Pinnacle's EPS Beats, Revs In-line

Pinnacle West Capital Corp.’s (PNW - Analyst Report) adjusted earnings for fourth quarter were 11 cents per share, ahead of the Zacks Consensus Estimate of by 6 cents. Results also compare favorably with 6 cents earned in the year ago quarter. Adjusted earnings were $12.1 million compared with $5.2 million in the fourth quarter of 2010.

A combination of cooler than normal weather, lower operations and maintenance expenses and higher transmission revenues aided the company to deliver better than expected number in the quarter.

Adjusting for after-tax gain from Pinnacle West’s sale of APS Energy Services in August 2011 and gain from discontinued real estate operations, the company’s reported net income came in at 11 cents per share, compared with 7 cents per share reported in year ago quarter.

Full year adjusted earnings came in at $2.99 per share, comfortably surpassed the Zacks Consensus Estimate of $2.90 but fell short of year ago earnings of $3.03. Results also exceeded company’s guidance of $2.75 to $2.90 per share.

Adjusting for after-tax gain from Pinnacle West’s sale of APS Energy Services in August 2011 and loss from discontinued real estate operations, the company reported net income of $3.09 per share, compared with $3.27 per share reported in 2010.

Revenue

Pinnacle West’s revenue was $667.9 million in the fourth quarter was 1.6% above year ago revenue of $657.4 million. Revenues were almost in line with the Zacks Consensus Estimate. A 2% increase in Regulated Electricity segment revenue largely drove the increase.

Full year revenue grossed $3.2 billion, up 1.6% over 2010 and also in line with the Zacks Consensus Estimate.

Operational Results

Total regulated electricity delivered in the quarter decreased 2.5% to 6,802 Gwh compared with 6,973 Gwh last year.

During the quarter, retail electricity sales grew 1% to 6,139 Gwh compared to 6,076 Gwh last year. The increase was driven by higher electricity consumption by business customers.

Also, average electric customer growth in the quarter was slow at 0.6% compared to 0.5% in the year-ago comparable period.

On the cost side, fuel and purchased power costs at the Regulated Electricity segment showed a decline of 4.5% in the quarter, while the company’s operations and maintenance (O&M) expenses were down 0.9%. The O&M expense decline was primarily due to lower power planned maintenance costs.

Depreciation & amortization expenses increased 0.8% in the quarter. These factors largely aided operating expense to decline 2.0% year over year.

Full-year 2011 operating expenses increased 0.8% over 2010 to $2.49 billion.

An improvement in revenue coupled with downside in costs led Pinnacle’s operating income for the quarter to increase 39.9% year over year, coming in at $78.7 million. Operating income in 2011 improved 4.4% year over year to $746.5 million.

Financial Condition

As of December 31, 2011, Pinnacle West had cash and cash equivalents slumped to $33.6 million from year ago level of $110.2 million.

Long-term debt of $2.95 billion, were almost in line with 2010 end level.

The company generated $1.13 billion of cash from operations in 2011 and diverted $884.4 million towards capital expenditure, $665.2 million towards long-term debt repayments and $221.7 million towards dividends.

Zacks Rank

We retain our Neutral recommendation on Pinnacle West Capital. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

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).