Long-Term Opportunities in Brazilian Electric Utililites: Should You Buy?

What's the outlook for Companhia Energetica Minas Gerais, CPFL Energia, and Companhia Paranaense de Energia?

Feb 11, 2014 at 10:34AM

Despite the recent turmoil around emerging markets, Brazil still presents long-term opportunities within its energy sector. According to the Brazilian national agency's 10-year plan, electricity consumption in the country will grow 5.9% annually until 2019, showing a 40% increase from 2012. In addition, government spending plans will improve the current industry infrastructure, helping companies reach the desired growth. So, if you are willing to start a position in this sector, here are three companies to consider.

Increasing generation
First, we have Companhia Energetica Minas Gerais (NYSE:CIG), also known as Cemig, which produces, transforms, transmits, and distributes electric power primarily to clients in the southeast and south of Brazil.

Some recent news concerning Cemig has been impressive. The company has undergone a $1 billion investment to enhance the quality of its distribution services. Plus, its recent partnership with Vale (NYSE:VALE) has raised expectations as it expands business opportunities. The agreement consists of the creation of a new company, with 55% ownership by Vale and 45% by Cemig, that holds assets capable of initially generating 1,158 MW. Regarding generation, Cemig's growth plans are aggressive, as it expects to reach a power generation of 239.7 TWh in 2035, giving the company a market share of 19%.

However, the company's high dependence on hydro sources for electricity could be a problem, as 97% of Cemig's installed generation capacity is hydro. In addition, government interference remains an issue, as the state of Minas Gerais is Cemig's major shareholder. The government has a history of interference in the company's affairs, affecting its performance.

Exposed to tariff cuts
Next is CPFL Energia (NYSE:CPL), which generates electricity through hydroelectric plants, small hydropower plants and thermoelectric power stations. It is Brazil's largest private power distributor.

Fundamentals are solid for CPFL Energia, as its scale and distribution monopoly give it a sustainable competitive advantage. Plus, Brazil's young regulatory environment gives the company an additional competitive advantage, since about three fourths of its operating income is derived from regulated electricity sales, providing a steady and predictable cash flow stream.

However, this competitive advantage can turn into a problem. In March last year, the Brazilian government approved reducing energy tariffs on average by 20%, and for industry, agriculture, business, and the services sector, the discount could reach as high as 32%. Such a decision has a strong impact on companies like CPFL Energia, considering its high exposure to regulated tariffs.

Government interference
Finally, there's Companhia Paranaense de Energia (NYSE:ELP). Also known as Copel, it produces, transforms, transmits, distributes, and sells electrical energy exclusively in the state of Paraná, Brazil.

Fundamentals for Copel are sound, as the majority of the company's earnings growth potential lies in its generation and transmission assets. In fact, at the beginning of next year, Copel's generation base should grow by 300 MW when the Colider hydroelectric plant is completed.

Nonetheless, the main issue with this company has always been related to government interference, as state-dictated pricing has historically nullified Copel's competitive advantage. The government possesses 59% controlling interest over the company, and its recent actions to suspend rate increases is affecting the firm's underlying metrics.

Bottom line
Risk-tolerant investors should be able to benefit from Brazil's long-term economic growth prospects. Lately, however, volatility and uncertainty within the region are making funds and investors stay away from stocks in the emerging world. The corrections taking course are not over yet, and you might see some more volatility further on. Plus, the recent devaluation of the real affects some operations for these companies, which have debt that is denominated in dollars.

Regarding Cemig, if it plans to continue its course the company will be a major player in the country, with sound improvements in its generation capacity and profitability.

CPFL Energia is well-positioned to benefit from increased demand during the next decade. However, given the country's pressure on the real and growing inflation, regulated tariffs could be modified again, affecting profitability.

Similar issues affect Copel, and for this company it could be worse than with its peers. Unfortunately, at any given moment the company's management, regulatory regime, or operational strategy could change, to the detriment of shareholders.

Grow your income with The Motley Fool
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.


Louie Grint has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information