(ELP) Companhia Paranaense de Energia Downgraded to Neutral

We recently downgraded our recommendation on Companhia Paranaense de Energia (ELP), also known as COPEL, from Outperform to Neutral. Copel is one of the leading Brazilian electric utility companies, which accounts for approximately 7% of total electricity production in the country.

With the gradual recovery of the global economy, demand for electricity is seen to be rising, especially in emerging countries like Brazil. The country’s economic outlook is strongly-favorable for the electric utility company as Brazil is investing to improve its infrastructure and power generation capabilities.

According to the Ministry of Mines and Energy’s (MME) ten-year plan through 2019, energy consumption in Brazil is expected to rise by 5.9% annually with hydroelectric plants being the main source of power. A decision has been taken to raise Brazil’s total installed capacity for electricity generation from 112 megawatts to 167 megawatts by 2019 and contribution of hydroelectric power from 83 megawatts to 117 megawatts.

In accordance with the company’s recently announced capital investment plans for 2011, R$1,024.8 million were allocated for generation and transmission, R$933.3 million for distribution, and R$102.4 million for telecommunications.

At the same time, growth momentum gets restricted due to rising operating expenses. In the first quarter 2011, operating costs and expenses soared 5.7% year over year, 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) and Enersis S.A. (ENI).

Zacks estimate for the quarters ahead are on a declining trend, registering a fall of 7% for the second quarter and 9% for the third quarter.

Considering all these factors and expecting performance in line with the market, we downgrade Copel from Outperform to a Neutral recommendation.

CEMIG SA -ADR (CIG): Free Stock Analysis Report

COPEL-ADR PR B (ELP): Free Stock Analysis Report

ENERSIS S A ADR (ENI): Free Stock Analysis Report

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