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On Sep 26, 2013 we maintained our Neutral recommendation on Pinnacle West Capital Corp. (PNW - Analyst Report). The Arizona-based utility service provider currently carries a Zacks Rank #3 (Hold).

Why the Reiteration?

Positive rate changes and a decline in infrastructure cost led the company to deliver positive earnings surprise in the second quarter of 2013. The reiteration, however, takes into consideration the impact of weather variations that can affect Pinnacle West’s bottom-line. In addition, water scarcity in the desert regions of Arizona might create operational difficulties as Pinnacle West’s generating plants require considerable supplies of water.

The steady recovery of the Arizona economy backed by consistent customer additions will drive Pinnacle West’s near-term top-line. The positive market fundamentals prompted the company to maintain its projected average annual customer increase of 2.0% for 2013 through 2015.

Pinnacle West’s efforts to expand its renewable portfolio will offer encouraging prospects given the favorable renewable climate in the U.S. Its flagship AZ Sun program is advancing well with developmental work progressing at the Gila Bend facility.

A strong cash flow position will support Pinnacle West’s future growth-centric initiatives while an upgrade in investment credit rating to “BBB+" from “BBB’’ by Fitch’s will allow easy access to capital markets.

Nonetheless, strict federal regulations might lead to cost pressure thereby impacting margins. Also, work lag resulting from retirement of old employees and hiring of new laborers might upset operations.

Other Stocks to Consider

Utility players looking good at the moment are Zacks Ranked #2 (Buy) Integrys Energy Group Inc. (TEG - Analyst Report), IdaCorp Inc. (IDA - Snapshot Report) and The AES Corp. (AES - Analyst Report).

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