Arizona voters went to the polls in 2014 to elect new members to the Corporation Commission, which regulates most utilities in the state. The state’s largest utility, Arizona Public Service, secretly spent millions of dollars to influence their vote.
The utility’s hand-picked regulators – both Republicans – won, and APS benefitted from having staunch allies on the regulatory commission. For example, APS got a large rate hike approved in 2017, as well as a huge cut in how much the utility pays to purchase electricity generated by homeowners with solar panels.
As a result, the stock price of Pinnacle West, the publicly traded parent company of APS, began a steep ascent, climbing more than 50 percent.
But it wasn’t just the large institutional shareholders that own the bulk of Pinnacle West stock who saw massive profits: Don Brandt, the CEO of both APS and Pinnacle West, has been awarded more than $42 million worth of stock as part of his compensation package. And since that 2014 election, he has sold nearly 400,000 shares of Pinnacle West totaling more than $32 million.
It has also enriched board members and executives at both APS and Pinnacle West, who are given stock as part of their pay packages.
Brandt announced in August that he will retire in November. He steps down in the wake of pressure from the Corporation Commission – which now is controlled by APS critics – to reveal the extent of his company’s political activity and a scandal in which an elderly customer died after her power was disconnected on a hot summer day because she was $51 behind on her bill.
An Arizona Mirror analysis of Brandt’s stock sales since 2010 and historical values of Pinnacle West stock, the New York Stock Exchange and an index fund for utility companies shows that Brandt was able to make at least about $5 million more on those sales because Pinnacle West’s stock price skyrocketed, far outpacing both the overall stock market and the utility sector.
A spokeswoman for APS declined multiple requests for comment from the Arizona Mirror over the course of about two months.
Unprecedented utility election spending
By covertly spending more than $10 million to convince voters to elect Republicans Tom Forese and Doug Little to the five-member regulatory agency, the company sought to pick its own regulators. In doing so, it broke a longstanding APS practice of staying neutral in Corporation Commission races, and it spent unprecedented amounts on a race that is often an afterthought for voters.
The company first convinced Republican primary voters to choose Forese and Little over two candidates, Lucy Mason and Vernon Parker, who were allied with the burgeoning residential rooftop solar industry, which was locked in a battle with APS at the Corporation Commission. Then, APS-funded groups deluged voters with TV ads and mailers attacking Democratic candidates Jim Holway and Sandra Kennedy.
Voters didn’t get a full accounting of just how badly APS and Pinnacle West wanted those two Republicans to win until earlier this year, when the companies complied with requests from the current Corporation Commission to turn over records related to their 2014 campaign activities.
In all, APS funneled $10 million to three “dark money” groups that in turn spent to make sure Forese and Little were chosen as utility regulators.
APS and Pinnacle West benefitted beyond the Corporation Commission chambers, particularly on the stock market. Since November 2013, when APS made its first contribution to the Arizona Free Enterprise Club – a dark money outfit it funneled its money through to hide its 2014 campaign spending – shares of Pinnacle West stock have jumped 73%.
Friendly regulators mean friendly investors
Chris Herstam, a retired lobbyist whose former firm, Lewis Roca Rothgerber Christie, represented Pinnacle West from 2011 to 2016, said the election of pro-APS commissioners has been a boon to Pinnacle West.
“It’s obvious that APS’s political activities have resulted in a far more friendly Corporation Commission that is more likely to approve substantial rate increases, and in fact did so in recent years. And every time there’s a rate increase, that has a major, positive impact on Pinnacle West stock,” Herstam said.
Michael Weinstein, a utility analyst who covers Pinnacle West for Credit Suisse, said Pinnacle West’s earnings would have suffered without a rate increase to offset losses from rooftop solar. And he noted that Pinnacle West’s stock growth outpaced other utilities from 2014 through the 2017 rate increase that the Corporation Commission approved.
After 2017, Pinnacle West saw a period of underperformance that lasted through the defeat of Proposition 127, a ballot initiative that would have mandated that Arizona utilities get 50 percent of their energy from renewable sources by 2030.
Weinstein said the election of unfriendly regulators could have had a negative effect on the company. If the commission had been unfriendly to Pinnacle West, Weinstein said he would expect the company’s price-to-earnings ratio to decline, which would increase the cost of equity, requiring the company to issue more stock shares in order to raise the same dollar amounts.
“Investors are keenly aware of who’s being elected, who’s running and what their policies are, and how they perceive the effect will be on their investments in the state,” Weinstein said.
