Morningstar | Pinnacle West Reports Strong First-Quarter Results and Reaffirms Earnings and Rate Base Guidance
We are reaffirming our $91 per share fair value estimate after Pinnacle West reported strong 2019 first-quarter earnings and reaffirmed 2019 earnings guidance and projected rate base growth through 2021. Our 2019 EPS estimate of $4.85 remains at the midpoint of the guidance range of $4.75-$4.95.Although management slightly modified its capital expenditure allocations, annual capital expenditure guidance through 2021 was roughly the same as presented during the year-end conference call in February and had no impact on our fair value estimate.
Our rate base growth through 2021 is in line with guidance, but our five-year compound annual growth rate through 2023 is at the top end of management’s long-term target of 6%-7%. Our bullish long-term rate base growth assumption is driven by strong load and customer growth in Phoenix. We are confident our assumption will be confirmed when wholly owned Arizona Public Service submits its 15-year Integrated Resource Plan on Aug. 1. The last IRP projected 30% load growth over 15 years ending in 2030, and we expect the new one will indicate an even higher growth rate.
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 9.5% realized return on equity target or higher, well above our estimate of the company’s 7.5% cost of equity.
Earnings in the first quarter were $0.16 per share versus $0.03 in the same period last year. Favorable weather added $0.14 to gross margin during the quarter driven by the second-coldest February in 40 years. Lower O&M added $0.09 versus last year due in large part to lower planned outage costs. These favorable variances were partially offset by higher depreciation expense from plant additions and reduced pension credits due to lower assumed market returns.
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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