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Pinnacle Upgraded to Outperform

Zacks Equity Research

We have upgraded our recommendation on Pinnacle West Capital Corporation (PNW) to Outperform from Neutral. This revision was primarily driven by the company’s strong financial position, improvement in credit rating along with steady inorganic growth strategy. In addition, we remain confident about Arizona's fundamentals, which are allowing the company to reach higher financial as well as operational levels as the economic environment picks up. Pinnacle West expects annual customer growth of approximately 2% for 2012 through 2015 to benefit its overall results.

We appreciate Pinnacle West’s continuous effort toward maintaining a solid balance sheet and a flexible liquidity position. In the first half of 2012, the company witnessed increased cash flow of $458.6 million compared with $436.2 million in the year-ago comparable period. We believe Pinnacle West’s attempt to increase cash flow generation is expected to reduce its external financing needs, which in turn, will enable the company to minimize its borrowing costs.

It is evident from the past that Pinnacle West frequently engages in investments related to its inorganic growth strategy to diversify and expand its asset portfolio. In 2012, the company has already increased its capital expenditure outlook to $1.1 billion to continue its existing and new external as well as internal expansion activities. During second-quarter 2012, Pinnacle West was involved in two major programs – a renewable energy initiative called the AZ Sun program and acquisition of the high-quality Four Corners. We believe these projects will act as a positive catalyst for the company’s forthcoming financial and operational performance.

In second-quarter 2012, Pinnacle West’s consumer portfolio increased by 0.9% compared with 0.8% in the previous quarter. Recently, the company received approvals from the Arizona Public Service Company to decrease its retail electricity rate. We believe this effort will enable the company to increase its future consumer headcount, which will subsequently strengthen its future financial results. 

Although we have identified several key stimuli for the company’s future growth; we are skeptical about stringent regulations, unexpected disruption of services owing to power outages or equipment failure, and volatile weather conditions, which might challenge Pinnacle West’s future performance.

Phoenix, Arizona-based Pinnacle West Capital Corporation 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. With a market capitalization of $5.77 billion, Pinnacle West has 6,663 full time employees. The company currently has a short-term Zacks #1 Rank (Strong Buy rating) and its closest peer is Arizona-based, UNS Energy Corporation (UNS).

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