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COPEL's Long-Term Prospects Solid, Runs Near-Term Risks

Zacks Equity Research

We have issued an updated research report on Companhia Paranaense de Energia ELP or COPEL on Jan 30, 2017. This fully integrated electric utility, with a $2.15 billion market capitalization, is engaged in the generation, transmission and distribution of electricity in the state of Parana.
After the release of third-quarter 2016 results on Nov 10, American Depository Receipts of COPEL yielded a return of 105%, which was above the return of 7.27% generated by the Zacks categorized Utility Electric Power industry.

We believe, over the long run, COPEL is well positioned to benefit from growing infrastructural developments in Brazil, which will subsequently call for increased electricity supply. Exiting the third quarter, the company directly served approximately 4.5 million customers in 395 municipalities and 1,113 localities. Also, it had a generation capacity of roughly 5,624 megawatt, 99% of which is hydroelectric. Of the company’s 20 power plants, 18 were hydroelectric, one thermal and one wind power plant. To capitalize on the growing demand for electricity, the company has planned investments of approximately R$2,034.9 million for 2017. It will enhance its electricity generation capacity.

Also, we believe that COPEL enjoys the benefits of a diversified business portfolio. In addition to its core business of generation and transmission of electricity in Parana, the company provides telecommunications services through Copel Telecom, manages its interests in special-purpose entities in the energy, gas, telecommunication, sanitation and service sectors through Copel Participacoes. It also deals with investments in renewable energy generation projects through Copel Renovaveis.

Notwithstanding these positives, we believe that COPEL’s exposure to headwinds, including higher costs, huge debt levels, stiff competition, governmental interference and dependence on water resources, might restrict its growth momentum in the near term. Moreover, dealing with lawsuits is a risky affair as any judgment passed against the company might result in huge losses. Exiting the third quarter, COPEL maintained a provision for legal claims amounting to R$1.4 billion for cases considered as probable losses. The company also had cases worth R$2.6 billion, already classified as possible losses.

We believe that the above-mentioned pros and cons clearly justifies COPEL’s Zacks Rank #3 (Hold). Some better-ranked stocks in the electric utility industry include CenterPoint Energy, Inc. CNP, Spark Energy, Inc. SPKE and Ameren Corporation AEE. While both CenterPoint Energy and Spark Energy sport a Zacks Rank #1 (Strong Buy), Ameren Corporation carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

CenterPoint Energy, Inc. reported better-than-expected results in three of the last four quarters. Average earnings surprise was a positive 5.07%. Also, earnings expectations for 2017 have improved over the past 60 days.

Spark Energy, Inc.’s earnings estimates for 2017 have been revised upward in the last 60 days.

Ameren Corporation posted better-than-expected results in the last quarter, with a positive earnings surprise of 10.14%. Also, earnings estimates for 2017 have been revised upward over the past 60 days.

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