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We recently downgraded the Brazilian electric utility, Companhia Paranaense de Energia (ELP - Analyst Report), also known as COPEL from Outperform to Neutral recommendation.

Why Downgrade?

Growth in the global economy has spurred demand for better infrastructure and advanced agricultural equipment and in turn is raising demand for electricity. According to the International Energy Outlook 2013 published by the U.S. Energy Information Administration (EIA) in Jul 2013, energy consumption worldwide is anticipated to grow 56% within the 2010-2040 period. Talking of Brazil, energy consumption in the country is expected to rise by 5.9% annually, according to the Ministry of Mines and Energy's (MME) ten-year plan till 2019.

COPEL is one of the largest electric utilities— engaged in generation, transmission and distribution in Brazil and currently serves over 4.1 million customers in 395 municipalities and 1,113 localities. The company, to leverage benefits from the apparent demand growth, is making serious efforts to extend its generation capabilities and improve its services.

Besides the bright long-term aspects of COPEL, the near-term concerns surrounding the stock have kept us on the sidelines. We believe higher operating expenses, high debt levels, huge dependency on rainwater for electricity generation and political interference will restrict the growth momentum for COPEL. Operating expenses in the second quarter grew 2.1%, thereby impacting margins.

Other Stocks to Consider

COPEL currently has a $3.3 billion market capitalization. Other stocks to watch out for in the industry are Huaneng Power International, Inc. (HNP - Snapshot Report) with a Zacks Rank #1 (Strong Buy) while Alliant Energy Corporation (LNT - Snapshot Report) and UNS Energy Corporation (UNS - Snapshot Report), each come with a Zacks Rank #2 (Buy).

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