$ AAPL

$ ABBV

$ ABNB

$ ACGL

$ ADI

$ ADM

$ ADP

$ ADSK

$ AEE

$ AEP

$ AES

$ AFL

$ AIG

$ AIZ

$ AJG

$ AKAM

$ ALB

$ ALGN

$ ALL

$ AMAT

$ AMCR

$ AMD

$ AME

$ AMGN

$ AMP

$ AMT

$ AMZN

$ ANET

$ AOS

$ APA

$ APD

$ APO

$ APTV

$ ARE

$ ATO

$ AVB

$ AWK

$ AXON

$ BA

$ BALL

$ BAX

$ BBY

$ BDX

$ BEN

$ BG

$ BIIB

$ BKNG

$ BLDR

$ BMY

$ BR

$ BRO

$ BXP

$ CAG

$ CAH

$ CARR

$ CAT

$ CBOE

$ CBRE

$ CCL

$ CDNS

$ CDW

$ CEG

$ CF

$ CHD

$ CHRW

$ CI

$ CINF

$ CL

$ CLX

$ CMCSA

$ CMG

$ CMI

$ CMS

$ COIN

$ COO

$ COP

$ COR

$ CPAY

$ CPT

$ CRL

$ CRWD

$ CSCO

$ CTRA

$ CTSH

$ CTVA

$ CVS

$ CVX

$ CZR

$ DAL

$ DASH

$ DAY

$ DD

$ DDOG

$ DE

$ DELL

$ DG

$ DGX

$ DIS

$ DOC

Pinnacle West Capital delivered solid customer and sales growth in Q2 FY2025, but margin pressures and regulatory uncertainties remain key investor concerns.

# Pinnacle West Capital Q2 FY2025: Solid Customer Growth Offsets Margin Pressures Amid Regulatory Transition

---

## Executive Summary

- **Pinnacle West Capital delivered Q2 FY2025 revenue of $1,358.8M (+3.8% YoY) and EPS of $1.58, in line with consensus.** The company’s top-line growth was driven by robust customer expansion (+2.4% YoY) and a 5.2% increase in sales volume, despite headwinds from milder weather and rising operating costs.
- **Margins compressed as operating expenses rose,** with operating margin declining to 22.6% (from 24.0% YoY) and net income down $11.2M. Higher O&M, interest, and depreciation expenses weighed on profitability, even as revenue growth remained healthy.
- **Management struck a balanced tone,** expressing confidence in long-term customer and sales growth, supported by a strong pipeline (4.5 GW committed, nearly 20 GW uncommitted). However, they acknowledged ongoing cost pressures and regulatory uncertainties, emphasizing cost control and regulatory initiatives such as the proposed formula rate mechanism (FRAM).
- **2025 EPS guidance was reaffirmed at $4.40–$4.60,** reflecting a conservative stance that incorporates weather normalization and persistent cost headwinds. The company’s $9.66B CapEx plan and regulatory improvements could provide upside if executed effectively.
- **Key risks include high leverage (debt/equity 1.8x), margin compression, and regulatory lag,** while opportunities center on regulatory reform, accelerated CapEx, and strategic clean energy adjustments. Near-term market reaction is expected to be stable, with investors watching for evidence of cost discipline and regulatory progress.

---

## Performance Snapshot

| Metric         | Reported   | Consensus | Surprise | YoY Change |
|----------------|------------|-----------|----------|------------|
| Revenue        | $1,358.8M  | $1,350M*  | +$8.8M   | +3.8%      |
| EPS            | $1.58      | $1.58     | $0.00    | -          |
| Operating Margin | 22.6%    | -         | -        | -1.4pp     |
| Customer Growth | +2.4%     | -         | -        | +2.4%      |
| Sales Volume   | +5.2%      | -         | -        | +5.2%      |

*Consensus revenue estimate is approximate.

---

## Earnings Quality

- **Revenue growth was healthy, underpinned by strong customer and sales volume expansion.** However, this was offset by a notable decline in operating margin (22.6% vs. 24.0% YoY) and a $11.2M drop in net income, reflecting the impact of higher O&M, interest, and depreciation expenses.
- **Cost structure remains a concern,** with O&M expenses rising $14.3M YoY. The company is targeting a downward trend in O&M per MWh, but margin recovery will depend on successful execution of these initiatives.
- **Profitability lagged revenue growth,** highlighting the challenge of translating top-line gains into bottom-line improvement amid a rising cost environment.

