COPEL's (ELP) Q2 Earnings Surge Y/Y, Revenues Decrease

Companhia Paranaense de Energia (NYSE:ELP) or COPEL’s results in second-quarter 2016 were impressive, with net income of R$996.6 million (US$284.7 million) surging 230% from the year-ago tally.

Earnings came in at R$3.63 per share or $1.04 per American Depository Receipt.

Revenues

Talking about COPEL’s top line, net operating revenues in the quarter totaled R$3,694.6 million (US$1,055.6 million), down 5.5% year over year.

The top-line weakness was triggered by a 39.6% decline in electricity sales to distributors and 8.8% fall in revenue from distribution of piped gas. This softness was partially offset by a 4.2% growth in revenue from electricity sales to final customers, 273% increase in revenue generated from use of the main distribution and transmission grid, 10.4% hike in construction revenue, 19.9% growth in telecommunications revenue and 28.1% increase 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 declined 2.4% year over year to 6,753 Gigawatt hours in second-quarter 2016. The decrease was led by 7% fall in Industrial and 5.3% in Commercial, partially offset by 3.9% increase in Residential and 5.1% hike in Other segment.

Expenses/Income

In the quarter, COPEL recorded operating costs and expenses of R$2,382.9 million (US$680.8 million), down 34.3% year over year. Expenses, as a percentage of revenues, were 64.5% down from 92.8% in the year-ago quarter. The company recorded a 40.7% decline in costs related to electricity purchased for resale, 91.1% related to materials & supplies for power electricity and 79% in natural gas and supplies for the gas business.

However, the impact of lower costs and expenses was partially offset by a 14.2% increase in costs related to personnel and management, 8.5% for the main distribution and transmission grid, 16% in materials and supplies, 9.4% in third-party services, 4.7% in depreciation and amortization and 59.5% in other costs and expenses.

Adjusted earnings before interest, tax, depreciation and amortization (“EBITDA”) increased 50.6% to R$540.8 million (US$154.5 million), with an EBITDA margin of 14.6%.

Balance Sheet & Cash Flow

Exiting second-quarter 2016, COPEL had cash and cash equivalents of R$828.3 million (US$256.4 million), down from R$1,160.4 million (US$323.2 million) at the prior-quarter end. Loans, financing and debentures decreased 6% sequentially to R$6,031.1 million (US$1,867.2 million).

In the first half of 2016, COPEL generated net cash of R$1,083.5 million from its operating activities, increasing 110.2% year over year. Capital spending on the purchase of property, plant and equipment increased 15.6% year over year to R$603.9 million.

During the period, the company distributed approximately R$353.6 million as dividends and interest on equity.

Outlook

For 2016, COPEL plans to use R$3,149.8 million in capital expenditure. Of the total, roughly R$1,695.1 million will be used for the Generation and Transmission business, R$570 million for the Distribution business and R$146 million for the Telecommunications business.

Our Take

COPEL is one of the largest integrated electricity utilities in Brazil. In addition to its core operations, the company is involved in telecommunication business and has interests in energy, gas, sanitation and service sectors. We believe that growing infrastructural developments in Brazil will call for increased electricity supply, which will boost the company’s business going forward. However, the electric utility industry is highly competitive, with COPEL facing competition from players like Korea Electric Power Corp. (NYSE:KEP) , Companhia Energética de Minas Gerais S.A. (NYSE:CIG) and CMS Energy Corp. (NYSE:CMS) .

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