COPEL's Potential Value Mitigated By Ongoing Execution Concerns

A management team's ability to execute is often the difference between "value" and "value trap", and Brazilian electrical utility COPEL (NYSE:ELP) has been far more of the latter over the past three years, leading the shares to significantly underperform peers like Eletrobras (EBR), CTEEP, and Equatorial Energia (OTCPK:EQUEY), as well as the broader Brazilian market. The weak state of the Brazilian economy is not the fault of COPEL's management, but the company's ongoing operational inefficiencies in its distribution operations ("Disco") certainly fit under their umbrella of responsibilities and the company's position/exposure to spot pricing likewise lands on their doorstep.

Even with a higher discount rate to account for the elevated debt situation and management's missteps, COPEL shares look undervalued on the basis of long-term revenue growth in the mid-single digits and improving FCF margins. I'd also note that the shares trade at a pretty sizable discount to tangible book value. All of that said, I can only give a tepid endorsement to these shares given the skill (or lack thereof) management has shown during this challenging time. The Brazilian electricity market is not an easy place to compete, and the value I see in the shares is tempered by real questions as to whether management will be able to realize that value for shareholders.

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COPEL's Potential Value Mitigated By Ongoing Execution Concerns

Seeking Alpha: AES Tiete Very Attractive, But Very Hard To Own

It's a real shame that when AES (NYSE:AES) restructured the ownership of AES Tiete (TIET11.SA) it chose to cancel the ADR program. AES Tiete may not only be one of the most interesting assets within AES, but it is one of the more interesting and differentiated Brazilian electrical utilities. While it is technically possible for individual American investors to own shares traded in Brazil, it is not easy - not only can it be challenging to find a broker, there are language barriers to consider and serious issues of convenience and hassle. To put it another way, I periodically approach brokers about the possibility of opening an account and more than once the response has been along the lines of "which company do you like so much that you want to do all of this?"

All of that said, I think AES Tiete looks to be about 25% undervalued today, with a very clean balance sheet and strong upside to a long-term recovery in Brazilian electricity prices. For those who can buy Brazilian equities, I'd definitely recommend a closer look. For those who can't, maybe it's worth a spot on a watch list on the off chance that AES makes ADRs available once again.

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AES Tiete Very Attractive, But Very Hard To Own

Seeking Alpha: Tractebel Offers Accessible Leverage To Future Growth In Brazil

Even though Brazil's economy is likely still looking at a few more rough quarters, investors are starting to come back to this beaten-up emerging market. Shares of the iShares MSCI Brazil Index (NYSEARCA:EWZ) are up 6% over the last five days, 12% over the last month, and 38% year-to-date. Brazil's utility sector has been invited along for the ride, with CEMIG (NYSE:CIG) and CPFL Energia (NYSE:CPL) modestly exceeding that performance and COPEL (NYSE:ELP) trailing slightly. Tractebel (OTCPK:TBLEY), my subject for this article, hasn't been quite as strong year-to-date (up around 27% as of this writing), but the shares have notably outperformed all of those comps (by 10% to 45%) over the past year.

While I lament that AES Tiete (TIET11.SA) (one of the best performers of the group) is not really accessible to American investors, Tractebel isn't a bad consolation prize. Like Tiete, CESP (OTCPK:CESDY), and CPFL Renovaveis (which has outperformed Tractebel over the last year), Tractebel is a pure generation company and offers investors a way to play recovering economic growth in Brazil and higher future electricity prices. The shares don't look like a big bargain today, and there's likely more money to be made in riskier names more leveraged to an improving economy and lower interest rates, but they're still a little undervalued and maybe worth a closer look from U.S. investors.

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Tractebel Offers Accessible Leverage To Future Growth In Brazil

Seeking Alpha: CPFL Energia One Of The Best ... And Priced Like It

It's tough out there for Brazilian utility companies, both in real-world market terms and the significantly fuzzier world of investor sentiment, and CPFL Energia's (NYSE:CPL) market performance would seem to lend more support to the notion that when times get tough enough, even the best get pulled down.

