Morningstar | Pinnacle West Reports Strong 2018 Results and Moves Aggressively Into Battery Storage
We are reaffirming our $85 per share fair value estimate after Pinnacle West reported strong 2018 earnings, reaffirmed 2019 earnings guidance, and increased its weather-normalized sales growth forecast.EPS in 2018 was $4.54 versus $4.35 last year. Earnings beat our estimate and consensus by $0.06 per share. Rate design, modified in the 2017 rate case, pushed more revenue to a fixed charge, which added $0.17 per share in the fourth quarter versus last year and was more than we had expected.
Management reaffirmed EPS guidance for 2019 within $4.75-$4.95 per share. Our estimate remains at the midpoint, or $4.85 per share. The unchanged guidance now assumes weather-normalized retail electricity sales increase 1%-2%, up from the 0%-1% when the guidance was initiated in November.
There is no sign of the economy cooling off in Pinnacle West's service territory. Single-family and multifamily housing permits remain strong. Strong sales growth reduces regulatory lag and gives us additional confidence Pinnacle West will meet its realized return on equity target of 9.5% or higher, well above our estimate of the company’s 7.5% cost of equity.
The day before the earnings release, wholly owned Arizona Public Service announced plans for 141 megawatts of utility-owned battery storage in service by mid-2020. In addition, APS plans to construct 660 MW of combined solar and battery storage and stand-alone battery storage by 2025 and contract for an additional 150 MW of battery storage with 20-year power purchase agreements.
We believe the aggressive move to add 950 MW of new clean energy technology, including battery storage, by 2025 puts another nail in the coffin of any attempt to resurrect the failed Arizona Proposition 127 to establish a constitutional amendment requiring utilities to source 50% of their retail energy sales from renewable energy by 2030. The amendment was soundly defeated by voters in November.
Pinnacle West Capital is a holding company. Through its subsidiary, Arizona Public Service Company, the company provides either retail or wholesale electric service to most of the State of Arizona, with the exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitan area and Mohave County in northwestern Arizona. The company's business segment is its regulated electricity segment, which consists of regulated retail and wholesale electricity businesses (primarily electric service to Native Load customers) and related activities, and includes electricity generation, transmission and distribution.
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