Q1 2025 Earnings Summary
- Robust Large Load Growth & TSMC Expansion: The Q&A highlighted that ramp-up in TSMC fabs (notably Fab 1 at full production with potential acceleration for Fab 2 and Fab 3) is driving strong large commercial and industrial (C&I) sales growth, supporting a bullish long-term demand outlook.
- Enhanced Rate Recovery Approach: Management’s explanation of the upcoming traditional rate case coupled with a formula rate plan suggests an annual opportunity to adjust rates, which should minimize regulatory lag and better capture the allowed ROE, benefiting margins and investor returns.
- Disciplined Operational Execution: Despite one-time adjustments (e.g., accounting changes for unbilled revenues) and short-term outages, management expects to meet full-year operating and maintenance (O&M) guidance, underlining solid control over operating expenses and operational efficiency.
- Regulatory and rate‐case uncertainty: The proposed formula rate plan, which is meant to reduce regulatory lag, depends on uncertain case outcomes and timing. Delays or unfavorable adjustments could result in lower-than-expected recovery of the allowed ROE and prolong periods of underperformance.
- Negative impact from revenue recognition adjustments: A one-time change in estimating unbilled revenues led to an offset in residential sales growth. This adjustment, while procedural, raises concerns about the underlying strength of reported sales figures and could signal potential demand weaknesses.
- Capital and operational execution risks: The significant investments in advanced transmission projects and large-scale capital programs (including recovery of outage costs and IT project transitions) introduce execution risks. If cost overruns or delays occur, they could adversely impact margins and overall financial performance.
| Metric | YoY Change | Reason |
|---|---|---|
Operating Revenues | +8.5% YoY (from $951,712K in Q1 2024 to $1,032,280K in Q1 2025) | Increased electric revenue receipts and improved customer growth have built on the prior period’s gains from favorable rate case impacts and market conditions, driving total operating revenue higher. |
Operating Income | –14% YoY (declining from $66,792K in Q1 2024 to $57,222K in Q1 2025) | Rising operational costs and margin pressures have offset revenue gains. Despite higher revenues, expenses from increased operating costs led to a 14% drop compared to Q1 2024 where cost management was better. |
Net Income | Swing from $21,168K profit in Q1 2024 to a loss of $338K in Q1 2025 | A dramatic deterioration in net income results from increased non-operating expenses (including higher interest expense) and potentially non-recurring adverse items, which outweighed the operating revenue gains, contrasting with the positive profitability seen in the previous period. |
Total Interest Expense | +10.6% YoY (from $86,633K in Q1 2024 to $94,841K in Q1 2025) | Higher borrowing costs or increased debt levels have contributed to a 10.6% rise in interest expense, reflecting ongoing capital investment financing compared to Q1 2024’s lower cost base. |
Net Cash Provided by Operating Activities | +15.7% YoY (from $347,353K in Q1 2024 to $401,895K in Q1 2025) | Stronger operational efficiency and enhanced cash collections from electric revenues improved operating cash flow by 15.7%, building on the positive trends established in Q1 2024. |
Capital Expenditures | –6.8% YoY (reducing from –$665,846K in Q1 2024 to –$622,552K in Q1 2025) | A modest easing in CapEx spending suggests more disciplined capital allocation or deferred projects, as investments from prior periods mature and the company recalibrates its spending, leading to a 6.8% reduction. |
Total Shareholders’ Equity | +8.4% YoY (from $6,310,533K in Q1 2024 to $6,845,982K in Q1 2025) | Accumulated retained earnings and prior equity infusions have driven equity growth. The base built during earlier periods, supported by solid operating performance, allowed an 8.4% rise in equity despite lower recent profitability levels. |
Cash and Cash Equivalents | +5.7% YoY (from $9,494K in Q1 2024 to $10,047K in Q1 2025) | Improved liquidity management and the boost in operating cash flows contributed to a modest 5.7% increase in cash balances, indicating effective control over cash outflows relative to collections from operations compared to Q1 2024. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Sales Growth | FY 2025 | 4% to 6% | 4% to 6% | no change |
Customer Growth | FY 2025 | 2.1% (range 1.5%‑2.5%) | 2.3% | raised |
Long‑Term EPS Growth Guidance | FY 2025 | 5% to 7% (based on midpoint of original 2024 EPS guidance of $4.60‑$4.80 per share) | no current guidance | no current guidance |
Capital and Financing Plans | FY 2025 | Focused on strengthening infrastructure with over 40% of future capital investments tracked via system reliability benefit surcharges or FERC formula rates | no current guidance | no current guidance |
Capital Plan | FY 2025 | no prior guidance | Designed to meet customer growth needs with specific projects including transmission investments, high‑voltage lines, substations, and generation upgrades | no prior guidance |
O&M | FY 2025 | no prior guidance | Remains unchanged despite higher planned outage costs and IT project expenses | no prior guidance |
Financing | FY 2025 | no prior guidance | Remains unchanged, featuring a mix of debt and equity sources | no prior guidance |
