Company Q3 2025: Contradictions in Transmission CapEx and Formula Rate Plans Highlight Growth Strategy Divergences

Date of Call: November 3, 2025

Financials Results

• EPS: $3.39 per share for the quarter, up $0.02 YOY

Guidance:

• Raised 2025 EPS guidance to $4.90–$5.10 (from $4.40–$4.60); O&M increased to $1.025B–$1.045B.
• 2026 EPS expected $4.55–$4.75 (lower vs revised 2025 due to normal weather and higher financing & D&A).
• 2026 customer growth 1.5%–2.5%; 2025 customer growth narrowed to the high end of 2%–2.5%.
• Weather-normalized sales growth 2026: 4%–6%; long-term sales growth raised to 5%–7% through 2030.
• Rate base growth 7%–9% through 2028 with updated capital plan for transmission and generation.
• Equity need ~$1.0–$1.2B for 2026–2028; ~85% of 2026 equity already priced (~$550M).
• No rate-case impact assumed in 2026 guidance; rate-case hearing expected in Q2 2026 and outcomes will be reflected once concluded.

Business Commentary:

* Strong Operational and Financial Performance: - Pinnacle West Capital Corporation reported earnings of $3.39 per share for Q3 2025, a modest increase of $0.02 year-over-year. - This result was driven by higher transmission revenues and sales growth, particularly robust sales growth across customer classes.

• Sales Growth and Economic Indicators:
• The company experienced 5.4% weather-normalized sales growth for the quarter, including 6.6% for C&I and 4.3% for residential customers.

• This growth was underpinned by strong underlying economic growth in their service territory, robust population growth, and increased demand from high-growth industries like semiconductors and data centers.

• Infrastructure Investments and Transmission Expansion:

• Pinnacle West is investing significantly in transmission, with multiple projects underway and more in development.

• These investments, supported by constructive recovery through FERC's formula rate, are expected to enhance reliability, resiliency, and integration of new resources.

• Generating Capacity Expansion:

• The company announced plans to develop a new natural gas generation site near Gila Bend, which could add up to 2,000 megawatts of reliable and affordable energy.
• This development is part of a strategy to support growing customer demand and meet the needs of extra-large energy users like data centers.

Sentiment Analysis:

Overall Tone: Positive

• "we delivered strong operational and financial performance"; management raised 2025 EPS guidance to $4.90–$5.10; "Palo Verde Generating Station operated at 100% capacity factor the entire summer"; company disclosed expanded capital plan and raised rate-base growth to 7%–9% through 2028.

Q&A:

• Question from Julien Dumoulin-Smith (Jefferies LLC): How are you thinking about eventually giving visibility on '29 and '30, especially what you've seen up here? Can you speak a little bit to the extent possible of what that trajectory as you rolled it forward here would potentially look like in that context? And maybe speak a little bit more to the sequencing of getting this pipeline built in time and in service to align with what seems like a fairly tight time frame altogether to build out this generation.
  Response: Pipeline expected in service 2029; Desert Sun Phase 1 to serve committed customers by 2030; key equipment and interconnection secured; Phase 2 timing will be aligned to customer ramps via the subscription model.

• Question from Julien Dumoulin-Smith (Jefferies LLC): How is that progress going on the subscription part? You talked about this 1.2 gigawatt opportunity. Where are you in sort of 'filling that bucket' or that opportunity?
  Response: Active dialogues with counterparties for the 1.2 GW Tranche 1; market receptive and timing being matched to customers' desired in‑service ramps.

• Question from Julien Dumoulin-Smith (Jefferies LLC): One little detail here on '26, you've got this $0.55 bump here on transmission. That's a sustainable level, right? That's a pretty big bump.
  Response: Yes — the ~$0.55 uplift reflects stepped-up FERC-regulated transmission investments and the formula rate; management views it as a sustainable trend tied to the capital plan.

• Question from Fei She (Barclays Bank PLC): Clarification on equity dilution: since 2026 equity need is 85% taken care of (the $550 million already priced), what's the true incremental equity needs for '26 through '28, especially when we look at the $1 billion to $1.2 billion total equity used for the 3‑year guidance period? And how should we think about the cadence of issuing through '26 and '27? And any equity mitigation given the strong sales growth backdrop?
  Response: $1.0–$1.2B is the incremental equity need for 2026–2028; ~85% of 2026 need derisked via prior issuances and ATM; cadence will be lumpy and tied to CapEx timing; mitigation possible via rate-case improvements to retained earnings and subscription cash from large customers.

• Question from Fei She (Barclays Bank PLC): On the transmission capital investment slide: can you comment on your assumption on annual transmission CapEx post‑2028? And how should we interpret the $6 billion plus, especially what's contributing and driving the upside?
  Response: No detailed post‑2028 breakdown; baseline transmission run rate now $300–$400M/year with increments above that reflecting longer‑lead strategic transmission projects (the $6B+ opportunity); year‑to‑year variability expected.

