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We reiterate our neutral recommendation on Pinnacle West Corporation (PNW - Analyst Report). Pinnacle West’s second quarter 2012 results surpassed the Zacks Consensus Estimate and the year-ago figure. We remain confident of Arizona's fundamentals, allowing Pinnacle West to grow to stronger levels as the economic environment improves.

The recent approval of the retail rate case decrease filed by Arizona Public Service Company, the largest electric utility of Pinnacle West, is expected to increase the company’s consumer base. We anticipate this trend to continue in the coming years with average annualized customer growth of 2% over the period 2012 through 2015.

However, Arizona Public Service Company is subject to comprehensive regulation by federal, state and local regulatory agencies, which will significantly influence its operational results.

Pinnacle West’s increased capital expenditure outlook of $1.1 billion will certainly enable it to capture high-performing assets in the future. The company’s favorable renewable prospects like the AZ Sun program and the high-quality Four Corners acquisition would offer ample opportunities for growth. In addition, Pinnacle West’s long-term credit rating upgrade as awarded by both Moody’s and Fitch to Baa 1 and BBB+ will  propel the company’s stock profile in the market and also provide increased access to capital which would help in improving its financials in the future.

Nonetheless, the company’s business is exposed to weather variations, which lead to demand sensitivities and hence causes volatility in revenue. Additionally, lack of access to sufficient water could create operational difficulties and influence margins.

Pinnacle West expects retail customer count to increase approximately 1%. Total electricity gross margin is estimated to be in the range of $2.13 billion to $2.18 billion. The company expects adjusted earnings for 2012 to be in a range of $3.35-$3.50 per share.

The Zacks Consensus Estimates for the third quarter and full year 2012 currently stand at $2.29 per share and $3.42 per share, respectively. The company’s closest peer is Arizona-based, UNS Energy Corporation .

Pinnacle West presently has a short-term Zacks #2 Rank (Buy rating). Based in Phoenix, Arizona, the company 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.

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