COPEL's Near-term Risks Overweigh Long-term Prospects - Analyst Blog

On Sep 26, 2014, we issued an updated research report on Companhia Paranaense de Energia (ELP) or COPEL.

The Brazilian electricity market is the largest in South America. As of Jun 2014, the country's totaled installed capacity was 129 thousand Megawatts (MW), including 3,428 MW of electricity generated by wind firms. The Brazilian government is keen on further expanding its generation capacity to meet the burgeoning demand.

Energy consumption in the country rose 3.5% year over year in 2013.  Again, growing infrastructural development in the country is expected to enhance it further. To capitalize on this situation, COPEL, one of the leading electric utilities, has planned investments in order to improve its electricity generation capacity. The company is also expanding its wind farm portfolio. In Jun 2014, the company's board of directors approved the acquisition of 49% stake in São Miguel do Gostoso wind farm complex.

Despite these long-term positives, dismal results in second-quarter 2014 have made us dubious about COPEL's performance in the quarters ahead. Earnings per share in the quarter declined 1.3% year over year despite a 45% increase in revenues. Top-line growth was more than offset by a 56% increase in operating costs and expenses. Moreover, huge debt levels pose a threat to COPEL's growth as it increases the company's financial burden, thereby hurting its profitability.

In addition, COPEL being a state-owned company, governmental interference causes delay in execution of its regular operations. Also, excessive dependence on rainwater to source majority of its hydroelectric power becomes risky for the company, in the event of an unpredictable, lower-than-average rainfall.
 
Some other electric utilities in the industry include Companhia Energetica de Minas Gerais (CIG), Enersis S.A. (ENI) and NRG Yield, Inc. (NYLD).