10-Q: Pinnacle West Q2 Earnings Dip Amid Rising Costs

Pinnacle West Capital Corporation reported a decrease in net income for the second quarter and first half of 2025, primarily driven by higher operating expenses and lower pension credits, despite revenue growth.

Summary

• Net income attributable to common shareholders for the three months ended June 30, 2025, decreased by $11 million to $193 million, compared to $204 million in the prior-year period.
• Net income attributable to common shareholders for the six months ended June 30, 2025, decreased by $33 million to $188 million, compared to $221 million in the prior-year period.
• Operating revenues increased by $50 million to $1,358.751 million for the three months ended June 30, 2025, and by $130 million to $2,391.031 million for the six months ended June 30, 2025.
• Fuel and purchased power expenses increased by $40 million to $477.008 million for the three months and by $62.043 million to $857.079 million for the six months.
• Operations and maintenance expenses increased by $14.339 million to $286.605 million for the three months and by $56.87 million to $586.714 million for the six months.
• Pension and other postretirement non-service credits, net, decreased by $9.185 million to $3.692 million for the three months and by $17.795 million to $6.650 million for the six months.
• Interest charges, net of allowance for borrowed funds, increased by $4.113 million to $101.968 million for the three months and by $12.321 million to $196.809 million for the six months.
• Retail customers in APS's service territory increased by 2.4% for the period ended June 30, 2025.
• Retail electricity sales (weather-adjusted) increased by 3.8% for the period ended June 30, 2025.
• APS filed a 2025 Rate Case application on June 13, 2025, seeking a net base rate increase of $579.5 million, representing a 13.99% net increase, with a proposed original cost rate base of $12.5 billion and a 10.70% common stock equity cost of capital.
• The 2025 Rate Case hearing is currently scheduled to begin in May 2026, with the requested increase to become effective in the second half of 2026.

Sentiment

Score: 4

Explanation: While the company demonstrates strong customer and sales growth, and maintains a robust balance sheet with ample liquidity, the decline in net income due to rising operating costs and lower non-service pension credits is a concern. The significant proposed rate increase in the 2025 Rate Case, coupled with numerous unresolved regulatory proceedings and a new class action lawsuit, introduces considerable uncertainty regarding future profitability and operational clarity. The capital raises are necessary for ongoing operations and investment, but the increased debt balances contribute to higher interest expense.

Positives

• Operating revenues increased by $50 million for the three months and $130 million for the six months ended June 30, 2025, compared to the prior-year periods.
• Customer growth of 2.4% and weather-adjusted retail electricity sales growth of 3.8% for the period ended June 30, 2025, driven by strong sales to commercial and industrial customers, including new data centers and large manufacturing facilities.
• Allowance for Equity Funds Used During Construction (AFUDC) increased by $6 million for the three months and $9 million for the six months ended June 30, 2025.
• Transmission service revenues increased, contributing positively to financial results.
• Investment gains in El Dorado contributed to higher other income.
• A lawsuit challenging the Arizona Corporation Commission's (ACC) formula rate policy was dismissed by the Superior Court of Arizona on June 13, 2025.
• The ACC approved APS's request to refund uncommitted Demand Side Management Adjustor Charge (DSMAC) and Renewable Energy Adjustment Charge (REAC) surcharge funds, approximately $9 million and $43 million respectively, during July and August of 2025.
• The ACC approved APS's Bring-Your-Own-Device Battery (BYOD) Pilot Plan of Administration on March 20, 2025.
• Pinnacle West and APS maintain strong liquidity with ample borrowing capacity under their respective credit facilities.
• Pinnacle West's common equity ratio was approximately 61% and APS's was approximately 54% as of June 30, 2025, both well above the ACC's 40% minimum requirement.
• The qualified pension plan was 101% funded as of January 1, 2025, and postretirement benefit plans were 195% funded as of December 31, 2024.
• APS was selected by the U.S. Department of Energy's (DOE) Grid Deployment Office (GDO) to receive up to $70 million in federal money for fire mitigation and grid infrastructure projects.
• Arizona Governor Hobbs signed a bill into law on May 12, 2025, requiring Arizona electric utilities to develop and seek approval for wildfire mitigation plans, defining the standard of care.
• APS executed a long-term gas transportation precedent agreement in July 2025 to secure natural gas capacity along a newly constructed pipeline expected to be operational by late 2029.
• Pinnacle West shareholders approved an amendment to the Company's Articles of Incorporation on May 21, 2025, to increase the number of authorized shares of common stock from 150 million to 300 million.

