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Pinnacle West Capital Corp.’s (PNW - Analyst Report) earnings of $2.21 per share in the third quarter of 2012 lagged the Zacks Consensus Estimate of $2.23. Earnings exhibited a decline of 1.3% from $2.24 earned in the year-ago quarter. Earnings of $244.8 million inched down 0.4% year over year.

A combination of milder weather, higher operations and maintenance expenses and lower retail electricity sales induced the company to post weak numbers. However, lower infrastructure-related costs, higher transmission revenues and regulatory settlement limited the downside.

Revenue

Pinnacle West reported revenue of $1.11 billion in the quarter, declining 1.4% from the year-ago revenue of $1.12 billion. Revenues fell short of the Zacks Consensus Estimate of $1.16 billion.

Operational Results

Total regulated electricity delivered in the quarter waned 1.1% to 10,276 Gwh from 10,396 Gwh in the prior year.

During the quarter, retail electricity sales decreased 9% to 9,064 Gwh from 9,432 Gwh last year. The decline was due to lower electricity consumption by business as well as residential customers.

Average electric customer growth in the quarter was 1.2%, compared with 0.4% in the year-ago comparable period.

On the cost side, fuel and purchased power costs at the Regulated Electricity segment decreased 10.4% in the quarter, while the company’s operations and maintenance (O&M) expenses increased 5.1%.

Depreciation & amortization expenses skidded 5.6% in the quarter. These factors were largely responsible for a 4.1% year-over-year overall increase in operating expense.

The magnitude of increase in expenses more than offset the magnitude of revenue improvement, thereby driving operating income to grow 3.0% in the quarter.

Financial Condition

As of September 30, 2012, Pinnacle West’s cash and cash equivalents soared to $79.5 million from the 2011-end level of $33.6 million.

Long-term debt of $3.4 billion increased 10.6% from the 2011-end level.

The company generated $929.5 million in cash from operations in the first nine months of 2012, increasing1% over the prior-year period.

Capital expenditure elevated 4.3% year over year to $670.7 million.

2012 Guidance

Pinnacle West expects retail customers to increase approximately 1%.

Total electricity gross margin is expected to be in the range of $2.13 to $2.18 billion.

Operating expenses is expected to range from $1.32 to $1.35 billion, down from the prior guidance of $1.33 to $1.36 billion and interest expense is expected to range between $180 to $190 million.

Based on the combination of all these factors, the company expects adjusted earnings in a range of $3.35 to $3.50 per share.

Peer Take

UniSource Energy Corporation (UNS - Snapshot Report) reported third quarter 2012 net income of 1.24 per share, exceeding the Zacks Consensus Estimate by 3 cents.

NV Energy Inc. reported third quarter 2012 earnings of 94 cents, exceeding the Zacks Consensus Estimate by 5 cents.

Zacks Rank

We retain our Outperform 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.

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