Despite the Environmental Protection Agency's curbs on the use of coal-fired power plants, coal electricity is still widespread. This year, coal-fired power plants still make up for 40% of the total electricity generation in the U.S. Electric utility companies are slowly shifting away from coal to natural gas as the preferred fuel for power generation; yet, once-cheap gas prices are now long gone due to increased demand for natural gas.

Industry outlook
The government's proposal to impose tough new limits on the amount of carbon dioxide new power plants can emit will ultimately force more power producers to shift from coal to gas fuel, albeit at the cost of electricity becoming more expensive. While conventional fuels continue to provide the bulk of the country's electricity, numerous utilities are diversifying their portfolio with a shift to alternative-energy sources.

Renewable energy provided more than 14% of America's electric power in the first half of 2013, according to the U.S. government. A total of 14.2% of domestic power was generated by non-hydro renewables during the first six months of the year.

At this time of opportunity and policy shift, leading utilities are revising their portfolios. Duke Energy (NYSE:DUK) is looking to boost the presence of wind power in its portfolio. Plans of building between 26 to 100 wind turbines in Kentucky are in discussion after the company completed its largest ever wind power production in Texas earlier in 2013. Furthermore, the company is continuing with its shift the company has also agreed to retire five of its coal fired power plants in Indianapolis by 2018.

Southern Company (NYSE:SO), on the other hand, does not have wind energy as a portfolio but has an impressive lineup of solar initiatives across the country. Its subsidiary, Georgia Power, is said to be doubling its solar-power availability.

Since 2000, the price of photovoltaic cells has declined by 50%, yet the company's CEO believes that alternative energy forms are still non-competitive. Contrary to its peers, Southern seems to be the least likely to make a fundamental switch from its more than 60% reliance on coal and gas as fuel sources.

American Electric Power's (NYSE:AEP) portfolio is largely built up of coal and gas fuels; they make up 83% of the company's fuel-source breakdown. By 2020, the company aims to reduce this number to only 79% while its reliance on solar and wind-power generation has not been given much attention in the company's plans. 

Financial picture
Duke Energy has the largest market capitalization among the three under discussion. While independent estimates claim Duke Energy is one of the most polluting utility companies in the US, its numbers certainly show no sign of slowing down.

Duke has outperformed its peers over the course of the last 12 months. In fact, the Dow Jones Utility Average has also failed to keep pace with Duke's stock market performance since July. With the winter season fast approaching, demand for electricity will grow for the next five months, a cyclical trend. At the same time, a far-off S&P 500 performance line suggests a lack of growth for electricity consumption in the US, as the sector lags behind the market average.

Indicator

Duke Energy

Southern Co

American Electric Power

P/E TTM

24.1

21.1

17.6

Forward P/E

13.2

12.7

11.2

PEG Ratio

2.5

3.3

7.3

Operating Margin % TTM

16.0

20.8

16.2

Dividend Yield, %

4.57%

4.78%

4.39%

Current Price

$67.98

$42.30

$44.56

The three companies are all undervalued when compared to the industry average P/E of 32. However, the forecast ratios don't show encouraging growth prospects for the utilities.

Southern Company and American Electric Power in particular are expected to post weak earnings growth over the course of the next four quarters. While Duke's growth prospects are showing far better prospects, its margins struggle when compared to its rivals. With the addition of wind energy, Duke Energy is expected to improve its margins in the long run as its portfolio becomes less fossil-fuel dependent.

Why Duke is the way forward
Duke's strengthening and diversification of its power-generation portfolio is essential to realizing the company's future earnings potential. The company offers an attractive yield of 4.6%. Most importantly, its move toward sustainable energy has come earlier and is much faster paced than its rivals.

Seeing how the stock has outperformed the industry since July, the introduction of confidence-building projects are expected to boost its prospects even more.

 

Awais Malik has no position in any stocks mentioned. The Motley Fool recommends Southern Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.