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We retain our Neutral recommendation on Pinnacle West Capital Corp. (PNW - Analyst Report). The Arizona based utility play presently holds a Zacks Rank #3 (Hold).

Why the Reiteration?

Pinnacle West posted inspiring earnings results in the first quarter of 2013, widely surpassing our expectation. The company outperformed on the back of positive non-fuel rate changes and favorable retail sales.

Nevertheless, our reiteration takes into consideration the impact of the Obama climate plan which calls for reduction in coal-fired operations in the future. This will inevitably take a toll on Pinnacle West’s coal-generation business, which forms a major part of its operational mix.

Also, the lingering weak economic fundamentals in the U.S. will continue to prevent electric prices from gaining momentum thereby deterring Pinnacle West’s opportunities.

Yet, the company’s gradual shift to renewable energy sources will bode well for its future broad growth objectives. Pinnacle West has a series of solar investments in the pipeline in Arizona which will elevate its clean energy generation share to 15% by 2025. This will be further supported by consistent customer additions expected in the next 3 years.

To expand its market accessibility, the company has also ventured into developing transmission assets. Pinnacle West’s ambitious 10-year plan to build a 275-mile line will strengthen its position in the energy industry. Apart from this, the company is also developing transmission lines to connect far off cities like California and Phoenix.

On the flip side, the company needs to watch out for rising operating expenses resulting from regulatory compliance cost.

Other Stocks to Consider

Other stocks which are worth considering are Zacks Ranked #2 (Buy) ALLETE Inc. (ALE - Snapshot Report), DTE Energy Company (DTE - Analyst Report) and Calpine Corp. (CPN - Snapshot Report).

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