Fed Hike Pressures Utility Debt Costs and Dividends
The Federal Reserve’s first rate hike since 2023 raises the cost of capital for utilities, prompting investors to scrutinize debt coverage at Exelon, PG&E, and Centuri.
Federal Reserve Chair Kevin Warsh announced a 25-basis-point increase in the benchmark interest rate, lifting the funds rate to a range of 3.75% to 4.00%. The Federal Open Market Committee voted unanimously for the move, citing elevated inflation, rising oil prices from the Middle East crisis, and a stable labor market. Warsh indicated that further rate hikes are expected before the end of 2026 to bring inflation closer to the 2% target.
For the capital-intensive Zacks Utilities sector, this monetary tightening represents a significant headwind. Unlike banks, which benefit from higher interest income, utilities rely heavily on external financing for infrastructure projects. Rising borrowing costs increase the sector's cost of capital, potentially compressing margins and constraining the ability to maintain consistent dividend payouts. Investors are now focusing on companies with strong debt coverage to withstand these financial pressures.
Exelon Faces High Infrastructure Spend
Exelon Corporation, based in Chicago, serves approximately 11 million customers through its transmission and distribution operations. The company is responding to rising high-density load interest, primarily driven by data centers, by planning a $41.7 billion infrastructure investment over the 2026-2029 period. Exelon’s times interest earned ratio stands at 2.5, indicating sufficient operating income to cover interest expenses. The stock carries a beta of 0.3, a dividend yield of 3.98%, and a Zacks Rank #3 with a VGM Score of B.
PG&E Expands Capital Allocation Plan
PG&E Corporation, headquartered in Oakland, California, generates revenue from electricity and natural gas delivery. Driven by expanding data center demand, the utility plans to invest $12.4 billion in 2026 and $73 billion over the 2026-2030 timeframe. PG&E has also identified at least $5 billion in additional customer-beneficial investment opportunities beyond its current capital plan. The company’s times interest earned ratio is 1.9, with a beta of 0.24. Analysts expect 10% year-over-year growth in 2026 earnings per share, while the current dividend yield is 1.52%.
Centuri Targets Infrastructure Services
Centuri Holdings, based in Phoenix, Arizona, provides utility and energy infrastructure services. The company is included in this analysis due to its financial metrics, which align with the criteria of a times interest earned ratio greater than 1, ensuring it can cover current interest expenses without immediate default risk. Centuri holds a Zacks Rank #3 and a VGM Score of A or B, indicating stable valuation and growth characteristics despite the broader sector's sensitivity to interest rate fluctuations.
