Weather Damages Pinnacle's Earnings

Pinnacle West Capital Corp. (PNW - Analyst Report) today released it earnings results for the second quarter of 2011. The company’s adjusted earnings for the quarter were 78 cents per share, missing the Zacks Consensus Estimate of 88 cents by 10 cents.

The company’s results also slumped on a year-on-year basis, compared with the EPS of 82 cents reported in the year-ago period. The primary factor causing the damage during the quarter was an extremely mild weather, which affected retail sales. 

Revenue

Pinnacle West’s quarterly revenue was $799.8 million in the second quarter was marginally below revenue of $802.8 million reported in the year-ago quarter. However, revenues in the quarter ran past the Zacks Consensus Estimate of $708 million.

The slight fumble in second quarter revenue as compared to the year-ago revenue is mainly due to a 0.1% decline in Regulated Electricity segment revenue and nearly 66.6% decline in Other revenue.

Operational Results

Total regulated electricity delivered in the quarter decreased 0.7% to 7,711 Gwh compared with 7,654 Gwh last year.

During the quarter, retail electricity sales grew only 0.6% to 6,713 Gwh compared to 6,676 Gwh last year. Despite the mild weather, the increase was primarily related to higher electricity consumption by residential customers, reflecting continuing stabilization of the Arizona economy. On the other hand, wholesale electricity sales dipped 2% year over year, causing a decline in the overall regulated sales.

Also, Average electric customer growth in the quarter was slow at 0.3% compared to 0.7% in the year-ago comparable period.

On the cost side, fuel and purchased power costs at the Regulated Electricity segment showed a decline of 3.1% in the quarter, while the company’s operations and maintenance (O&M) expenses were down 1.4%. The O&M expense decline was primarily due to the timing and level of planned maintenance at the company’s fossil-fueled generating plants.

Depreciation & amortization expenses increased 3.5% in the quarter. These factors led total operating expenses to increase by 0.2% to $602.8 million.

The marginal decline in revenue accompanied with a marginal upside in costs led Pinnacle’s operating income for the quarter to dip by 2.2% year over year, coming in at $197 million. Pinnacle West reported quarterly consolidated net earnings of $86.0 million compared to earnings of $88.5 million in the year-ago quarter.

Financial Condition

As of June 30, 2011, Pinnacle West had cash and cash equivalents of $92.3 million and long-term debt of $2.7 billion, compared to $110.2 million of cash and $2.9 billion of long-term debt as of December 31, 2010.

The company generated $436.3 million of cash from operations in the first half of 2011 and diverted $378.3 million towards capital expenditure, $188 million towards long-term debt repayments and $112.5 million towards dividends.

Outlook

Pinnacle West lowered its adjusted earnings per share expectation for fiscal 2011 due to the abnormally mild weather in the first seven months of the year and higher estimated property taxes, partially offset by lower estimated interest expense.

The company now expects adjusted earnings for the year to be in the range of $2.75 to $2.90 per share, compared to $3.00 to $3.15 guided earlier.

Pinnacle also pulled down its guidance for total electricity gross margin to $2.01 to $2.06 billion, compared to $2.05 to $2.10 billion expected earlier.

For 2011, Pinnacle now expects total operating expenses of about $1.33 to $1.36 billion, down from the previously guidance of $1.32 to $1.35 billion. Interest expense is now guided at $195 to $205 million, compared to $200 to $210 million guided earlier.

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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