Executive Summary / Key Takeaways

• Pinnacle West Capital Corporation ($PNW), through its Arizona Public Service Company (APS) subsidiary, is strategically positioned to capitalize on Arizona's robust economic and population growth, particularly in the advanced manufacturing and data center sectors.
• The company is undertaking its largest generation and transmission expansion in history, projecting 7% to 9% rate base growth through 2028 and raising long-term weather-normalized sales growth to 5% to 7% through 2030.
• A critical focus is on regulatory evolution, with a new rate case filed in June 2025 proposing a Formula Rate Adjustment Mechanism (FRAM) to mitigate regulatory lag and ensure timely cost recovery for essential infrastructure investments.
• Operational excellence, exemplified by Palo Verde Generating Station's 100% capacity factor during record summer demand in 2025, and strategic investments in natural gas generation (like the Desert Sun Power Plant) and transmission are foundational to maintaining reliability and affordability.
• While facing risks from regulatory outcomes, environmental compliance costs, and capital market volatility, PNW's diversified growth drivers and proactive investment strategy underpin its affirmed long-term EPS growth guidance of 5% to 7%.

Powering Arizona's Economic Boom

Pinnacle West Capital Corporation, an investor-owned electric utility holding company, operates primarily through its Arizona Public Service Company (APS) subsidiary, serving approximately 1.40 million retail customers across 11 Arizona counties. Since 1886, APS has been a foundational energy provider in the state, evolving its infrastructure and strategic approach to meet the dynamic needs of its service territory. The company's overarching vision is to create a sustainable energy future for Arizona, underpinned by a mission to deliver safe, reliable, and affordable energy through operational excellence and strategic grid expansion.

Arizona is experiencing an unprecedented economic boom, driven by significant population growth and a diversifying industrial base. Maricopa County was recognized as the top county in the nation for economic development in 2025, attracting high-growth industries such as semiconductors, data centers, and logistics. This growth is exemplified by Taiwan Semiconductor Manufacturing Company (TSM), which began high-volume chip production in Q4 2024 and announced an additional $100 billion investment, totaling $165 billion, for six fabrication centers and two advanced packaging facilities. Amkor Technology (AMKR) is also investing $7 billion in a new semiconductor packaging facility. This influx of high-load factor commercial and industrial (C&I) customers, alongside steady residential expansion, is fueling a substantial increase in electricity demand.

PNW's strategy is to enable this growth through robust investments in generation, transmission, and distribution. The company is committed to maintaining top-tier reliability, a critical factor during extreme weather events, such as the 113 consecutive days of 100+ degree temperatures in Phoenix in 2024. APS set a new peak energy demand record of over 8,500 megawatts (MW) on July 9, 2025, demonstrating the escalating need for resilient infrastructure.

Technological Edge and Strategic Resource Development

APS's energy portfolio is balanced, with nuclear power serving as a cornerstone. The Palo Verde Generating Station, which celebrated its 40th anniversary in 2025, is a primary source of carbon-free electricity for the Southwest. It consistently delivers strong performance, operating at a 100% capacity factor during the summer of 2025. APS holds a 23.90% ownership interest in Palo Verde Unit 2, having acquired two previously leased interests in September 2025 for approximately $199 million. The company is actively preparing for subsequent license renewals for Palo Verde into the 2060s, underscoring its long-term commitment to this critical asset.

Beyond nuclear, natural gas remains a vital dispatchable resource. APS is developing 675 MW of additional natural gas generation and plans the Desert Sun Power Plant near Gila Bend, capable of adding up to 2,000 MW. This two-phase project is designed to serve both existing customers and the rising demand from extra-large energy users. A crucial enabler for this expansion is the long-term gas transportation precedent agreement executed in July 2025 with Transwestern Pipeline Company for the Desert Southwest pipeline expansion, expected in service by late 2029. This pipeline secures a reliable, long-term natural gas supply, which is essential given that existing pipelines into Arizona are currently 100% committed.

PNW is also leveraging technological advancements in its operations. The company has developed an AI strategy to enhance customer and employee experiences and optimize operational reliability, including the deployment of AI-based fire-sensing cameras for early wildfire detection. Furthermore, APS is exploring emerging nuclear technologies, such as Small Modular Reactors (SMRs), in collaboration with other Arizona utilities, applying for a Department of Energy (DOE) grant for preliminary site exploration. These SMRs, designed to generate 300 MW or less per unit, offer potential for flexible, carbon-free generation.

Financial Performance and Growth Trajectory

Pinnacle West's financial performance in the third quarter of 2025 reflected the underlying strength of its service territory. Consolidated net income attributable to common shareholders increased by $18 million year-over-year to $413 million, driven by higher transmission revenues, increased customer usage, and customer growth. This was partially offset by lower weather-driven sales compared to the exceptionally hot Q3 2024, higher interest expense, and reduced pension and other postretirement non-service credits due to the full amortization of prior-service credits as of January 31, 2025. For the nine months ended September 30, 2025, net income attributable to common shareholders was $601 million, a decrease of $15 million from the prior-year period, primarily due to the effects of weather and higher operations and maintenance (O&M) expenses, partially offset by increased usage, customer growth, and the gain from the sale of Bright Canyon Energy (BCE) in Q1 2024.

