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Morningstar | Arizona politics remain a concern, but Pinnacle West shareholders should earn 6% dividend growth.

Pinnacle West has been able to achieve management's targeted 9.5% ROE on a weather-adjusted basis the past few years, and we have a high level of confidence that it should be able to continue to achieve this level of return or higher based on the 2017 decision by the Arizona Corporation Commission approving a settlement for wholly owned Arizona Public Service.The new rates are based on a return on equity of 10%, above the average return we have seen in recent base rate decisions in the U.S. The new rates also include time-of-use rates that should allow APS to manage rooftop solar generation more efficiently. Earlier in 2017, the ACC modified the rate structure for new roof-top solar installations that ends a generous net metering rate structure in 2018. We expect this change to result in electric sales growth closer to, but still less than, APS' 2%-plus customer growth. Because of the strong customer growth in the Phoenix area, a higher allowed ROE for APS' FERC-regulated transmission, and management's track record of cost control, we have a high level of confidence that regulatory lag will be minimal and Pinnacle West should earn its targeted return or higher. The improved regulatory framework, combined with strong customer growth, should allow Pinnacle West to increase EPS by about 5% annually over the next five years.In 2012, the ACC approved a rate-case settlement that helped APS improve returns by providing automatic rate riders on solar energy investments and a decoupling mechanism that reduced the impact of customer-installed rooftop solar units and energy efficiency projects. The improved returns and earnings outlook allowed Pinnacle West to increase its common dividend almost 4% in 2012, the first increase since 2006. This increase was followed by three years of approximately 5% increases, and in the fourth quarter of 2017, the dividend was increased by over 6%. We project 6% annual increases during the next five years, in line with management's targeted dividend-growth rate.