Pinnacle West Stays Neutral

We maintain our Neutral outlook on Pinnacle West Capital Corp. (PNW - Analyst Report). Our cautious stance is primarily determined by the electric utility’s dependence on comprehensive regulation by several federal, state and local regulatory agencies. These regulations considerably influence the operating performance of the company, particularly of its subsidiary, Arizona Public Service ("APS"), and its ability to fully recover costs from utility customers in a timely manner.

The positive catalysts for the company are its retail customer growth, general retail electricity rate hikes, consistent dividend payments and a strong balance sheet with adequate liquidity.

However, the risk of unplanned power outages, possibility of stringent nuclear regulation,  along with the risk of potential downgrade in credit ratings limiting its access to capital and increasing borrowing costs, has prompted us to hold a more cautious outlook on the company.

Looking Ahead at 2011

In the past three years, spanning 2008 through 2010, APS registered an average customer growth of 0.9% per year. The company expects customer growth to average about 1.7% per year for 2011 through 2013, anticipating an economic improvement in both its state of operation, i.e., Arizona and United States.

For fiscal 2011, Pinnacle West expects its earnings per share to come in the range of $3.00 to $3.15. The Zacks Consensus Estimate is presently poised at the midpoint of the expected range at $3.08.

We Conclude

The expected growth in consumers and the possibility of lowering the operating expenses in the coming years are among the key positives for the company.

However, the possible penalty in case of failure to fulfill Arizona's increasing Renewable Energy Standards, unfavorable weather conditions in its service territories and possibility of lower demand due to energy efficiency unless offset by ratemaking mechanisms have kept us on the sidelines. Hence, we retain a Neutral rating on the company.

Phoenix, Arizona-based Pinnacle West Capital Corporation provides electricity services in the state of Arizona, through its subsidiaries. The company is involved in the generation, transmission, and distribution of electricity from coal, nuclear, gas and oil, and renewable resources. The company primarily competes with Southwest Gas Corporation (SWX - Snapshot Report).

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