2 Utility Stocks to Buy in February

NextEra Energy and Dominion Energy are positioned to benefit from a nascent AI-driven surge in data-center power demand: NextEra grew adjusted EPS >8% in 2025, placed 8.7 GW of new generation and storage online, secured a 13.5 GW resource pipeline (30 GW backlog) and forecasts >8% annual EPS growth through 2035 while planning dividend increases (10% this year, then 6% in 2027–28) and yielding ~2.5%. Dominion, the leading supplier to Virginia’s data‑center hub, supported 450 facilities, saw Virginia power demand jump ~30% last year, is negotiating up to 47 GW of supply (a 17% increase), plans $50 billion of utility investment from 2025–2029 including the $11.5 billion Coastal Virginia Offshore Wind (~3 GW), and targets 5–7% annual EPS growth while maintaining a >4% dividend yield. The piece argues these catalysts could underpin double‑digit total returns for both utilities, supporting a constructive investment case.

Analysis

Market structure: The AI-driven demand surge positions regulated and large-scale renewable developers (NEE, D, NextEra Energy Resources, grid owners) as direct winners — NextEra’s 30 GW backlog and Dominion’s talks for ~47 GW and a 30% local surge in VA imply multi-year contracted demand. Losers include merchant thermal generators facing squeezed utilization and data-center customers that cannot secure long-term PPAs may face higher delivered-costs; transmission, transformer supply and interconnection queues are the immediate bottlenecks tightening capacity and raising project premia.

Risk assessment: Tail risks include state/federal regulatory reversals on preferential rates or ROE (a 100–200 bps cut would materially reduce IRRs), offshore-wind permitting/cost overruns (Coastal VA $11.5bn), and rising WACC from a 100–200 bp move in rates which compresses utility valuations. Near-term (days/weeks) volatility will track news (Coastal start, quarterly bookings); medium-term (6–18 months) risk centers on capex execution and supply chains; long-term (3–10 years) depends on achieved contracted GW and rate-case outcomes.

Trade implications: Tactical allocations should favor regulated developers with secured backlog: overweight NEE and D but size for financing risk (2–4% each). Use LEAPS or staggered call spreads to play upside while limiting capital; consider short exposure to merchant generators (e.g., NRG) or unhedged power producers to hedge demand-side risk. Cross-asset: higher utility capex raises corporate debt issuance — prefer IG bonds of utilities with stable coverage; watch NG prices for inflationary pressure.

Contrarian angles: Consensus underestimates grid interconnection and labor/supply friction — timelines can slip 12–36 months, delaying revenue recognition while capex accrues. Market may be underpricing rate-case outcomes and credit risk: if Dominion’s FFO/Net Debt deteriorates >15% by 2027, dividend sustainability is at risk. Monitor signed PPAs, state ROE dockets, and transformer lead-times as leading indicators of execution vs. expectation.

Key Decisions for Investors

• Establish a 2–3% long position in NEE via staggered purchases (50% now, 50% on >8–10% pullback) or buy Jan 2028 LEAPS to capture 8–10%+ EPS CAGR to 2035; set a stop-loss/trim at a 15% adverse move.
• Establish a 2–3% long position in D sized to match regulatory execution risk; sell 6–9 month covered calls at strikes 7–10% above entry to monetize dividend yield (~4%+) while capping upside near-term.
• Implement a pair trade: long 2% D (regulated) vs short 1.5–2% NRG (NRG) to express regulated growth vs merchant exposure; rebalance if spread narrows >200 bps or if NRG posts >10% yoy margin recovery.
• Use options to express asymmetric risk: buy 12–18 month call spreads on NEE (debit spread capped loss) sized to 1–2% notional; for D, buy a tail-protecting 12-month put at ~12–15% OTM if regulatory ROE cuts or cost overruns occur.
• Trigger-based risk rules: reduce combined NEE+D exposure by 50% if (a) a major rate case lowers allowed ROE by ≥100bps; (b) Dominion’s FFO/Net Debt worsens >15% over two quarters; or (c) Coastal VA delays announced >6 months.