Pinnacle EPS Excels, Revenue Lags - Analyst Blog

Pinnacle West Capital Corp. (PNW) reported fourth quarter 2010 earnings of 6 cents per share, surpassing the Zacks Consensus Estimate of 1 cent and last year's loss of 16 cents. For full-year 2010, Pinnacle's earnings reached $3.08 per share, which exceeded the Zacks Consensus Estimate of $3.02 by 6 cents. Earnings for the year also outperformed the year-ago earnings of $2.30.

The results were helped by higher revenues from retail electricity rate increases, disciplined cost management and high concentration on its core electricity business.

Revenue

Pinnacle West clocked operating revenues of $683.6 million in the reported quarter, an increase of 3.4% compared with $660.9 million in the year-ago quarter. Revenues in the quarter, however, lagged the Zacks Consensus Estimate of $702 million.

The year over year increase in quarterly revenues was driven by a 0.5% increase in Regulated Electricity segment revenue and nearly 184% growth in Other revenue.

Full-year revenues increased 3% year over year to $3.26 billion, while it was marginally behind the Zacks Consensus Estimate of $3.34 billion. For the full year, Regulated Electricity segment revenue improved 1% year over year, while Other revenues grew 210%.

Operational Results

Operating results in both periods were mainly helped by higher revenues related to APS's retail electricity rate increases implemented in January 2010, partially offset by increased operating expenses. 2010 results also benefited from lower real estate impairment charges recorded in the year due to the disposal of SunCor assets.

In the reported quarter, total regulated electricity delivered in the quarter was 6,993 Gwh compared to 6,782 Gwh last year. Total retail electricity sales increased marginally to 6,076 Gwh compared to 6,071 Gwh in fourth quarter 2009. Average electric customer growth in the quarter remained flat at 0.5% compared to last year.

Full year total regulated electricity sales totaled 31.9 million Gwh (down 1.2% year over year) with total retail electricity sales of 27.7 million Gwh (down 1.8%). Average electric customer growth for the year was also flat at 0.6% compared to 2009.

Pinnacle West's fuel and purchased power costs at the Regulated Electricity segment showed an increase of 12.6% in the quarter, while the company's overall operations and maintenance expenses increased 5.2% and depreciation & amortization expenses increased 3.2% in the quarter. This led total operating expenses to increase by 1.7% to $624.3 million.

Full-year operating expenses increased 1.0% year over year to $2.5 billion with fuel & purchased power costs up 11.2%, operations & maintenance expense up 5.5% and depreciation & amortization up 1.7%.

Despite the rise in operating costs, the company's operating income for the quarter improved 26.5% to $59.3 million from $46.9 million in the year-ago period. Operating income for the year also rose 18.6% to $723.9 million.

Pinnacle West reported quarterly consolidated net ongoing earnings of $7.1 million compared to a loss of $16.1 million in the year-ago quarter. The company's annual ongoing earnings totaled $330.4 million versus $233.3 million in 2009.

Financial Condition

As of December 31, 2010, Pinnacle West had cash and cash equivalents of $110.2 million and long-term debt of $3.0 billion, compared to $145.4 million of cash and $3.4 billion of long-term debt as of December 31, 2009.

The company generated $750.5 million of cash from operations in the year and diverted $748.4 million towards capital expenditure, $106.6 million towards long-term debt repayments and $217.0 million towards dividends.

Outlook

For fiscal 2011, Pinnacle West expects its earnings per share to come in the range of $3.00 to $3.15, within the Zacks Consensus Estimate of $3.07.

Our View

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. The company primarily competes with Southwest Gas Corporation (SWX) and Allegheny Energy Inc. (AYE).

Pinnacle West currently has a short term Zacks #3 Rank, which supports our long-term Neutral recommendation.