10-Q: Pinnacle West Reports Q3 Earnings Rise, Strategic Investments

Pinnacle West Capital Corporation reports increased Q3 net income and operating revenues, driven by customer growth and strategic investments, despite a nine-month decline in net income.

Summary

• Pinnacle West Capital Corporation (Pinnacle West) reported consolidated net income attributable to common shareholders of $413 million for the three months ended September 30, 2025, an increase of $18 million compared to the prior-year period.
• Consolidated net income attributable to common shareholders for the nine months ended September 30, 2025, was $601 million, a decrease of $15 million compared to $616 million for the prior-year period.
• Operating revenues for the three months ended September 30, 2025, increased to $1,821 million from $1,769 million in the prior-year period.
• Operating revenues for the nine months ended September 30, 2025, increased to $4,212 million from $4,030 million in the prior-year period.
• Basic earnings per share (EPS) for the three months ended September 30, 2025, was $3.45, a decrease from $3.47 in the prior-year period.
• Diluted EPS for the three months ended September 30, 2025, was $3.39, an increase from $3.37 in the prior-year period.
• Basic EPS for the nine months ended September 30, 2025, was $5.03, a decrease from $5.42 in the prior-year period.
• Diluted EPS for the nine months ended September 30, 2025, was $4.93, a decrease from $5.32 in the prior-year period.
• Arizona Public Service Company (APS) purchased two of three leased interests in Palo Verde Unit 2 in September 2025 for approximately $199 million, increasing its ownership to 23.9%.
• APS filed a 2025 Rate Case application on June 13, 2025, seeking a net base rate increase of $579.5 million (13.99% net increase), with new rates requested to be effective in the second half of 2026.
• The Arizona Corporation Commission (ACC) approved a policy statement on formula rate plans on December 3, 2024, which APS is incorporating into its 2025 Rate Case proposal.
• APS ceased coal-burning operations at Cholla Power Plant in March 2025 and formally retired Units 1 and 3 on April 30, 2025.
• Pinnacle West's Board of Directors declared a quarterly dividend of $0.910 per share, increasing the indicated annual dividend from $3.58 to $3.64 per share, payable on December 1, 2025.
• APS plans to develop the Desert Sun Power Plant, a natural gas facility near Gila Bend, Arizona, capable of adding up to 2,000 MW of generation, with a new subscription model for large load customers.
• APS executed a long-term gas transportation precedent agreement in July 2025 for a new pipeline expected to be operational by late 2029, with purchase commitments estimated at $7.3 billion over 25 years.

Sentiment

Score: 6

Explanation: The filing presents a mixed financial picture with strong Q3 net income growth and increased revenues, but a decline in nine-month net income and EPS. Strategic investments in generation, transmission, and clean energy are significant, indicating a positive long-term outlook. However, substantial capital expenditures, rising interest costs, and numerous pending regulatory and legal challenges introduce considerable uncertainty and risk. The dividend increase is a positive signal for shareholders, but the overall sentiment is tempered by the financial decline over the longer nine-month period and the array of external pressures.

Positives

• Net income attributable to common shareholders increased by $18 million (4.6%) for the three months ended September 30, 2025, compared to the prior-year period.
• Operating revenues increased by $52 million (2.9%) for the three months and $182 million (4.5%) for the nine months ended September 30, 2025, driven by customer usage, growth, and higher transmission service revenues.
• Net cash provided by operating activities increased by $158 million to $1,328 million for the nine months ended September 30, 2025, reflecting higher cash receipts from electric revenues and lower income taxes.
• Pinnacle West increased its quarterly common stock dividend to $0.910 per share, raising the indicated annual dividend from $3.58 to $3.64 per share.
• APS acquired two leased interests in Palo Verde Unit 2 for approximately $199 million, increasing its ownership and securing a critical carbon-free energy asset.
• APS was selected by the U.S. Department of Energy (DOE) to receive up to $70 million in federal funding for fire mitigation and grid infrastructure projects.
• The ACC approved a policy statement regarding formula rate plans, which APS is proposing to implement to reduce regulatory lag and allow for rate gradualism.
• APS's participation in Markets+ (expected live October 2027) and Western Resource Adequacy Program (full-binding participation as early as summer 2027) is expected to lower fuel and purchased-power costs and improve reliability.
• APS's 2023 All-Source Request for Proposal (ASRFP) procured significant resources: 3,606 MW of battery storage, 517 MW of natural gas, 2,649 MW of solar, and 500 MW of wind resources expected in service from 2026 to 2028.

