In our last few reports on Copel (ELP), we have warned against the political influence on Copel’s corporate matters as the Government of the State of Parana owns 58% of the company’s voting shares. Even worse, the Governor of the State, Mr. Roberto Requiao, is well known by his populist approach to politics.
Due to the higher PPI inflation in Brazil in 2008, electric tariff corrections were expected to be close to 15% in 2009. However, this week Mr. Requiao announced that “even though most electric utilities are adjusting tariffs in 2009 as high as 20%, in the State of Parana the population could come down because the Government of the State refuses to raise tariffs that high during a crisis period.”
It was not the first time Mr. Requiao behaved like this. In 2003, the Aneel (Brazilian electric energy agency) authorized a tariff increase of 25.27% but no adjustment was implemented. In the beginning of 2004 the adjustment was 15%. In the middle of 2004 Aneel authorized an increase of 14.43% and Mr. Requiao only adjusted ELP’s tariff by 9% — the remaining 5% was implemented on February 2005. By the middle of 2005, the actual adjustment was just 4.4% when the authorized amount was 7.8%.
Considering the overall elections in Brazil in 2010, we believe Mr. Requiao will not miss the opportunity to increase his popularity, thus we believe the tariff hike for Copel will probably be closer to 8% than to 15%.
Of course, the market did not react well to such news. The political influence on Copel’s corporate matters is a reality. Even though Mr. Requiao did not create many problems in the last 2-3 years, it does not mean that he has changed. He hasn’t!
Despite the negative news, we reinforce our positive outlook on Copel and we consider any weakness as a buying opportunity. If the valuation of the company remains very attractive and is not be too affected by a lower tariff adjustment, it will continue to be attractive.
Additionally, Copel has a strong balance sheet, a non-cyclical and monopolistic nature. It is a great way to get some exposure to Brazil while avoiding the higher risk of commodity producers. Investors with a medium term horizon should welcome the opportunity to buy Copel at attractive prices.
Read the full analyst report on “ELP”
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