Top Utilities for Data Center Growth, According to Jefferies By Investing.com

Jefferies highlights utilities exposed to hyperscaler data-center expansion, naming NiSource its top pick and forecasting an effective 10%+ EPS trajectory while protecting ratepayers (NiSource Q4 2025 adj. EPS $0.51 vs. revenue $1.2B; dividend $0.30). Entergy is cited for sector-leading ~11% EPS growth (Jefferies est.) though its Q4 EPS $0.51 and $2.92B revenue missed expectations. AEP has a 56GW data-center pipeline to 2030 with ~90% backed by service agreements and a $4.2B Ohio transmission project to support a 10GW campus; Xcel offers a low-cost, decarbonized Midwest footprint and received an Argus upgrade.

Analysis

Hyperscaler clustering is creating quasi-fiefdoms for utilities that have nailed the regulatory playbook; the economic lever is not just incremental megawatts but the ability to convert large-load contracts into de-risked rate base growth that accrues to shareholders without imposing marginal costs on residential customers. Expect announced load to materialize into visible EPS accretion on a 12–36 month cadence as tariffs roll in and transmission builds are permitted — but the real valuation kicker is the optionality of repeat deals in adjacent geographies.

Second-order beneficiaries include transmission OEMs, large-station E&C contractors, and modular substation manufacturers where lead times and supply bottlenecks can create 200–400bp margin tailwinds to utilities that control delivery. Conversely, independent renewables and merchant generators could see shorter-run price pressure in constrained regions as hyperscaler demand compresses nodal prices during off-peak hours, changing the economics of behind-the-meter storage deployments.

Key risks are concentrated and binary: a hyperscaler capex pause (weeks–months), state-level political backlash that reopens tariff structures (6–18 months), or a spike in real rates that increases allowed returns’ valuation sensitivity (instant). Legal challenges to contract terms or transmission permitting delays can push the bulk of expected returns out multiple years, materially lowering IRRs even if the load eventually arrives.

From a capital-allocation lens, managements that use contractual minimums and termination fees are effectively selling optionality to hyperscalers; the market should pay a premium only if those contractual protections are both enforceable and cash-collectible. That makes due diligence on regulatory orders, contract assignment clauses, and counterparty credit (including hyperscaler concentration) the top priority for investors before monetizing the growth story.

Key Decisions for Investors

• Long NI (12–24 months): Buy shares sized to 2–3% of portfolio with a stop at -18% and a target of +30% if two additional large-load deals are announced or regulatory orders confirm tariff economics. Rationale: outsized optionality to repeatable contract wins; tail risk is regulatory reversal or settlement collapse.
• Long AEP via calendar call spread (18–36 months): Buy AEP long-dated calls financed by selling nearer-term calls (e.g., buy 2028 calls / sell 2026 calls) to capture multi-year transmission-led rate base growth while reducing theta decay. Reward: levered participation in 10+ GW transmission monetization; risk: project permitting slippage compresses IRR.
• Pair trade (6–12 months): Long NI / Short XEL sized 1:0.6 to neutralize market beta. Trade rationale: pay up for contractual/regulatory clarity and short a utility where latent wildfire and valuation complacency could reprice. Stop-loss: 10% on the pair; objective: capture 10–20% relative move as contract wins re-rate NI.
• Tactical hedge for the hyperscaler cycle (0–9 months): Buy sector protection (put spread on XLU or buy short-dated puts) ahead of major hyperscaler earnings/capex updates to protect against a sudden capex pause. Rationale: cheap insurance against a fast, market-moving announcement that would knock forward flow expectations.