Shares of Pinnacle West (PNW) are under pressure on Thursday after Guggenheim analyst Shahriar Pourreza downgraded Pinnacle West to Sell from Buy following Arizona Public Service's rate case hearings. The analyst argued that the Arizona Corporation Commission "has now confirmed that they are the single most value destructive regulatory environment in the country" for investor-owned utilities. Voicing a similar opinion, his peer at Wells Fargo also lowered her price target on Pinnacle West's shares and cut earnings per share estimates as she views the hearings as another sign of continued deterioration in the Arizona regulatory environment.
RATE CASE HEARINGS: The Arizona Corporation Commission held a three-day Special Open Meeting to discuss a pending rate application from Arizona Public Service Company, or APS. In a 3-2 vote, the ACC elected to delay the SCR prudency decision to a future proceeding, which could take 6-12 months per the staff. While the company will still have an opportunity to seek prudency/recovery, Wells Fargo analyst Sarah Akers highlights that there are currently three “no” votes but Pinnacle West "lives to fight another day on the issue." The commission also voted to adopt an 8.9% base ROE with a 20-basis point penalty resulting in an all-in 8.7% in a 4-1 decision. Pinnacle West has stated that a 50-basis point change to the ROE equates to $32M of revenue, about 20c after-tax.
SELL PINNACLE WEST: Following the rate case hearings, Guggenheim analyst Shahriar Pourreza downgraded Pinnacle West to Sell from Buy with a price target of $58, down from $97. The Arizona Corporation Commission "has now confirmed that they are the single most value destructive regulatory environment in the country" for investor-owned utilities, Pourreza argued. The analyst pointed out that the two-notch downgrade is also a valuation call as well as "a forward fundamental deterioration call, a negative earnings revision call," and an "incremental equity/balance sheet worsening call."
Keeping an Equal Weight rating on the shares, Wells Fargo analyst Sarah Akers lowered the firm's price target on Pinnacle West and cut earnings per share estimates following the rate case hearings. The Arizona Corporation Commission wrapped up three days of rate case hearings that demonstrated "continued animosity" toward APS and concluded with the adoption of a few positions that further solidify Arizona's reputation as a meaningfully below-average regulatory environment, Akers contended. The combination of base ROE and adopted amendments drive 6%-7% reductions to her post-2021 earnings per share estimates. The analyst views the hearings as another sign of continued deterioration in the Arizona regulatory environment. While in her view the circumstances were somewhat unique, she thinks the sum of the ACC's decisions push the bounds of onerous rate case outcomes. While Akers sees a path to improved outcomes as APS appears to be on a positive trajectory in terms of customer service and clean energy, the unpredictability of this commission is concerning, she added.
PRICE ACTION: In Thursday morning trading, shares of Pinnacle West have dropped about 6% to $69.68.
Pinnacle West
-4.225 (-5.70%)