COPEL Stock: Ignore The Balance Sheet; Hold (NYSE:ELP)

Weather Conditions Are a Crucial Factor in the Electricity Sector

It is well known that the electricity consumption of residential and industrial companies is strongly dependent on weather conditions.

When the winters are colder than expected, people tend not to be satisfied with cozy warmth, while in the summers, which are becoming warmer and warmer due to climate change, people long for a significantly cooler environment than the outside temperature.

The various heating and air conditioning systems provide the necessary assistance, and even when trying to educate people to behave in a more environmentally friendly way, electricity peaks are inevitable at certain times of the year.

Depending on whether it is north or south of the equator, the next spike in electricity consumption will be the need for heating in the northern hemisphere and cool comfort in the southern hemisphere.

For example, in Brazil, Southern Hemisphere, where the cycle has just left spring and entered summer, the period roughly corresponding to the months December 21 through March 20 should therefore see a spike in power consumption as the Brazilians turn on the air conditioning to protect from the heat.

For operators that distribute and sell electricity in the South American country, this is also the warmest period of their fiscal year, with 85% of that overlapping with the first quarter of 2023 and earnings results to be announced sometime in May 2023.

Companhia Paranaense de Energia – COPEL and the Short-Term Catalyst

In this respect, the Companhia Paranaense de Energia – COPEL (NYSE:ELP) stands out. Companhia Paranaense de Energia – COPEL is a Curitiba, State of Paraná, based-energy company that distributes and sells electricity for industrial, residential, commercial and rural needs primarily in the Brazilian state of Paraná and also in the municipality of Porto União, which is in the Brazilian state of Santa Catarina.

Known for attracting many visitors between May and July, Paraná is not equally appreciated during the summer months of December to March due to the tropically humid weather and temperatures consistently above 31 degrees Celsius, resulting in peak electricity consumption for cooling needs. The state of Santa Catarina has similar weather patterns with temperatures peaking in the period from December to March.

So, while quarterly earnings could show significant growth due to the impact of seasonal consumption spikes, there’s also the potential to far exceed analysts’ estimates as, despite advances in measurement techniques, it’s impossible to predict weather conditions accurately and well in advance.

Based on the Tipranks.com chart below, the chance that actual earnings per share [EPS] will beat analysts’ estimate of EPS in the first quarter of 2023 is not small compared to other quarters. While history is not a guarantee of future results, it does, however, indicate a likely trend.

If the spread between actual EPS and estimated EPS is large enough to cause a major earnings surprise, then its impact on stock price is likely to be statistically significant. If so, within days of the earnings announcement, there will be a peak in the stock price cycle that will provide an opportunity to take a profit by selling some of the shares.

For the first quarter of 2023, analysts are forecasting that Companhia Paranaense de Energia – COPEL will report EPS of $0.18, paving the way for a positive earnings surprise, assuming the company instead reports EPS in line with the same quarter in 2022 of $0.24.

Therefore, it makes sense to continue holding all Companhia Paranaense de Energia – COPEL shares in the portfolio until the next rise in the share price provides an attractive entry point to make a profit by selling some shares.

Analysts on Wall Street Report This

Sell-side analysts on Wall Street estimate that the stock price, driven by volatility, could show net upside potential averaging 17.15% over the next 12 months from current levels at the time of writing.

Wall Street also recommends a Hold rating on Companhia Paranaense de Energia – COPEL stock.

The Stock Valuation Suggests Holding Shares

Shares of Companhia Paranaense de Energia – COPEL traded at $7.17 apiece for a market cap of $3.84 billion and a 52-week range of $4.83 to $8.25 as of this writing.

Fueled by a rapid rise in oil & gas and other commodity prices, shares in Companhia Paranaense de Energia – COPEL are up 41.74% over the past year and the share price is trading above the 200-day moving average of $6.87 and traded above the midpoint of $6.54 of the 52-week range.

Based on these technical indicators, this does not appear to be the cheapest market price to add to the position right now.

