Pinnacle West Earnings: Regulatory Activity Heats Up After Scorching Summer

We are reaffirming our $77 per share fair value estimate for Pinnacle West PNW after the company reported earning $3.50 per share in the third quarter, up from $2.88 in the third quarter of 2022. We are reaffirming our narrow moat rating.

Extreme weather conditions continue to result in volatile earnings that we do not think represent the steady core growth in Pinnacle West’s core utility business. An abnormally warm summer added $0.38 per share to third quarter earnings year over year. This follows a $0.25 per share year-over-year headwind from mild weather during the second quarter, a $0.09 per share benefit in the first quarter.

At the start of the year, we expected a 6% drop in earnings in 2023 after backing out a $0.39 weather benefit in 2022, in line with management’s initial $3.95-$4.15 EPS guidance range. However, after adjusting for a net-positive weather impact so far this year, Pinnacle West is on track to keep earnings mostly flat, in line with management’s $4.10-$4.30 EPS guidance range.

Pinnacle West will have difficulty offsetting weather normalization next year, even as the core business continues to grow. Management expects 2% customer and electric usage growth, a factor of migration into Arizona and a surge in commercial demand such as data centers. 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.

Two key regulatory developments to watch early next year that will drive near-term and long-term growth are Pinnacle West’s 15-year integrated resource plan filing and its customer rate increase request. We continue to expect state regulators to approve slightly more than half of APS’ updated $378 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.