Per the latest Earnings Preview, the Zacks Utilities sector’s third-quarter 2022 earnings are expected to decline 9.3% while revenues are estimated to improve 3%. The capital-intensive utility stocks were impacted by the ongoing increase in interest rates and rising operating costs, while new rates implemented in their service territories boosted revenues.

With the assistance of the Zacks Stock Screener, we have identified four utilities, namely The AES Corporation (AES Quick QuoteAES - Free Report) and  Ameren Corporation (AEE Quick QuoteAEE - Free Report) ,  Pinnacle West Capital Corp. (PNW Quick QuotePNW - Free Report) and Primo Water Corporation (PRMW Quick QuotePRMW - Free Report) ,which are poised to beat the Zacks Consensus Estimate in third-quarter earnings. These stocks have the ideal combination of two ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy), or 3 (Hold) — to surpass expectations. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

A few large utilities like NextEra Energy, American Electric Power Company and FirstEnergy Corp., among others, have already reported a positive surprise in their respective earnings releases.

Factors That Likely Impacted Q3 Results

Domestic-focused companies operating in the sector are focused on cost management and implementation of energy-efficiency programs. New rates and customer additions are creating fresh demand as well as assisting the utilities. Investment in strengthening the infrastructure is allowing utilities to provide services even during extreme conditions, leading to stable earnings. Domestic-focused operations also insulate utilities from the adverse impact of currency fluctuation.

Capital-intensive utilities need massive funds to upgrade, maintain and expand their infrastructure and operations, and are capital-intensive in nature. The performance of the utilities is likely to have been adversely impacted by the increase in interest rates from near-zero levels. The ongoing increase in borrowing costs and the possibility of more interest rate hikes this year may have further pushed up capital servicing expenses and adversely impacted earnings.

Weather does play a significant role in driving demand for utility services. Per the National Oceanic and Atmospheric Administration, the July-September 2022 average contiguous U.S. temperature was 73.0°F, 2.8°F above average. The above-average temperature during the summer months is likely to have spurred demand for water and electricity for cooling purposes, benefiting the utilities.

Utilities have been focused on improving productivity and their cost structure through investments in digital technologies, integrating key systems and analyzing data to make proper decisions to improve overall operations. The utilities have been educating customers relating to the proper usage of electricity to reduce utility bills and things to do during emergency situations to reduce damage.

Expected Q3 Outperformers

Ameren Corporation generates and distributes electricity and natural gas to residential, commercial, industrial and wholesale end markets in Missouri and Illinois. During the 2022-2026 period, the company expects to spend up to $17.3 billion on overall system reliability, environmental compliance and electric and natural gas utility infrastructure improvements.

The Zacks Consensus Estimate for third-quarter earnings is pegged at $1.72, indicating an increase of 4.24% from the year-ago reported figure. AEE has an Earnings ESP of +1.41% and a Zacks Rank #3.

The AES Corporation operates as a diversified power generation company. The company is taking advantage of favorable trends in clean power generation, transmission and distribution and LNG infrastructure to improve the profitability of its business. At the end of first-half 2022, the company had a 37 GW pipeline of development projects.

The Zacks Consensus Estimate for third-quarter earnings is pegged at 54 cents, indicating an increase of 8% from the year-ago reported figure. AES has an Earnings ESP of +3.42% and a Zacks Rank #3.

Pinnacle West Capital Corporation provides electricity services in the state of Arizona through its subsidiaries. The company is involved in the generation, transmission and distribution of electricity from coal, nuclear, gas, oil and solar. The utility plans to invest $4.7 billion during the 2022-2024 period to further strengthen its infrastructure and efficiently serve its increasing customer base.

The Zacks Consensus Estimate for third-quarter earnings is pegged at $2.62, indicating a decline of 12.7% from the year-ago reported figure. PNW has an Earnings ESP of +1.66% and a Zacks Rank #2.

Primo Water Corporation provides water solutions for residential and commercial customers. Primo Water makes consistent investments to upgrade and maintain its existing infrastructure to provide 24x7 reliable services to the expanding customer base.  In 2022, the company aims to invest $200 million to strengthen its operations. It sets aside $40-$60 million per year to make acquisitions and expand its footprint.

The Zacks Consensus Estimate for third-quarter earnings is pegged at $2.62, indicating a decline of 12.7% from the year-ago reported figure. PRMW has an Earnings ESP of +1.10% and a Zacks Rank #3.

Stay on top of the upcoming earnings announcements with the Zacks Earnings Calendar.