Negatives

• Net income attributable to common shareholders decreased by $15 million (2.4%) for the nine months ended September 30, 2025, compared to the prior-year period.
• Basic EPS decreased by $0.02 for the three months and $0.39 for the nine months ended September 30, 2025, compared to the prior-year periods.
• Diluted EPS decreased by $0.39 for the nine months ended September 30, 2025, compared to the prior-year period.
• Net cash used for investing activities increased by $364 million to $1,833 million for the nine months ended September 30, 2025, primarily due to increased capital expenditures.
• Operations and maintenance expenses increased by $48 million for the nine months ended September 30, 2025, due to higher information technology, corporate resource, and non-nuclear generation costs.
• Pension and other postretirement non-service credits, net, decreased by $28 million for the nine months ended September 30, 2025, due to prior-service credits becoming fully amortized.
• Interest charges, net, increased by $25 million for the nine months ended September 30, 2025, primarily due to higher debt balances.
• APS ceased coal-burning operations at Cholla Power Plant in March 2025 and formally retired Units 1 and 3 on April 30, 2025, leading to unrecovered plant costs now being addressed in the 2025 Rate Case.
• The ACC denied APS's request for a deferral order for wildfire management operations and maintenance expenses, recommending recovery in the 2025 Rate Case instead.
• The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, curtailed several clean energy tax credits, imposing new phase-out deadlines and restrictions on projects with foreign entity assistance.

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.
• Ability to meet current and anticipated future needs for generation and associated transmission facilities, including due to unprecedented demand from high load customers.
• 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, general economy, energy conservation, 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 the outcome of the 2025 Rate Case and appeals related to the 2022 Rate Case.
• 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 to meet renewable energy and energy efficiency mandates and recover related costs, especially with the proposed repeal of RES and EES rules.
• Ability to achieve the 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 and potential liability under the Price-Anderson Act.
• Development of new technologies which may affect electric sales or delivery, including delays in their development and application.
• Cost of debt, including increased cost as a result of rising interest rates, and equity capital and ability to access capital markets.
• Environmental, economic, and other concerns surrounding coal-fired generation, including regulation of greenhouse gas emissions (GHG) and coal combustion residuals (CCR).
• 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, including for wildfire events.
• New accounting requirements or new interpretations of existing requirements.
• Generation, transmission, and distribution facilities and system conditions and operating costs.
• 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.
• Uncertainty regarding the definition of gross receipts from nuclear sales for the Nuclear Production Tax Credit (PTC) and the potential for the IRS to disagree with APS's methodology.
• Impacts of the One Big Beautiful Bill Act (OBBBA) on clean energy tax credits and eligibility for projects with foreign entity assistance.
• Litigation challenging EPA's carbon emission standards for power plants and the Good Neighbor Plan.
• Class action lawsuit alleging antitrust violations by nuclear operators for suppressing compensation.

Future Outlook

Pinnacle West projects annual customer growth of 2.0% to 2.5% for 2025 and an average annual growth of 1.5% to 2.5% through 2030. Annual retail electricity sales in kWh are projected to increase in the range of 4.0% to 6.0% for 2025 and 5.0% to 7.0% through 2030, including significant contributions from data centers and large manufacturing facilities. The company is actively pursuing new generation and transmission to meet unprecedented demand from large load customers, including a new subscription model. APS expects its participation in western energy markets (Markets+) to lower fuel and purchased-power costs and improve reliability. The 2025 Rate Case is expected to become effective in the second half of 2026, aiming for timely cost recovery and rate gradualism. Future year pension plan contributions are expected to be zero for the next three years.

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.
• Securing a reliable grid requires ongoing infrastructure investments in addition to investments to support new customer growth.
• There is a need for additional natural gas to support reliability for customers and meet increasing energy needs and existing natural gas pipelines into Arizona are currently 100% committed.
• Palo Verde, one of the nations largest carbon-free energy resources, serves as a foundational part of APSs resource portfolio.
• Wildfire safety remains a critical focus for APS and other utilities.
• We are committed to keeping bills as low as possible for our customers while maintaining high levels of reliability.
• APS is also seeking to reduce cross-subsidization of customer classes and ensure that growth pays for growth by requesting modifications to its cost allocation methodologies in the 2025 Rate Case.
• The subscription model is a commercial construct designed to ensure growth pays for growth while protecting affordability for other customers.
• APS has an aspirational goal to be carbon-neutral by 2050.
• Maintaining a balanced and diverse portfolio of resources will ensure continued reliable service to our customers in the most affordable manner possible.
• Serving customers with excellence is foundational to APSs business and remains our core focus as we adapt to evolving customer needs and emerging technology.
• APS has developed an AI strategy to responsibly utilize AI to advance our business strategy, enhance customer and employee experiences, and optimize operational reliability.

Industry Context

Pinnacle West operates within a dynamic utility industry characterized by increasing energy demand, particularly from large load customers like data centers, and evolving regulatory landscapes focused on clean energy, grid reliability, and affordability. The company's strategic investments in battery storage, solar, wind, and natural gas, alongside its pursuit of new transmission and generation facilities, align with broader industry trends towards diversified energy portfolios and grid modernization. The emphasis on wildfire mitigation and participation in western energy markets (Markets+) reflects industry-wide efforts to enhance resilience and optimize resource utilization. Regulatory challenges, such as the proposed repeal of RES/EES rules and ongoing litigation over carbon emissions, highlight the complex policy environment utilities navigate while striving for carbon neutrality goals.

