EPE Dispute with Furnas/Privileged and Confidential

John Novak called me Wednesday to assist in handling a dispute involving EPE
and the Cuiaba project. EPE entered into a PPA with Furnas, the government
entity buying power to sell to distributors. Furnas is wrongfully
withholding its consent to assignment required by the banks (OPIC and KfW)
for financing this project. We believe Furnas is acting in bad faith and
has no contractual right to withhold its consent which gives EPE a right to
issue a default under the PPA.
EPE issued a default notice to Furnas and Eletrobras (the guarantor of
Furnas' obligations under the PPA) in September of 2000. The grace period
to cure the default has expired and EPE is now analyzing whether to proceed
with termination of the PPA, to initiate arbitration over the dispute, or to
follow some other course of action.

Furnas is using the assignment consent as leverage to hold up financing and
force EPE to renegotiate the PPA because of commercial risk and loss it has
incurred resulting from delay of Phase II of project. By way of
background, EPE issued a force majeure notice under the contract last year
for delay in building the project as a result of the Mato Grosso attorney
general's investigation and imposition of tedious environmental measures that
have caused significant delay in building the gas pipeline to the plant over
the ridges region of Caceres. EPE has no contractual obligation to remedy
Furnas' losses resulting from a valid force majeure delay and no obligation
to renegotiate the contract. The PPA contains an ICC arbitration clause
(arbitration in Paris) and Brazilian law governs the contract. We are also
investigating alternative remedies to resolve the matter.

John Gardiner of Skadden Arps in New York will act as counsel on
international arbitration. Fernado Serec with Tozzini Freire Teixeira e
Silva Advogados in Sao Paulo will advise us on the Brazilian law aspects of
this dispute. Please call me if you have any questions 56159.
Regards,
Michelle