COPEL 2Q Misses Estimate

Companhia Paranaense de Energia (ELP - Analyst Report), also known as COPEL reported 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 behind the Zacks Consensus Estimate of US$0.50 per share.

The year-over-year decline was primarily due to higher operating expenses, which more than offset a modest increase in net revenues.
 
Revenue

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 due to 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 soaring17.9%, industrial 12.1%, commercial 10.9% and rural 7.9%. The main reason for the hike was a higher demand.

Margins

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 main transmission grid and 17.6% increase in  materials and supplies.

EBITDA decreased by 51.2% year over year to R$231.5 million (US$128.6 million) with EBITDA margin of 16.1% versus 35.0% in the second quarter of 2009.

Balance Sheet

Exiting the second quarter, COPEL’s cash and cash equivalents plummeted 12.9% sequentially to R$1,476.5 million (US$820.3 million) due to payment of employee sharing for 2009, amortization of debt, dividend and interest payments. Loans, financing and debentures, net of current portion were R$1,430.0 million (US$794.4 million), down roughly 1.0% sequentially.

Cash Flow

Net cash flow from operating activities were R$89.3 million (US$49.6 million) down significantly from R$378.9 million (US$181.3 million) in the year-ago quarter. Capital spending in the quarter was R$264.5 million (US$147.0 million) versus R$258.4 million (US$123.6 million) in the second quarter of 2009.

Our Take

We believe COPEL is one of the best-positioned companies in the Brazilian electric utility sector, where demand for electricity is expected to rise by roughly 5.0%. Besides, the company’s focus is now on expanding its capacities for which COPEL has allocated a capital spending of $323 million for 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. Nevertheless, the company’s attractive valuation relative to its international peers, strong balance sheet, cost control measures, and investments to enhance internal generation capacity make COPEL an attractive stock to own. We currently maintain an Outperform recommendation on the stock.

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