European Utilities Look Toward Renewable Energy

I have documented in successive posts my take on the shakeout happening in European utilities. The squeeze of higher gas prices, the absolute dependence of the European continent on outside sources of fuel (at least carbon-based), the increasingly dominant position of nuclear power in France and the looming Russian energy bear right outside of Europe's doors all make for a volatile and explosive cocktail.

In the coming few months, the European utilities that are going to come out ahead are either already jockeying for position in Russia or investing heavily in alternative, renewable energy sources. In particular, the Spanish and (to some extent) Italian utilities that I discuss below are already capitalizing heavily on the resources that seem plentiful in Southern Europe -- sun and wind.

Electricite de France

Electricite de France is the second-largest utility in the world. With a market cap of $184.8 billion, the company has posted a steady and vigorous stock appreciation since its initial IPO on November 2005. Its two-year and one-year stock returns came to 88.7% and 66%, respectively.

Electricite de France's power generation is almost exclusively based on nuclear power (71.2%), with hydro power constituting 7.8% of its power generation base and fossil fuel thermal, 5.3% derives from fossil fuel thermal and the remaining 15.7% from renewable energies excluding hydro.

Sixty-nine percent of its revenue is generated by the production and sale of electricity and natural gas. Its net earnings growth last quarter came to 71%, with the following breakdown: Revenue originating from generation and supply of electricity (70% of revenue) increased by 20%, while distribution revenue (16% of revenue) declined by 7%, and transmission revenue (7% of revenue) declined by 3.5%. Finally, the last segment, consisting of energy services (7% of revenue), including thermal and renewable energy services, posted a 57% increase in revenue. An unusually warm winter in Western Europe did a number on Electricite de France's revenue, as well as other European utilities.

The problem with Electricite de France is that, in an increasingly eco-conscious Europe and in the face of increasingly severe European Union directives, the utility is unable to manage its carbon dioxide emissions, which increased by 255.6% last quarter. Nevertheless, due to France's dominant nuclear position along with the support of the population, I foresee bright days ahead for this stock, with continued strong price appreciation like in the past.