CPFL Energia has fared better than CEMIG (NYSE:CIG), COPEL (NYSE:ELP), Light (OTCPK:LGSXY), and Alupar over the past year with a roughly 3% decline in the local shares (and a 15% drop in the ADRs), and has lagged only Energias among the integrated distribution ("disco")/generation-transmission ("genco" and "transco") players in Brazil's electrical utility sector. Even so, it's been a rough stretch in the neighborhood as turbulence in the power industry, weakness in Brazil's economy, and a crisis of confidence in the equity and credit markets have done their damage.

As a company, I really like CPFL Energia. The debt level is high, but then so too is the near-term cash generation to cover it, and I believe there is a wide range of potential growth opportunities for the company. That said, everybody seems to agree that CPFL Energia is a well-run company and you don't often find bargains where there's that level of concordance.

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CPFL Energia One Of The Best ... And Priced Like It

Seeking Alpha: COPEL Will Take Its Licks In 2016, But The Future Is More Promising

There are valid reasons for Brazilian utilities to still be trading well below past valuation levels. Electricity demand continues to fall in the weak economic climate, spot generation prices have plunged, and interbank interest rates in the mid-teens really hurt an industry that relies on debt for a substantial percentage of capital. Add in the risks that go with heavy state ownership, and I can understand why COPEL (NYSE:ELP) has been weak, falling about 14% from my last update on the company.

I believe this integrated generation, transmission, and distribution company is undervalued today. Management has made some bad decisions and let investors down with its execution recently, but the shares seem to assume a level of future pricing that just doesn't make sense to me. While there are near-term risks from weak spot prices and a mid-year rate review, I believe the shares are undervalued below $11/ADR.

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COPEL Will Take Its Licks In 2016, But The Future Is More Promising

Seeking Alpha: CEMIG Still Under Substantial Pressure

Readers didn't agree with me, but my cautious outlook on CEMIG (NYSE:CIG) back in May of 2015 was warranted, as the ADRs are down more than 50% from that point and that's after a 100% move from the January lows. This isn't just a Brazil problem, either, as COPEL (NYSE:ELP) has declined about 25% while CPFL Energia (NYSE:CPL) and Eletrobras (NYSE:EBR) are down around 10% to 15% over the same period.

Unfortunately, I don't see things getting substantially easier for CEMIG anytime soon. There is still the possibility of the company winning a favorable outcome on its concession dispute with the government over three hydro plants, but that doesn't change management's long track record of poor investment decisions or the company's high debt load. Add in ongoing service quality issues and weak demand for power, and it's not a pretty set-up.

I think today's price already factors in CEMIG keeping the disputed plants, albeit on terms that will require compensation back to the government. I do believe that the company can grow from here, but I'm concerned that the balance sheet will keep the company on the sidelines of consolidation (or involve them as net sellers) and I worry about the near-term liquidity crunch. If CEMIG can get its house in order, though, the upside would be large and few companies in Brazil's energy space would have more to gain if Brazil's credit market improves and interest rates ease up from recent levels in the mid-teens.

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CEMIG Still Under Substantial Pressure

Seeking Alpha: Cemig Making Do, But Still Needs A Favorable Concession Decision

I wasn't very eager to own Brazilian utility company Cemig (NYSE:CIG) back in October of 2014 and the 13% decline in the share price since then (even with a sizable rally since March) hasn't really improved my view of the shares. Granted, Cemig shares haven't really done any worse than the iShares MSCI Brazil Index (NYSEARCA:EWZ) or fellow utilities like Copel (NYSE:ELP), Electrobras (NYSE:EBR), or AES Tiete (OTCPK:AESAY), but the company has a growing debt burden and the uncertainties over major concessions threaten an important source of incremental earnings potential.

I am still concerned that greenfield projects may not be priced to generate attractive enough returns for the long term. With that, I just don't see a lot of value in these shares today. I will note, though, that a strongly positive decision on the plant concessions could still add more than $3/ADR (at current exchange rates) to fair value and Brazilian authorities have been making more industry-friendly decisions lately. Last and not least, currency can have a big impact on the value of these shares and a strengthening of the Brazilian real could offer upside independent of the underlying fundamentals.

