"Contradictions Emerge on Long-Term Growth Targets, Formula Rate Plans, and Transmission Investments in Q3 2025 Earnings Call"

Date of Call: November 03, 2025

Financials Results

• EPS: $3.39 per share, up $0.02 YOY

Guidance:

• Raised 2025 EPS guidance to $4.90–$5.10 (from $4.40–$4.60).
• 2026 EPS expected $4.55–$4.75 (no rate-case assumption).
• 2026 sales growth forecast 4%–6%; long-term sales growth raised to 5%–7% through 2030.
• Rate-based growth expected 7%–9% through 2028.
• Updated 2025 O&M of $1.025B–$1.045B and capital plan extended through 2028.
• Forecasted incremental Pinnacle West equity need of $1.0B–$1.2B for 2026–2028.

Business Commentary:

* Strong Financial Performance and Sales Growth: - Pinnacle West Capital Corporation reported earnings of $3.39 per share for the third quarter, up $0.02 year-over-year. - This growth was attributed to higher transmission revenues and higher sales, driven by robust sales growth across customer classes.

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

• This trend reflects strong economic growth, particularly in the advanced manufacturing and data centers sectors, supported by population and business expansion.

• Earnings Guidance and Forecast:

• Pinnacle West raised its 2025 EPS guidance to $4.90-$5.10 per share, reflecting strong sales growth and increased transmission revenues.

• For 2026, the company anticipates earnings per share of $4.55-$4.75, accounting for normal weather and higher financing costs.

• Generational and Transmission Investments:

• The company announced plans to develop a new generation site near Gila Bend, which could add up to 2,000 megawatts of natural gas generation.
• These investments aim to support rising customer demand and are expected to drive rate-based growth of 7%-9% through 2028.

Sentiment Analysis:

Overall Tone: Positive

• Management: "we delivered strong operational and financial performance"; Palo Verde operated at "100% capacity factor the entire summer"; raised 2025 EPS guidance to $4.90-$5.10; cited weather-normalized sales growth of 5.4% in Q3 and confident multi-year sales growth 5%-7%.

Q&A:

• Question from Julien Dumoulin-Smith (Jeffries): How are you thinking about eventually giving visibility on 2029 and 2030, sequencing to get the pipeline and generation built in time, and the trajectory as you roll this forward?
  Response: Pipeline expected in service in 2029; Desert Sun phase one targeted to serve committed customers by late 2030; key equipment and land secured; phase two capacity to be contracted via subscription model aligned to customer ramp timing.

• Question from Julien Dumoulin-Smith (Jeffries): How is progress going on the subscription tranche (1.2 GW)? Where are you in filling that bucket?
  Response: Active dialogue with counterparties, optimistic about deployment; tranche timing being aligned to counterparties' desired in‑service dates and designed to finance growth while protecting affordability.

• Question from Julien Dumoulin-Smith (Jeffries): On the $0.55 transmission bump in 2026 — is that a sustainable level?
  Response: Yes — it reflects the trend from increased FERC-regulated transmission investment and the formula rate construct that converts that capital into recurring earnings.

• Question from Nick Campanella / Fay (Barclays): Clarification on incremental equity needs for 2026–2028 given ~85% of 2026 equity priced; cadence of issuance and mitigation options?
  Response: $1.0B–$1.2B represents the incremental equity need for 2026–2028; ~85% of 2026 is already priced; cadence is lumpy and managed via ATM, rate-case outcomes, internal cash, and upfront subscription proceeds to mitigate issuance.

• Question from Nick Campanella / Fay (Barclays): On the transmission CapEx outlook — how should we think about annual transmission CapEx post-2028 and the drivers behind the $6B+ figure?
  Response: Baseline local transmission run rate is ~$300M–$400M; the increment above that toward the $6B+ reflects strategic, longer‑lead high‑voltage projects (500–600 mi) and will cause year‑to‑year variability as projects are developed and energized.

• Question from Nick Campanella / Fay (Barclays): Confidence to extend the 7%–9% rate‑based growth beyond 2028?
  Response: 2028 guidance reflects projects coming into service; additional large projects (e.g., Desert Sun, Redhawk expansion) and CWIP pipeline into 2029–2030 support continued rate‑base growth, to be refined as projects progress.

• Question from Shah Peruza / Alex (Wells Fargo): How will you set the new base for the 5%–7% sales growth and will you roll forward the plan once the rate case concludes?
  Response: The rate case and formula‑rate structure are the precipitant to making growth more 'evergreen'; management will reassess and roll forward the base after the case resolution.

• Question from Shah Peruza / Alex (Wells Fargo): Can you give a sense of the megawatt pipeline for hyperscalers and first‑generation capacity needs?
  Response: 4.5 GW of incremental committed demand already, plus a 20 GW uncommitted queue; 1.2 GW was offered as the first subscription tranche and the company plans to offer additional tranches as projects are developed.

• Question from Travis Miller (Morningstar): Confirm 2026 guidance includes no rate‑case contribution; any back‑end estimate if the case resolves late in the year?
  Response: Correct — 2026 guidance assumes no rate‑case outcome; the case is expected to resolve in Q4 and management will update guidance after the conclusion and as formula‑rate details are known.