Rate Base Growth | FY 2025 | no prior guidance | Working on larger projects including strategic transmission planning and self‑build generation investments | no prior guidance |
Long‑Term Resource Procurement | FY 2025 | no prior guidance | Seeking at least 2,000 megawatts of new resources to be in service between 2028 and 2030 | no prior guidance |
High Load Factor Customers | FY 2025 | no prior guidance | Committed to 4 gigawatts of infrastructure build‑out with interest from an additional 10+ gigawatts | no prior guidance |
Regulatory and Credit Ratings | FY 2025 | no prior guidance | No changes to current ratings and stable outlooks with a focus on reducing regulatory lag through an upcoming rate case | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Regulatory Lag and Formula Rate Plan Implementation | Extensively discussed in Q2, Q3, and Q4 with emphasis on reducing lag, designing a formula plan with features like a dead band, and addressing cost recovery ( ) | Continued focus on addressing regulatory lag through a formula rate plan with an explicit “dead band” to align earnings with allowed ROE ( ) | Consistent emphasis with a deeper focus on the formula mechanism designed to deliver more timely cost recovery and reduce lag. |
Regulatory Uncertainty and Rate Case Outcomes | Addressed across Q2–Q4 through discussions on rate case timing, traditional versus formula approaches, and engagement with ACC on regulatory dockets ( ) | Reinforced commitment to filing a mid-2025 rate case that includes the formula rate plan to mitigate uncertainty and ensure rate gradualism ( ) | Steady progression toward resolution; the messaging remains consistent while laying the groundwork for smoother future outcomes. |
Capital Expenditure, Project Backlog, and Execution Risks | Multiple periods discussed elevated capital plans, a growing project backlog (including multi-gigawatt projects), and execution challenges from long-dated investments ( ) | Reaffirmed strategic capital investments and an expanded pipeline (e.g., strategic transmission, multiple large projects) along with continued attention to execution risks ( ) | Ongoing commitment to growth through heavy capital expenditure; while project scaling is robust, execution risks persist but are being proactively managed. |
Demand Growth from TSMC Expansion, Data Centers, and High Load Customers | Consistently highlighted in Q2–Q4, with emphasis on TSMC investments, increasing data center demand, and broad high-load customer growth ( ) | Detailed emphasis on a major TSMC expansion (additional $100B investment and accelerated fab timelines), alongside robust data center and high-load customer growth ( ) | Bullish and even more pronounced in current commentary; demand growth factors remain a key positive driver for the future. |
Operational Execution Challenges, Planned Outages, and O&M Risks | Q2 and Q3 featured discussion on managing O&M efficiencies, extreme weather impacts, and planned outages, while Q4 had little focus on these issues ( ) | Q1 2025 provided detailed discussion on major planned outages (e.g., at Four Corners and Palo Verde), higher O&M costs, and proactive operational measures (including fire mitigation investments) ( ) | Continued operational challenges with planned outages; although higher O&M costs are noted, proactive management measures suggest that these are expected and are being effectively mitigated. |
Earnings Guidance and Allowed ROE Recovery | Q2–Q4 discussed EPS guidance updates, long‐term growth targets, and the need to align allowed ROE with regulatory filings ( ) | Reaffirmed 2025 guidance for sales and EPS while emphasizing a formula rate plan to enable recovery of allowed ROE and close regulatory lag gaps ( ) | Stable and consistent; guidance remains largely unchanged with an increased focus on ROE recovery through the regulatory process. |
Revenue Recognition Adjustments Impacting Reported Sales | Not mentioned in earlier periods | Introduced as a one-time procedural adjustment affecting reported sales figures, with no expected long-term effect ( ) | New topic; a technical accounting adjustment that provides clarity on short-term sales figures without implying a structural change. |
Inflationary Impacts on Operating Costs | Addressed in Q2–Q4, with discussions on historically lagging cost recovery due to outdated test years and efforts to manage O&M cost increases ( ) | Mentioned indirectly through higher O&M expenses (attributed to planned outages and IT projects) without explicit focus on inflation, suggesting cost pressures are being normalized ( ) | Persistent factor; while inflation remains a background influence, current emphasis is on managing its impact through operational adjustments. |
Equity Dilution and Capital Funding Risks | Discussed in Q2–Q4 with reference to block equity issuances, ATM programs, and planned incremental equity to maintain a balanced capital structure ( ) | Not explicitly discussed in Q1 2025 | Reduced emphasis in the current period suggests a stable capital funding environment with previous measures fully in place. |
Regulatory Commission Composition Changes and Political Risk | Q2–Q4 addressed commission composition changes and early political risk considerations via ACC election discussions and new commissioners ( ) | Not mentioned in Q1 2025 | Discontinued focus in Q1 2025 implies that regulatory political risks appear to be stable, reducing the need for further commentary. |
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Regulatory Lag
Q: Expected lag on allowed ROE?
