PINNACLE WEST CAPITAL CORP

Pinnacle West Capital Corporation is an investor-owned electric utility holding company based in Phoenix, Arizona, with consolidated assets of approximately $30 billion ¹. The company derives essentially all of its revenues and earnings from its principal subsidiary, Arizona Public Service Company (APS), which is Arizona's largest and longest-serving electric company and generates safe, affordable electricity in 11 of Arizona's 15 counties ². APS currently provides electric service to approximately 1.4 million customers ³ and owns or leases 6,257 MW of regulated generation capacity ⁴. The industry is characterized by comprehensive regulation by the Arizona Corporation Commission (ACC) for retail electric rates and the Federal Energy Regulatory Commission (FERC) for wholesale power sales and transmission services, with the profitability of APS affected by the rates it may charge and the timeliness of recovering costs incurred through its rates and adjustor recovery mechanisms.

The filing does not name specific primary competitors or provide market share data relative to peers. APS is subject to varying degrees of competition from other investor-owned electric and gas utilities in Arizona (such as Southwest Gas Corporation), as well as cooperatives, municipalities, electrical districts, and similar types of governmental or non-profit organizations. Additionally, some customers, particularly industrial and large commercial customers, may own and operate generation facilities to meet some or all of their own energy requirements, and APS and utilities broadly are seeing a rise in large customers seeking to develop or accelerate large, utility scale generation projects to serve their energy needs. The company states a goal of achieving top quartile reliability compared to its peers.

Pinnacle West's reportable business segment is its regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electric service to Native Load customers) and related activities, and includes electricity generation, transmission, and distribution. These activities are conducted primarily through its wholly-owned subsidiary, APS. For 2025, retail electric revenues were 95% of total operating revenue ⁵, and for 2023 through 2025, retail electric revenues averaged approximately 94% of total operating revenues ⁶. During 2025, no single purchaser or user of energy accounted for more than 1.9% of electric revenues ⁷. Approximately 4.5% of APS's electric operating revenues resulted from wholesale sales and transmission services ⁸.

APS's generation portfolio includes nuclear, natural gas and oil, coal, solar, and energy storage facilities. The Palo Verde Generating Station is a 3-unit nuclear power plant located approximately 50 miles west of Phoenix, Arizona; APS operates the plant and owns 29.1% of Palo Verde Units 1 and 3 and approximately 23.9% of Unit 2 ⁹, and leases approximately 5.2% of Unit 2 ¹⁰, resulting in a 29.1% combined ownership and leasehold interest in that unit, with a total entitlement of 1,146 MW ¹¹. APS has six natural gas power plants with a total entitlement of 3,722 MW ¹². APS owns 63% of Four Corners Units 4 and 5, with a total entitlement of 970 MW ¹³. APS owned 419 MW of solar resources and 201 MW of energy storage in operation as of the report date ¹⁴. In 2025, the share of APS's energy supply derived from clean resources was approximately 58% ¹⁵, which includes energy from nuclear, renewables, and DSM as well as PPAs with clean resources.

APS has a diverse portfolio of existing and planned resources, including biomass, biogas, coal, energy storage, geothermal, natural gas, solar, and wind. APS has an aspirational goal to be carbon-neutral by 2050. APS's owned renewable resources in operation include 419 MW of solar and 201 MW of energy storage, with an additional 168 MW of solar and 150 MW of energy storage planned or under development ¹⁶. Non-APS owned renewable energy resources currently in operation total 4,111 MW, with 3,063 MW planned or under development ¹⁷. Non-APS owned energy storage resources currently in operation total 2,139 MW, with 3,493 MW planned or under development ¹⁸. APS also plans to add up to 2,000 MW of flexible natural gas generation to its portfolio ¹⁹.

In 2025, APS purchased two of the three leased interests in Palo Verde Unit 2, leaving one remaining lease for approximately 5.2% of Unit 2 that expires in 2033 ²⁰. On June 13, 2025, APS filed an application with the ACC seeking a net base rate increase of $579.5 million ²¹, which represents a 13.99% net increase ²². On May 15, 2025, Pinnacle West contributed $300 million into APS in the form of an equity infusion ²³, which APS used to repay the $300 million of its 3.15% senior notes that matured on the same date ²⁴. On December 18, 2025, Pinnacle West contributed $75 million into APS in the form of an equity infusion ²⁵. Pinnacle West has an ATM Program under which approximately $700 million of common stock is available to be issued ²⁶. During 2025, Pinnacle West increased its indicated annual dividend from $3.58 per share to $3.64 per share ²⁷, and total dividends paid per share of common stock were $3.60 per share ²⁸, resulting in dividend payments of $423 million ²⁹.

Consolidated net income attributable to common shareholders for the year ended December 31, 2025 was $617 million ³⁰, compared with $609 million ³¹ for the prior-year period, an increase of approximately $8 million ³². Operating revenues were $5,339,939 thousand ³³ compared to $5,124,915 thousand ³⁴ in 2024. Operating income was $1,067,630 thousand ³⁵ compared to $1,012,063 thousand ³⁶ in 2024. Diluted earnings per share were $5.05 ³⁷ compared to $5.24 ³⁸ in the prior year. Net cash provided by operating activities was $1,805 million ³⁹ in 2025 compared to $1,610 million ⁴⁰ in 2024.

