8-K: Pinnacle West Outlines Robust Growth and Strategic Capital Plan at July Investor Meetings

Pinnacle West Capital Corporation and Arizona Public Service Company presented a strong outlook for customer growth, capital investment, and financial performance, emphasizing an improved regulatory environment and commitment to affordability.

Summary

• Pinnacle West Capital Corporation (Pinnacle West) and Arizona Public Service Company (APS) participated in investor meetings in July 2025, utilizing detailed handouts.
• As of December 31, 2024, consolidated assets were $26 billion, market capitalization was $9.64 billion, and generating capacity was 6.5 GW, serving 1.4 million customers.
• The company's clean energy mix stood at 54%, with retail sales split 52% residential and 48% non-residential.
• APS projects residential customer growth of 1.5%-2.5% for 2025, following 2.1% growth in 2024, driven by Arizona's robust economy and affordable housing.
• Large commercial and industrial (C&I) customers are expected to contribute 3%-5% to the 4%-6% long-term weather-normalized sales growth guidance through 2027.
• The company anticipates long-term Earnings Per Share (EPS) growth of 5%-7% Compound Annual Growth Rate (CAGR) off the original 2024 midpoint, targeting 2024-2028.
• A total capital expenditure (CapEx) of $9.66 billion is planned for 2024-2027, allocated across Generation ($2.06B), Transmission ($2.40B), Distribution ($2.55B), and Other ($2.65B).
• The projected ACC jurisdictional rate base is expected to grow from $11.23 billion in 2025 to $14.4 billion in 2027, with an allowed Return on Equity (ROE) of 9.55% (ACC) and 10.75% (FERC).
• The 2025-2027 financing plan includes approximately $3.6 billion from cash from operations, $2.5 billion-$2.7 billion in APS debt, $500 million-$700 million in PNW debt, and $700 million-$900 million in PNW equity.
• In May 2025, Pinnacle West issued $800 million in unsecured bonds, using proceeds to pay off $500 million PNW 2025 maturity and $300 million APS 2025 maturity.
• Operating & Maintenance (O&M) guidance for 2025 is projected at $910 million-$920 million for core O&M, $150 million-$160 million for RES/DSM, and $55 million-$65 million for planned outages.
• APS rates have remained below the rate of inflation, with an average annual change of 2.53% from 2018-2024, compared to CPI at 3.78% and Phoenix CPI at 4.75%.
• Annualized dividends per share were $3.58 in 2024, with a long-term dividend payout ratio target of 65-75% and a ~4.1% Dividend Per Share (DPS) CAGR.
• The 2025 APS rate case application, filed June 13, 2025, requests a net revenue increase of $580 million, leading to a 13.99% customer net revenue impact on Day 1, with rates requested to be effective in the second half of 2026.
• The rate case proposes an allowed Return on Equity (ROE) of 10.70% and a capital structure of 47.65% long-term debt and 52.35% common equity.
• A Formula Rate Adjustment Mechanism (FRAM) is proposed, allowing for annual updates and potential rate adjustments if actual ROE falls outside a +/20 basis points band of the authorized ROE.
• As of March 31, 2025, approximately 187,140 residential grid-tied solar photovoltaic (PV) systems, totaling 1,676 MWdc, have been installed in APS's service territory.

Sentiment

Score: 9

Explanation: The filing presents a highly positive outlook, emphasizing strong customer growth, a supportive regulatory environment, robust capital investment plans, disciplined cost management, and a commitment to shareholder returns through EPS growth and dividends. All key financial metrics and strategic initiatives are presented favorably, indicating strong confidence in future performance.

Positives

• Arizona's robust economy and strong customer growth, with Maricopa County ranking third among U.S. counties for growth and Phoenix ranking first for manufacturing growth.
• Improved regulatory environment, including approval of a Formula Rate Policy Statement and continued support for adjustor mechanisms like the System Reliability Benefit (SRB) Surcharge, which reduces regulatory lag.
• Strategic capital plan of $9.66 billion for 2024-2027, optimized to reliably serve the growing service territory and drive strong rate base growth.
• Commitment to customer affordability, with APS rates remaining well below the rate of inflation (2.53% average annual change vs. CPI 3.78% and Phoenix CPI 4.75% from 2018-2024).
• Long-term EPS growth target of 5%-7% CAGR off the original 2024 midpoint, supporting competitive total shareholder return.
• Healthy capital structure and solid investment-grade credit ratings (APS: Baa1/BBB+/BBB+; Pinnacle West: Baa2/BBB+/BBB), supporting affordable growth.
• Proven track record of dividend growth with a ~4.1% DPS CAGR and a target payout ratio of 65-75%.
• Proactive wildfire mitigation strategies, including comprehensive vegetation management, asset inspection, and operational mitigations.

