Dominion Resources, Inc. (D), Duke Energy Corp (DUK): Does This Utility Have the Best Position in the Business?

That being said, I still like the balance at Dominion. We’ve seen an over-reliance on one type of generating fleet working against nuclear kingpin Exelon Corporation (NYSE:EXC) . The company, which generates more than half its power from nuclear, recently cut its dividend as returns have been held back by low natural gas prices. Instead, Exelon has turned to diversify its fleet by taking on smaller renewable projects which it hopes will have a quick payback.

Dominion is making its own investments in cleaner forms of energy generation, but not in the same way as its peers. It recently completed the Virginia City Hybrid Energy Center which cost $1.8 billion and will have 585 MW of capacity. What’s interesting to note here is that Dominion is using another very inexpensive fuel — coal — but with a renewable twist: 20% of the facility’s fuel will be wood waste. There’s more on the way as company has several other coal-fired stations that it’s converting to take wood waste with plans to spend more than $150 million to convert 150 MW of baseload capacity.

This is but a small sample from the impressive list of expansion projects across the company’s portfolio. Between 2013 and 2017 the company could spend upwards of $3 billion each year on growth projects. That capital is expected to generate earnings growth of 5%-6% annually.

These projects are designed to move the company’s business mix to generate much more stable regulated earnings. As it does, Dominion plans to be able to increase its dividend payout ratio to between 65% and 70% of earnings, up from a range of 60%-65%. Right now that’s enough to generate a dividend right around 4% which the company now expects to grow by 6%-7% per year.

When you add it all up — the generation growth, the midstream opportunities, and the financial profile — its easy to see that Dominion has a lot to offer income-seeking investors. There’s also more potential upside in the future from Cove Point and even an eventual sale or MLP IPO of some of its midstream assets, especially in the Utica. That’s why I think Dominion just might be the best-positioned utility to generate market-beating returns over the next few years, and to show my confidence in this call, I’m giving Dominion the thumbs-up in my CAPS profile.

The article Does This Utility Have the Best Position in the Business? originally appeared on Fool.com.

Matt DiLallo has the following options: Short Apr 2013 $35 Puts on Exelon. The Motley Fool recommends Dominion Resources and Exelon.

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