third quarter of the year that not only reduced the EBITDA but also led to a R$150 million net loss. Excluding these provisions, the Companys EBITDA would have been R$1,076 million, 40.6% higher than in 2005. Furthermore, the Company would have posted a net income of R$293 million, 21.0% higher than 2005s net income 2005. Revenues Lights net revenues rose 11.0% in 2006, reaching R$5.4 billion. All of its revenue streams increased, notably revenues related to energy sold, which represented 85.5% of total revenues and was responsible for the improvement in its operating performance.

Net Revenues
(R$ million) 8,000 6,000 4,000 2,000 0 2004 2005 2006 4,084 5,423

4,886

Revenues from energy sold totaled R$4.6 billion in 2006, an increase of 6.9% over the same period the previous year. This was caused mainly by the 10.8% average tariff adjustment (including the CVA pass-through) authorized on November 6, 2005, which compensated for the 4.6% decline in captive market power consumption to 18,260 GWh. Power consumption in the residential, commercial and other customer segments remained relatively stable, although there was a decrease in consumption in the industrial segment as a result of the migration of customers (A2 and A4 customers served by 88 and 138 kV and 2.3 to 25 kV lines, respectively and customers receiving supply of between 88 and 138 kW) to the free market. Other factors that also contributed to this level of consumption included low temperatures in different periods of the year as well as the effect of the reduction in the number of billing days. The network usage revenues (7.1% of net revenues) totaled R$384 million, representing an increase of 21.7% over the previous year while revenues for own generation sold in auction totaled R$237 million, a 54.2% rise in 2006. Sales of power on the spot market increased

494% to R$107 million due to consumption that led the company to earmark the surplus of contracted power to this market. Physical sales on the spot market increased from 640GWh to 1,610GWh. Costs and expenses
Profit and Losses Net Revenues Purchased energy CCC/CDE Account Personnel Expenses Material Outsourced Services Provisions Others EBITDA Depreciation EBIT Equity Income Financial Result Financial Revenues Financial Expenses Non-Operating Income Non-Operating Revenues Non-Operating Expenses Pre-Tax Earnings Social Contribution, Income Tax and Deferred Income Tax Net Profit/(Loss) 2005 4,885 (2,637) (487) (214) (19) (214) (479) (70) 765 (322) 443 0 104 549 (444) (91) 3 (94) 456 (213) 243 % 100.0% -54.0% -10.0% -4.4% -0.4% -4.4% -9.8% -1.4% 15.7% -6.6% 9.1% 0.0% 2.1% 11.2% -9.1% -1.9% 0.1% -1.9% 9.3% -4.4% 5.0% 2006 5,423 (2,863) (426) (257) (19) (238) (738) (145) 738 (321) 417 2 (325) 416 (741) 9 5 4 100 (249) (149) % Variation% 100.0% 11.0% -52.8% 8.6% -7.8% -12.7% -4.7% 20.0% -0.3% -3.1% -4.4% 11.4% -13.6% 54.2% -2.7% 106.4% 13.6% -3.6% -5.9% -0.3% 7.7% -5.9% 0.0% na -6.0% -411.9% 7.7% -24.2% -13.7% 66.8% 0.2% -109.4% 0.1% 69.0% 0.1% -103.9% 1.8% -78.0% -4.6% 16.7% -2.7% -161.4%

Non-manageable costs, which include purchased power and the CCC-CDE accounts (sectorial charges), totaled R$3.3 billion for the year. The 5.2% increase in non-manageable costs was lower than the rise in revenues, leading to a 3.4 percentage point contribution to EBITDA margin. Manageable costs were stable as a percentage of net revenues, although personnel expenses rose 20.0%, due to provisions for employee profit sharing payments and a salary increase awarded in May 2006. Payments to third parties increased 11.4% because of contract adjustments. On the other hand, expenses with provisions rose to 13.6% of net revenues in 2006, compared to 9.8% the previous year, mainly due to non-recurring provisions booked on July 31, 2006 (Relevant Fact published August 10, 2006). Among these, the largest provision with an impact on the EBITDA was with regard to Braslights R$150 million actuarial deficit. Overall, the Company created R$444 million in provisions during the third quarter of 2006, of which R$338 million were recognized in operating accounts, reducing the Companys EBITDA. EBITDA in 2006 was R$738 million, 3.6% lower than in 2005, representing an EBITDA margin of 13.6%. When the effect of these provisions is excluded, the EBITDA would have increased 40.5% to R$1,076 million, reaching an EBITDA margin of 19.8%.