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Cemig Making Do, But Still Needs A Favorable Concession Decision

Seeking Alpha: Can Capex And Catch-Up Tariffs Support A Higher Price At Copel?

These are not easy times for power utilities in Brazil, as low reservoir levels and weak rainfall have undermined hydropower generation and the government tries to strike a balance between the needs of the utilities (sustainable economic returns) and the needs of consumers and businesses. While I'm not fond of Cemig (NYSE:CIG) due to its exposure to uncertain concession decisions, higher debt, and questionable greenfield investment decisions, I'm more favorably inclined toward Copel (NYSE:ELP).

I'm looking for Copel to benefit from "catch up" tariffs that were deferred by vote-grubbing politicians and I think the company's greenfield capex allocation strategy across fossil fuel, hydro, and wind assets will create a better portfolio down the road. There are clearly problems with the Colider plant and Copel may find itself in a worse position relative to spot prices as the year rolls on, but I think the fundamental value here is more appealing and less dependent upon the kindness of regulators.

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Can Capex And Catch-Up Tariffs Support A Higher Price At Copel?

Seeking Alpha: COPEL Has Enjoyed A Good Run, But Brazilian Utilities Remain Tricky

I thought COPEL (ELP) (or Companhia Paranaense de Energia) was trading too cheaply back in December of 2013 and said so here. Since then, the shares have risen almost 18%, handily beating the Bovespa (up 5%) as well as beating the Brazilian shares and the ADRs of CEMIG (CIG), Enerbras (EBR), and AES Tiete (OTCPK:AESAY). COPEL has certainly benefited from selling uncontracted electricity at high spot prices, but what the rains give they can take away. There's also a lot of lingering uncertainty about this year's tariff adjustment, renewal of its distribution concessions, and management's future plans after a change in the CEO.

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COPEL Has Enjoyed A Good Run, But Brazilian Utilities Remain Tricky

Seeking Alpha: CEMIG Walking A Fine Line In A Challenging Market

Older investors can likely remember a time when those who wanted to invest in emerging markets had few choices outside of telecom, bank, and utility companies. Nowadays there is a much larger menu of choices and sectors like utilities have had to do deal with the same sort of regulatory and growth issues that affect their developed market peers.

In the case of CEMIG (or "Cemig") (CIG), Brazil's second-largest utility has the advantage of a sizable distribution and transmission business to offset risks in the generation business, but the company is looking at the loss of sizable generating concessions and a much more aggressive regulatory environment. It also does not help matters that Brazil's electricity sector appears to be moving toward oversupply and that management is willing to allocate capital to projects with IRRs only basically in line with the company's cost of capital.

That said, the market's valuation of Cemig already reflects a lot of these challenges. Moreover, even if the future isn't likely to be as profitable as the past, this is a company with a good history of free cash flow generation and returns on capital relative to its sector. Management seems committed to paying a healthy dividend and these shares don't look very expensive today.

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CEMIG Walking A Fine Line In A Challenging Market

Seeking Alpha: This Brazilian Company Offers Good Dividend And Cap Gains Upside , But Mind The Risks

Operating a regulated business in Brazil is no picnic, as investors in companies as diverse as Cosan (CZZ), Petrobras (PBR), AES (AES), and CEMIG (CIG) can attest. It's no less of an issue for COPEL (Companhia Paranaense de Energia) (ELP), as concession expirations in 2015 threaten both the generation and distribution businesses, and there are no guarantees that Brazilian authorities will continue to be reasonable with tariff adjustments for operators in the electrical utility sector.

It is not as though these risks are going uncompensated, though. COPEL is priced to yield about 5% today and does look meaningfully undervalued on the basis of 2014 EBITDA. What's more, Brazilian auctions are often predicated on construction costs and COPEL has a pretty good record of spending less than they initially expect. Couple that with an under-leveraged balance sheet and an underlying growing market that needs more power, and I think the combination of potential capital gains and higher dividends merits a closer look.

