Pinnacle West Earnings Sink on Rate Cut

We are reaffirming our $77 per share fair value estimate for Pinnacle West PNW after the company announced earning $4.26 per share in full-year 2022, down from $5.47 in 2021. This was in line with our expectations. We are reaffirming our narrow moat and stable moat trend ratings.

The key reason for the drop in earnings was the Arizona regulatory decision in December 2021 that cut electricity rates $200 million along with several regulatory accounting changes. Lower rates during the year lowered earnings by $0.98 per share. Favorable weather and strong customer growth offset some of the regulatory headwinds.

We don’t expect earnings to reach 2021 levels until 2026. This will require a constructive outcome in Arizona Public Service’s recent request for a $460 million rate increase. We assume regulators approve only half of that amount. This will be the first APS rate case for three of the five commissioners on the Arizona Corporation Commission, including chairperson Jim O’Connor, following November 2022 elections. Republicans have a 4-1 majority, but we don’t expect political party to be a deciding factor.

We expect mostly flat earnings in 2023 assuming a return to normal weather, which added $0.39 per share year over year in 2022. Our earnings estimate is in line management’s $3.95-$4.15 EPS guidance range. We think continued customer growth near 2%—one of the highest growth rates in the sector—will partially offset rising costs, especially interest costs. We continue to forecast 5% earnings growth through 2026 off weather-normalized 2022 earnings, at the low end of management’s 5%-7% target.

Management added $600 million to their three-year capital investment plan, now totaling $5.3 billion. This is in line with our forecast. However, we think management might scale back growth investment if it receives another challenging outcome in its current rate review. That also could put the dividend at risk.