Pinnacle West Capital, the Phoenix-based parent of Arizona Public Service (APS), reported a 7.3% drop in quarterly profit on Tuesday, as higher interest expenses and depreciation charges offset continued customer growth at its main utility.
The company said profit attributable to common shareholders fell to $178.6 million, or $1.43 per share, for the quarter ended June 30, from $192.6 million, or $1.58 per share, a year earlier. The decline came despite APS adding new customers during the period.
Pinnacle West reaffirmed its full-year earnings guidance of $4.55 to $4.75 per share, signaling that management expects the headwinds to ease later in the year.
Why interest costs are rising
Like many capital-intensive businesses, utilities rely heavily on borrowing to fund large infrastructure projects, such as new power plants, transmission lines, and grid upgrades. When interest rates rise, the cost of servicing that debt increases, eating into profits.
The Federal Reserve has lifted its benchmark rate to the highest level in over two decades, pushing borrowing costs up across the economy. Utilities, which typically carry substantial debt loads, are especially sensitive to these moves. Higher rates also increase depreciation expenses as companies spread the cost of new assets over their useful lives.
Pinnacle West is not alone in feeling this squeeze. Other utilities and companies with heavy debt have reported similar pressure on earnings. For example, NRG Energy's profit missed estimates after interest costs ballooned following its $12 billion acquisition. The pattern underscores how rising rates are rippling through the corporate sector.
Customer growth remains a bright spot
Despite the profit decline, APS continues to add customers, reflecting Arizona's strong population growth and economic expansion. More customers mean higher future revenue potential, which is a positive sign for the company's long-term prospects.
However, customer growth alone does not immediately translate into higher profits, especially when costs are rising. The company must balance the need to invest in infrastructure to serve new customers with the financial drag of higher interest and depreciation.
What it means for investors
For everyday investors, Pinnacle West's results highlight a key risk of owning utility stocks in a high-interest-rate environment. Utilities are often seen as defensive investments because they provide steady, regulated returns and pay reliable dividends. But their heavy capital spending and debt make them vulnerable to rising rates.
When rates are high, the cost of borrowing rises, and utilities may also face pressure to raise rates to cover those costs, which can attract regulatory scrutiny. Additionally, higher rates make the fixed dividends of utility stocks less attractive compared to safer investments like Treasury bonds.
That said, Pinnacle West's reaffirmed guidance suggests management is confident it can manage these challenges. The company's regulated business model provides some stability, as regulators allow utilities to earn a return on their investments, though the timing of rate cases can create short-term volatility.
Investors should also watch how the broader interest-rate environment evolves. If the Fed begins cutting rates later this year or in 2025, utilities could see relief as borrowing costs decline. Conversely, if rates stay higher for longer, the pressure on earnings may persist.
For context, other companies are also navigating similar dynamics. HSBC, for instance, has benefited from higher rates as a bank, while rising energy costs are adding to inflationary pressures globally. The interest-rate environment remains a central theme for markets.
Looking ahead
Investors will be watching Pinnacle West's next earnings report to see if the company can deliver on its full-year target. Key factors include the pace of customer growth, the outcome of rate cases in Arizona, and any changes in interest rates.
For now, the company's reaffirmed outlook provides some reassurance, but the pinch from higher interest costs is a reminder that even defensive sectors are not immune to the broader economic environment.