• Question from Fei She (Barclays Bank PLC): Given elevated 5%–7% sales growth through 2030 and 7%–9% rate base growth through 2028, can you comment on confidence to possibly extend the 7%–9% rate base growth further into the horizon and key drivers?
  Response: Management is confident in a long runway as long‑lead projects (e.g., Redhawk expansion, Desert Sun) come into service in 2029–2030; the exact level beyond 2028 will be refined as projects progress and CWIP disclosures accumulate.

• Question from Alex (Wells Fargo): On the growth rate outlook, you're still targeting 5%–7% on the '24 midpoint. In the context of new 2026 guidance, what will you use as your new base? Will you roll forward the plan as soon as the rate case is concluded?
  Response: Rate case is the precipitant — once concluded management will reassess and aims for the formula rate to make growth more evergreen; they will roll forward targets post‑case to reflect recovered earnings and reduced regulatory lag.

• Question from Alex (Wells Fargo): Can you give a sense on the megawatt pipeline around the hyperscaler side and how you think about capacity first generation needs?
  Response: 4.5 GW of committed incremental demand is a diversified mix of chip manufacturing and data centers plus steady residential/small business growth; Desert Sun enables serving queued (20 GW) uncommitted load via tranches over time.

• Question from Travis Miller (Morningstar Inc.): I want to confirm on the guidance for 2026. There's no contribution from the rate case. Is that correct? And if that's correct, any ideas on what a dollar increase might be in the back end of the year?
  Response: Correct — no rate‑case assumption included in 2026 guidance; management expects the case to resolve later in the year and will update guidance and quantify impacts once concluded.

• Question from Travis Miller (Morningstar Inc.): That 4.5 GW of committed customers, can you elaborate on who those customers are? Is any of that going to systemwide base with residential or small commercial? How would you break up that 4.5 GW?
  Response: 4.5 GW is a blend across sectors: advanced manufacturing (e.g., TSMC, Amkor), data centers, and ongoing residential/small business growth — a diversified mix rather than concentration in one sector.

• Question from Travis Miller (Morningstar Inc.): Would most of that 4.5 GW go into rate base? Or is some of that via the subscription model that might be outside of rate base?
  Response: All investments go into rate base; the subscription model is a special rate/contracting mechanism that remains rate‑based but aligns recovery timing and can involve customer financing to reduce dilution.

• Question from Stephen D’Ambrisi (RBC Capital Markets): Can you provide more color on the year‑over‑year change in sales growth as an EPS driver? For '25 guidance you embedded $0.58 and for '26 it's $0.39 — what's driving the difference?
  Response: Variability is driven by timing and ramp rates of large load customers (customer‑by‑customer testing vs actual ramp); residential/small business is stable; long‑term trajectory is stronger but intra‑year lumpiness causes differing EPS impacts.

• Question from Stephen D’Ambrisi (RBC Capital Markets): Does the $0.55 transmission benefit scale linearly with increased transmission spending or will there be lumpiness/supernormal recoveries?
  Response: Over time benefits are roughly proportional to investment under the formula rate, but near‑term lumpiness is expected due to larger long‑lead projects; management may sectionalize energizations to accelerate earnings and also capture wheeling/wholesale revenues.

Contradiction Point 1

Transmission CapEx and Growth

It involves differing perspectives on transmission capital expenditure and its impact on growth, which are crucial for financial planning and investor expectations.

How should we understand the $6 billion in transmission CapEx after 2028? - Fei She (Barclays Bank PLC, Research Division)

2025Q3: Post 2028 CapEx includes core and strategic projects. The $300 million to $400 million run rate is a baseline, with strategic investments incrementally adding to capacity. - Andrew Cooper(CFO)

Can you discuss the transmission opportunity and provide long-term CapEx details, as current disclosures cover only the next few years? - Julien Patrick Dumoulin-Smith (Jefferies LLC)

2025Q2: Transmission is critical for three reasons: connecting new generation, expanding existing system capacity, and providing access to the regional energy marketplace. The current $300 million to $400 million run rate is a major step-up from previous levels, with strategic transmission projects starting in 2025 to 2027. These projects are part of a decade-long strategic plan with ongoing capital investments. Longer-term projects will be revealed as they progress, with future CapEx disclosures expected in the third quarter. - Andrew Cooper(CFO)

Contradiction Point 2

Formula Rate Implementation and Future Growth

It highlights differing perspectives on the implementation of formula rates and their impact on future growth, which is crucial for investor expectations and strategic planning.

How does the 2025 midyear rate case align with formula rate implementation? What are your views on potential ROE changes and CapEx allocation shifts post-formula rates? - Travis Miller (Morningstar)

2025Q3: The formula rate plan would follow the next traditional rate case, with adjustments one year after conclusion. - Theodore Geisler(President)

Do you need to litigate fully to implement formula rates at this point? How do you think about CapEx trends beyond 2027, considering growth and demand trends? - Julien Dumoulin-Smith (Jefferies)

2024Q4: We always believe that settlements can lead to good outcomes, but we're preparing for a litigated case as we want formula rates implemented correctly. - Theodore Geisler(President)