EBITDA (R$ Million)


1,200 1,000 800 600 400 200 0 2004 2005 2006 838 766 738 1,076 338

The Company ended the year with a R$150 million net loss, mainly caused by the aforementioned provisions that impacted both the EBITDA as well as the financial expenses that offset the growth in revenues derived from the tariff increase. Excluding the impact of the provisions, the Company would have posted R$293,000 in net income. Financial Situation

Gross Debt
(R$ million)

5,000 4,000 3,000 2,000 1,000 0

4,560 3,561 3,235

2004

2005

2006

On December 31, 2006, Lights total debt was R$3.2 billion, representing a reduction of R$326 million compared to the previous year. Light SESA is the sponsor of the Fundao de Seguridade Social Braslight, a closed, nonprofit supplemental pension entity. The amount of the technical deficit restated as of December 31, 2006 was R$861 million. On January 22, 2007, the Companys Light SESA subsidiary concluded the issue of R$1.0 billion in debentures designed to liquidate all the financial debt contracted through the debt renegotiation process that was concluded during fiscal year 2005 in advance and simultaneously.

The debentures issue allowed the Company to reduce the total cost of its debt, minimize its foreign exchange exposure and eliminate covenants that had made it impossible to be more flexible in terms of investments in its business. In addition, the Company will use approximately R$466 million of its own funds to completely pay off these debts in advance, reducing the total debt by this amount. Also in January 2007, the Board of Directors approved a reduction in Light S.A.s capital of R$288 million, while that of its Light SESA subsidiary was reduced by R$3 billion as a result of the absorption of losses accumulated through September 30, 2006. There was no change in the number of shares of both companies as a result of the issue. Cash Flow

Statement of Added Value


Besides these social actions, Light also contributes to the well being and development of society at large by adding value to its business.

Vale Added Statement (1) Wealth Produced Sale of Merchandise and Products (2) Wealth Consumed Raw materials consumed Third Party materials, services and others Accounts receivable losses (3) Gross Value Added (1-2) (4) Depreciation/Amortization/Depletion (5) Net Value Added (6) Capitalization of expenses Personnel Financial Charges (7) Value Added Received through Transfers Equity Restatement Transfer Financial Income (8) Net Value Added - VAL (5+6+7) Use of VAL Labor compensation Government (taxes) Financial Charges and Rents Retained Profit

2005 2006 Var % 6,992,723 8,005,794 14.5% 7,083,210 7,997,196 12.9% (90,487) 8,598 -109.5% 3,324,712 3,820,189 2,642,117 2,851,592 311,615 589,609 370,980 378,988 3,668,011 4,185,605 321,127 321,081 14.9% 7.9% 89.2% 2.2% 14.1% 0.0% 15.5% 224.9% -5.8% -103.0% -19.8% -95.0% -24.0% 11.4% 11.4% 7.8% 10.8% 147.0% na

3,346,884 3,864,524 12,113 40,879 (28,766) 516,665 (30,150) 546,815 39,352 38,492 860 414,280 (1,517) 415,797

3,875,662 4,318,157 3,875,662 4,318,157 274,323 295,815 3,026,169 3,352,085 332,326 820,748 242,844 (150,491)

Capital Markets
Light has been listed on the Novo Mercado of the So Paulo Stock Exchange (Bovespa) since July 28, 2005 and, as such, follows the best corporate practices in the country. Besides the adaptations that were made to its by-laws, Light assumed a number of commitments: 1) to supply regular information within the standards required by the New Market; 2) to offer minority shareholders in the event of a sale of ownership control the same purchase conditions offered to the controlling shareholders (100% tag along rights); and 3) adhesion to the markets Chamber of Arbitration. The new controlling shareholders as well as its managers made a contractual commitment to adopt a set of corporate governance practices and assure additional rights for minority shareholders. The Novo Mercado requires that 25.0% of the Companys capital be in circulation within three years of its entry into in this level of governance (in the case of Light, as of July 2008). Today, approximately 20.6% of Lights capital is floating, of which about 9.97% belongs to EDF.

