PNW

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2026, for Pinnacle West Capital Corporation (Pinnacle West) and its principal subsidiary, Arizona Public Service Company (APS). Pinnacle West is an investor-owned electric utility holding company based in Phoenix, Arizona, deriving essentially all revenues from APS, which serves approximately 1.5 million retail customers. The filing includes unaudited condensed consolidated financial statements for both entities.

Key Financial Metrics (Six Months Ended June 30, 2026)

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased by $214 million (9.0%) compared to the six months ended June 30, 2025. This was driven by weather effects ($57 million), increased customer usage and growth ($93 million), and higher transmission revenues ($15 million).
• Profitability: Net income attributable to common shareholders increased by $23 million (12.2%) for Pinnacle West. This increase was primarily due to favorable weather impacts, increased usage, and lower operations and maintenance expenses, partially offset by higher interest charges ($41 million increase) and higher depreciation ($19 million increase).
• Expense Trends: Fuel and purchased power expenses rose by $138 million, largely due to higher volumes and market prices. Operations and maintenance expenses decreased by $27 million, primarily due to lower costs for renewable energy programs and non-nuclear generation.
• Asset Base: Total assets increased by approximately $2.5 billion year-over-year, reflecting continued investment in plant in service and construction work in progress.

Guidance, Outlook, and Management Commentary

• 2025 Rate Case: APS filed an application seeking a net base rate increase of $579.5 million (13.99%). The hearing concluded in July 2026, with a decision anticipated before year-end. APS requested the increase to be effective in the second half of 2026.
• Customer Growth: Retail electricity sales (weather-adjusted) increased 9.5% year-over-year. Management projects annual retail sales growth of 4.0% to 6.0% for 2026, driven significantly by data centers and large manufacturing facilities.
• Capital Plan: Estimated capital expenditures for 2026 are $2.6 billion, with a focus on distribution, transmission, and generation (including nuclear and gas). A planned conversion of two Cholla units to natural gas (approx. 380 MW) is targeted for in-service in 2029.
• Regulatory Risks: Significant uncertainty remains regarding the repeal of Renewable Energy Standard (RES) and Energy Efficiency Standard (EES) rules by the Arizona Corporation Commission (ACC). Additionally, the Arizona Court of Appeals ruled in June 2026 that the Grid Access Charge (GAC) for solar customers was imposed without adequate notice; APS plans to seek review by the Arizona Supreme Court.
• Environmental Compliance: The company is navigating evolving EPA regulations regarding coal combustion residuals (CCR) and carbon emissions. While some rules are under review or repeal, compliance costs remain a material consideration.

Investor Verification Checklist

• Rate Case Outcome: Monitor the final ACC decision on the 2025 Rate Case, specifically the approved revenue requirement and return on equity, as this will impact future earnings.
• Regulatory Repeals: Track the status of the ACC's repeal of RES and EES rules and the outcome of the GAC litigation, as these affect cost recovery and revenue streams.
• Debt Maturities and Refinancing: Verify the execution of refinancing activities, including the $500 million senior unsecured notes issued in June 2026, and monitor interest rate exposure.
• Capital Expenditure Execution: Assess the progress of the Cholla gas conversion project and the ability to secure additional natural gas transportation capacity by 2029.
• Environmental Liabilities: Review updates on EPA CCR regulations and potential impacts on asset retirement obligations (ARO) and remediation costs.