Neutral Rating Reaffirmed on Copel

We recently maintained a Neutral recommendation on Companhia Paranaense de Energia (ELP - Analyst Report), also known as COPEL. The company is a leading Brazilian electric utility, accounting for roughly 7% of total electricity production in the country.

Copel primarily engages in the generation, transmission, and distribution of electricity in the State of Parana. The company sources 99% of its electricity generation from hydroelectric resources. Copel owns 18 power plants, including 17 hydroelectric plants and 1 thermal plant and has interests in 7 power generation companies. The company also provides telecommunications, natural gas, engineering, water and sanitation services.

The growth prospects of Copel look bright as revival in the global economy is inducing growth in emerging markets like Brazil. Of late, demand for electricity in Brazil is on the rise on the back of investments made to improve the country's infrastructure and power generation capabilities. Moreover, hosting of two major sporting events in the near future will boost electricity demand.

In accordance with the company's recently announced capital investment plans of approximately R$211 billion for the fiscal year 2011, roughly 49.7% will be spent on generation and transmission, 45.3% on distribution and 5.0% on telecommunications.

At the same time, the company's growth momentum gets restricted due to rising operating expenses. In the second quarter 2011, financial performance got a setback from roughly 11.8% increase in operating costs and expenses. These were primarily attributed to higher expenses related to electricity purchased for resale, materials and supplies and raw material and supplies for electricity generation.

Moreover, being a state-owned company, Copel's decisions are subject to political interference and unfavorable regulatory system. Also, the company faces stiff competition from its peers like Cia Energetica de Minas Gerais (CIG - Analyst Report) and Enersis S.A. (ENI - Snapshot Report).

The current Zacks Consensus Earnings Estimates for the fiscal years 2011 and 2012 are $2.46 and $3.17 per share, representing year-over-year growth of 19.42% and 3.17%, respectively.