A: Management is focused on reducing regulatory lag so that the utility can earn rates closer to the allowed ROE through a formula rate plan designed to minimize customer cost impacts in future adjustments. -
Rate Adjustment
Q: Will formula rate start in 2027?
A: If the rate case concludes in 2026, the design anticipates the first annual formula rate adjustment in 2027 to keep rates current. -
Filing Structure
Q: Single filing or split approach?
A: The filing integrates a traditional rate case covering the 2024 test year with a proposal for a formula rate plan in a single comprehensive submission to recover revenue deficiencies and reduce future lag. -
Quip Disclosure
Q: Impact of $3B–$3.5B Quip balance?
A: The disclosure is meant to signal a broader project pipeline beyond the current 3-year plan, without affecting the immediate rate base, highlighting additional strategic opportunities. -
Semiconductor Fabs
Q: What’s the outlook on fabs?
A: Fab 1 is now in full production while Fab 2 and Fab 3 are expected to accelerate — with Fab 2 anticipated around 2028 and Fab 3 later, reinforcing robust semiconductor-driven growth. -
High Load Pipeline
Q: Status of high load customer pipeline?
A: The company is committed to 4 GW of high load capacity and is actively evaluating an additional 10+ GW, supporting a strong long-term commercial and industrial sales outlook. -
Resource Procurement
Q: When will resource procurement occur?
A: Procurement is underway for new resources to come online between 2028 and 2030, with the possibility of exceeding the minimum 2,000 MW target depending on proposal quality. -
Long-Term Planning
Q: Is a longer-term view planned?
A: Management is evaluating a broader disclosure beyond the current 3-year window, linking integrated resource planning cycles with a 5-year view as part of a longer-term strategy. -
O&M Trend
Q: How is core O&M performing?
A: Excluding the effect of one-time outages and IT project timing, core O&M trends are on track with guidance and are expected to normalize over the full year. -
O&M Offsets
Q: Are offsets planned for O&M lumpiness?
A: Yes, the anticipated lumpiness from planned outages and IT costs has been factored into current guidance, with expectations that O&M will meet annual targets. -
Transmission Voltage
Q: Possibility of 645 kV lines?
A: The engineering team is reviewing various voltage options, but current projects require no more than 500 kV, with no immediate plans for 645 kV lines. -
Rooftop Solar Impact
Q: How do lower rooftop solar applications affect offsets?
A: The reduction in new rooftop solar installations reflects market saturation and is considered a normalization trend, causing only a modest offset to demand growth. -
Eldorado Gain
Q: What drove the Eldorado gain?
A: A profit was realized from a legacy electric switchgear investment through Eldorado, marking a small, non-core yet favorable economic trend. -
Coal Plant Closure
Q: Any changes on coal plant restart?
A: The Toa coal plant remains retired owing to federal mandates and economic factors, with plans now focused on repurposing the site for new-generation technologies. -
Residential Sales Impact
Q: Why did residential sales appear lower?
A: A one-time adjustment in estimating unbilled revenues for residential customers lowered the reported growth, though underlying consumption trends remain consistent.
Research analysts covering PINNACLE WEST CAPITAL.