Pinnacle West Beats on Revs, Earnings Lag

Zacks

Pinnacle West Capital Corp. (PNW) reported adjusted earnings per share of $2.04 in the third quarter of 2013 compared with $2.21 in the year-ago quarter. Earnings also lagged the Zacks Consensus Estimate of $2.16 by 5.5%.

The downside in earnings reflects lower electric sales volume, increased operating and maintenance expense and higher infrastructure costs partially offset by decline in income taxes.

Total Revenue

Quarterly revenue was $1,152.4 million, up 3.9% from the year-ago revenue of $1,109.5 million. Revenue also surpassed the Zacks Consensus Estimate by 4.2%.

The top-line growth is attributable to a steady recovery in the Arizona economy along with a rise in the customer base.

Operational Highlights

During the quarter, total electricity sales volume declined to 10,232 gigawatt-hour (:GWH) from 10,276 GWH in the year ago quarter. This was due to lower retail sales in the third quarter.

On the cost side, fuel and purchased power expenses climbed 15.9% to $350.9 million from the year-ago quarter. The company’s operations and maintenance (O&M) expenses also rose 5.7% year over year to $233.3 million due to an increase in communication costs related to net metering and deregulation partially tempered by a decline in fossil generation costs.

Operating income declined 7.2% year over year to $415.7 million in the third quarter.

Financials

As of Sep 30, 2013, Pinnacle West’s cash and cash equivalents were $135.5 million versus $26.2 million as of Dec 31, 2012.

Long-term debt as of Sep 30, 2013, was $2,820.3 million compared with $3,199.1 million as of Dec 31, 2012.

The company generated $882.3 million in cash from operations in the nine months ending Sep 30, 2013 compared with $929.5 million in the nine months ending Sep 30, 2012.

Guidance

Pinnacle West retained its earnings guidance for 2013 in the range of $3.55-$3.70. For 2014, the company expects earnings in the range of $3.60-$3.75 per share.

The retail customer base is expected to increase on an average by 2% annually in the period 2013 to 2015. Pinnacle West maintained its operating expenses outlook for 2013 in the range of $1.37 billion to $1.40 billion. Operating and maintenance expense for 2014 is expected in the $790-$810 million range.

Other Utility Company Releases

Xcel Energy Inc. (XEL) posted earnings per share of 77 cents, exceeding the Zacks Consensus Estimate by a penny.

Wisconsin Energy Corp. (WEC) reported third quarter 2013 earnings of 60 cents per share, beating the Zacks Consensus Estimate by 4 cents.

Exelon Corp. (EXC) reported pro forma earnings of 78 cents per share, beating the Zacks Consensus Estimate by 12 cents.

Our View

Pinnacle West posted mixed financial results as its earnings trailed our expectation while revenue outpaced it. The gradual improvement in the Arizona economy is expected to continue to drive sales.

The company’s unrelenting efforts to develop its solar asset portfolio and expansion of transmission capabilities will boost future growth.

However, the ongoing water scarcity issues in the U.S., particularly in Arizona, might create operational difficulties. Indeed Pinnacle West’s generating plants require considerable supplies of water. Pinnacle West presently carries a Zacks #3 Rank (Hold).

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