The Federal Reserve chair Janet Yellen said last month that she expects the central bank to raise interest rate this year as the U.S. economy has started to show signs of improvement after a sluggish first quarter. She also said that delaying a monetary policy tightening until employment and inflation hit the central bank's targets risked overheating the economy.

Per the U.S. Bureau of Labor Statistics, the unemployment rate was down to 5.4% in April, the lowest in the last seven years. Also, the U.S. GDP is expected to improve by nearly 2% in the second quarter after contracting 0.7% in the first. Taking into consideration these positive movements and encouraging data, Fed officials might decide in favor of increasing the short-term interest rate sooner than earlier expected. In any case, the rate hike is definitely expected this year.

While economically sensitive sectors like energy and industrials are expected to benefit from the rate hike, interest-rate-sensitive sectors like the utilities will be hit hard by the rise in rates after more than six long years.

Utilities are capital intensive and need to have a continuous inflow of funds to carry on their organic growth and infrastructure upgrade projects. This is essential in maintaining the uninterrupted supply of basic amenities like electricity, fresh water and gas. Utilities generate funds from operations which are to some extent used to meet their capital requirements. But these funds are mostly used for dividend payouts. They take recourse to external sources of financing to meet their capital requirements. So, an interest rate hike will spur their cost of capital and lower profitability.

Additionally, these reliable dividend payers are in competition with bonds as an investment option. So, an increase in interest rates from the present level will definitely make bonds more attractive than utilities.

Moreover, historically low rates and their high-yielding appeal have led investors to park their money here. This has given rise to pricey valuations in the utility sector making them look less palatable than ever.

And yet, the “boring” utilities have resurfaced time and again. Their strength lies in the fact that they will never run out of business. A recovering U.S. economy with more jobs in the offing will drive customer growth across all classes, be it residential, industrial or commercial. Their diversification into renewable assets and efforts to curtail carbon emissions from the power sector have also been praiseworthy.

Even if the Fed decides to hike interest rates, which at this point looks inevitable, there are still a few utilities well prepared to withstand the challenges.

Our Picks

We have selected three utility stocks based on parameters so convincing that investors will think twice before ignoring them even post rate hike. The qualifying criteria include a current ratio greater than 1, which indicates that a company has enough resources to pay its debts over the next 12 months. This is supported by a Zacks Rank #2 (Buy) and long term earnings per share growth greater than 5%.

WGL Holdings Inc. (WGL - Snapshot Report), based in Washington, the District of Columbia, sells and delivers natural gas, and provides energy-related products and services through its subsidiaries.

This Zacks Rank #2 (Buy) stock has a current ratio of 1.03 and a debt-to-capital ratio of 41.65% -- lower than the industry average of 44.04%. The long-term earnings growth of this utility is 6%. WGL Holdings has registered positive earnings surprises in the last four quarters with an average beat of 47.80%.

New Jersey Resources Corp. (NJR - Snapshot Report), an energy services holding company, provides regulated gas distribution services and retail and wholesale energy services out of Wall, NJ.

This Zacks Rank #2 stock has a current ratio of 1.14 and a debt-to-capital ratio is 37.79%, better than the industry average of 44.04%. The long-term earnings growth of this utility is 6%. The company delivered an earnings surprise in three out of the last four quarters with an average beat of 77.04%.

DTE Energy Co. (DTE - Analyst Report), based in Detroit, MI, is a holding company with subsidiaries engaged in regulated and unregulated energy businesses. The company’s largest regulated subsidiaries are DTE Electric Company and DTE Gas Company.

Its current ratio is 1.52 while the debt-to-capital ratio is 50.46%, marginally higher than the industry level of 49.48%. The long-term earnings growth of this utility is 5.05%. This Zacks Rank #2 stock has pulled earnings surprises in two of the last four quarters with an average beat of 2.49%.

Making a Case for Utilities

On the eve of World Environment Day, the utilities mentioned above are doing their part to create a cleaner future through effective use of fossil fuels. DTE Energy’s efficiency programs have not only curtailed power usage but have also lowered customer bills over the years. WGL Holdings apart from supplying natural gas to its customers have planted trees to observe Earth Day.

The year-over-year earnings growth from the utility sector in the first quarter of 2015 was 8.4%, way ahead of the S&P 500 growth of 2.4%. Earnings growth from the utility space is expected to be 4.3% in 2015 compared with 0.9% from the S&P 500. For more details read: Q1 Earnings Season Winding Down

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