Pinnacle West's $4.75 2026 EPS Target Masks a 380 MW Cholla Bet

2026 earnings look stable, but the bigger investor debate centers on Cholla

The market may be focusing on the wrong year. Pinnacle West looks more like a steady utility today than a company with a major 2026 step-change, while the bigger rerating debate may center on the 380 MW Cholla project if it moves from proposal toward permitted construction.

2026 looks solid, not exceptional

The near-term earnings picture supports that read. Pinnacle West posted $1.43 per diluted share in the second quarter, and management still expects $4.55 to $4.75 per diluted share for full-year 2026. That is reassuring, but it is not the same as excitement. The latest quarter also reflected pressure from higher interest charges, higher depreciation and amortization, and lower transmission service revenues. In plain English, the base business looks capable of holding the line more than dramatically expanding it.

Why Cholla matters more than the current earnings base

That shifts attention to 2029. APS plans to convert retired coal units into a 380 MW natural-gas facility with commercial operation in 2029 while leveraging existing transmission lines and infrastructure. For utility investors, the appeal is straightforward: add flexible capacity where the grid may need it and build on some already-existing assets. The real catalyst now is not the headline itself, but whether Cholla advances from proposal toward construction before investors lose interest.

Cholla's appeal is the demand backdrop and the asset-reuse logic

That 2026 earnings base matters because it helps show where the next dollar of investment could go. Arizona has already posted customer growth of 2.2%, and management has described robust customer growth and increased energy demand as early summer heat built. The utility is not planning into a flat or shrinking load profile. The demand case is already visible in the numbers: full-year 2025 was helped by increased customer usage, customer growth and related pricing, and first-quarter 2026 results also benefited from customer growth, usage, and related pricing. That makes Cholla look less like a purely theoretical future bet and more like a response to demand that is already showing up.

Asset reuse can help the execution case

This is the part bulls focus on. APS does not need to start from a greenfield site. The company plans to leverage existing transmission lines and infrastructure for the conversion, and Cholla has been part of Arizona's power system since it was originally commissioned in 1962. That does not eliminate project risk, but it can help capex look more manageable and may improve the odds of getting useful capacity back into the system on a clearer timeline.

Local support may help, but it is not the same as approval

There is also a practical reason this project could find supporters. Cholla is not an abstract site in an empty part of the state. It has been described as important to northeastern Arizona, and local reaction around the conversion has pointed toward giving the site a future for this facility rather than leaving it behind. That still does not equal regulatory approval, but in utility investing, local and economic support can sometimes make the path from proposal to permitted project easier if it aligns with reliability and job arguments.

Financing and approvals are the parts that can still go wrong

A utility project can still be the right business decision and disappoint the stock if the approval path, capital plan, or timing slips. The financing strain is already visible in the numbers. Pinnacle West's first quarter included $125.8 million of interest expense, up 19.84% from the prior year, while long-term debt rose to $9.80 billion. At the same time, 2025 already delivered $5.05 in diluted EPS, and management is still guiding to a $4.55 to $4.75 2026 EPS range. The reasonable read is that the balance sheet can support additional investment, but not endlessly so. If Cholla requires fresh capex while rate support remains costly, the market may care more about future earnings pressure than about a more distant capacity story.

What investors need to see next

For investors, the watch list is fairly simple:

• Approval milestones
• Any change in capex timing
• Whether higher financing costs remain contained

If those items stay in line, the stock may start to reflect Cholla before it comes online. If not, near-term earnings remain the main anchor.

How to think about PNW from here

Cholla still looks more like a decision pipeline than a done deal.

Base case: hold the story, but demand proof

The balanced stance is neutral to cautiously bullish. The underlying utility business still shows robust customer growth and increased energy demand and robust customer and sales growth, but the balance sheet already reflects higher interest expenses. That suggests the stock likely needs proof before it rerates again: evidence that Cholla can move from proposal to permitted project without turning the capital plan into a bigger uncertainty.

What would strengthen the bull case

• Clear progress toward regulatory approval for the natural gas conversion at Cholla
• Signs that existing transmission lines and infrastructure are reducing execution risk
• Continued operating support from customer growth of 2.2%, usage, and pricing

What would weaken it

• A slide from today's timeline for a project expected to begin commercial operation in 2029
• Financing costs that keep rising while higher interest charges already show up in results
• Any hint that management needs to lean more heavily on debt to fund growth instead of relying on more routine utility funding pathways

Practical signposts

Watch approval milestones first, then any change in capex phasing, then whether demand stays strong enough to support the spend. If those signposts remain green, the market can start valuing Cholla before it spins. If not, the stock likely stays tethered to near-term earnings quality.