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COPEL (ELP) Q2 Earnings Down Y/Y on Lower Sales, High Costs

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Companhia Paranaense de Energia or COPEL reported disappointing results for second-quarter 2017, recording year-over-year decline of 84.9% in net income. The bottom line suffered from lower revenue generation and rise in operating costs and expenses.

Earnings per share came in at R$0.51 or 16 cents per American Depository Receipt, down from R$3.63 per share or $1.04 per ADR in the year-ago quarter.

Revenues

Operating revenues in the quarter totaled R$3,173.2 million ($988.5 million), reflecting year-over-year decline of 16.7%.

The top-line weakness stemmed from a decline of 26.3% from electricity sales to final customers, fall of 53.5% in sales derived from use of main distribution and transmission grid, 41.8% in construction revenues and 1.7% in sales derived from distribution of piped gas.

However, these weaknesses were partially offset by 23% growth in electricity sales to distributors, 22.3% increase in revenues from telecommunications and 4.5% hike in other operating revenues.

Electricity Sales

COPEL’s electricity sales to final customers include Copel Distribuicao’s sales in the captive market and Copel Geracao e Transmissao’s sales in the free market.

The company’s electricity sales to final customers decreased 8% year over year to 6,210 gigawatt hours in the quarter. The decline was led by a fall of 2.4% in Residential, 14.7% in Industrial and 10.4% in Commercial, partially offset by growth of 1.1% in Rural and 0.5% in Other segment.

Expenses/Income

In the quarter, COPEL’s operating costs and expenses increased 13.3% year over year to R$2,699.4 million ($840.9 million). Expenses, as a percentage of revenues, were 85.1% compared with 62.6% in the year-ago quarter.

The company recorded increase of 27% in costs related to electricity purchased for resale, 11.8% in personnel and management costs, 9.2% costs related to materials and supplies for power electricity, 2.8% in natural gas and supplies costs for the gas business and 6% rise in depreciation and amortization.

However, the impact of higher costs and expenses was partially offset by a decline of 34.2% in charge of the main distribution and transmission grid, 7.2% in costs related to pension and healthcare plans, 3.6% in materials and supplies costs, 4.7% in third-party services costs, 17.7% fall in construction costs and 36.2% drop in other costs and expenses.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) surged 46% to R$707.2 million ($220.3 million), with an EBITDA margin of 22.3%.

Balance Sheet & Cash Flow

Exiting the second quarter, COPEL had cash and cash equivalents of R$1,423.9 million ($443.6 million), up from R$945.6 million ($302.1 million) in the prior-quarter end. Loans, financing and debentures grew 5.7% sequentially to R$6,523.8 million ($2,032.3 million).

In the first half of 2017, the company’s net cash generation from operating activities decreased 48.3% from the year-ago period to R$585.7 million ($184.2 million). Capital used for addition of property, plant and equipment totaled R$564.1 million ($177.4 million), down 6.6% year over year.

The company distributed approximately R$197.9 million ($62.2 million) as dividends and interest on equity.

Outlook

For 2017, COPEL plans to use R$2,877.5 million in capital expenditures. Of the total, roughly R$1,024.5 million will be used for the Generation and Transmission business, R$649.2 million for the Distribution business and R$214.3 million for the Telecommunications business. The rest will be utilized for improving other businesses.

The capital spending target represents an increase of 41.4% over the previous budget of R$2,034.9 million.

Stocks to Consider

COPEL currently has a $2 billion market capitalization. Some major players in the industry are RWE AG (RWEOY - Free Report) , Atlantica Yield PLC (ABY - Free Report) and Fortis Inc. (FTS - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

RWE AG’s earnings expectations for 2017 and 2018 have improved over the past 60 days. Its earnings growth rate for the next three to five years is predicted to be 11.20%, up from 6.20% for the industry.

Atlantica Yield performed well in the last quarter, with an earnings surprise of 118.18%. Earnings estimates for 2017 and 2018 have improved in the last 60 days.

Fortis Inc. pulled off an average positive earnings surprise of 10.99% for the last four quarters. Also, earnings expectations on the stock improved for 2017 and 2018 in the last 60 days.

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