We arrive at a target price of $100 using a weighted average of: 1) a 20.0x P/E multiple on our 2026 consolidated EPS estimate; 2) a 1.4x EV/rate base multiple on 2026 ACC and FERC rate base estimate; and 3) a dividend discount model.

• P/E multiple: We apply a 20.0x multiple on our 2026 consolidated EPS estimate, slightly above peer average. This approach yields a target price of $101/share.

• EV/rate base multiple: We apply a 1.4x rate base multiple on 2026 ACC and FERC rate base to reflect improved regulatory environment in Arizona. This approach yields a target price of $104/share.

• DDM: We assume a near-term dividend growth rate of 2.0%, terminal growth rate of 3.5%, and a cost of equity of 6.91%. This approach yields a target price of $96/share.

Key risks to our target price include:

• Regulatory Environment: Arizona is one of the most restrictive regulatory jurisdictions in the US. There is a risk that: 1) the alternative rate mechanism proceeding could not improve regulatory lag or change the current rate structure (historical test year); 2) the commissioner election results could increase regulatory uncertainty and potentially push the jurisdiction to be more restrictive; and 3) adoption of alternative rate mechanisms would increase regulatory uncertainty in the near term (more time and resources needed to advance learning curve).

• Unfavorable rate case outcomes (including lower authorized ROE) and underearning can impact APS’s long-term EPS outlook. 

• Capital Market Access & Cost of Capital: There is a risk that unfavorable regulatory environment could impact APS’s earnings profile and potentially lower APS/PNW’s credit rating, which can limit PNW’s access to capital markets.

• Higher interest rates at APS could destroy value for APS utility assets and create earnings drag, which would impair stock value.

• Affordability: Increase in APS customer bills could increase further political pushback on favorable regulatory outcomes and make the Arizona regulatory environment even less constructive. This could impact longer-term APS growth and EPS outlook.

• Economic Growth: There is a risk that economic growth in Arizona could slow down, which might cause postponement or cancelation of large C&I projects. This could result in lower-than-expected load growth in APS service territory. 

• Supply Chain & Permitting: There is a risk that supply chain and permitting process could delay APS’s generation and transmission asset buildout, which could incur additional revenue requirement to customers relative to APS’s preferred plan. 

• Four Corners Delayed Retirement: There is a risk that APS could delay Four Corners retirement beyond 2031 if replacement generation does not materialize, which would incur additional emission costs, slow APS’s pace to achieve their carbon goals by 2035 and 2050, and result in unplanned ESG impacts.

Conversely, positive developments in these risk factors could cause the share price to remain above our target price.