Risks

• Uncertainties associated with the current and future economic environment, including economic growth rates, labor market conditions, inflation, supply chain delays, increased expenses, and volatile capital markets.
• Current and future economic conditions in Arizona, such as the housing market and overall business and regulatory environment.
• Ability to manage capital expenditures and operations and maintenance costs while maintaining reliability and customer service levels.
• Direct or indirect effect on facilities or business from cybersecurity threats or occurrences.
• Variations in demand for electricity due to weather, seasonality, general economy, social conditions, customer and sales growth (or decline), energy conservation measures, distributed generation, and technological advancements.
• Potential effects of climate change on the electric system, including weather extremes like prolonged drought and high temperature variations.
• Power plant and transmission system performance and outages.
• Competition in retail and wholesale power markets.
• Regulatory and judicial decisions, developments, and proceedings, including new legislation, ballot initiatives, and interpretations of existing regulations.
• Fuel and water supply availability.
• Ability to achieve timely and adequate rate recovery of costs through rates and adjustor recovery mechanisms, including returns on and of debt and equity capital investment.
• Ability of APS to meet renewable energy and energy efficiency mandates and recover related costs.
• Risks inherent in the operation of nuclear facilities, including spent fuel disposal uncertainty.
• Data security breaches, terrorist attack, physical attack, severe storms, or other catastrophic events.
• Development of new technologies which may affect electric sales or delivery, including delays in their development and application.
• Cost of debt, including increased cost from rising interest rates, and equity capital, and ability to access capital markets when required.
• Environmental, economic, and other concerns surrounding coal-fired generation, including regulation of greenhouse gas emissions.
• Volatile fuel and purchased power costs.
• Investment performance of assets in nuclear decommissioning trust, captive insurance cell, coal mine reclamation escrow, pension, and other postretirement benefit plans and resulting impact on future funding requirements.
• Liquidity of wholesale power markets and the use of derivative contracts.
• Potential shortfalls in insurance coverage.
• New accounting requirements or new interpretations of existing requirements.
• Generation, transmission, and distribution facilities and system conditions and operating costs.
• Ability to meet anticipated future need for additional generation and associated transmission facilities.
• Willingness or ability of counterparties, power plant participants, and power plant landowners to meet contractual or other obligations or extend rights for continued power plant operations.
• Restrictions on dividends or other provisions in credit agreements and Arizona Corporation Commission (ACC) orders.

Future Outlook

Pinnacle West projects long-term EPS growth of 5%-7% CAGR off its original 2024 midpoint through 2028, supported by an optimized capital plan of $9.66 billion for 2024-2027. The company aims to maintain a healthy capital structure with accretive equity, achieve declining O&M per MWh, and continue competitive shareholder dividends. An improved regulatory environment, including the proposed Formula Rate Adjustment Mechanism, is expected to lead to more consistent and timely cost recovery, further supporting economic development and sales growth.

Management Comments

• We are focused on maintaining customer affordability through disciplined cost management, customer growth, innovative customer programs, a balanced long-term capital plan, and stakeholder engagement.
• Our investor goals going forward include long-term EPS growth of 5%-7%, an optimized capital plan, managing a healthy capital structure with accretive equity, declining O&M per MWh, competitive shareholder dividend, and solid balance sheet and credit ratings.
• We are focused on cost control and customer affordability, aiming for reduced year-over-year core O&M excluding planned outages, and maintaining a lean culture with a declining O&M per MWh goal.
• We have a stable foundation with solid execution going forward, supported by a fast-growing service territory, improved regulatory environment, strong customer-centric strategy, efficient O&M practices, and a solid balance sheet.

Industry Context

The filing highlights Arizona's position as a rapidly growing region, particularly Maricopa County and Phoenix, which are attracting manufacturing and business investment due to affordability, workforce availability, and favorable business policies. This strong regional growth provides a robust foundation for APS, a major electric utility, to expand its customer base and infrastructure. The company's focus on clean energy (54% currently) aligns with broader utility industry trends towards decarbonization and renewable energy integration. Its emphasis on grid hardening and wildfire mitigation reflects increasing industry-wide concerns about climate resilience and operational safety. The pursuit of regulatory mechanisms like the Formula Rate Adjustment Mechanism (FRAM) is a common strategy among utilities to reduce regulatory lag and ensure timely cost recovery in a capital-intensive industry.

