PNW

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2025, 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 1.4 million retail customers. The filing includes unaudited condensed consolidated financial statements for both entities.

Key Financial Metrics (Six Months Ended June 30, 2025)

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased by $130.0 million (5.8%) compared to the six months ended June 30, 2024. This was driven by new rates from the 2022 Rate Case, customer growth, and higher transmission revenues, partially offset by weather effects.
• Profitability Decline: Net income attributable to common shareholders decreased by $32.7 million (14.8%) to $187.9 million. Key drivers included higher operations and maintenance expenses ($57 million increase), higher depreciation and amortization ($29 million increase), and lower pension non-service credits ($17 million decrease).
• One-Time Items: The prior year period included a $23.0 million gain on the sale of Bright Canyon Energy (BCE), which was not present in the current period.
• Expense Increases: Fuel and purchased power expenses rose by $62.0 million. Operations and maintenance costs increased significantly due to higher information technology costs ($19 million) and non-nuclear generation costs ($18 million).
• Cholla Retirement: APS formally retired Cholla Units 1 and 3 on April 30, 2025, impacting depreciation and future operational costs.

Guidance, Outlook, and Management Commentary

• 2025 Rate Case: On June 13, 2025, APS filed an application seeking a net base rate increase of $579.5 million (13.99%) to address a revenue deficiency. The hearing is scheduled for May 2026, with rates requested to become effective in the second half of 2026.
• Capital Expenditures: APS estimates total capital expenditures of $2.4 billion for 2025, $2.55 billion for 2026, and $2.65 billion for 2027. Major investments are directed toward renewables, energy storage, transmission, and distribution.
• Strategic Shift: APS updated its clean energy goal from "zero-carbon" to "carbon-neutral" by 2050, removing interim targets to better balance reliability and affordability amidst record load growth.
• Load Growth: Retail electricity sales (weather-adjusted) increased 3.8% year-over-year. Management projects annual sales growth of 4.0% to 6.0% for 2025, driven by data centers and large manufacturing facilities.
• Regulatory Risks: Significant uncertainty remains regarding EPA regulations on greenhouse gas emissions and coal combustion residuals, as well as ongoing litigation regarding the Grid Access Charge (GAC) for solar customers.

Investor Verification Checklist

• Rate Case Outcome: Monitor the ACC's decision on the 2025 Rate Case, specifically the approved revenue requirement and return on equity, as this directly impacts future earnings.
• Cholla Closure Costs: Verify the recovery mechanism for the $81 million remaining net book value and environmental remediation costs associated with the Cholla plant retirement.
• Capital Expenditure Execution: Track the ability to fund the projected $2.4 billion+ annual capex without diluting equity or increasing leverage beyond covenant limits (currently 61% debt-to-capitalization for Pinnacle West).
• Regulatory Lag: Assess the impact of the "Formula Rate Adjustment Mechanism" (FRAM) proposal on reducing regulatory lag and the potential for mid-year rate adjustments.
• Environmental Compliance: Review updates on EPA's Good Neighbor Plan and coal ash regulations, which could impose material compliance costs or force early retirement of remaining coal assets.