Negatives

• Net income attributable to common shareholders decreased by $11 million for the three months and $33 million for the six months ended June 30, 2025.
• Higher operating expenses, including fuel and purchased power, operations and maintenance, and depreciation and amortization, impacted profitability.
• Pension and other postretirement non-service credits, net, were significantly lower due to prior-service credits becoming fully amortized as of January 31, 2025.
• Higher interest charges resulted from increased debt balances.
• The effects of weather negatively impacted retail revenue.
• A one-time benefit recognized in the second quarter of 2024 related to the Los Alamitos Investment Tax Credit (ITC) purchase did not recur in 2025.
• APS withdrew its deferral application for unrecovered book value and closure costs of Cholla Units 1 and 3, requesting these costs be addressed in the 2025 Rate Case instead.
• The ACC denied APS's request for a deferral order for wildfire management expenses, recommending recovery in the 2025 Rate Case.
• The lawsuit challenging the ACC's formula rate policy, though dismissed by the Superior Court, has been appealed to the Arizona Court of Appeals and the Arizona Supreme Court, creating ongoing legal uncertainty.
• The ACC has not yet ruled on the 2024 and 2025 Renewable Energy Standard (RES) Implementation Plans, the Green Power Partners Program (GPP) application, or the latest Resource Comparison Proxy (RCP) application.
• A new general docket was opened by the ACC to explore potential future changes to the 10% annual reduction cap in the solar export rate and the 10-year rate lock period for distributed solar customers.
• Uncertainty persists regarding the outcome of the Energy Modernization Plan and potential repeal of Electric Energy Efficiency Standards (EES) and RES rules.
• The litigation challenging EPA's current carbon emission standards for power plants is in abeyance, delaying clarity on compliance requirements.
• New Effluent Limitation Guidelines (ELG) regulations requiring zero discharge for bottom ash transport water could materially increase costs, with compliance options still being evaluated.
• The EPA's Good Neighbor Proposal for Arizona, though withdrawn, may be reconsidered, potentially impacting thermal power plant operations and costs.
• A class action lawsuit was filed on July 11, 2025, against APS and other U.S. nuclear power plant operators, alleging antitrust violations related to compensation suppression.
• The One Big Beautiful Bill Act (OBBBA) curtailed several clean energy tax credits, introducing new phase-out deadlines and restrictions on projects receiving material assistance from prohibited foreign entities, which the Company is still analyzing.

Risks

• Uncertainties associated with the current and future economic environment, including economic growth rates, labor market conditions, tariffs, 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, data security breaches, terrorist attacks, physical attacks, severe storms, or other catastrophic events.
• Variations in demand for electricity due to weather, seasonality, economy, social conditions, customer and sales growth/decline, energy conservation, distributed generation, and technological advancements.
• Potential effects of climate change on the electric system, including weather extremes, 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 those by the ACC and FERC.
• New legislation, ballot initiatives, and regulation or interpretations of existing legislation or regulations, including those relating to tax, environmental requirements, regulatory and energy policy, nuclear plant operations, and potential deregulation of retail electric markets.
• 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.
• Ability of APS to achieve its clean energy goal to be carbon-neutral by 2050 and the impact of such achievement.
• Risks inherent in the operation of nuclear facilities, including spent fuel disposal uncertainty.
• Development of new technologies which may affect electric sales or delivery, including delays in their development and application.
• Cost of debt and equity capital, including increased cost due to rising interest rates, and ability to access capital markets.
• 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 trusts, 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 the anticipated future need for additional generation and associated transmission facilities in the region.
• 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 ACC orders.
• The inability to successfully develop, acquire, or operate generation resources to meet future resource needs and load forecasts in accordance with reliability requirements and other new or evolving standards and regulations.
• Opposition from environmental advocacy groups and other third parties to the permitting, construction, and operation of fossil fuel infrastructure projects.
• Uncertainty regarding the definition of gross receipts from nuclear sales for the Nuclear Production Tax Credit (PTC) phase-out and whether the IRS will agree with the Company's methodology.
• Potential for additional funding to the Captive Insurance Cell if claims exceed its available assets.
• Uncertainty regarding the outcome of the Nuclear Wage Class Action Lawsuit and its potential material impact on financial position, results of operations, or cash flows.
• Uncertainty regarding the outcome of CERCLA lawsuits related to the Motorola 52nd Street Superfund Site and APS's share of liability.
• Uncertainty regarding future expenditures related to necessary remediation for PFAS impacts at the SIBW Superfund site.
• Potential for material increases in costs associated with APS's management of Coal Combustion Residuals (CCR) due to new EPA regulations and ongoing site investigations.

