An Uncertain Future for Europe's Utilities

                                                                                         

These are golden days for European utilities. High energy prices and strong industry fundamentals, including ever-increasing demand for electricity, mean power companies across the Continent are posting record results at a time when many others are feeling the chilling effects of the credit squeeze. On Feb. 20, for instance, French giant Electricite de France (EDF.PA) announced 2007 net profits of $6.9 billion, up 10.6, to $3.8 billion.
Yet behind the bumper results lie huge challenges that could test European utilities as never before. The quest for regional and global growth is kicking off another round of cross-border mergers just at a time when obtaining financing for big deals has gotten more expensive. Strict European environmental rules requiring 20 annually to $4.4 billion -- announced a $44.5 billion renewable investment plan to cut its carbon emissions by 60 million tons per year by 2015. According to analysts at Citigroup (C), this strategy will limit future shareholder returns as RWE pours money into green technology instead of dividends.
And yet it still may not be enough. A study by France's Environment & Energy Management Agency shows Europe currently produces 6.9, to $131.3 billion, on the back of megamergers, such as the deal by Italian giant Enel (ENEI.MI) and its Spanish partner ACS (ACS.F) to take over Spain's Endesa for $64 billion.
Analysts worry companies may be overstretching themselves to meet shareholder expectations for global strategies. Companies such as E.ON and Spain's Iberdrola (IDRO.BE), itself a perennial takeover target, have expanded into emerging markets, particularly Russia and Latin America. But experts say the moves could expose the utilities to changes in local regulation and global market volatility. Nervous About the Future As an alternative, Datamonitor's Akbar reckons energy companies may try for smaller, local deals. "You're going to see a lot more regional deals going ahead, rather than two large companies announcing a merger," he says. "In the tighter credit markets, M&A activity will depend a lot on the cash flows of the companies involved."
Whether such strategies please investors is anything but certain. Despite booming profits for utilities, shareholders are understandably nervous about the future. Indeed, EDF shares shed 9.4% on Feb. 22 despite its record results because the company's 2008 growth estimates came as a disappointment to investors. Such volatility underscores the dilemma for European utilities: 2007 may have been a record-breaking year, but with so much uncertainty ahead, investors may start looking for better returns elsewhere.

About the author:
Velimir Lackovic runs internet portal "Energetika" ( http://www.energetika.co.yu )
dedicated to renewable energy sources,oil gas and energy efficiency. Velimir has
completed gratuadte studies in power systems engineering and
has industry experiance of over 20 years in this field.

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