A Hold on Pinnacle West

We retain our Neutral recommendation on Pinnacle West Capital Corporation ( PNW - Analyst Report ) . Pinnacle West’s first quarter 2012 loss was 7 cents per share compared with a loss of 15 cents per share in the year-ago period and in line with the Zacks Consensus Estimate. The loss narrowed down considerably year-over-year due to solid operational performance along with lower expenses. However, the company still reported in the red owing to weather irregularities and lower customer usage.

Going forward, we remain confident of Arizona's fundamentals, allowing Pinnacle to grow to stronger levels as the economic environment improves. We believe the company’s increasing consumer portfolio will aid in strengthening its revenue base in the years ahead. Moreover, Pinnacle West expects its customer count to grow at an annualized rate of 1.6% during the period 2012 through 2014, which will further enhance the company’s revenue base. Besides, Arizona Public Service Company’s energy efficiency programs along with investments in resource rich areas will improve its stock performance.

Pinnacle West also recently in mid-May received favorable approval from the Arizona Corporation Commission for a retail rate case settlement to be effective from July 1, 2012. The rate case approval in less than one year after the initial June 1, 2011 filing reinforces our view that the company operates within the purview of a regulatory friendly body – Arizona Corporation Commission.

Pinnacle West has been a prominent player in the Arizona utility market for more than eighty years and it has kept its growth momentum on track by engaging in acquisitions and diversification activities. Its recent plans to acquire Edison International’s ( EIX - Analyst Report ) interest in the Four Corners plant in New Mexico and develop its solar power plants would further solidify its position in the market. We believe going forward focus on cost structure improvement, improvement in rate base, and higher customer count should help it sustain a steady level of growth.

Conversely, running of power generation facilities involves risks that could result in unscheduled outages or reduce output that could materially affect Pinnacle West’s operations. Any change in credit rating could also affect market prices of Pinnacle’s and its primary subsidiary, Arizona Public Service's (“APS”) securities and limit its access to capital or increase borrowing costs leading to financial losses.

Also, APS is exposed to comprehensive regulation by federal, state and local regulatory agencies. Regulatory bottlenecks significantly influence its business, liquidity, operational results and its ability to promptly and fully recover costs from utility customers.

Currently our earnings estimate for Pinnacle West is witnessing an upward trend. Per the Zacks Consensus Estimate the company’s earnings growth rate is projected to be roughly 12.9% and 5.1%, for fiscals 2012 and 2013, respectively. The Zacks Consensus Estimates for the second quarter and fiscal 2012 are currently pegged at 99 cents per share and $3.37 per share, respectively.

Pinnacle West Capital Corporation presently retains a Zacks #2 Rank which translates to a short-term Buy rating. The company competes with UniSource Energy Corporation ( UNS - Snapshot Report ) and Southwest Gas Corporation ( SWX - Snapshot Report ) .

Pinnacle West Capital based in Phoenix, Arizona provides electricity services in the state of Arizona. The company is involved in the generation, transmission, and distribution of electricity from coal, nuclear, gas and oil, and renewable resources. The company, which has a market cap of $5.61 billion, owns or leases roughly 6,340 MW of regulated generation.