Pinnacle West Earnings: Brighter Prospects for Next Round of Rate Decisions

We are reaffirming our $77 per share fair value estimate for Pinnacle West PNW after the company announced a $0.03 per share loss in the first quarter, down from a $0.15 profit in the first quarter of 2022. Despite this drop in earnings during the quarter, Pinnacle West remains on track to meet our full-year earnings expectations. We are reaffirming our narrow moat and stable moat trend ratings.

We expect earnings growth will be challenging this year as Arizona Public Service, or APS, manages through an unfavorable regulatory ruling in late 2021 and favorable weather in 2022. Although the 2021 rate cut no longer has a year-over-year impact on earnings, the ruling has made it more difficult for APS to offset higher operating, pension, interest, and other costs. Higher operating costs primarily due to inflation offset otherwise strong customer and energy demand growth.

Favorable cold winter weather in Arizona added $0.09 per share in the quarter, but the company must make up a $0.39 per share full-year weather benefit in 2022. Our full-year earnings estimate remains in line with management’s $3.95-$4.15 EPS guidance range, assuming normal weather the rest of the year. We don’t expect earnings to reach 2021 levels until 2025.

Earnings growth could pick up late this year if APS receives a constructive outcome in its current rate request. We assume regulators approve about half of APS’ $460 million rate increase request, including an increase in its 8.7% allowed return on equity, or ROE. Peer Tucson Electric Power appears positioned to receive an allowed ROE near 9.5%, below APS’ 10.25% request but what we would consider a constructive outcome.

Apart from regulatory and weather fluctuations, Pinnacle West enjoys favorable fundamental growth. Customer growth was 2% and electricity demand growth was 3.6% in the first quarter. We continue to forecast at least $1.6 billion of annual capital investment and 5% annual earnings growth on a normalized basis.