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
).
PINNACLE WEST (PNW): Free Stock Analysis Report
UNS ENERGY CORP (UNS): Free Stock Analysis
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