Morningstar | Pinnacle West Reports Strong 3Q and Initiates 2019 Guidance Above Our Estimate
We are increasing our fair value estimate to $85 per share from $82 after Pinnacle West reported strong third-quarter earnings, initiated 2019 earnings guidance higher than we expected, and reported that the Phoenix economy remains strong. Third-quarter EPS came in at $2.80 versus $2.46 in the same period last year. Even subtracting a $0.14 benefit due to the timing of tax reform refund recognition, third-quarter earnings were impressive, and we increased our 2018 EPS estimate by $0.03, to $4.48.Our fair value estimate increase was driven by a 20-basis-point increase in average annual rate base growth during the next five years, to an average annual rate of 6.8%. The rate base increase drives our annual earnings growth estimate to 5.4% versus our previous estimate of 4.8%. Our fair value estimate also benefited from time value appreciation since our last update.
Pinnacle West initiated 2019 EPS guidance of $4.75-$4.95, above our previous estimate of $4.70. Arizona Public Service still plans to delay its rate case filing to 2020, and we thought this would pressure realized return on equity. It appears it will not, due in large part to cost control and a growing customer base. We have increased our 2019 EPS estimate to the midpoint of the guidance range.
There is no sign of the economy in Pinnacle West's service territory cooling off. Nonresidential vacancy rates continue to decline, and single-family and multifamily housing permits remain strong. APS expects energy usage to increase 30% by 2030, driving rate base growth.
Arizona Proposition 127, to establish a constitutional amendment requiring utilities to source 50% of their retail energy sales from renewable energy by 2030, up from 15% by 2025 currently, was soundly defeated by voters. The defeat, combined with the 2017 rate framework reducing subsidies for rooftop solar installations, gives us additional confidence in APS’ sales growth during the next decade.
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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