Pinnacle Slumps on Higher Costs

Pinnacle West Capital Corp. (PNW - Analyst Report) posted negative results in the first quarter 2011. The company’s ongoing loss of 14 cents per share was greater than the Zacks Consensus Estimate of a loss of 2 cents. The company’s results also slumped on a year-on-year basis, compared with the ongoing EPS of 7 cents reported in the year-ago period.

During the quarter, higher retail customer usage and weather effects contributed positively to the earnings, while planned timing and level of gas-fired power plant maintenance led to the negative earnings results.

Revenue

Pinnacle West’s quarterly revenue was $659.6 million in the first quarter, an increase of 6.3% compared with $620.4 million in the year-ago quarter. Revenues in the quarter also ran past the Zacks Consensus Estimate of $634 million.

The year over year increase in first quarter revenue was driven by a 6% increase in Regulated Electricity segment revenue and nearly 29.9% growth in Other revenue.

Operational Results

Total regulated electricity delivered in the quarter increased marginally to 6,747 Gwh compared with 6,707 Gwh last year. Total retail electricity sales increased 3.2% to 5,926 Gwh compared to 5,742 Gwh in first quarter 2010. Average electric customer growth in the quarter was 0.4% compared to 0.6% in the year-ago comparable period.

Pinnacle West’s fuel and purchased power costs at the Regulated Electricity segment showed a decline of 1.6% in the quarter, while the company’s operations and maintenance (O&M) expenses increased 23.4%. The O&M expense increase was substantially due to planned timing and level of maintenance at two of the company’s gas-fired, combined-cycle generation plants.

Depreciation & amortization expenses increased 5.9% in the quarter. This led total operating expenses to increase by 10.6% to $622.4 million.

Driven by the rise in operating costs, Pinnacle’s operating income for the quarter dipped 35.7% to $37.1 million from $57.7 million in the year-ago period. Pinnacle West reported quarterly consolidated net ongoing earnings of $14.8 million compared to an ongoing earnings of $6.9 million in the year-ago quarter.

Financial Condition

As of March 31, 2011, Pinnacle West had cash and cash equivalents of $114.2 million and long-term debt of $2.8 billion, compared to $110.2 million of cash and $3.0 billion of long-term debt as of December 31, 2010.

The company generated $243.5 million of cash from operations in the first quarter and diverted $191.6 million towards capital expenditure, $175.2 million towards long-term debt repayments and $55.3 million towards dividends.

Outlook

For fiscal 2011, Pinnacle West retained its ongoing earnings per share guidance of $3.00 to $3.15, which is within the Zacks Consensus Estimate of $3.08.

Our View

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 UniSource Energy Corporation (UNS - Snapshot Report) and Southwest Gas Corporation (SWX - Snapshot Report).

Pinnacle West currently has a short term Zacks #4 Rank (Sell). We maintain our long-term Neutral recommendation on the stock.

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