Future Outlook

Pinnacle West projects annual customer growth of 1.5% to 2.5% for 2025 and through 2027, with retail electricity sales (weather-adjusted) expected to increase by 4.0% to 6.0% for the same periods, driven significantly by data centers and large manufacturing facilities. APS is updating its clean energy goals from an aspirational zero-carbon to an aspirational carbon-neutral approach by 2050, removing interim targets to prioritize reliability and affordability, and will continue to seek opportunities for dispatchable resources like natural gas and potential coal extensions beyond 2031. The company expects to go live in Markets+ by October 2027 and transition to full-binding participation in the Western Resource Adequacy Program as early as summer 2027. APS is exploring additional nuclear generation (SMRs) and monitoring Carbon Capture Utilization and Storage (CCUS) technologies. The 2025 Rate Case hearing is scheduled for May 2026, with the requested rate increase effective in the second half of 2026. A new long-term gas pipeline is expected to be operational by late 2029. The company anticipates zero minimum required cash contributions for its pension plan and no voluntary contributions to other postretirement benefit plans for the next three years. The purchase of certain Palo Verde leased interests is expected to close by December 31, 2025, pending FERC approval. The company intends to claim the Nuclear Production Tax Credit on its 2024 tax return if Treasury guidance is not released by October 15, 2025.

Management Comments

• Our vision is to create a sustainable energy future for Arizona.
• Our mission is to serve customers with safe, reliable, and affordable energy.
• We are committed to delivering operational excellence at the lowest cost possible while aspiring to lower carbon emissions over time.
• We have a goal of achieving top quartile reliability as compared to peers.
• Maintaining a balanced and diverse portfolio of resources will ensure continued reliable service to our customers in the most affordable manner possible.
• APS continues to evaluate policy and regulatory options, as well as insurance programs, to mitigate the impact of wildfire events.
• We believe that Pinnacle West and APS currently have ample borrowing capacity under their respective credit facilities and may readily access these facilities ensuring adequate liquidity for each company.
• We continually monitor financial market volatility and its impact on our retirement plans and other postretirement benefits, but we believe our liability driven investment strategy helps to minimize the impact of market volatility on our plans funded status.

Industry Context

The utility sector is experiencing significant growth in energy demand, particularly from high load factor customers like data centers and large manufacturing facilities, necessitating substantial infrastructure investments. The industry continues its transition towards clean energy, balancing decarbonization goals with the critical need for reliable, dispatchable resources such as natural gas and battery storage. Wildfire mitigation is an escalating concern, driving increased utility investments and new legislative requirements. Utilities are actively participating in regional energy markets like Markets+ and the Western Resource Adequacy Program to enhance reliability and reduce costs. The sector is also exploring advanced technologies such as small modular nuclear reactors (SMRs), carbon capture, and artificial intelligence to meet future energy needs and operational efficiencies. Regulatory environments remain dynamic, with ongoing debates and legal challenges surrounding rate cases, environmental regulations (e.g., EPA carbon rules, ELG, Good Neighbor Plan), and tax incentives, creating a complex operating landscape. A new class action lawsuit against nuclear operators regarding compensation practices highlights an emerging legal risk across the industry.