Shareholder Breakdown

10.64% 9.97%

79.39%

RME

EDF

Free Float

Light ON - LIGT3 40,000 35,000 30,000 Volume R$ 1,000 25,000 20,000 15,000 10,000 5,000 0 Jun-06 Jul-06 Jan-06 Jan-06 May-06 Oct-06 May-06 Aug-06 Aug-06 Sep-06 Nov-06 Nov-06 Dec-06 Feb-06 Mar-06 Apr-06 0.0 10.0 5.0 Price (per 1,000 shares) 20.0 15.0 25.0

Shares of Light are traded under ticker symbol LIGT3. The closing price of its shares in 2006 was R$23.01 per thousand shares, an increase of 49.9% over the year. During this same period, the IBOVESPA index rose 32.9%. This increase came about after the change in ownership control and is attributed to the confidence that the market places in the quality of the new controlling groups management.
Bovespa (Cash Market) Accumulated Quantity traded (million) Number of trades Volume of trades (R$ million) Price per thousand shares Share appreciation Ibovespa appreciation

2005 2006 14,959.57 84,644.26 47,513.00 130,361.00 R$ 317.92 R$ 1,472.86 R$ 15.35 -45.30% 127.70% R$ 23.01 49.90% 32.90%

Light x Ibovespa x IEE Base 100 = jan/06 160 150 140 130 120 110 100 90 80 Jan/06 Feb/06 Mar/06 May/06 Oct/06 Nov/06 Jul/06 Aug/06 Dec/06 Jun/06 Sep/06 IEE Apr/06

Light

Ibovespa

The average daily trading volume of Lights shares was approximately R$6 million/day in 2006. The average quantity of shares traded per day (ADTV) in 2006 was 344 million. Lights shares are listed on the IBOVESPA and the following indexes: IBrX50, IBrX, IVBX-2, IEE, IGC and ITAC. Lights Board of Directors will decide on a dividend policy to be adopted in the next fiscal years. The Company has not distributed dividends in the past few years. The Companys Investor Relations activity has been upgraded and has its own staff, whose objective is to develop a complete program for the investment community.

Commitment to the future


People Management
Light understands that the participation and commitment of its employees is of fundamental importance for it to achieve its objectives and comply with its mission. Moreover, in the climate of renovation and transformation the Company currently is undergoing, the role played by its leaders is extremely important. The A Great Place to Work survey conducted a few days before RME became the controlling owner of Light demonstrated that the Company has employees who are very proud to work for Light and have a strong spirit of camaraderie, factors that doubtless will be important allies for the new groups project. On the other hand, the survey showed that the Companys management team needs to improve its credibility. The Transformation Plans Project 12 A great place to work defined seven points of action: 1) Leadership: To train managers to be leaders and to encourage exemplary attitudes; 2) Knowledge Management: To create the Light Academy a center that fosters knowledge management for employees, work partners and customers; 3) Workplace Safety: To improve Lights culture of prevention, with the preservation of life becoming a business commitment; 4) Quality of Life: To offer stimulating installations, generating employee well being and nurturing a climate of propriety and good maintenance; 5) Correction of Distortions: To implement immediate and exemplary actions that seek to correct situations that could compromise the organizational climate; 6) Professional Realization: To increase prospects for growth and mobility, develop talents and compensate employees based upon the market and results; 7) Transparency: To promote greater involvement and participation of people through wide ranging communication and direct conversations between the leaders and employees. Some of the actions of this project were initiated during 2006. Of these, particularly notable were the Transparency activities. Three institutional programs were created in parallel with the Transformation Plan: The Face-to-Face Program This involves quarterly meetings between managers and their subordinates, where a relationship forum is created for the discussion of results and of projects and decisions related to the Companys management. The Face-to-Face Program offers two-way communication, giving employees the opportunity to provide feedback about how they perceive the Company and the decisions that affect them.

