A wholly owned subsidiary of Pinnacle West Capital Corporation PNW, Arizona Public Service Company (APS) has completed the construction of the previously announced Red Rock Solar Plant, a 40 megawatt (“MW”) utility-scale solar facility, in partnership with Arizona State University (ASU) and PayPal Holdings, Inc. PYPL.
Details of the Projects
The photovoltaic (PV) plant is located in Red Rock, AZ. Energy generated by the plant will be purchased by ASU and PayPal as part of their broader efforts to lower carbon pollution by transitioning to clean energy. This collaboration demonstrates the Arizona business community’s initiative to promote the use of solar energy in a cost-effective manner.
Red Rock is APS’ largest grid-scale solar power plant and it leverages economies of scale to provide additional, affordable solar to more customers.
Focus on Renewable Energy
Pinnacle West continues to focus on enhancing its renewable capacity. As of Nov 3, 2016, the company’s total renewable portfolio was 1,369 MW. In 2016, solar energy on APS’ system reached one gigawatt, the only utility outside California to achieve the mark.
In Sep 2016, coal was projected to constitute 27% of the total generation mix in 2017, which would decline to 14% by 2032 on account of the company’s persistent efforts to lower the fossil fuel’s usage in energy generation.
Shares of Pinnacle West have gained 21.7%, outperforming the Zacks categorized Utility-Electric Power industry’s gain of 6.5% over the last 12 months.
The company carries investment grade ratings of A3, A- and A- by Moody’s, S&P and Fitch, respectively. A higher rating denotes higher credit worthiness, thereby ensuring access to cheap financing options. Pinnacle West’s solid credit rating will allow it to secure funds from the market at favorable conditions despite the recent rate hike. This is boosting investor interest in the stock and in turn its price.
Utility Industry Outlook
Primarily, three factors — historically low interest rates, public policies that promote the use of cleaner sources of energy and innovative drilling technologies — have led many companies in the utility space to venture into new areas of growth.
However, the Federal rate hike in Dec 2016, to some extent, dampened the enthusiasm for high-yielding utilities stocks, as other income-oriented investments, such as bonds, become more attractive in comparison.
The Fed’s hawkish stance on interest rate hikes exposes utilities with high valuations and limited growth prospects to major risk.
As per an Energy Information Administration report, annual U.S. electricity produced from natural gas (34%) surpassed coal-fired generation (30%) in 2016. However, natural gas prices have recently begun to rise, thereby encouraging electricity generation from coal-fired power plants, indicating a trend that is likely to continue through 2017. As a result, share of natural gas in the generation mix in 2017 is expected to fall to 32.3%, while coal rises to 32.5%.
In addition, President-elect Donald Trump offers another ray of hope to utilities as his campaign publicly advocated his support for the fossil fuel. His policies may call for the rollback of the Clean Power Plan and other decarbonization regulations, which have been hurting utilities for quite some time now.
Zacks Rank & Other Key Picks
Pinnacle West carries a Zacks Rank #2 (Buy). Other favorably placed stocks in the same space include DTE Energy Company DTE and NextEra Energy, Inc. NEE.
On an average, DTE Energy has delivered a positive earnings surprise of 10.07% in the trailing four quarters. The company's 2016 earnings estimates increased from $5.26 to $5.27 over the last 60 days. DTE Energy sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
NextEra Energy, another Zacks Rank #2 stock, delivered a positive earnings surprise of 7.22% in the trailing four quarters. The company's 2016 earnings estimates increased from $6.21 to $6.22 over the last 60 days.
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Pinnacle West Capital Corporation (PNW): Free Stock Analysis Report
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