Comparison to Industry Standards

• APS has a goal of achieving top quartile reliability as compared to peers, though specific peer comparisons are not provided in the filing.
• APS's average residential rates have risen 16.2% from 2018 through 2024, remaining well-below national (24.9%) and Phoenix (32.1%) Consumer Price Index for All Urban Consumers (CPI-U) inflation figures, according to the U.S. Energy Information Administration.
• Palo Verde Generating Station is highlighted as one of the nation's largest carbon-free energy resources, serving as a foundational part of APS's portfolio.
• APS's 24/7 call center answers 75% of customer calls within 30 seconds, indicating an internal service benchmark.

Corporate Governance

Legal Proceedings

• A lawsuit challenging the ACC's authority to issue a formula rate policy statement was filed on March 28, 2025, dismissed by the Superior Court of Arizona on June 13, 2025, but the plaintiffs have filed an appeal with the Arizona Court of Appeals and a Petition for Special Action with the Arizona Supreme Court.
• A class action lawsuit was filed on July 11, 2025, in the U.S. District Court in Maryland against APS and 25 other U.S. nuclear power plant operators, alleging violations of antitrust laws by agreeing to exchange compensation information and suppress compensation.
• APS is a Potentially Responsible Party (PRP) in the Motorola 52nd Street Superfund Site, Operable Unit 3 (OU3) in Phoenix, Arizona, with one active lawsuit pending concerning $8.3 million in remediation legal expenses.
• The EPA is conducting an investigation into actual or threatened releases of per-and polyfluoroalkyl (PFAS) compounds into groundwater within the South Indian Bend Wash (SIBW) Superfund site, which includes the APS Ocotillo power plant site, with on-site investigations commencing and a remedial investigation and feasibility study underway.

Related Party Transactions

• Pinnacle West contributed $300 million into APS in the form of an equity infusion on May 15, 2025.
• Pinnacle West established a captive insurance cell (Captive) to insure certain risks of Pinnacle West and its subsidiaries, which Pinnacle West consolidates.
• Pinnacle West guaranteed certain obligations that Navajo Transitional Energy Corporation (NTEC) has to the other owners of Four Corners.
• Pinnacle West guaranteed the obligations of PNW Power to make production tax credit (PTC) funding payments to borrowers of the Clear Creek and Nobles 2 wind farms.
• Pinnacle West continues to maintain certain performance guarantees relating to the Kpono Solar Project sale-leaseback financing, with Ameresco (the project owner) obligated to reimburse Pinnacle West for any payments made under such guarantees.

Stakeholder Impact

• Shareholders: Experienced a decrease in net income and earnings per share, but continued to receive dividends. Potential for future dilution exists due to ongoing equity offerings. Regulatory uncertainties and legal challenges could impact future financial performance and stock value.
• Customers: Face a proposed net base rate increase of $579.5 million (13.99%) in the 2025 Rate Case. Will receive refunds of uncommitted DSMAC and REAC surcharge funds in July and August 2025. Benefit from ongoing customer assistance programs and efforts to manage affordability.
• Employees: The Nuclear Wage Class Action Lawsuit alleges suppression of compensation, which could impact employee relations and compensation practices across the nuclear power generation sector. The company is focused on increasing employee retention.
• Communities: Benefit from wildfire mitigation efforts aimed at improving safety and reliability. Coal Community Transition (CCT) Plan payments to impacted communities have been completed.
• Counterparties: The company is exposed to credit risk in the event of non-performance or non-payment by energy derivative counterparties, though risk management policies are in place.

