The Zacks Utilities sector’s third-quarter earnings are expected to have benefited from a revival of demand in the commercial and industrial groups of customers. An improvement in economic conditions after the pandemic has been generating fresh demand for utility services.

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.

Factors to Consider

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 the 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.

Per the updated outlook of 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.

A clear transition is evident in the Utilities space, with companies operating in this space gradually moving toward clean sources of fuel to produce electricity and lower emission. The stringent regulation of emissions, the high cost of conventional fuel and government incentives on the usage of clean fuel are also urging the utilities to focus more on clean energy sources. Many utilities have already pledged to provide 100% electricity from clean sources in the next few decades.

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 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.

According to the Zacks model, a company needs the right combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to increase the odds of an earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Pinnacle West Capital Corporation’s (PNW Quick QuotePNW - Free Report) third-quarter earnings are likely to have benefited from the ongoing economic development in Arizona and an expanding retail customer base. Third-quarter earnings might have also gained from sales growth in new large manufacturing facilities and several large data centers developed in its service territories. (Read more: What's in Store for Pinnacle West in Q3 Earnings?)

Our proven model predicts a likely earnings beat for Pinnacle West Capital this time around. PNW has an Earnings ESP of +1.66% and a Zacks Rank of 2.

Exelon Corporation’s (EXC Quick QuoteEXC - Free Report) third-quarter earnings are likely to have benefited from cost management, strong demand from customers and decoupled distribution rates, which reduce volumetric risk. ( Read more: Exelon to Report Q3 Earnings: What's in the Offing?)

Our proven model does not conclusively predict an earnings beat for Exelon this time around. EXC has an Earnings ESP of 0.00% and a Zacks Rank of 2.

Consolidated Edison Inc.’ s (ED Quick QuoteED - Free Report) third-quarter earnings are likely to have benefited from warmer-than-normal temperatures in its service territories, boosting demand for utility services. The implementation of new rates has also boosted earnings.

Our proven model does not conclusively predict an earnings beat for Consolidated Edison this time around. ED has an Earnings ESP of 0.00% and a Zacks Rank of 2.

Eversource Energy’s (ES Quick QuoteES - Free Report) third-quarter earnings are likely to have benefited from organic growth and systematic investment in its transmission and distribution facilities, resulting in a higher contribution. The new equity issuance might have a dilutive impact on third-quarter earnings. ( Read more: Eversource to Report Q3 Earnings: What's in the Offing?)

Our proven model does not conclusively predict an earnings beat for Eversource Energy this time around. ES has an Earnings ESP of -0.29% and a Zacks Rank of 3.

Sempra Energy’s (SRE Quick QuoteSRE - Free Report) third-quarter earnings are likely to have benefited from new rates and higher demand from customers due to warmer weather in its service territories. (Read more: What's in the Cards for Sempra Energy in Q3 Earnings?)

Our proven model does not conclusively predict an earnings beat for Sempra Energy this time around. SRE has an Earnings ESP of -6.12% and a Zacks Rank of 3.

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