The company's revenue growth is robust. Weather-normalized sales growth was 5.4% in Q3 2025, including 6.6% C&I growth and 4.3% residential growth. Year-to-date, weather-normalized sales increased 4.5% through September 30, 2025. This strong performance led management to raise its 2025 EPS guidance to a range of $4.90 to $5.10 per share. Looking ahead to 2026, EPS is anticipated to be $4.55 to $4.75 per share, reflecting a projection of normal weather and higher financing and depreciation and amortization (D&A) costs as the company navigates the rate case process.

PNW's capital plan is aggressive, with investments expected to drive rate base growth of 7% to 9% through 2028, an increase from prior guidance. This includes significant spending on strategic transmission projects and new generation resources.

The company's financing strategy maintains a balanced mix of debt and equity, with approximately 85% of its 2026 equity needs already priced. Pinnacle West also maintains strong liquidity through committed revolving credit facilities and an at-the-market (ATM) equity distribution program.

Competitive Landscape and Strategic Positioning

Pinnacle West operates within the highly regulated U.S. electric utility sector, where its primary competitive advantage stems from its regulated status and extensive, established transmission and distribution network in Arizona. This provides stable revenue streams and operational reliability, fostering strong customer loyalty. Compared to larger, multi-state utilities like Duke Energy (DUK) or Southern Company (SO), PNW's geographic concentration in Arizona offers deep regional expertise and localized regulatory relationships, which can be a unique value proposition in community engagement and service delivery. However, this concentration also limits revenue diversification compared to DUK's broader footprint.

Against renewable-focused players like NextEra Energy (NEE), PNW's balanced energy portfolio, including nuclear, natural gas, and renewables, provides greater service reliability in fluctuating conditions. While NEE may demonstrate faster innovation in green technologies and stronger growth rates from renewable expansions, PNW's approach aims for comprehensive reliability for a mixed energy demand profile. Edison International (EIX), another regional player, shares a focus on grid modernization, but PNW's energy mix, particularly its nuclear assets, offers a differentiated approach to carbon-free baseload power.

PNW's strategic positioning is further enhanced by its proactive approach to addressing the unique demands of its service territory. The development of a "subscription model" for extra-large load customers, such as data centers, is a key initiative to ensure "growth pays for growth" and prevent cost shifts to residential and small business customers. This innovative rate design aims to secure long-term contracts where these large customers cover capital costs and assume development risks, accelerating their path to service. This directly addresses a competitive challenge faced by many utilities with rapidly expanding industrial loads.

Regulatory Evolution and Risk Assessment

Regulatory matters are central to PNW's investment thesis. The company filed a new rate case on June 13, 2025, seeking a net base rate increase of $579.50 million, representing a 13.99% net increase, with new rates anticipated in the second half of 2026. A key component of this filing is the proposal for a Formula Rate Adjustment Mechanism (FRAM). This mechanism is designed to reduce regulatory lag, which has historically impacted earnings, and allow for more timely recovery of prudent and necessary costs, thereby smoothing customer bill impacts. The Arizona Corporation Commission (ACC) approved a policy statement on formula rates in December 2024, indicating a supportive environment for such mechanisms.

However, regulatory and environmental risks persist. The outcome of the 2025 rate case, including the approval and design of the FRAM, is not guaranteed. Environmental regulations, particularly those related to Coal Combustion Residuals (CCRs) and EPA's power plant carbon regulations, could lead to material increases in compliance costs. For instance, APS cannot reasonably estimate the full cost of the CCRMU asset retirement obligation, and the outcome of litigation challenging EPA's carbon emission standards could significantly impact costs for new gas-fired power plants. The company also faces uncertainties regarding the EPA's "Good Neighbor Plan" for Arizona, which could materially affect operating costs and the ability to develop new thermal generation. Wildfire mitigation costs are another area of regulatory scrutiny, with the ACC recommending recovery through the 2025 rate case.

Financial risks include volatile capital markets, rising interest rates affecting debt costs, and the ability to access capital. Despite these, PNW maintains a strong balance sheet, with APS's common equity ratio at 52% as of September 30, 2025, well above the 40% ACC-mandated threshold for dividend payments.

Conclusion

Pinnacle West Capital Corporation stands at a pivotal juncture, poised to leverage Arizona's dynamic economic expansion into sustained shareholder value. The company's strategic commitment to substantial infrastructure investments, particularly in baseload nuclear and natural gas generation, coupled with a robust transmission build-out, directly addresses the unprecedented demand from its rapidly growing customer base. The proactive pursuit of a Formula Rate Adjustment Mechanism in the upcoming rate case is a critical step towards mitigating historical regulatory lag, promising a more predictable and stable earnings profile for investors.

While PNW operates within a competitive and evolving regulatory landscape, its foundational strengths—a diversified energy portfolio anchored by the high-performing Palo Verde Generating Station, a deep understanding of its regional market, and an innovative approach to serving high-load customers—provide a strong competitive moat. The company's technological exploration of SMRs and its AI strategy further underscore its forward-looking approach to operational efficiency and long-term sustainability. With a clear investment plan, a focus on cost management, and a service territory experiencing exceptional growth, Pinnacle West is well-positioned to deliver on its affirmed long-term EPS growth guidance, making it a compelling investment for those seeking exposure to a growing, modernized utility.