Next Steps

• APS is required to propose a revenue allocation based on a site-load cost of service study in its next rate case.
• Disbursement of Coal Community Transition (CCT) funds for electrification of homes and businesses on the Navajo Nation and Hopi reservations is planned to be finalized after discussions.
• The ACC is expected to rule on the 2024 and 2025 Renewable Energy Standard (RES) Implementation Plans.
• The ACC is expected to rule on the Green Power Partners Program (GPP) application.
• The ACC is expected to rule on the latest Resource Comparison Proxy (RCP) application (filed May 1, 2025).
• The ACC is expected to act on the Recommended Opinion and Order (ROO) regarding potential future changes to the solar export rate and 10-year rate lock period.
• The rulemaking process for Electric Energy Efficiency Standards (EES) and RES will continue, with potential repeal of current rules.
• APS will continue evaluating compliance options for Four Corners based on new Effluent Limitation Guidelines (ELG) regulations.
• Initial Coal Combustion Residuals Management Units (CCRMU) site surveys are due by February 2026, with final site investigation reports to be finalized by February 2027.
• The EPA intends to put forth an initial rulemaking to propose extending the compliance deadlines for many of the zero-discharge effluent limitations and pretreatment requirements in the 2024 ELG Rule.
• The EPA intends to reconsider the Good Neighbor Plan.
• Comments are due by August 7, 2025, on EPA's proposed rule to repeal the Greenhouse Gas (GHG) regulations finalized in 2024.
• Comments are due by August 11, 2025, on EPA's proposed rule to repeal specific amendments finalized in the 2024 Mercury and Air Toxics Standard (MATS) regulations.
• APS is to negotiate and execute final grant agreements with the U.S. Department of Energy's (DOE) Grid Deployment Office (GDO) for fire mitigation and grid infrastructure projects.
• APS will continue to evaluate policy and regulatory options, as well as insurance programs, to mitigate the impact of wildfire events.
• APS will continue to explore available options for securing sufficient electric generation and transmission to meet future customer needs.
• APS will continue to monitor emerging nuclear technologies, such as small modular nuclear reactors (SMRs), and Carbon Capture Utilization and Storage (CCUS) technologies.
• APS will continue education outreach to customers and communities that may potentially be impacted by the Public Safety Power Shutoff (PSPS) program.
• APS will continue to participate in the Western Energy Imbalance Market (WEIM) until its transition to Markets+.
• APS expects to go live in Markets+ in October 2027.
• APS plans to transition to full-binding participation in the Western Resource Adequacy Program as early as summer 2027.
• APS will continue to analyze the One Big Beautiful Bill Act (OBBBA) and await regulations and other guidance.
• The Nuclear Wage Class Action Lawsuit will proceed, and APS will monitor its outcome.
• Ameresco is obligated to reimburse Pinnacle West for any payments made by Pinnacle West under the Kpono Solar Project guarantees.
• Ameresco has agreed to make efforts to refinance the Kpono Solar Project and eliminate these guarantees prior to 2030.
• Pinnacle West will continue to issue shares under its At-The-Market (ATM) Program and February 2024 Forward Sale Agreements.
• The purchase of two Palo Verde leased interests is expected to close by December 31, 2025, contingent upon standard closing conditions, including FERC approval.
• The hearing for the 2025 Rate Case is currently scheduled to begin in May 2026.
• The requested increase in the 2025 Rate Case is expected to become effective in the second half of 2026.
• A new long-term gas pipeline, secured by APS, is expected to be operational by late 2029.
• APS filed a request to extend the deadline to file its 2026 DSM Implementation Plan until 120 days after the ACC acts on its Second Amended 2024 DSM Implementation Plan.
• APS filed its 2025 annual LFCR adjustment, requesting an increase effective November 1, 2025.
• The Company intends to first claim the Nuclear Production Tax Credit (PTC) on its 2024 tax return using a revenue requirement methodology to determine its gross receipts from nuclear sales, assuming Treasury guidance is not released prior to October 15, 2025.

Key Dates

Recommendation

While the company demonstrates strong customer and sales growth, and maintains a robust balance sheet with ample liquidity, the decline in net income due to rising operating costs and lower non-service pension credits is a concern. The significant proposed rate increase in the 2025 Rate Case, coupled with numerous unresolved regulatory proceedings and a new class action lawsuit, introduces considerable uncertainty regarding future profitability and regulatory outcomes. The long-term strategic investments in clean energy and grid modernization are positive, but their cost recovery and implementation face regulatory hurdles. Investors should hold to monitor the outcomes of the rate case, environmental regulations, and legal proceedings, as these will be key determinants of future financial performance.

Keywords

Utility, Electric, Energy, Arizona, SEC Filing, 10-Q, Quarterly Report, Financial Results, Power Generation, Transmission, Distribution, Regulatory, Rate Case, APS, Pinnacle West, PNW, Nuclear, Solar, Battery Storage, Natural Gas, Coal, Renewable Energy, Carbon Neutral, Wildfire Mitigation, Capital Expenditures, Debt, Equity, Customer Growth, Inflation, Environmental Regulations, ACC, FERC, Palo Verde