We recently downgraded our recommendation for Companhia Paranaense de Energia (ELP), also known as COPEL, one of the leading Brazilian electricity utilities from Outperform to Neutral.
Second Quarter Highlights
On August 11, COPEL announced its financial results for the second quarter 2010. Net income dipped 53.2% year over year to R$135.7 million (US$75.4 million), or R$0.50 per share (US$0.28 per ADR) compared with R$290.0 million (US$138.8 million) or R$1.06 per share (US$0.51 per ADR). Earnings per ADR lagged the Zacks Consensus Estimate of US$0.50.
The year-over-year decline was primarily due to higher operating expenses which more than offset a modest increase in net revenues.
Considering the top line, net revenues of R$1,438.1 million (US$799.0 million below the Zacks Consensus Estimate of US$834 million) soared 6.0% year over year because of an increase in the average price per megawatt hour (MWh) and higher sales volume.
Electricity sales to final consumers improved 13.3% year over year with residential sales soaring 17.9%, industrial 12.1%, commercial 10.9% and rural 7.9%. The main reason for the hike was higher demand.
During the quarter, operating costs and expenses went up 33.4% year over year to R$1,308.5 million (US$726.9 million) attributable to a 73.7% year-over-year increase in electricity purchased for resale, 15.7% rise in costs related to the use of the main transmission grid and 17.6% increase in materials and supplies.
Downgraded to Neutral
We believe COPEL is one of the best positioned companies in the Brazilian electric utility sector, accounting for approximately 7.0% of total electricity production. Due to the relatively inelastic demand for electricity, the recent global financial crisis had limited impact on electric utilities, especially in emerging markets like Brazil. With the Brazilian economy growing, demand for electricity in Brazil is also expected to increase by roughly 5.9%.
To meet escalating demand, COPEL in its 2010 capital investment plan has allocated $323 million for the Mauá Hydroelectric plant, $176 million for generation and transmission, $762 million for distribution and $81 million for telecommunications.
However, COPEL, being a state-owned company, is largely influenced by political interference. The government of the State of Paraná owns 58.6% of the company’s outstanding voting shares, which gives it the power to control the election of the majority of the company’s Board of Directors and also appoint senior management. Unfavorable political decisions can impact the company’s financial over time.
Moreover, the company’s weak financial results for the second quarter of 2010 have dampened growth prospects for the second half.
Based on the above and anticipating the lack of a positive driver, we downgrade our recommendation on COPEL to Neutral from Outperform.
COPEL-ADR PR B (ELP): Free Stock Analysis Report
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