The Management Encounters Program This program of meetings between managers and top management is designed to offer line managers a channel of communication and participation in the development of projects and programs related to change. The Encounters with the CEO Program A program designed to reduce the hierarchical distance in the communication process and bring the employees in the field, who generate the Companys image, into closer contact with the CEO and top management. Another project that deserves mention is the creation of the Light Academy as part of the Knowledge Management set of actions. The Company approved its statutes and the actions required to launch the Academy during the first quarter of 2007. The Light Academy is a center of human development and knowledge management, integrating the bases for the sustainable growth of the Company and the vision of its commitment to the future. Also as part of its personnel development program, Light runs a trainee program to identify, attract and train talented young people, improving the opportunities of new professionals in the job market.

Benefits and Private Pension Light provides a benefits program that includes a health plan, day care center assistance, meal tickets, meals and snacks and scholarships. In 2006, some R$29 million was spent on these benefits. Its occupational medicine program conducts diagnoses of the occupational activities at the workplace in order to manage and control health risks in compliance with the parameters established by the World Health Organization, OSHAS, International Labor Organization and the regulations of the Ministry of Labor and Employment (MTE). The Company created a benchmark document designed to orient actions designed to preserve the health of its employees. It has made it possible to conduct regular preventive medical tests in accordance with the specific risks of each professional occupation. Some 97.1% of Lights employees took their regular health exams. Besides satisfying workplace health legislation, Light annually sponsors a number of campaigns for all employees with positive repercussions in terms of public health and quality of life. The following were highlights: Ninth Flu and Other Respiratory Diseases Prevention Campaign; Hearing Conservation Program; Executive Check-up Program; Preventive Medicine. The Health/Dental Plan is one of Lights most important social benefits. The basic plan is free to 100% of its 4,147 employees and their respective dependents, with an option available to join other plans with financial contributions by the beneficiaries.

Plans Active Health Plan Retiree Health Plan Additionals Health Plan Active Dental Plan Retiree Dental Plan

Beneficiaries 12,426 3,632 560 9,307 764

Light seeks to identify social and functional situations that enhance the well being, integration and development of its employees by investing in important social projects such as the Vital Energy program. This programs goal is to promote the good health and integration of employees and their family members through actions directed at bettering their quality of life. Vital Energy is based on both permanent and eventual checkups and health indicators.
Program Labor Gymnastics Description Continuous program conducted at 12 Light addresses reaching all employees assigned to these areas. The activity is conducted through physical exercises lasting 15 minutes three times a week, at the start of the work day. The objective is to encourage the adoption of a healthy lifestyle through physical exercises consisting of stretching and relaxing, designed to generate positive reflexes in employee productivity, integration and well being. Beneficiaries 2,837

Chemical Dependence Prevention The objectives is to assure a workplace free of alcohol and other drugs, fostering the and Treatment Program good health and safety of employees, the community and the environment as well as helping preserve the property and image of the Company. Conducted together with the Social Service and Occupational Health Departments, the program consists of the realization of preventive campaigns that reach all employees and the sending for treatment and payment of the costs for employees who seek help . Psycho-pedagogical Designed to reimburse specialized and/or rehabilitation treatment of employees with neuropyschic disabilities or speech or sensorial disturbances. Rehabilitation treatment is considered to be that which is provided by an integrated multidisciplinary team of professionals in the fields of physical and speech, pyscho-pedagogical, pyschologoical, occupational and other specialized therapies conisdered essential by the attending physician. Other Programs Anti-Smoking, Quality of Life Walk, dance School, Pregnancy Program, Glaucoma Prevention, Skin Cancer Prevention, Heart Week and International Women's Day

