Swapping Dominion For WEC Energy Group (NYSE:WEC)

Utilities have become an exciting sector as both market prices and fundamentals are changing rapidly. We monitor the relative opportunity of the major electric utilities as factors change and have come to believe that WEC Energy Group (WEC) has become more opportunistic than Dominion (D).

This article will discuss why we are trimming D in favor of WEC. We shall begin with a discussion of Dominion as it has played out and follow with a renewed thesis on WEC.

Dominion—Still Strong but Valuation is Less Appealing Due to Appreciation

We have liked Dominion since our initial thesis that it would have powerful demand drivers through its access to northern Virginia, which is the epicenter of data center development. Aside from some minor delays and cost overruns on CVOW, fundamentals have played out beautifully.

Dominion has successfully grown earnings and still has an impressively large growth pipeline. Dominion has had 2 main challenges, which previously caused it to trade at a discount to most electric utilities:

1. Higher leverage at 60% debt to capital
2. High capital needs to fund the load growth

In May of 2026, it was announced that NextEra Energy (NEE) was going to buy Dominion and form the largest electric utility ever.

We liked the merger right away as it directly solves both of Dominion‘s challenges. NEE has access to vast amounts of low-cost capital, which means the combined company will be able to very accretively fund Dominion‘s growth pipeline. As the merger was announced, the market was hesitant to believe it would go through, which left a large arbitrage gap that we discussed in the above-linked article.

Specifically, Dominion was trading at $68.32 (at the time of writing the above-linked article), while the value of NEE shares, into which it would convert upon merger completion, was $73.36. Furthermore, D was due just over $4.00 in dividends while waiting for closing, such that the overall upside was 13.25%.

Over time, the arbitrage gap began to close as the market got more comfortable with the deal. On July 16^th, D and NEE filed with regulators to approve the merger, which solidified that both parties are interested and pursuing a path to closing.

That largely closed the arbitrage gap. As of 7/21/26, D is trading at $70.15 with the converted value in NEE shares worth $71.49.

With about 5 dividend periods until expected close date, D shareholders would get total proceeds of $74.83 for total remaining merger upside of 6.67%. Given the roughly 1.25 years until expected close, this seems about right, and I would consider the arbitrage to be essentially played out.

There remains some chance the merger will get shot down by regulators, so it is not risk-free, but I consider it fairly low risk for 2 reasons:

1. Both companies are stable and successful as stand-alone
2. There is a hefty breakup fee that NEE would have to pay Dominion that would substantially pad any downside from a failed merger.

Given the rise in Dominion‘s price, it is no longer trading at a material discount to peer electric utilities.

Dominion is trading at 12.14X 2027 EBITDA compared to 11.96X for the sector. Its PE multiple is fractionally lower than peers, making its overall valuation essentially right in the middle.

We still prefer the Dominion leg over the NEE leg. The combined company looks to be an entirely reasonable investment with good growth in both Virginia and Florida. However, the less attractive valuation after the run-up encourages us to look elsewhere in the sector.

The WEC Buy Thesis

I think the market has misinterpreted the strict VLC Tariff (very large customer) tariff passed by the Public Service Commission of Wisconsin as a negative. In a more balanced demand environment, the terms could be demand destructive for data center development, but presently time-to-market is the key desideratum of where to develop, and the structure of the tariff actually improves time-to-market.

The result is that WEC gets development terms that are highly favorable to the utility while experiencing a quantity of demand that will materially expand their earnings power over time.

Let us begin with a discussion of the VLC Tariff and move on to show how it is facilitating a massive load expansion for WEC.

The VLC Tariff

WEC proposed a VLC Tariff along with a Bespoke Resources Tariff for large customers in March, which was meant to do 2 things:

1. Protect ordinary customers from having to foot the bill for data center development
2. Create a framework of guaranteed payment such that WEC would not be left without a revenue source if the large customer were to back out.

In their proposal, WEC called for it to apply to customers over 500MW and wanted to establish a minimum 10-year term so as to make sure they got paid back for development expenses.

The Public Service Commission of Wisconsin reviewed the proposal and made it substantially more aggressive before passing it on April 24^th, 2026.

Yale Clean Energy Forum discusses the VLC Tariff in greater detail.