---

## Management Commentary & Guidance

- **Management maintained a cautiously optimistic tone,** highlighting robust customer growth and a significant future pipeline (4.5 GW committed, nearly 20 GW uncommitted). They acknowledged headwinds from milder weather (cooling degree-days down 15.4% YoY) and rising costs.
- **Regulatory initiatives are a key focus,** with the pending $580M rate case and the proposed FRAM aimed at stabilizing earnings and reducing regulatory lag.
- **2025 EPS guidance was reaffirmed at $4.40–$4.60,** on a weather-normalized basis, reflecting a realistic approach given current uncertainties.

---

## Key Risks

- **Cost inflation and margin pressures** from rising O&M, interest, and depreciation expenses.
- **High leverage (debt/equity 1.8x)** increases financial risk and limits flexibility.
- **Regulatory lag and weather-related demand volatility** could further pressure earnings.
- **Lower marginal returns compared to peers** may limit near-term valuation upside.

---

## Expected Market Reaction

- **Stable to modestly positive reaction expected,** as in-line EPS and revenue growth are balanced by margin compression and high leverage concerns.
- **Investor sentiment will hinge on evidence of cost control and regulatory progress,** with upside potential if management delivers on these fronts.

---

## Final Takeaway

- **Q2 FY2025 was a solid quarter for Pinnacle West Capital in terms of customer and sales growth, but margin compression and cost pressures highlight underlying fragility.**
- **The market may be underpricing the potential upside from regulatory reform and cost management,** but overvaluing near-term growth if leverage and expenses are not addressed.
- **Key upcoming catalysts:** Arizona rate case decision, progress on FRAM implementation, and updates on CapEx deployment and customer growth.

---

Pinnacle West (PNW): Growth Offsets Margin Pressures

Pinnacle West faces stable revenue but ongoing margin pressure, with cost discipline and regulatory timing key to near-term EPS recovery amid Arizona growth.

# Pinnacle West Capital Corporation: Navigating Margin Pressures Amid Arizona Growth – Q2 2025 Earnings Outlook

## Executive Summary: Neutral Outlook as Margin Recovery Hinges on Cost Discipline

We expect **Pinnacle West Capital Corporation (PNW)** to deliver **stable revenue growth** in the upcoming quarter, supported by robust Arizona demand and a growing retail customer base. However, **margin compression** remains a central concern, with Q1 2025 operating margin declining to **5.5%** from **7.0%** a year ago, primarily due to elevated O&M and depreciation expenses. Our view is **Neutral**: while revenue is likely to remain in the **$1.03–$1.05B** range, the path to EPS upside is constrained by persistent cost pressures. The market may be underestimating the **impact of regulatory timing**—delays in rate case outcomes could further postpone margin recovery, a risk not fully reflected in consensus expectations.

## Recent Trends Signal What’s Next: Revenue Growth, Margin Squeeze

Recent quarters highlight a **consistent revenue uptrend** but a **downward margin trajectory**. Q1 2025 revenue reached **$1.03B** (+8.5% YoY), yet operating margin fell to **5.5%** (from 7.0% in Q1 2024), and EPS slipped into negative territory. The following table summarizes the last four quarters:

### Quarterly Financial Trends

| Quarter    | Revenue ($M) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($)  |
|------------|--------------|------------------|---------------------|---------------|----------|
| Q2 2024    | 1,010        | 32.1             | 7.2                 | 4.1           | 0.05     |
| Q3 2024    | 1,120        | 33.0             | 8.0                 | 5.0           | 0.12     |
| Q4 2024    | 1,020        | 31.5             | 6.8                 | 3.8           | 0.01     |
| Q1 2025    | 1,030        | 30.8             | 5.5                 | 2.9           | (0.04)   |

**Trend:** Revenue is stable to slightly up, but margins and EPS are under pressure, with cost inflation outpacing top-line gains. This pattern is likely to persist into the next quarter unless cost controls improve.

## Management’s Forward Tone and Positioning: Cautious Optimism, Eyes on Costs

Management’s recent communications reflect **measured confidence**. In the Q1 2025 call, leadership stated, **“Q1 cost pressures are anticipated and manageable,”** signaling that while headwinds are present, they are not viewed as structural. The reaffirmation of full-year **adjusted EPS guidance ($4.40–$4.60)** and **capex ($3.2B)** suggests a belief in operational resilience. Compared to prior quarters, the tone has shifted from “monitoring cost trends” to “actively managing through a known cost environment,” indicating a more proactive stance but with limited near-term upside.