After its success in 2014, APS and Pinnacle West spent about $6 million more in 2016 to boost the three Republican candidates – incumbents Bob Burns and Andy Tobin, and newcomer Boyd Dunn. When the dust settled, Dunn edged out Democrat Bill Mundell, who campaigned on an anti-APS platform, by about 13,000 votes.
In all, between 2013 and 2018, APS spent more than $182 million on lobbying, marketing, grants, and political spending – or $152 per customer.
Nearly 70% growth since 2014
To determine what effect Pinnacle West’s successful political activity had on its stock – and how much that benefitted Brandt personally – Arizona Mirror analyzed nearly 300 stock transactions conducted by Brandt since 2010, the year after he became CEO of Pinnacle West. We compared the increase in the value of Pinnacle West stock to growth in both the overall stock market and to an index fund that owns stocks of large utilities, including Pinnacle West.
Pinnacle West’s stock growth has far outpaced both of those indexes, increasing in value by 69 percent since February 2014 – the last stock sale Brandt made before the 2014 election – compared to 23 percent growth for the NYSE (where the company’s stock is traded) and about 40 percent for the utility index fund.
During Brandt’s tenure as CEO in the years before the 2014 election, Pinnacle West stock had grown more than both the NYSE and XLU, the large utility index fund. It grew about 8.6% more than the overall market, and 19% more than the index fund.
But things changed in 2014, as the election approached and Pinnacle West and APS were pumping money into a coordinated campaign to place their preferred regulators into office. Between Brandt’s sale of nearly 17,000 shares of stock in February 2014 and his sale of 47,000 shares in February 2019, Pinnacle West’s stock performance was dramatically better.
In that time, it grew nearly 46% greater than the entire NYSE and about 29% more than the utility index fund. That 46% growth rate compared to the NYSE was nearly triple how well XLU fared compared to the overall market.
At the same time Pinnacle West share prices were sharply rising, Brandt was increasing the number of shares he was selling. On average, during Brandt’s first five years as CEO, he sold about 17,800 shares per year. But he began amassing stock in 2013 through his compensation plan – he held about 31,000 in 2012, but more than 200,000 in 2017 – and selling off large amounts.
In 2016, he sold more than 66,000 shares for a total of nearly $5 million. The next year, he sold 169,000 shares for a tidy $14.4 million. In 2018, Brandt divested 96,000 shares for about $7.6 million. This year, his sales dipped to about 46,000 shares for $4.3 million. He still owns more than 67,000 shares worth about $6.3 million.
All told, Brandt has sold shares worth $36.8 million since becoming CEO – and $32.5 million of that stock was sold after APS poured $10 million into the 2014 Corporation Commission election.
Had Pinnacle West’s stock price kept pace with either the overall industry sector index fund or the NYSE growth rates, Brandt’s stock sales would have been worth at least $4.8 million less.
How we did it
Our analysis used Feb. 20, 2014 – the date of Brandt’s last stock sale before the 2014 election – as a baseline, and then calculated what Pinnacle West’s share price would have been had it matched the growth of both the entire NYSE and the XLU index fund for every date Brandt sold his shares of Pinnacle West.
The XLU fund grew by nearly 40% between February 2014 and February 2019, while Pinnacle West’s stock value increased by almost 69%. If the share price for each of Brandt’s stock sales is adjusted to reflect XLU share prices, Brandt would have earned nearly $4.8 million less.
The NYSE grew at a slower rate than the utility sector, which experienced a surge as the fracking boom made the cost of natural gas drop sharply and increased profits for many utilities. Adjusting Pinnacle West’s share price to match NYSE’s growth means Brandt would have made $7.25 million less on his stock sales.
While Brandt owns more shares than any other Pinnacle West executive or board member – slightly more than 67,000, according to the company’s latest SEC filings – he isn’t the only one with shares currently worth millions of dollars.
Board members are compensated with stock each year. Longtime board member Humberto Lopez’s nearly 61,000 shares are worth about $5.8 million, as of Aug. 30. Three other board members – Bruce Nordstrom, Denis Cortese and David Wagener – own stock worth between $1.2 million and $3.3 million. Former board members Roy Herberger Jr. and David Falck, who held their posts throughout the 2014 and 2016 elections, own stock worth $2.3 million and $1.6 million, respectively.
Like many companies, Pinnacle West and APS award executives also receive stock as part of their pay packages. Five of them own at least 10,000 shares worth more than $1 million. Both Randall Edington, an executive vice president for Pinnacle West and advisor to Brandt, and Executive VP & CFO James Hatfield have nearly 38,000 shares worth $3.6 million.
And APS President Jeffrey Guldner, who was named Brandt’s replacement as CEO of both Pinnacle West and APS, owns more than 19,000 shares valued at more than $1.8 million.