Power Up With Brazilian Energy

By Gregory S. Davis | October 21, 2008 AAA

Brazil has been the jewel of Latin American economic growth and with her prosperity has come an increase in energy consumption. In addition to being one of the world's fastest growing economies, the Energy Information Administration lists Brazil as the tenth largest energy consumer in the world and the third largest in the western hemisphere, trailing only the U.S. and Canada. A large portion of Brazil's energy demand is satisfied with electric power generated at companies like Brazilian-based CPFL Energia (NYSE:CPL).

Brazilian Growth
Brazil's economy is expected to grow at an annual rate of 4.1% through 2012. ANEEL, the Brazilian Electricity Regulatory Agency, estimates the country's market for electric power is growing at an annual rate of 4.5%. CPFL Energia distributes, generates and commercializes electricity in Brazil. In 2007, it provided service to 6.3 million customers in a country with a population of approximately 189 million people. ANEEL reports that the greatest opportunities for investment in the Brazilian electricity market exist in the areas of new generation power sources and privatization of assets.

CPFL's Growth Strategy
To serve Brazil's burgeoning energy demand, CPFL Energia has a three-year plan to increase generation capabilities at existing facilities. During the first half of 2008, CPFL Energia increased operating revenue by 2.20% to R$6.382 billion ($2.977 billion) over the prior year. However, CPFL Energia's increased expenditure on personnel, materials, and outsourced services caused its operating income to decline -26.73% during the same period.

Rising Acquisition Costs
CPFL Energia's rising costs can be attributed, in part, to the acquisition of CMS Energy Brazil - a former division of CMS Electric and Gas and parent company CMS Energy (NYSE:CMS). By acquiring CMS Energy Brazil , CPFL Energia has positioned itself for greater access to the growing energy needs of Sao Paulo - the largest city in Brazil, with a population exceeding 10.9 million people. Expansion into densely populated cities like Sao Paulo contributes to CPFL Energia's long-range growth strategy. (To learn more about acquisitions, read Analyzing an Acquisition Announcement.)

Comparison
CPFL Energia has outperformed the -34.81% return of the iShares Dow Jones U.S. Utilities Index (AMEX:IDU) since the beginning of the year. IDU has been dragged down by difficult market conditions for the fund's largest holdings, including Exelon Corporation (NYSE:EXC), Southern Company (NYSE:SO), Dominion Resources (NYSE:D) and FPL Group (NYSE:FPL). CPFL, on the contrary, is down -20% prior to its attractive 10% dividend yield being factored into beginning-of-year prices. (To learn more about dividends, check out How and Why Do Companies Pay Dividends?)

Final Thoughts
While utilities investments may not tickle your fancy, they make a lot of sense during these tough economic times. For potential investors, CPFL Energia can be considered a power generation company that is booming in an emerging marketplace. It boasts an above-average dividend and a comprehensive growth plan to boot.

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