Holding the position in Companhia Paranaense de Energia – COPEL includes receiving a forward dividend, which according to Yahoo Finance is $0.45, yielding 6.30% as of this writing.

On October 19, 2022, the Board of Directors appointed the Extraordinary General Meeting of shareholders to approve the payment of gross dividends of R$970 million. The first payment of R$600 million was scheduled for November 30, 2022, while the second payment for the remaining amount of R$370 million will be made at a date to be determined by the Annual General Meeting of shareholders next year.

The payment of the dividend as well as the business continuity and investments are supported by the following financial situation.

The Financial Condition Needs to Be Improved

Despite issues of lower dispatch of Gigawatt hours [GWh] through the distribution of TPP Araucária in Paraná State, the adjusted EBITDA for the first nine months of 2022 rose 3.4% year over year to R$4.1 billion.

While the distribution lines, Copel, are performing well and had a positive impact on gross operating profit, along with a decrease in manageable costs, including a 7.5% staff reduction this year to 5,902 employees.

The total distribution lines operated by Companhia Paranaense de Energia – COPEL amount to approximately 205,000 km, plus approximately 3,650 km of transmission lines. Companhia Paranaense de Energia – COPEL is the biggest electric utility company in the State of Paraná. The company currently holds power distribution concessions for 394 municipalities in the state of Paraná and the municipality of Porto União in the state of Santa Catarina.

The company generates electricity by operating 20 hydroelectric power plants, 30 wind power plants and one thermoelectric power plant. On November 30, 2021, Companhia Paranaense de Energia – COPEL acquired the Vilas Wind Power Complex in the state of Rio Grande do Norte, which also made a strong contribution to the Adjusted EBITDA improvement.

The total consolidated debt of the company increased by almost 13% to R$13.3 billion at the end of the third quarter of 2022 compared to the last quarter of 2021. At the end of Q3 2022, the debt-equity ratio or leverage ratio stood at 62.5%, outperforming most of its peers. On an adjusted basis, the ratio of net debt to EBITDA was 1.9x.

The debt plan, with an average term of 3.9 years, appears manageable, since more than 70% of it does not mature until 2025.

The company’s weighted average cost of 9.9% compared to a return on capital of 2.88% results in returns that do not match the cost of capital, implying value destruction.

However, as of September 30, 2022, the company still had R$4.33 billion in cash, and a debt reduction of nearly 20% of its total debt is expected to be completed by the end of this year. So, the ratio of the weighted average cost of capital to the total return on capital should improve somewhat.

This Is How the Company Moves on The Investment Side

All in all, this is not a bad financial situation, but it needs to be improved as business continuity is at risk. To cancel the risk, the Board approved an investment policy in March 2021 aimed at using the majority of the R$2.07 billion in cash to improve the operational efficiencies of Copel’s distribution lines, especially in rural areas, and reduce costs through certain projects favoring their modernization of the asset, the acquisition of new assets and investments in innovation.

The company states that more than 80% of its investment program for the year has been executed. The company is also increasing renewable energy capacity at a start-up Jandaíra Wind Complex project, which has sold an average of 14.4 MW, or about 30% of the plant’s committed energy, through an auction organized by an energy consortium.

Companhia Paranaense de Energia – COPEL agreed to acquire certain wind farms with an installed capacity of 260.4 MW in Rio Grande do Norte, most of which were sold in the regulated contract environment, resulting in wind power accounting for 17% of the company’s total portfolio of electricity generation. The project is financed on a long-term basis with a term until 2043.

Conclusion

The company is poised for a significant increase in share price in the near term, and it could occur after the announcement of Q1 2023 earnings results.

To take advantage of this, it is convenient to hold the position while current market valuations do not encourage buying more shares.

The investment in Companhia Paranaense de Energia – COPEL currently carries the risk that the continuation of the business will be impaired by a financial situation that is not entirely solid.

The company intends to improve its financial position by allocating resources to projects that need to increase business efficiencies and reduce costs.