Executives with Pinnacle West Capital Corp. last week said that the Arizona-based power company’s asset-backed trading operations make Pinnacle “cautiously optimistic” that it can take advantage of opportunities that crop up in the western power markets, which has seen wholesale power prices finally start to firm up in recent months.

Counterbalancing that fairly rosy outlook are continuing concerns over liquidity, which could be further crimped if several power companies facing severe financial crunches fall by the wayside over the next year or two, Pinnacle officials warned.

“The wholesale power markets in the West continue to provide opportunities for our power marketing group and our unregulated generation,” said Jack Davis, Pinnacle’s president, in a conference call with analysts following Pinnacle’s release of fourth quarter and 2002 earnings.

Prices in the region have firmed somewhat in the last two months, but Pinnacle’s “efforts are focused more on managing the risks associated with wholesale power sales and procurement.” Davis noted that 2002 “was a very successful year for us and our energy operations, despite western wholesale power prices being down some 75% from the levels [of] 2001.”

Pinnacle sees reserve margins in the Southwest in the 15%-20% range for the next several years.

“Obviously, credit is an issue, and a lack of liquidity in the market, but conversely transparency has disappeared and we think that will contribute to widening margins,” added Don Brandt, Pinnacle’s chief financial officer.

“It’s still pretty speculative going forward over the next year as to how we see developments in the Western power markets, but we think we’re positioned pretty well as an asset-backed trading organization, and that wasn’t too fashionable two years ago, but it is today,” Brandt said. “We’re optimistic going forward, but cautiously optimistic.”

“Relative to the contracts we have in place, we’re pretty well hedged into our profit positions,” Brandt noted at a later point in the call. “For those contracts, we won’t see — assuming market prices continue to firm up — a big upside. It will give us a little opportunity to trade around those positions going forward, but more importantly it will give us more opportunities in the market with additional customers and/or counterparties.”

Meanwhile, an analyst asked Pinnacle executives to extrapolate on what impact the company will see if the current level of natural gas prices continues to be in the range of $5.00 for the rest of this year and into 2004.

In October, Pinnacle said that it was looking at about a $20 million increase in gas prices in 2003 over 2002 “as a result of, at least at that time, out-of-the-money hedges,” said Bill Post, Pinnacle’s chairman. “For the most part, those hedges are now in-the-money, so in terms of the estimate from what we had in October to where we stand today, those hedge positions have actually improved as a result of this increase in terms of overall price.”

“With that position on gas, going forward with the movement in electric prices, that’s very positive,” said Brandt. “If that trend continues, we’re positioned to capitalize on it. Part of the uncertainty going into ’03 and ’04 is, basically, around the western power markets,” he added.

“On the one hand, we see prices firming up. Depending on what happens in the summer out here, it’s potentially on the positive side,” the CFO said. “However, the concern in the back of our minds is the liquidity issue with some of the players.”

Brandt said “We have the potential to lose a number of the troubled companies over the next year or two and that will put a real dent in overall market liquidity, which is important for all the participants. So it’s trying to balance those negatives and positives. It’s fairly uncertain, but I think that our downside is relatively minimal, and we’re positioned to take advantage of an uptick in the market if it comes about.”

Meanwhile, Pinnacle executives said that the company this week will seek clarification of an Arizona Corporation Commission (ACC) judge’s recent decision related to an upcoming bidding process for power in the state.

At issue is an ACC administrative law judge’s (ALJ) late January recommendation that a bidding process start next month for the state’s two major private-sector electric utilities to obtain up to 3,200 MW of power on the wholesale market.

“Our preliminary review would indicate that the ALJ’s recommendation basically adopts the ACC staff’s position,” Davis went on to note. “However, the recommendation is still being analyzed and we do have concerns about some apparent inconsistencies and ambiguities in the recommendation.” Pinnacle intends to seek clarification of these issues in a filing that will be made at the ACC on Feb. 10.

Pinnacle reported consolidated income before an accounting change for 2002 of $215.2 million, or $2.53 per diluted share of common stock, compared with $327.4 million, or $3.85 per share, for the prior year. The results were in line with previous disclosures by the company.

Consolidated net income for 2002 was $149.4 million, or $1.76 per diluted share, compared with $312.2 million, or $3.68 per share, in 2001. Results for 2002 included a $65.7 million charge due to the adoption of a new accounting standard for trading activities.

©Copyright 2003 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.