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Pinnacle West Beats, Guides 2012

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Pinnacle West Capital Corp.’s (PNW - Free Report) adjusted earnings of $1.12 cents per share in the second quarter of 2012 outpaced the Zacks Consensus Estimate by 8 cents. Earnings exhibited a significant improvement of 43.5% from 78 cents earned in the year-ago quarter. Adjusted earnings of $123.1 million improved 43% year over year.

A combination of hotter-than-normal weather, lower infrastructure-related costs, higher transmission revenues and lower fuel costs and improved mark-to-market valuations of fuel contracts aided Pinnacle West to deliver strong numbers. However, higher operations and maintenance expenses and lower retail electricity sale curbed the positives.

Adjusting for loss from discontinued real estate and energy services businesses of $0.8 million or 1 cent a share, the company reported net income of $122.3 million or $1.11 per share, compared with $86.7 million or 79 cents per share reported in the year-ago quarter.


Pinnacle West reported revenue of $878.6 million in the quarter, increasing 9.8% from the year-ago revenue of $799.8 million. Revenues surpassed the Zacks Consensus Estimate of $861 million. An increase in Regulated Electricity segment revenue was largely responsible for the overall improvement.

Operational Results

Total regulated electricity delivered in the quarter increased 7.5% to 8,291 Gwh from 7,711 Gwh last year.

During the quarter, retail electricity sales increased 8% to 7,255 Gwh from 6,714 Gwh last year. The increase was due to higher electricity consumption by business as well as residential customers.

Also, average electric customer growth in the quarter was 0.9%, compared with 0.3% in the year-ago comparable period.

On the cost side, fuel and purchased power costs at the Regulated Electricity segment increased 8.5% in the quarter, while the company’s operations and maintenance (O&M) expenses increased 2.5%.

Depreciation & amortization expenses decreased 5.6% in the quarter. These factors were largely responsible for a 7.3% 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 21.6% in the quarter.

Financial Condition

As of June 30, 2012, Pinnacle West’s cash and cash equivalents slumped 66% to $11.2 million from the 2011-end level of $33.6 million.

Long-term debt of $3.4 billion increased 11.7% from the 2011-end level.

The company generated $458.6 billion in cash from operations in the first half of 2012, declining 5.1% over the prior-year period.

Capital expenditure increased 9.7% year over year to $424.8 million.

2012 Guidance

Pinnacle West expects retail customers to increase approximately 1%.

Total electricity gross margin to be in a range of $2.13 to $2.18 billion.

Operating expenses in a range of $1.33 to $1.36 billion and interest expense 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 reported second quarter 2012 net income of 64 cents, exceeding the Zacks Consensus Estimate by 3 cents.

NV Energy Inc. reported second quarter 2012 earnings of 29 cents, exceeding the Zacks Consensus Estimate by 11 cents.

Zacks Rank

We retain our Neutral recommendation on Pinnacle West Capital. The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates slight upward boost on the stock over the near term.

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