Pinnacle West Earnings: Arizona Regulation Appears To Be Trending Up; Weather Still Volatile

We are reaffirming our $77 per share fair value estimate for Pinnacle West PNW after the company reported earning $0.94 per share in the second quarter, down from $1.45 in the second quarter of 2022. We are reaffirming our narrow moat rating.

Volatile weather this year has made it difficult to draw any long-term growth trends from quarterly earnings comparisons. A cold winter boosted first-quarter earnings, but a mild June sunk second-quarter earnings following a warmer-than-normal June in 2022. Record-breaking hot weather in July likely will be a big third-quarter earnings benefit.

We previously expected a 6% drop in earnings in 2023 based on normal summer weather, in line with management’s initial $3.95-$4.15 EPS guidance range. However, after adjusting for weather trends through July and incorporating the earnings benefit from a favorable regulatory ruling in July, we plan to raise our 2023 earnings estimate in line with management’s new $4.10-$4.30 EPS guidance range. Weather fluctuations don’t have a material impact on our fair value estimate.

Pinnacle West started collecting $52.5 million annualized in July after resolving issues related to environmental controls at the Four Corners power plant. This development along with relatively constructive progress in APS’ current rate review suggests regulatory relations might be rebounding from their low following the 2021 rate review.

We continue to expect state regulators to approve half of APS’ $460 million rate increase request and a 9.5% allowed return on equity, lower than APS’ 10.25% ROE request but higher than the initial 8.7% ROE from the 2021 rate case.

APS’ weather-normalized electricity demand continues to grow near 2%, double the rate as most utilities. This supports our expectation for $1.6 billion of annual capital investment during the next four years, in line with management’s plan. We continue to expect 5% annual long-term earnings growth on a weather-normalized basis.