47

Light is the founding sponsor of the Braslight Social Security Foundation, a closed supplemental pension entity designed to guarantee retirement income for Company employees who are connected to the foundation and a stipend for their dependents. Braslight offers three plans: A and B (defined benefit) and C (mixed). Some 96% of the active participants in the other plans migrated to it. In 2006, Light contributed R$11 million to Braslight. Training The Company invested R$3 million in 288,713 hours of training during 2006, corresponding to 69 man-hours per employee. Approximately 74% of the 20,083 workers taught during the year received training in systems and safety. The major training emphasis in 2006 was to teach users how to operate the customer management system (CCS SAP), whose implementation was concluded in 2006. Workplace safety courses also were important because they systematically qualified employees to carry out their jobs safely, avoiding accidents and improving productivity.

In 2006, the Company ran a second in-company MBA program in partnership with the Brazilian Capital Market Institute (IBMEC), graduating 38 talented employees. Compensation The Company runs a profit sharing program (PRL), to which approximately R$17 million was earmarked in 2006. The distribution of the PRL is based on individual merit and compliance with corporate targets. Employee Profile Light has 4,152 employees, whose average time with the Company is 15.6 years. The Company has been making an effort to renew its workforce and the quantity of its professionals under the age of 30 has increased to 32.2% over the past three years, although the majority of its workers are more mature: 38.9% are 31-45 years old while 40.0% are over 46. Light has 266 management positions. In 2006, while 256 employees left the Company there were 236 new hires, with the total headcount remaining stable. Outsourced Employees In December 2006, the Light Group used the services of 5,858 employees of about 60 outsourced companies in a number of activities: maintenance, expansion, distribution network operations, customer service (connections, disconnections, cutoffs, re-connections, call center), energy recovery, meter reading and bill delivery, system maintenance and operation (power generation), IT support, building cleaning and maintenance, safety and administrative support. Lights strategic objectives will be achieved through joint action of its labor force, in which the various internal areas and service suppliers are focused on striving for greater productivity and efficiencies in satisfying customer requirements. The Company seeks to maintain partnership relationships that require trust between the parties along with transparency and ethical principles.

Research and Development (R&D)


The objective of the Research and Development Program (R&D) is to ensure Lights continuous access to the technological development of the electricity sector and to seek innovations allowing it to confront the technological and market challenges it faces. For this, the Company identifies and develops strategic projects with qualitative results designed to improve the quality of its services, boost productivity gains and strengthen its image. In addition, these projects include training of employees that focus on improving economic results, reducing costs and tariff structure and in registering patents and innovative equipment. Lights R&D projects in 2006 concentrated on these areas: the environment; the combat of energy losses and past due accounts;

customer service and satisfaction; the energy market; regulatory aspects; needy communities; improvement in the operating conditions of the power generation, transmission and distribution system. During 2006, Light invested some R$8 million in R&D projects and, at years end, signed new contracts, to be developed over 2007, in the amount of R$13 million.

The Environment
Lights Environmental Policy is based on NBR ISO 14001 and is in line with the Companys declaration of intentions and principles regarding its overall environmental performance. It was created in 2001 on the occasion of the implementation of the Corporate Environmental Management Pilot System (SGA), which consists of a program for the certification of units in accordance with the NBR ISO14001 parameters. Since then, the SGA has certified 59 units. This year, 64 units are developing the SGA system, with certification expected by the end of 2007. Light should be fully adjusted to the ISO 14001 requirements in 2010, with 423 certified installations. In 2006, an outside audit maintained the certifications of the sites received three years previously upon the setting up of the SGA Pilot Project. Another audit also maintained the triple certification of the generating parks facilities of NBR ISO 9001 (quality), NBR ISO 14001 (environment) and OHSAS 18001 (occupational health and safety). Light has an agreement with the SOS Mata Atlntica Foundation, the largest Brazilian environmental non-governmental organization (NGO). This NGO has made a commitment to donate a total of 500,000 tree seedlings to the Degraded Areas Recovery Program (PRAD) or the Light Reforestation Program. Over the past five years, approximately 100,000 seedlings were planted in more than 440 hectares of Atlantic Forest areas. Since the beginning of the PRAD, about 3 million seedlings have been planted, directly benefiting other uses of the water in the Companys hydroelectric reservoirs. Another PRAD action was initiation of recovery of an area on the right shoulder of the Ponte Coberta Dam in Pira in southern Rio de Janeiro state, using bio-engineering resources involving placement of a vegetation-based bio-cover. R&D partnership projects with three Brazilian universities were maintained, focused on enhancing the environmental quality of the Companys reservoirs.