## KPI Trends & Upcoming Quarter Drivers: Customer Growth, Capex, and Cost Focus

The most relevant KPIs for the next quarter are:

- **Retail Customer Count:** **1,421,957** (+2.3% YoY, +0.6% QoQ)
- **Retail Sales Volume:** **+2.0% YoY**
- **Capex:** **$622.6M** in Q1 2025 (up 9% YoY)

### KPI Movement Table

| KPI                  | Q1 2024   | Q4 2024   | Q1 2025   | YoY Change | QoQ Change |
|----------------------|-----------|-----------|-----------|------------|------------|
| Retail Customers     | 1,390,000 | 1,415,000 | 1,421,957 | +2.3%      | +0.6%      |
| Retail Sales Volume  | +1.8%     | +1.9%     | +2.0%     | +0.2pp     | +0.1pp     |
| Capex ($M)           | 570       | 610       | 622.6     | +9.2%      | +2.1%      |

**Implications:**  
- **Customer and sales growth** should support revenue stability or modest upside.
- **Capex intensity** is a double-edged sword: it supports long-term growth but pressures near-term margins and cash flow.
- **Cost discipline** will be the swing factor for EPS recovery.

## Missed by the Street: Short Interest and Regulatory Lag

A **32.7% increase in short interest** (now 4.14% of float) signals growing skepticism about near-term margin recovery. This is not widely discussed in analyst commentary but suggests that some investors expect further cost or regulatory setbacks. Additionally, **regulatory lag**—the time between cost increases and rate recovery—remains a subtle but material risk, as highlighted in recent footnotes about pending rate case outcomes.

## Scenarios for the Upcoming Quarter: Bull, Base, Bear

### Scenario Table

| Scenario | Total Revenue ($B) | EPS ($)   | Operating Margin (%) | Key Assumptions                                      |
|----------|-------------------|-----------|----------------------|------------------------------------------------------|
| Bull     | 1.05              | 0.01      | 5.7                  | Cost pressures ease, C&I demand outperforms          |
| Base     | 1.03              | (0.04)    | 5.5                  | Revenue steady, costs remain elevated                |
| Bear     | 1.01              | (0.06)    | 5.2                  | Regulatory delays, further cost escalation           |

**Most Likely:** The **Base case** is most probable, given current cost trends and management’s cautious tone. Upside is possible if O&M costs moderate, but regulatory and input cost risks remain elevated.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter    | Revenue ($M) | EPS ($)  | Operating Margin (%) |
|------------|--------------|----------|----------------------|
| Q2 2024    | 1,010        | 0.05     | 7.2                  |
| Q3 2024    | 1,120        | 0.12     | 8.0                  |
| Q4 2024    | 1,020        | 0.01     | 6.8                  |
| Q1 2025    | 1,030        | (0.04)   | 5.5                  |

### KPI Movement Table

| KPI                  | Q1 2024   | Q4 2024   | Q1 2025   | YoY Change | QoQ Change |
|----------------------|-----------|-----------|-----------|------------|------------|
| Retail Customers     | 1,390,000 | 1,415,000 | 1,421,957 | +2.3%      | +0.6%      |
| Retail Sales Volume  | +1.8%     | +1.9%     | +2.0%     | +0.2pp     | +0.1pp     |
| Capex ($M)           | 570       | 610       | 622.6     | +9.2%      | +2.1%      |

### Key Management Quotes

1. **“Q1 cost pressures are anticipated and manageable.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: Management expects cost headwinds but believes they are not structural.*

2. **“We reaffirm our full-year adjusted EPS guidance of $4.40–$4.60.”**  
   *Q1 2025 Earnings Release*  
   *Interpretation: Confidence in long-term earnings power despite near-term margin squeeze.*

3. **“Capex for the year remains on track at $3.2 billion.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: No pullback in investment, which could pressure near-term FCF.*

4. **“We are seeing early signs of normalization in O&M expenses.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: Potential for margin stabilization if this trend continues.*

5. **“Regulatory outcomes remain a key variable for the remainder of the year.”**  
   *Q1 2025 10-Q*  
   *Interpretation: Rate case timing is a material risk to margin recovery.*

6. **“Customer growth in Arizona continues to exceed expectations.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: Demand-side tailwinds remain intact.*

7. **“We are closely monitoring input cost trends and supply chain dynamics.”**  
   *Q1 2025 Earnings Call*  
   *Interpretation: Ongoing vigilance on cost inflation; risk of further margin pressure.*

---

**Bottom Line:**  
Pinnacle West Capital enters the next quarter with solid demand fundamentals but faces a challenging margin environment. The key to upside will be cost containment and timely regulatory relief—areas where the market may be underestimating both risk and potential.

PNW: Margin Recovery Hinges on Cost Control