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EFS Special Release - Eletrobras Debentures

Eletrobrás wants to put an end to the long story on dividends

To put an end to the long story regarding the dividends that have not been paid yet, the ELETROBRÁS controller partner must reimburse billions of dollars in capital reserve which has been illegally appropriated since 1970.

These illegal apropriation have been done in order to increase the Eletrobrás controller partner's capital payment in their voting shares.

These happened in disregard of the holders of preferred stock, non voting shares and debentures bearers which should have been paid or converted in shares with the original capital reserve.

It is important to emphasize that the illegal appropriation of capital reserves that occurred in 1970 shows that ELETROBRÁS has not distributed dividends for over 20 years, this fact characterized crime which is under the SEC - Securities and Exchange Commission investigation (as demonstrated by the independent auditors report part of this investigation, see it here).

The newspaper Valor Econômico wrote the news below which enphasizes the desires of Eletrobrás to put an end on the story regarding dividends.

Itaipu - EletrobrásA more political focus, which means less influence of the Treasury in government’s discussion is the reason for the optimism of the board of Eletrobrás for end, in 2009, of the long controversy of its $ 9.7 billion in retained dividends. Considering only the minority, the liability is approximately R$ 2 billion (USD 0.983 billion), which is a few years ago, fed the corrosion of the company’s image in the securities market. The Brazilian Securities Commission (CVM) has decided that the retention is illegal and it will establish the responsibilities of managers and directors of the company. Moreover, the pressure of the minority shareholders may increase. The U.S. investment fund Brandes, manager of 8% in common shares (ON, with voting rights) is studying whether to take the complaint to SEC, the Securities and Exchange Commission, the regulatory body of the securities market in the USA.

Astrogildo Quental, chief financial and investor relations of Eletrobrás, explains that he is more optimistic because the problem is not being treated "technically" in the Treasury. He ensures that now the issue has a more political focus "in other areas of government, which refers to the decision of the President of Brazil Luiz Inácio Lula da Silva.

Despite of the probability of a more positive approach to put an end to the scratches on Eletrobrás’ image, the cause of tension in the securities market, he acknowledges that a solution must be adopted this year. Quental knows that in 2010, year of Presidential elections in Brazil, there are minimal chances of success because the outcome depends, necessarily, of Congress. "The payment of dividends is an issue as important as the investments of the company. I trust in the solution for this problem this year because other areas of government, beyond the Revenue, are prepared" he says.

In the assessment of the Director, the Treasury and the BNDES are more convinced of the Eletrobrás investment plan consistency and therefore may agree to raise its stake in a future call to increase the capital of the company. In the universe of the ordinary shares, the Treasury has 53.99% and the BNDES, 14.75%. The minority has 21.8%. Quental shows that there is a "strong work "of the Ministry of Mines and Energy (MME) to convince the Treasury on the benefits of the capitalization of the company.

The forecast investment of Eletrobrás is more than R$ 30 billion (USD 14.7 trillion) by 2012, with partnerships, and the government has made it clear the desire to strengthen the muscles of the company. The chief minister of the Casa Civil, Dilma Rousseff, knows deeply the subject of retained dividends and knows that the funding from capital market is a source that cannot be neglected. The ministers Edison Lobão (Mines and Energy) and Luiz Dulci (Secretary General of the Presidency) are also favorable to Eletrobrás.

Quental knows that to achieve the goal of having at least 25% of shares traded on a stock exchange, the Eletrobrás must comply with its obligations to its shareholders. Currently, the market volume is 21%.

Itaipu - EletrobrásOf about R$ 10 billion in cash (USD 4.92 billion), R$ 2 billion (USD 0.983 billion) are committed with a fund for the financing of 15 subsidiaries. This means that there is sufficient volume to settle the liability of $ 9.7 billion in withheld dividends. The highlights of the system are Eletrobrás Eletronorte, Chesf, Furnas, Cepel, Eletrosul, Eletronuclear, CGTEE and Itaipu.

A long troublesome story of retained dividends from Eletrobrás was not solved last year past because, according to Quental, the issue lost ground to the demands of the social area in the voting of the law of the 2009 national budget. Thus, it was impracticable to reserve around $ 4 billion for the solution to the deadlock.

Besides, the director regrets that the Ministry of Finance has insisted on receiving the same amount destined to the minority shareholders. Currently, the director states that the scenario developed and the government, not just the Ministry of Finance, is more sensitive to solve the problem.

On Friday, the price of the common shares of Eletrobras rose 6.3%, to $ 28.94, with the prospect of payment of dividends withheld. It was the second largest high index of Bovespa.

In October 2008, the Council of CVM (Brazilian Securities Commission) decided, unanimously, following the vote of the rapporteur Marcos Barbosa Pinto and accepting the charges filed by the shareholders Eduardo Duvivier Neto and Brandes Investment Partners. The determination was to investigate irregularities conducted by managers of Eletrobrás.

According to the rapporteur, the Eletrobrás Group can not keep the retention of dividends under the grounds that it would depend on investments. The practice is prohibited by the Article 198 of the Act 6404 of 1976. In the vote, the director of CVM also argues that the Brazilian Federal Union has several legal and financial mechanisms to pay dividends without affecting investments. One alternative is to capitalize the company with its share of the dividends distribution and finance the remaining market, even with the help of shareholders.

For CVM, the Act 6385/76 does not allow the regulator agency (CVM) to order that Eletrobrás distributes the mandatory dividends withheld, but it may establish, through an administrative procedure, sanctions, the responsibility of the staff of managers and directors for any infractions to the Act 6404/76 and other rules of governing in the securities market.

The postponing of these dividends retention is already causing discomfort among the leaders and advisers of Eletrobrás. The CVM can impose heavy penalties in accordance with the rules of Act 6835 of 1976. The punishments can vary from simple warnings to fines of up to R$ 500 thousand (USD 200 thousand), and the prohibition to occupy positions in listed companies. Although the government is to one to decide who are the occupants of management positions in the board these managers may be punished and charged to pay with their personal assets.

The newspaper “Valor” has heard members of the board, but they did not want to comment on the matter. Today, in Brasília, they participated of a regular meeting of the Board. The current composition is the Minister Luiz Dulci, the sub-head of the Coordination and Monitoring Office of Civil Presidency of the Republic Miriam Belchior, executive secretary of the MME Marcio Zimmerman (Chairman), the head of the office of José Antonio MME Corrêa Coimbra, director of infrastructure and basic inputs of the BNDES Wagner Bittencourt de Oliveira, the head of Treasury's Office of Lindemberg Bezerra Lima, economist and former director of Previ (Brazilian huge pension fund) Arlindo Magno de Oliveira, the diplomat Carlos Alberto Leite Barbosa, José and president of Eletrobrás Antonio Muniz Lopes.

Source: Valor Econômico (Newspaper)
Translation: Luciano Medina Martins

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