Power Capacity Expansion And Regulatory Shifts Will Shape Arizona's Energy Future

Key Takeaways

• Expansion in power capacity and strong C&I customer growth are expected to drive significant future revenue increases.
  
• Strategic infrastructure investments and regulatory shifts could enhance earnings and improve rate adjustments.
  
• Regulatory lag and rising costs are constraining net margins and cash flow, posing risks to future earnings growth and profitability.

Catalysts

Through its subsidiary, provides retail and wholesale electric services primarily in the state of Arizona.

• Pinnacle West's expansion plans, including the contracted Redhawk Power Plant expansion and ongoing sourcing of new generation and battery storage projects, are expected to boost future revenue through increased capacity for reliable power supply.
  
• Strong customer growth, especially in the critical C&I sector and due to the semiconductor manufacturing boom, is projected to drive revenue growth with 4% to 6% weather-normalized sales growth in 2025 and beyond.
  
• Investment in infrastructure, including a $9.65 billion capital expenditure plan and strategic transmission projects, is anticipated to drive rate base growth of 6% to 8%, directly impacting revenue and earnings.
  
• The regulatory environment appears to be shifting toward reducing regulatory lag, which could improve earnings by allowing for more timely cost recovery and rate adjustments.
  
• The adoption of innovative demand-side management programs, such as the Cool Rewards smart thermostat program, is likely to enhance operational efficiency and could lead to improved net margins over time.

Pinnacle West Capital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pinnacle West Capital's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.3% today to 12.6% in 3 years time.
• Analysts expect earnings to reach $704.7 million (and earnings per share of $5.56) by about December 2027, up from $615.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.0x on those 2027 earnings, up from 15.9x today. This future PE is lower than the current PE for the US Electric Utilities industry at 20.7x.
• Analysts expect the number of shares outstanding to grow by 3.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Pinnacle West Capital Future Earnings Per Share Growth

Risks

• The company mentioned the issue of regulatory lag in its operations, which can lead to increased debt and equity financing costs. This can negatively impact net margins and earnings.
  
• Higher operating and maintenance expenses, along with depreciation and financing costs, contributed to a decline in earnings per share compared to the previous year, impacting overall profitability.
  
• A decrease in expected earnings per share for 2025 was noted due to regulatory lag and non-recurring gains from prior periods. This could affect projected revenue and net margins.
  
• The company increased its forecasted operating and maintenance expenses and capital expenditures for the year, indicating higher costs which could constrain net margins and affect cash flow.
  
• The upcoming end of a positive amortization and previous one-time gains could result in decreased earnings, creating downside risk for net margins and impacting future earnings growth.

Valuation

• The analysts have a consensus price target of $93.93 for Pinnacle West Capital based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $106.0, and the most bearish reporting a price target of just $80.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.6 billion, earnings will come to $704.7 million, and it would be trading on a PE ratio of 20.0x, assuming you use a discount rate of 5.9%.
• Given the current share price of $86.1, the analyst's price target of $93.93 is 8.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.