#-ad_banner-#It seems I struck a chord in my April 29 article “A Utility Stock with Triple-Digit Upside,” which described Chinese electric utility Huaneng Power International (NYSE: HNP). The article got a very strong response, though I admit I’m not surprised.

Why? Huaneng is about as close as a stock investor can get to the perfect investment, offering low volatility, a very nice yield and the possibility of high total returns. There should be more utilities like that, don’t you think?

It turns out there’s at least one.

It’s located in Alberta, Canada and it, too, is an electric utility. The company currently has about 9,000 megawatts of capacity, 51% coal-fired, 23% gas-fired and 26% renewable.

The company, TransAlta Corp. (NYSE: TAC), has a lot in common with Huaneng. Analysts think the stock could return triple digits — perhaps as much as 125% — in the next three to five years. The stock currently yields 5.5%.

 
Like Huaneng, this stock has below-average volatility, as shown by a beta of 0.70. Beta measures a stock’s price volatility relative to the overall market. A value of 1.0 means the stock moves in-line with the overall market, so a value of 0.70 means TransAlta’s stock is 30% less volatile than the market.

The company offers such an unusual growth opportunity because it’s a leader in the expanding, highly competitive and more speculative business of merchant generation — the creation and sale of electric power in unregulated markets. It’s definitely not one of those traditional regulated utilities known for fat dividends coupled with very modest stock gains.

To protect itself from large drops in the price of electric power and ensure a more consistent revenue stream, TransAlta makes heavy use of long-term power purchase agreements (PPAs), often locking-in customers at a particular rate for as long as 10 years. While that can obviously be a disadvantage when power prices rise substantially above what’s contracted in the PPAs, it’s the main reason for the relatively low volatility of TransAlta’s stock. And there’s the potential for windfall profits if expiring contracts are rolled over at higher rates — a distinct possibility in light of diminishing excess capacity in TransAlta’s areas of operation.

The fact that more than half the company’s output comes from coal-fired plants is a big advantage right now. Because coal is relatively cheap, the coal-fired plants are enjoying widening spreads between generation costs and rising power prices in Alberta and the Pacific Northwest, where TransAlta’s merchant business is concentrated.

However, management is well aware of the importance of “green” energy and will likely keep growing that part of the business. Capacity from renewable energy sources nearly doubled in the past two years, largely because of the December 2009 acquisition of Canadian Hydro Developers. The hydroelectric power firm is Canada’s largest renewable energy developer and operator, boasting 694 megawatts of capacity, mainly in Ontario. The acquisition made TransAlta Canada’s No. 1 renewable energy provider and could eventually lead to profitable expansion into the northeastern United States. TransAlta is starting to venture into wind power, too.

The company remains financially sound despite issuing $500 million of additional debt (along with $413 million in new equity) to finance the Canadian Hydro Developers deal. Analysts expect the company to be able to cover its interest costs through 2015, which is when the new bonds mature, by more than three times. The bonds carry a “BBB”  investment grade rating.

Earnings estimates for TransAlta have risen in the wake of strong first-quarter results. Analysts are now calling for $1.15 per share in 2011 and $1.30 a share in 2012, which would translate to growth of 20% and 13%, respectively, in those two years. Longer-term forecasts are for 14% earnings growth through 2016. Management predicts $800-$900 million in funds from operations in 2011 (up from $783 million in 2010), a sign that TransAlta can maintain its attractive dividend yield.

Action to Take –> If you’re like most equity investors, a low-risk, high-return investment will always catch your eye. TransAlta Corp. is such an investment. Due to an increasing focus on renewable energy sources, it should hold a lot of appeal for the “green-minded” investor as well. At close to $22 a share, analysts say the stock is slightly undervalued. I suggest buying right now so you can benefit from all the future growth potential the stock has to offer.

P.S. — I don’t know if you’re aware of this or not, but a 20-year energy agreement between the United States and Russia is about to expire. The problem is, this deal supplies 10% of America’s electricity. When the Russians refuse to renew the agreement, the U.S. will face an entirely new kind of energy crisis. This disruption could send a handful of energy stocks through the roof. Keep reading…