The PSC‘s version upped the terms to include:

• Financial guarantees for VLCs below A- credit rating
• 100 MW or bigger rather than 500MW or bigger
• Generation and transmission costs are 100% of VLC customer-funded.
• 15-year minimum term
• Early exit fee for full reimbursement of costs

One may note that each of these terms is “against” the data center in the sense that it locks them in and forces them to pay a larger share of the bill aimed to ensure they pay at least 100% of the costs.

This makes the terms of any data center development quite favorable to WEC because they will get a very high ROE on data center development, and that return is backed by a long contract with a high credit tenant or a capital reserve set aside.

While these terms are favorable for WEC, they could be viewed as demand destructive. If the terms are too aggressive against data centers, they may choose to locate elsewhere, potentially causing WEC to lose some of what would have been load growth.

The market seems to have interpreted the Public Service Commission‘s version as demand destructive, as WEC has materially underperformed its peers.

Note on the chart above how WEC has basically flatlined since it submitted its VLC proposal in March.

I think the market‘s interpretation is wrong and that the VLC Tariff is bullish for WEC.

Why the VLC Tariff Matters and How It Impacts WEC Earnings

There are always going to be tradeoffs in regulation, and this is among the more ironclad in terms of making sure the data centers pay for the development.

We see the VLC Tariff having 3 main effects:

1. Data center developers are slightly disincentivized economically to build in this jurisdiction.
2. Regulators will be faster and more willing to accommodate the development of data centers given the protection to residential customers.
3. Data center developers currently care more about speed to market rather than cost to build.

Thus, while demand remains high and speed to market is the key issue, the tariffs may actually stimulate activity.

Data center development is being aggressively fought at both a state and local level, such as the data center moratorium in New York. This red tape exacerbates what is already a slow process of building new power generation.

We believe the clear framework set forth in the Wisconsin VLC Tariff and the safeguards for residential customers go a long way to reducing that red tape. To the extent it can guarantee the data centers pay for the power and transmission, data center development is an economic and employment boon for the state and local areas. It makes it much easier to greenlight projects and thereby reduces time-to-delivery.

Faster development is a big deal for the hyperscalers who want to win the AI race, and I believe that is why so many data centers are popping up in Wisconsin.

Microsoft is building an enormous data center at Mount Pleasant

Vantage is building a data center for OpenAI and Oracle in Port Washington, where WEC already generates substantial power.

Beyond data centers, Wisconsin has strong manufacturing growth, as discussed by Scott Lauber, WEC‘s CEO, on the 1Q26 earnings call:

“There’s other notable growth in the state. As a recent example, Milwaukee Tool has announced plans to further expand its campus in our territory, including a new research and development facility. Waukesha Engine also announced plans to expand upon its local operation and employee base. In addition, we’re starting to see good housing development. In fact, realtor.com recognized Racine County, home of the Microsoft site, as one of the nation’s hottest housing markets. We’re committed to meeting the growing demand across our service areas as we invest in our system for increased capacity and reliability.”

These large-scale projects are fueling WEC‘s load growth and the earnings growth that comes along with it. In total, WEC plans to outlay $37.5B over the next 5 years.

Since utilities have regulated ROE and a higher ROE attached to data centers subject to the VLC Tariff, deployed capital translates directly to earnings per share growth. As these projects come online, WEC anticipates earnings growth accelerating to 8% annually.

WEC can fund this development at a reasonably low cost of capital. In June they issued $400 million of 5-year notes at 4.65% and $400 million of 10-year notes at 5.10%. This low spread over Treasuries is a testament to their strong balance sheet and operating track record.

High Total Return Potential Relative to Risk

With earnings growth accelerating to 8% annually and a 3.4% dividend yield, WEC is positioned to deliver an annual total return of 11.4% if one were to assume the multiple at which it trades remains flat.

That is a high return for a large-cap electric utility, which is generally considered to be below average risk for an equity. I would consider the outsized return relative to risk to represent mispricing and suggest that WEC will appreciate until such a price that it is generating a more normal forward expected return for its risk level.

Primary Risk to WEC

If demand for data centers were to drop off substantially, the aggressive terms of the VLC Tariff could indeed become demand destructive. We will be watching hyperscaler capex closely as their earnings reports roll out. High capex is good for utilities broadly and especially WEC.