Pinnacle West Held in Balance - Analyst Blog

On Jun 18, we have issued an updated research report on Pinnacle West Capital Corp. PNW. The utility operator looks well-positioned for 2014 given the steady improvement in the Arizona economy. Continued customer additions and falling non-residential vacancy rates signal positive recovery in the coming years which will bode well for Pinnacle West's future growth.

However, weather variations might pose challenges for the company's sales. Unfavorable weather lowered Pinnacle West's earnings per share by 8 cents in the first quarter of 2014. In addition, market price volatilities might further act as headwinds.

Pinnacle West, a Zacks Rank #3 (Hold) stock, posted mixed financial results in the first quarter with earnings marginally beating the Zacks Consensus Estimate. Revenue, on the other hand, fell short of the Zacks Consensus Estimate. On a year-over-year basis, both top and bottom line declined owing to lower transmission revenues and drop in electricity sales volume.

Meanwhile, Pinnacle West is driving up investments to expand its generation, transmission and distribution operations. For 2014, Pinnacle West intends to invest $973 million. In 2015 and 2016, the company intends to increase capital spending to $1.1 billion and $1.3 billion, respectively. This infrastructure-investment strategy will lend substantial upside to the company's future momentum.

In addition, the solar industry will witness the fastest growth in the long term thanks to the Obama Climate Plan. Solar power generation will account for 7.5% of total electricity generation from all non-hydro renewable energy sources in 2040 as per the Energy Information Administration.

Pinnacle West's Arizona Sun program will stand to benefit from the encouraging opportunities in the utility-scale solar market. Also, it will help the company to achieve the targeted renewable energy standard of 15% of retail electric sales from the renewable sources by 2025.

Nonetheless, coal as of now still dominates Pinnacle West's generation mix and is subject to strict pro-environment legislations. The company could face the brunt of cost pressure given the recent plan announced by the Obama administration that calls for the reduction in carbon emissions by 30% by 2030 from the 2005 levels.

Key Picks from the Sector

Other better-ranked utility players include NRG Energy Inc. NRG, Black Hills Corp. BKH and Entergy Corp. ETR. All the stocks currently carry a Zacks Rank #1 (Strong Buy).