Social Action

With the change in ownership control, Lights social actions will now be conducted according to the Light Institute for Urban and Social Developments guidelines. The Institutes objective is to decide on urban, environmental, social and institutional actions. Its mission is to contribute to the improvement of the economic and social conditions within Lights concession area. The idea is to conciliate the concepts of for-profit and public assets, an action that will be supported by a vigorous program. The activities in these four fields will be channeled directly through Lights directors (especially the directors of Customers, Personnel and the Environment and Energy) through the Cultural Center or supporting institutions and outside companies. Among the projects that are currently scheduled is one being developed with the Rio de Janeiro city government to create a leisure area and to build public housing in the Madureira neighborhood, one of the most important in the citys North Zone. Using new technology, Light will reduce the amount of space used in electric transmission line rights-of-way from 100 to 20 meters, freeing up a large area for the construction of a public park in the location. The Light Institute also has the responsibility of organizing cultural events, some of which benefiting from incentives through the Rouanet and ICMS-RJ Laws. In 2006, the Institutes projects were chosen for being compatible with Lights size and interests, for links to social programs and for being run by private and individual initiative. The main sponsorship funding went to the Brazilian Symphony Orchestra (R$750,000), the Book Biennial (R$750,000) the Rio de Janeiro Film Festival (R$300,000), the Casa do Pontal Museum (R$210,000) and the Feira da Providncia charity fair (R$260,000), the latter being considered to be of special social importance.

Light Institute Permanent Projects Light Cultural Center for Students Project A free Educational Project aimed at government school students. It consists of a Circuit where students, monitored by nine trainees, learn about the history of electricity and of Llight. The various permanent and temporary activities (Energy Planet, a play called A Grande Viagem no Bonde do Tempo, The Memory Space, the Old Rio Space, the Wide Street Space, the Multimedia Totem, the Video Space, temporary exhibits and snacks) that comprise the Circuit, were opened to the public in July 2002. In 2006, some 39,710 students and teachers from 416 teaching institutions in the state of Rio de Janeiro visited the project along with members of the general public, contributing to the dissemination of knowledge about electricit (its history and manner of production) and the important role played by Light in Rio de Janeiro's development. This is Light contributing to the formation of new generations

Services for researchers

Light makes its historical archives available, including its photographs, to researchers

Lights other social actions are focused on improving relationships with low-income customers. These initiatives have strongly contributed to the Companys image, creating a

climate of trust and respect for its employees in the field. In 2006, some R$730,000 was invested in the following actions: Funding a college entrance examination course in the Caju and Mar communities - 200 students/year; Maintenance of 104 Citizenship and Information Technology Schools (EICs) established by the Information Technology Democratizing Committee (CDI), benefiting 4,500 students/year; Sponsorship of the creation of four new EICs, expected to benefit some 200 students/year;

Other social actions


Service to Customers Income Communities in Low- Action s designed to create an ethical consumption culture among these consumers. That is, that they pay for the power that they use. The company believes that by helping people living in these communities use their power and equipment economically, they will retribute by paying for the services they use. Some R$5.8 million was invested in these actions in 2006. Includes the installation of service offices; the donation of entry standards; energy efficiency actions for this customer; the donation have energy efficient lights to small shopkeepers and lightbulbs; the refurbishing of electricity installations in rundown houses in the communities; the donation of lightbulb; and actions in schools. Developed in partnership with the Light Parents, Friends and People with Disabilities Association (APAEL) and the Niteroi Association of People with Physical Disabilities (ANDEF). It helps young Light has a program designed to help teenagers in needy communities who are at risk, seeking to assist them enter the job market through the So Martinho Charity Association . In 2006, on average 98 teens were assisted per month. Dring the period, some R$1,037,545.27 was spent on salaries, benefits and training of the young participants.

