E.ON and On

Another quarter, another respectable performance for German-based Pan-European E.ON (NYSE: EON  ) . Although high heating-oil prices have created some problems for the company's midstream natural gas business, it appears that business in general is still humming along.

Sales for the first half of the year were up 16% as reported, with power and gas volumes rising 3% and 6%, respectively. Elsewhere in the results, it appears E.ON hit a lucky streak. Adjusted EBIT was up 7%. Net income was up 7%. Earnings per share (EPS) were up 7%. And free cash flow (FCF) was up -- yes, you guessed it -- 7% for the first half of 2005.

During the quarter, the company continued to make progress with its ongoing European expansion strategy. After purchasing NRE Energie, E.ON now has retail utility customers in the Netherlands. In England, the company acquired Holford Gas Storage, with plans to expand storage facilities and improve the company's access to natural gas supplies.

Business was generally solid across most of the company's many operating units, but not in the Pan-European gas business. Reported sales there rose 29%, but EBIT declined 8%. The high (and rising) cost of heating oil contributed to the trouble; increasing heating oil prices have made natural gas more expensive as well. Unfortunately, the cost to procure the gas has risen faster than the price at which E.ON can sell it, which has compressed margins.

Even with some turbulence caused by higher fuel prices, E.ON still looks like a sound investment to me. It has already stretched across Europe and built a respectable utility business, but I believe there's still room to grow. In the meantime, E.ON boasts appealing profitability, good return on equity, and solid cash flow generation. Top it off with a respectable dividend, and you've got an attractive overseas utility opportunity.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).