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This Brazilian Company Offers Good Dividend And Cap Gains Upside , But Mind The Risks

Investopedia: Can E.On Maintain Its Fat Dividend Through A Difficult Restructuring?

Experienced dividend investors know better than to just take a fat dividend yield for granted. While there certainly are opportunities every so often to pluck an overlooked or underappreciated income story, oftentimes high yields are best read as a flashing “danger” sign.

That brings me to German utility company E.On (Nasdaq:EONGY). A dividend yield of nearly 9% is certainly attractive these days, but E.On is still in the early years of a difficult transition that is seeing the company cut costs and scale out of its traditional generation business in favor of newer opportunities like renewable generation, oil/gas exploration, and overseas generation. On balance I'm bullish on E.On's prospects for remaking itself over the next three years, but I would caution investors that the dividend could get cut, and possibly cut substantially, before the process is complete.

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Investopedia: CEMIG Not The Cheap Dividend Stock It Appears To Be

The business of producing and supplying power in emerging market countries like Brazil isn't all its cracked up to be. While it's true that companies like CEMIG (NYSE:CIG) are poised to benefit from increasing electricity demand as Brazil continues to modernize and grow, Brazil is not the only emerging market to pursue a rather hard line with respect to regulation and tariffs. This has put CEMIG in the unenviable position of having to rely on M&A and cost efficiency for better performance, all while sporting a hefty debt load.

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Seeking Alpha: Can AES Get Out Of Its Parents' Basement?

When I last wrote on international utility operator AES (AES), a Seeking Alpha reader commented that the company reminded him of a person who consistently tests at a genius level IQ, but never actually amounts to anything in life. As a long-term holder of AES, that comment cuts a little close to home, as there always seems to be to some external excuse for what in retrospect has become a tradition of under-performance. Although there is still potential for this company to do better, you can go broke betting on potential in lieu of performance.

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Can AES Get Out Of Its Parents' Basement?

Seeking Alpha: AES Still Waiting For Stability To Translate Into Higher Multiples

Global utility company AES (AES) is still waiting to see some of the tangible benefits of its multiyear restructuring. AES has gotten a lot more realistic about its international growth plans, added the stability of a regulated utility, and sharpened its focus on generating (and distributing) cash flow instead of a growth-at-any-cost philosophy. Nevertheless, the shares have not exactly soared on this transition to the new AES.

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AES Still Waiting For Stability To Translate Into Higher Multiples

Seeking Alpha: Will AES Finally Make Good In 2012?

Waiting for global electrical utility operator AES to pay off as an investment has been a lot like waiting for Godot, though I don't remember so many disappointments in Beckett's play. Although AES has a great collection of power generation assets, it has for some time now and management has never yet managed to wring much value out of them. With new management and a new plan, perhaps long-suffering investors will see some rewards for their patience in 2012.

The New New Plan
Long-term investors in AES have heard enough new plans over the years that they should well be skeptical. In particular, AES has a long history of shuffling the deck – selling this or that project and investing hundreds of millions into the next “big thing” all in the hopes of generating some real returns from a large asset base. Heretofore, it hasn't worked out so well and investors would have frankly done better with a money-market account for the last decade.

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Will AES Finally Make Good In 2012?

Investopedia: Will Brazil's Government Ruin A Good Thing?

CEOs come and go, but sometimes the circumstances matter. That is especially true in the case of Brazilian mining giant Vale (Nasdaq:VALE), which has recently announced that its CEO, Roger Agnelli, will be stepping down. 


This is not a case of a CEO leaving for a better opportunity, "to spend more time with family," or to enjoy a well-earned retirement. Instead, Vale's CEO is basically being run off by the Brazilian government, who apparently wants a more pliable and compliant executive running one of the country's largest companies.

Not only is this a serious matter for Vale shareholders, who are losing out on the continued leadership of an executive who was at the very least competent, but it is a serious matter for all investors with an interest in Brazil. While there can be a healthy and spirited debate about the balance between public and private interests, direct interference in a publicly-run company sets a dangerous precedent and Brazil's government had better be careful or risk falling out of favor in many investors' eyes. (For related reading, see Cautionary Signs For International Investors.)


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