The lIluminate Program Boys of Rio

Social Balance Sheet / 2006


Company: CONSOLIDATED
1 - Basis for Calculation 2006 Amount (R$ thousand) Net Revenues (NR) 5.423.107 Operating Result (OR) 89.938 Gross Payroll (GP) 256.851 2 - Internal Social Indicators Amount (thousand) % of GP % of NR Food 16.713 7% 0% Mandatory payroll taxes 49.286 19% 1% Private pension plan 10.871 4% 0% Health 11.966 5% 0% Occupational Health and Safety 707 0% 0% Education 3.639 1% 0% Culture 0 0% 0% Training and professional development 3.270 1% 0% Day-care or day-care aid 440 0% 0% Profit/Income sharing 17.753 7% 0% Other 6.006 2% 0% 120.652 47% 2% Total - Internal Social Indicators 3 - External Social Indicators Amount (thousand) % of OR % of NR Education 1.055 1% 0% Culture 2.557 3% 0% Health and sanitation 278 0% 0% Sport 0 0% 0% War on hunger and malnutrition 0 0% 0% Other 10.825 12% 0% 14.715 16% 0% Total contributions to society Taxes (excluding payroll taxes) 2.746.610 3054% 51% 2.761.325 3070% 51% Total - external social indicators 4 - Environmental indicators Amount (thousand) % of OR % of NR Company 6.610 7% 0% Investments in external projects/programs 0 0% 0% 6.610 7% 0% Total environmental investments Regarding annual targets for reducing residues, general ( ) has no targets ( ) meets 0-50% of the targets consumption used in production and increased efficiency in the ( ) meets 51-75% of the targets (X) meets 76-100% of the targets use of natural resources, the company 5 - Staff Indicators No. of employees at the end of the period 4.152 No. of employees hired during the period 261 No. of outsourced employees 5.858 No. of interns 143 No. of employees above 45 years of age 1.660 828 No. of women working at the company % of management positions occupied by women 24,00% No. of Afro-Brazilian employees working at the company N/A % of management positions occupied by Afro-Brazilian employees N/A No. of employees with disabilities or special neds 117 6 - Information Regarding Corporate Citizenship 2006 Ratio of highest and lowest compensation at the company 33,08 Total number of work-related accidents 24 ( ) top-level executives ( ) top-level executives and (X) all employees Company developed social and environmental projects were mid-level managements decided upon by: Health and safety standards at the workplace were set by: As regards trades union freedom, the right to collective negotiation and the internal representation of employees within the company: The Company' pension plan includes: s Profit-sharing program is comprised of: Upon selection of suppliers, the same ethical, social and environmental responsibility standards adopted by the company:
( ) is not involved ( ) supports to Procon 1.512 to Procon 98% 77,6 % Employees 19,0 % Third parties ( ) top-level executives ( ) top-level executives ( ) are not considered ( ) top-level executives and mid-level managements ( ) is not involved ( ) all employees (X) follows ILO regulations (X) all + Cipa ( ) follows and promotes ILO regulations

( ) top-level executives and (X) all employees mid-level managements ( ) top-level executives and (X) all employees mid-level managements ( ) are suggested (X) are required

In relation to volunteer work by employees, the Company: Total number of customer complaints/criticisms: % of costumers complaints/criticisms attended to/ resolved Total Amount-added for distribution (R$ thousands) Distribution of Amount-added

(X) sponsors and promotes to the Courts 28.073 to the Courts 64%

to the Company 12.802 to the Company 98%

In 2006: 4.318.157
6,9 % Government 0 % Shareholders -3,5 % Retained

Others Informations
Independent Auditors
According to Instruction CVM n 381/03, we inform that the Deloitte Touche Tohmatsu Independent Auditors just have services related to the external auditorship with Light S.A.

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