Pinnacle West Capital Corporation / Arizona Public Service

▲ Bull Case

• ◆ACC 2025/2026 rate case awards $450M+ in new annual revenue AND approves the Formula Rate Mechanism (FRM): FRM eliminates 2-4 year regulatory lag on new capex by allowing annual rate adjustments, transforming PNW from a binary rate-case utility to a smooth earnings grower worth $125-130/share. FRM approval alone could add $10-15/share to fair value. Combined with a favorable revenue award, FY2027-2028 EPS of $5.50-6.00+ becomes highly visible, supporting a 22-23x multiple on a growing, formula-rate-protected earnings stream.
• ◆Arizona data center and semiconductor franchise is durable and expands: TSMC Phoenix Phase 2-3 (leading-edge 2nm fabs) proceed on schedule, committing 1-2 additional GW of non-cyclical industrial load. A second hyperscaler anchor signs long-duration power agreements in Arizona. The 30,000 MW interconnection queue converts at above-average rates, driving rate base growth above the 11%/yr base case. Arizona's CFE requirements and nuclear power's rising value in the AI/data center era make Palo Verde a long-duration embedded option that the market begins to capitalize explicitly.
• ◆Palo Verde SLR NRC approval and nuclear renaissance re-rating: The March 2026 SLR filing for a 40-year license extension to 2065-2067 is approved, cementing Palo Verde's NAV floor for decades. Rising nuclear power valuations driven by AI/data center clean firm power demand cause the market to assign a premium multiple to PNW's 29.1% Palo Verde stake. This long-duration asset re-rating, combined with favorable rate case outcome, supports the $130+ bull case scenario.

▼ Bear Case

• ◆ACC 2025/2026 rate case delivers a 2021-style adverse outcome (less than $250M in new annual revenue): A below-$250M award reduces FY2027E EPS by $0.60-0.80/share from base case and triggers multiple compression from ~18.5x to 14-15x, implying a stock price of $64-72. This would confirm that the ACC regulatory compact is structurally impaired for large capital programs and that the $10.35B capital plan is financially sub-optimal. The $611M ask — the largest in Arizona history — faces elevated consumer advocate opposition and residential ratepayer politics, making a large proportional haircut historically probable.
• ◆November 2026 ACC elections deliver a 3-2 anti-utility majority, replicating 2021 conditions: The current 3-2 Republican majority is utility-friendly; a flip replicates the 2021 scenario that caused significant earnings impairment and required regulatory/legal remediation. With $10.35B in capex already underway, a hostile ACC majority could challenge the next rate filing, restrict recovery below WACC on already-deployed capital, and create a multi-year regulatory adversity cycle — all while PNW is in its heaviest capital deployment phase.
• ◆TSMC Phoenix Phase 2-3 formally delayed or cancelled, undermining the industrial load growth narrative: TSMC's US expansion depends on semiconductor demand cycles, CHIPS Act support, and construction timelines. A formal 18+ month delay would remove 1-2 GW of high-certainty future industrial load, weaken Arizona's semiconductor hub narrative, reduce the probability of a second hyperscaler anchor, and force a downward revision of FY2027-2028 rate base growth assumptions. Combined with equity dilution of ~$200-300M/yr (2-3M shares/yr), EPS growth could disappoint materially versus the 5-8% CAGR base case.

“The central Wall Street debate is whether PNW deserves a premium utility multiple given Arizona's data center/semiconductor demand pipeline, or whether the binary ACC rate case risk (H2 2026) justifies trading at or below PWFV. Bulls argue the 3.1 GW committed load from a 30,000 MW queue — anchored by TSMC Phoenix (non-cyclical semiconductor manufacturing) and hyperscalers — is structurally differentiated from peer utilities, warranting a 20-22x forward P/E versus the regulated utility peer average of 17-19x. They also point to the FRM as a structural fix to PNW's historical regulatory lag problem. Bears counter that the $611M rate case ask is the largest in Arizona history, ACC political risk is elevated heading into November 2026 elections, the 2021 adverse rate case precedent is only 4-5 years old, and at $99.76 investors are paying for the bull case without a margin of safety. A secondary debate surrounds Palo Verde: bulls see the SLR as a 40-year NAV catalyst in a nuclear renaissance; bears note that a single-site nuclear concentration creates asymmetric operational risk (Q3 is ~35% of annual revenue; an unplanned Palo Verde outage during Arizona peak summer demand would be catastrophic). Consensus has converged around HOLD/Neutral at current prices with price targets ranging from $88 (bear/adverse rate case) to $130 (bull/FRM approval), reflecting the binary nature of the H2 2026 catalyst.”

• ◆ACC 2025/2026 rate case ALJ Recommended Order (ROO) release — late summer 2026: First judicial recommendation on revenue amount; stock likely moves ±15-20%; critical first read-through on final outcome probability
• ◆ACC final rate case vote — late 2026: THE binary event; $450M+ new annual revenue + FRM approval = bull case re-rating to $125-130; <$250M = bear case $64-72
• ◆November 2026 ACC commissioner elections: Determines regulatory environment for the next rate case cycle; a 3-2 anti-utility flip is a kill switch
• ◆TSMC Phoenix Phase 2 formal power agreement signing (FY2026-FY2027): Semiconductor manufacturing power commitment confirms and extends the data center/industrial load growth thesis
• ◆Palo Verde SLR NRC decision: 40-year license extension to 2065-2067 cements long-duration NAV floor and may trigger nuclear re-rating premium in an AI/CFE demand environment
• ◆Q3 2026 earnings (October 2026): Summer heat peak demand confirmation; Google/hyperscaler load ramp; FY2026 EPS tracking versus $4.55-4.75 guidance

• ◆ACC rate case adverse outcome (<$200M new annual revenue): Regulatory compact broken; EPS impaired $0.80-1.00/share below base case; multiple compresses to 14-15x; exit trigger
• ◆November 2026 ACC elections produce 3-2 anti-utility majority: Replicates 2021 conditions; multi-year regulatory adversity cycle during heaviest capital deployment phase; exit trigger
• ◆Formula Rate Mechanism (FRM) explicitly rejected with prohibition on future formula-rate mechanisms: Structurally impairs ability to earn allowed ROE on $10.35B capital plan; reduces FY2027-2030 EPS $0.30-0.60/share annually; 25% reduction trigger
• ◆TSMC Phoenix Phase 2-3 formally delayed or cancelled beyond 18 months: Removes 1-2 GW high-certainty industrial load; weakens Arizona semiconductor hub narrative; 40% reduction trigger
• ◆FY2026 adj. EPS prints below $4.20 (>10% below guidance floor): Signals operational failure beyond weather — Palo Verde unplanned summer outage or O&M escalation; 40% reduction trigger
• ◆Equity dilution headwind: ~$200-300M/yr in equity issuance at $95-100 = 2-3M additional shares/yr; modest but real EPS headwind compounding over 3+ years of the capital program