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Contrary to a common assumption, not all utility stocks are the same. Oh, they were certainly similar enough before 2022 when the launch of ChatGPT sparked the frenzied construction of electricity-sucking artificial intelligence (AI) data centers. Then suddenly, the seemingly small differences between power providers became a very big deal. Some of them were ready for what was about to come. Some of them weren't. Now, shareholders are either benefiting or suffering from these utility companies' readiness (or lack thereof).
With that as the backdrop, here's a rundown of three utility names that are better positioned than most for an era of grid strain and high prices that consumers and corporations alike are pushing back on. Some corporations are generating their own electricity in response to these new conditions.
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If you were going to build a brand new power company from scratch today, it would probably look a lot like NextEra Energy (NYSE: NEE).
At first blush, it seems much like most other names in the business. Formerly known as Florida Power & Light, it still serves 12 million Floridians under the same name. The company's become so much more though. It's also one of the nation's biggest energy wholesalers, leveraging its 81 gigawatts' worth of power production capacity to serve customers other than its own. It could roughly double this output by 2032 if it continues to build as planned.
That's still not what makes this outfit so relevant in the current market environment. Even if it doesn't know exactly what the end results of these initiatives will be, NextEra Energy is rethinking what the electric utility business can and should look like, and how it can best function. As an example, in December of last year, the company announced a partnership with Alphabet's Google to design and build data centers from the ground up to be power-efficient and self-sufficient.
The development of AI-powered grid optimization solutions is also in the works. In this vein, NextEra Energy intends to build 15 gigawatts' worth of new electricity production capacity specifically for data center hubs by 2035.
These sorts of partnerships didn't used to be necessary. In light of Deloitte's prediction that the United States' data center industry's demand for power is going to grow 30-fold between 2024 and 2035, however, these sorts of cooperations have become must-act-on opportunities. The fact that NextEra is proactively embracing them is a big deal simply because it allows the company to make these deals on its terms.
Exelon (NASDAQ: EXC) isn't too terribly different from NextEra Energy in that it serves nearly 11 million customers -- mostly in the northeast -- although it doesn't operate an energy wholesaling business. It's still built to survive and even thrive in this difficult environment by leveraging its own areas of expertise.
One of these areas is how it works with major power users like data centers. By securing long-term transmission security agreements (or TSAs) with institutional customers, the company can make smart long-term investments in its production capacity and grid connectivity that don't lead to shocking price surges resulting from new customers the company isn't really ready to serve. In its own words, "by using TSAs, Exelon is flipping the script by getting large load customers like data centers to have 'skin in the game,'" adding TSAs "ensure that only serious, committed projects move forward while reducing expensive projects that could shift costs onto families and small businesses."
As of now, Exelon only has a handful of transmission security agreements in place, although the Federal Energy Regulatory Commission is reviewing several more. While other utility companies are sure to expand their own use of TSAs in the future, this one is mainstreaming the model that turns big customers into developmental partners right now.
The irony? In the long run, these agreements also keep bigger customers' power bills down and allow Exelon to operate more cost-effectively.
Exelon is also leveraging its sheer size to force the repair of what it calls "the broken PJM market." (PJM is the grid that interconnects power in 13 states, including Delaware, Illinois, Maryland, New Jersey, Pennsylvania, and Washington D.C.) Although fixing it won't directly add to Exelon's top or bottom lines, indirectly, a better-run regional grid will allow the company to operate more efficiently. Again, it's about having a seat at the table when the future of the business is shaped.
Finally, add Vistra (NYSE: VST) to your list of utility stocks that could outperform its peers in an environment marked by high electricity prices and an overworked power grid.
Much like NextEra along with several other names in the business, Vistra serves retail customers while simultaneously providing power on behalf of other utility outfits. Roughly half of last year's $7.2 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA), in fact, came from its wholesale business. This arm also accounted for most of last year's 5% EBITDA growth.
This is still just the beginning, with last year's growth not fully illustrating the opportunity ahead. Vistra has recently inked 20-year power-purchase agreements with Amazon as well as Facebook parent Meta Platforms, agreeing to deliver up to 3.8 gigawatts of power at their peak. A 20-year agreement, of course, allows Vistra to make bigger and more cost-effective investments in its production capacity.
This company is still different from Exelon and NextEra Energy in one big way that will matter to interested investors. That's its dividend. Whereas NextEra's forward-looking dividend yield of 2.6% and Exelon's 3.6% are pretty typical payouts for the utility sector, Vistra's is a scant 0.6%.
It's not an indictment of the company's ability to pay one though. I'm noting this low payout simply to highlight the fact that Vistra is using the majority of its profits to invest in more capacity or fund stock buybacks, both of which add shareholder value in a more tax-efficient way than dishing out regular quarterly income. That's why Vistra can and should perform more like a growth stock than a value stock or dividend stock for the foreseeable future, giving investors an option they don't often get from the utilities sector.
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James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, and NextEra Energy. The Motley Fool has a disclosure policy.
3 Utility Stocks Built for a World of High Energy Prices and Grid Strain was originally published by The Motley Fool