EUR 850.00 For Business Accounts Only

Morningstar | Healthy Load Growth Outlook for Pinnacle West

Pinnacle West has been able to exceed management's targeted 9.5% return on book equity on a weather-adjusted basis the past few years, and we have a high level of confidence that it can continue to achieve this level of return.Helping Pinacle West is the 2017 decision by the Arizona Corporation Commission approving a constructive rate base settlement for wholly owned Arizona Public Service and the overwhelming voter rejection of Proposition 127 in November 2018, likley requiring much higher levels of renewable energy.New rates are based on a 10% ROE, above the average return in recent base rate decisions in the United States. The new rates 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 rooftop solar installations that ended a generous net metering rate structure in 2018. We expect this change to result in electric sales growth closer to the top end of management's 1.5% to 2% guidance.Because of the strong customer growth in the Phoenix area, a higher allowed ROE for APS' Federal Energy Regulatory Commission-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 at approximately 6% 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, accelerating to 6% in 2017 and 2018. We project 6% annual increases during the next five years, in line with management's targeted dividend-growth rate.