Comparison to Industry Standards

• APS aims for top quartile reliability compared to peers, indicating a commitment to high operational standards.
• The company's average residential rates have risen 16.2% from 2018-2024, which is well below the national CPI-U increase of 24.9% and Phoenix CPI-U increase of 32.1% for the same period, suggesting better-than-average affordability management compared to general inflation trends.
• APS's 2023 ASRFP procured 3,606 MW of battery storage, 2,649 MW of solar, and 500 MW of wind, demonstrating a significant commitment to renewable and energy storage resources, comparable to leading utilities expanding their clean energy portfolios.
• The plan to develop the Desert Sun Power Plant (up to 2,000 MW natural gas) and the long-term gas transportation agreement address the 'unprecedented demand from high load customers' which is a common challenge for utilities in high-growth regions, similar to how utilities serving major tech hubs are expanding capacity.
• APS's participation in Markets+ and the Western Resource Adequacy Program aligns with the industry trend towards regional energy markets to enhance reliability and reduce costs, similar to efforts by other Western Interconnection utilities.

Corporate Governance

Legal Proceedings

• APS is a Potentially Responsible Party (PRP) in the Motorola 52nd Street Superfund Site, Operable Unit 3 (OU3), with EPA having approved the RI/FS on September 11, 2024, and executed a final Record of Decision (ROD) on September 25, 2025. APS anticipates additional expenditures but cannot reasonably estimate them.
• One active lawsuit remains pending in the U.S. District Court for Arizona concerning $8.3 million in remediation legal expenses related to the Motorola 52nd Street Superfund Site, with APS unable to predict the outcome or its share of liability.
• APS is subject to an EPA investigation into potential PFAS impacts to groundwater within the South Indian Bend Wash (SIBW) Superfund site, including the Ocotillo power plant site. APS estimates costs of approximately $1.7 million for oversight and participation in the remedial investigation work, but further remediation costs cannot be reasonably estimated.
• APS, along with 25 other U.S. nuclear power plant operators, was named in a class action lawsuit on July 11, 2025, alleging antitrust violations for agreeing to exchange compensation information and suppress compensation. The outcome and material impact are currently unpredictable.

Stakeholder Impact

• Shareholders: Impacted by the dividend increase, mixed financial results (Q3 up, 9-month down), and potential dilution from equity offerings. The Palo Verde acquisition and strategic investments aim to secure long-term value.
• Customers: Potential impact from the proposed $579.5 million rate increase in the 2025 Rate Case. Efforts to reduce cross-subsidization and implement a 'growth pays for growth' model for large load customers aim to protect affordability for residential and small business customers. Wildfire mitigation efforts and participation in regional energy markets are intended to improve reliability and lower costs.
• Employees: The nuclear wage class action lawsuit could impact compensation practices and employee relations across the nuclear power generation sector.
• Regulators (ACC, FERC, EPA): Heavily involved in numerous ongoing rate cases, policy dockets, and environmental compliance matters, influencing the company's operations and financial recovery mechanisms.
• Suppliers/Counterparties: Affected by long-term contracts for natural gas transportation and ASRFP procurements for new generation resources. Credit risk management policies are in place for energy derivative counterparties.

Next Steps

• APS will continue to pursue its 2025 Rate Case application, with the hearing scheduled to begin in May 2026 and new rates requested to be effective in the second half of 2026.
• APS will continue to evaluate and pursue options for reliably serving growing customer energy needs and demand, including the development of the Desert Sun Power Plant.
• APS will continue to participate in Western Energy Imbalance Market (WEIM) until transitioning to 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 monitor and respond to ongoing regulatory proceedings related to the 2022 Rate Case appeals, the regulatory lag docket, and the proposed repeal of RES and EES rules.
• APS will continue to evaluate the impacts of EPA's final CCRMU regulation, with initial site surveys due by February 2026 and final site investigation reports by February 2027.
• APS will continue to monitor the outcome of litigation challenging EPA's current carbon emission standards for power plants and the Good Neighbor Plan.
• APS will continue to await guidance from the U.S. Treasury Department related to the definition of gross receipts from nuclear sales for the Nuclear PTC.
• APS will continue to evaluate the impacts of the One Big Beautiful Bill Act (OBBBA) on its clean energy projects.
• APS will continue to monitor the nuclear wage class action lawsuit and assess its potential impact.
• Pinnacle West will continue to manage its ATM Program and equity forward sale agreements for capital raising.

Key Dates

Recommendation

Pinnacle West presents a mixed financial performance for the nine months ended September 30, 2025, with a decline in net income and EPS, despite a strong Q3. The company is undertaking significant strategic investments in generation, transmission, and clean energy, including the Palo Verde acquisition and plans for the Desert Sun Power Plant, which are crucial for long-term growth and reliability in a high-demand region. The dividend increase signals management's confidence. However, these investments come with substantial capital expenditures and are subject to numerous regulatory uncertainties, including the pending 2025 Rate Case, ongoing appeals from the 2022 Rate Case, and evolving environmental regulations (e.g., RES/EES repeal, EPA carbon rules, CCR). The outcome of these regulatory and legal proceedings will significantly influence future profitability and cost recovery. Given the strong long-term growth prospects in Arizona and strategic positioning, but also the near-term financial headwinds and regulatory risks, a 'hold' recommendation is appropriate for investors to monitor the resolution of these uncertainties before making further commitments.

Keywords

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