• Question from Travis Miller (Morningstar): The 4.5 GW of committed customers — who comprises that and will investments be in rate base or outside it (subscription)?
  Response: 4.5 GW is diversified across advanced manufacturing (e.g., chip fabs) and data centers alongside steady residential/small business growth; all investments go into rate base, with the subscription model structuring customer payments/recovery within rate base rather than outside it.

• Question from Steve D'Ambrosi (RBC): What explains the year‑over‑year difference in EPS uplift from sales (embedded $0.58 in 2025 vs $0.39 in 2026) given similar growth ranges?
  Response: Variability is driven by large‑load customer ramp timing on a customer‑by‑customer basis; residential/small business contribution is stable, so FY variability reflects timing and mix among big C&I customers.

• Question from Steve D'Ambrosi (RBC): Does the $0.55 transmission benefit scale linearly with increased spending or is there supernormal recovery?
  Response: Over time earnings scale with investment, but near‑term results can be lumpy due to multi‑year projects; management can sectionalize energization to reduce lag and also capture wheeling revenues to offset retail impacts.

Contradiction Point 1

Long-term Growth Targets and Rate-Based Earnings Growth

It involves differing statements regarding the company's long-term growth targets and confidence in rate-based earnings growth, which are crucial for investors and stakeholders.

Can you comment on the confidence in maintaining a 7-9% growth rate and the key drivers of this growth? - Nick Campanella (Barclays Bank PLC, Research Division)

2025Q3: Long-term confidence in 7-9% rate-based growth remains strong, supported by long lead projects and sales growth from large industrial and hyperscaler customers. - Andrew Cooper(CFO)

How do you expect regulatory lag to evolve over the next few years as the GRC and formula rate plan progress? - Nick Campanella (Barclays Bank PLC, Research Division)

2025Q2: We continue to believe that our business fundamentals are strong and our long-term growth target of 5-7% rate-based earnings growth is achievable. - Andrew Cooper(CFO)

Contradiction Point 2

Formula Rate Plan and Regulatory Lag

It pertains to the company's approach to regulatory lag and its impact on earnings growth, which is critical for investor expectations.

What will be your new base for long-term growth targets after the rate case? - Shah Peruza (Wells Fargo)

2025Q3: The formula rate will be crucial for stabilizing earnings growth. The goal is to make the 5-7% growth rate evergreen, providing year-over-year stability for customers and shareholders. - Andrew Cooper(CFO)

What impact will regulatory lag have on 2026 given the pending rate case? - Michael Lonegan (Evercore)

2025Q1: We're filing a traditional rate case based on a 2024 Test Year, with an included proposal for a formula rate plan to minimize regulatory lag. The rate case will recover revenue deficiency, and the formula rate will be implemented to keep rates current. - Ted Geisler(CEO)

Contradiction Point 3

Transmission Investment Opportunities Beyond 2027

It involves differences in the perceived opportunities for transmission investments beyond 2027, which are important for long-term financial planning and capital allocation.

What is the outlook for annual CapEx in transmission capital investments after 2028? - Nick Campanella (Barclays)

2025Q3: Transmission investments above the current $300 million-$400 million annual run rate reflect strategic projects. There is a long runway for transmission investments, with the potential for $850 million-plus as a run rate. - Andrew Cooper(CFO)

How do you view CapEx trends beyond 2027 given long-term demand growth? - Julien Dumoulin-Smith (Jefferies)

2024Q4: Our CapEx forecast goes up to 2027, but we see opportunities beyond that. We're looking at longer-lead generation projects and strategic transmission projects extending beyond this period. Formula rates may provide additional recovery opportunities. - Andrew Cooper(CFO)

Contradiction Point 4

Subscription Model and Customer Commitments

It highlights differing views on the progress and impact of the subscription model and customer commitments, which are essential for the company's growth strategy.

What progress has been made on the subscription model, specifically regarding the 1.2 gigawatt opportunity? - Julien Dumoulin-Smith (Jeffries)

2025Q3: Active dialogue is ongoing with counterparties to match desired in-service timing with infrastructure build. The subscription model is designed to both serve customers and ensure growth pays for growth while maintaining affordability. - Ted Geisler(CEO)

Can you discuss opportunities to scale beyond this RFP for 2028 through 2030 and access the uncommitted 16 gigawatts? - Julien Patrick Dumoulin-Smith (Jefferies LLC, Research Division)

2025Q2: The pipeline was a critical strategic commitment for us to create a long-term reliable supply of natural gas. We've contracted for a volume that supports substantial reliability and growth for many years to come, and we've contracted for the ability to procure even more from the pipe as needed. - Ted Geisler(CEO)

Contradiction Point 5

Formula Rate Implementation Timeline

It directly impacts the timeline for implementing a crucial revenue recovery strategy, which could affect financial forecasting and investor confidence.

What will be your new base for long-term growth targets after the rate case? - Shah Peruza (Wells Fargo)

2025Q3: The formula rate will be crucial for stabilizing earnings growth. The goal is to make the 5-7% growth rate evergreen, providing year-over-year stability for customers and shareholders. - Andrew Cooper(CFO)

How will the mid-2025 rate case interact with formula rates? - Travis Miller (Morningstar Inc.)

2024Q4: Next year's case will include formula rate design, aiming for conclusion by the end of 2026. If approved, a formula rate plan would adjust costs trued up beginning the year after. - Ted Geisler(CEO)