APS projects significant growth from large load customers such as data centers and large manufacturers. The company currently projects that annual retail electricity sales in kWh will increase in the range of 4.0% to 6.0% for 2026 ⁴¹ and that average annual growth will be in the range of 5.0% to 7.0% through 2030 ⁴², including the effects of customer conservation, energy efficiency, and distributed renewable generation initiatives, but excluding the effects of weather variations. These projected sales growth ranges include the impacts of several data centers and large manufacturing facilities, which are expected to contribute to 2026 growth in the range of 3.0% to 5.0% ⁴³ and to average annual growth in the range of 4.0% to 6.0% through 2030 ⁴⁴. APS has developed a subscription model for large load customers as part of a 'growth pays for growth' strategy where large load customers would enter into a long-term special contract to pay for the costs associated with incremental infrastructure.

APS is pursuing participation in western energy markets as a growth vector. APS participated in market design and tariff development of Markets+, a day-ahead and real-time market offering from SPP, and expects to go live in the market in October 2027 ⁴⁵. APS is also participating in the Western Resource Adequacy Program administered by Western Power Pool and plans to transition to full-binding participation in 2027 or 2028 ⁴⁶. APS continues to participate in the WEIM, a voluntary, real-time optimization market operated by the CAISO, which APS expects will lower its fuel and purchased-power costs, improve situational awareness for system operations, and improve integration of APS's renewable resources.

The filing does not provide specific margin trajectory or efficiency targets with exact figures.

APS's estimated capital expenditures for the next three years are $2,600 million for 2026 ⁴⁷, $2,650 million for 2027 ⁴⁸, and $2,700 million for 2028 ⁴⁹. These expenditures include generation, distribution, transmission, and other investments. APS expects to fund capital expenditures with internally generated cash and external financings, which may include issuances of long-term debt and Pinnacle West common stock. The expected minimum required cash contributions for the pension plan are zero for the next three years ⁵⁰, and the company does not expect to make any voluntary cash contributions in 2026, 2027 or 2028 ⁵¹. Regarding contributions to the other postretirement benefit plan, the company did not make a contribution in 2025 and does not expect to make any contributions in 2026, 2027 or 2028 ⁵².

Pinnacle West has an ATM Program under which approximately $700 million of common stock is available to be issued ⁵³. During 2025, Pinnacle West increased its indicated annual dividend from $3.58 per share to $3.64 per share ⁵⁴. The company currently projects annual customer growth to be 1.5% to 2.5% for 2026 ⁵⁵ and the average annual growth to be in the range of 1.5% to 2.5% through 2030 ⁵⁶ based on anticipated steady population growth in Arizona during that period.

The filing identifies several headwinds and constraints. Inflation has dramatically impacted the cost of goods and services, with the Consumer Price Index for All Urban Consumers (CPI-U) from 2018 through 2024 rising 24.9% nationally and 32.1% in Phoenix ⁵⁷. APS's average residential rates rose 16.2% for the same period ⁵⁸. Inflation has moderated from earlier highs, with CPI-U rising 2.7% nationally and 2.2% in Phoenix over the 12 months ended December 2025 ⁵⁹. APS remains cautious of potential price increases as a result of current and proposed tariffs, which could lead to higher costs and supply chain constraints. Existing natural gas pipelines into Arizona are currently 100% committed ⁶⁰, though APS executed a gas transportation precedent agreement in July 2025 to secure a long-term supply of natural gas, with the new pipeline expected to be operational by late 2029.

The filing identifies that APS is receiving incremental requests for service from large load customers with very high energy demands that persist virtually around-the-clock, such as data centers for AI and large manufacturers, and these incremental requests far exceed available generation and transmission resource capacity in the Southwest region for the foreseeable future. Because of the high growth in demand for such projects, APS has developed a queue that identifies and prioritizes projects while maintaining system reliability and affordability for existing customers. The difficulty in forecasting these demands and the additional risk of these arrangements could lead to stranded costs and other effects that could have material adverse impacts on APS's financial condition, results of operations, and cash flows.

The company's financial condition depends upon APS's ability to recover costs in a timely manner from customers through regulated rates, and the ACC regulates APS's retail electric rates and its issuance of securities. The operation of Palo Verde exposes APS to substantial regulatory oversight by the NRC, and APS may be required under federal law to pay up to $144.9 million (but not more than $21.6 million per year) of liabilities arising out of a nuclear incident at any nuclear power plant in the United States ⁶¹. APS is subject to retrospective premium adjustments under its nuclear property insurance policies for approximately $24.2 million if losses exceed accumulated funds ⁶². A 1% variation in annual residential and small commercial and industrial kWh sales projections can result in increases or decreases in annual net income of approximately $25 million ⁶³, and a 1% variation in annual large commercial and industrial kWh sales projections can result in increases or decreases of approximately $7 million ⁶⁴. Typical variations from normal weather can result in increases and decreases in annual net income of up to $20 million ⁶⁵. The company's debt covenants require that the ratio of consolidated debt to total consolidated capitalization not exceed 65% ⁶⁶; as of December 31, 2025, the ratio was approximately 60% for Pinnacle West ⁶⁷ and 50% for APS ⁶⁸.

Management's message emphasizes a commitment to delivering operational excellence at the lowest cost possible while aspiring to lower carbon emissions over time, with a vision to create a sustainable energy future for Arizona and a mission to serve customers with safe, reliable, and affordable energy. Key strategic priorities include achieving top quartile reliability as compared to peers, maintaining a balanced energy mix through a blend of dispatchable resources and intermittent resources, and pursuing a customer affordability initiative that includes internal opportunities such as training and mentoring employees on identifying efficiency opportunities, maintaining inventory to take advantage of lower pricing, entering into long-term contracts to hedge against price volatility, and implementing automation technologies. Management also emphasizes the importance of wildfire safety, noting that APS has increased investment in fire mitigation efforts and was selected by DOE's Grid Deployment Office to receive up to $70 million in federal money for fire mitigation and grid infrastructure projects ⁶⁹, contingent on APS negotiating and executing final grant agreements.