Comparison to Industry Standards

• Phoenix housing is affordable compared to major cities in the region, contributing to strong residential customer growth for APS, which saw 2.1% growth in 2024 compared to the national average residential growth from the 2024 Itron Annual Energy Survey Report.
• Phoenix is ranked #1 out of 15 top growth markets for manufacturing by Newmark Group, a global real estate firm, indicating a best-in-class service territory for commercial and industrial growth.
• Arizona State University is ranked #1 in Innovation for the 10th straight year by U.S. News and World Report, supporting workforce availability for high-tech growth.
• APS rates have remained well below the rate of inflation, with an average annual percentage change of 2.53% from 2018-2024, significantly lower than the CPI (3.78%) and CPI (Phoenix) (4.75%) over the same period, demonstrating strong customer affordability compared to general economic trends.
• Pinnacle West's O&M (as adjusted) per MWh was $32 in 2024, and its O&M average annual change from 2017-2024 was 2.97%, also below CPI (3.59%) and CPI (Phoenix) (4.67%), indicating efficient cost management relative to broader economic pressures.
• The company maintains solid investment-grade credit ratings (APS: Moody's Baa1, S&P BBB+, Fitch BBB+; Pinnacle West: Moody's Baa2, S&P BBB+, Fitch BBB), which are competitive within the utility sector and support affordable access to capital markets.

Stakeholder Impact

• Shareholders: Expected to benefit from long-term EPS growth of 5%-7% and a competitive dividend yield with a target payout ratio of 65-75%.
• Customers: Expected to benefit from continued focus on affordability (APS rates below inflation), improved reliability through significant capital investments in generation and transmission, and innovative customer programs to save energy and money.
• Employees: Implied positive impact from continued growth and capital investment, suggesting stable or growing employment opportunities.
• Regulators: The company is actively engaging with the Arizona Corporation Commission (ACC) to achieve balanced and constructive outcomes, including approval of formula rates and adjustor mechanisms, aiming for reduced regulatory lag.

Next Steps

• APS will continue to find alignment with regulators and work with stakeholders on common issues.
• Advocate for reduced regulatory lag and focus on customer affordability.
• The 2025 APS rate case application, filed June 13, 2025, requests rates to become effective in the second half of 2026.
• The Formula Rate Adjustment Mechanism (FRAM) proposal includes an ACC filing of Annual Update on or before July 31, with a rate effective date of the first September billing cycle if no formal challenge.
• The 2025 Lost Fixed Cost Recovery (LFCR) is to be filed July 31, 2025, with an effective date of November 1, 2025 (if approved).
• The 2026 Renewable Energy Standard (RES) Implementation Plan was filed July 1, 2025.
• Planned outages for 2025 include Palo Verde Unit 1 (43 days in Q2), Four Corners Unit 4 (11 days in Q2), and Palo Verde Unit 3 (36 days in Q4).
• Key projects under the System Reliability Benefit Surcharge are expected to be in-service: Agave BESS (Phase I) (2026), Sundance Expansion (2026), Ironwood Solar (2026), and Redhawk Expansion (2028).
• Strategic transmission opportunities are in siting progress with estimated in-service dates: Sundance to Milligan (2027), Ocotillo to Pinnacle Peak (2029), Panda to Freedom (2029), and Jojoba to Rudd (2030).

Key Dates

Recommendation

The filing presents a compelling investment case for Pinnacle West Capital Corporation. The company operates in a high-growth service territory (Arizona), demonstrating robust customer and sales growth. It has a clear, substantial capital expenditure plan ($9.66B through 2027) to support this growth, which is expected to drive significant rate base expansion. The improved regulatory environment, including the adoption of a Formula Rate Policy Statement and the proposed Formula Rate Adjustment Mechanism, is a critical positive, promising more consistent and timely cost recovery and reduced regulatory lag. The long-term EPS growth target of 5%-7% and a commitment to a competitive dividend with a healthy payout ratio indicate strong shareholder returns. The company's focus on affordability, efficient O&M, and solid investment-grade credit ratings further enhance its financial stability and attractiveness. These factors collectively suggest a strong potential for capital appreciation and reliable income for investors.

Keywords

Pinnacle West, Arizona Public Service, APS, Utility, Energy, Arizona, Phoenix, Capital Expenditure, Rate Base, EPS Growth, Dividends, Regulatory, Clean Energy, Solar, Grid Modernization, System Reliability Benefit Surcharge, Formula Rate Adjustment Mechanism