The news continues to turn bullish for the energy patch. US motor gasoline inventories are still far lower than average for this time of year as we head into the peak summer driving season. It’s no wonder gasoline prices are soaring.

And US crude stocks are way above historical norms mainly because of a spate of refinery outages. There’s an oversupply of unrefined crude sitting in the middle of the US.

But the crude oversupply in the US reflects refinery outages, not demand. And it certainly hasn’t translated into an oversupply globally. As I pointed out in the April 18 issue of The Energy Strategist, More Bullish Signs, Brent crude oil is trading at an historic premium to West Texas Intermediate (WTI).

Brent is a global oil benchmark that more closely reflects the international supply-and-demand balance. Brent recently traded above $70, and I wouldn’t be at all surprised to see $80 oil in the next two to three months.

And then there’s natural gas. This market has been the most worrisome during the past year. Natural gas prices were weak throughout most of 2006 because of unusually warm weather.

But that’s changing. Gas-related drilling activity in the US is picking up once again.

In its recent quarterly conference call, Schlumberger noted that it sees a recovery coming for natural gas drilling activity. This is the first time we’ve heard such bullish rumblings from this well-respected management team in more than a year. I certainly wouldn’t bet against Schlumberger.

Bottom line: The widely watched Philadelphia Oil Services Index rallied through its May 2006 highs recently, as predicted here in late 2006. Although there’s always the possibility of a correction, I don’t see this bull run for oil- and gas-related stocks petering out anytime soon.

Please note that I’ve updated my stops and buy advice in the Portfolio tables. Also, if you missed last week’s detailed flash alert, it’s available in our archives.

In This Issue

In the past few issues, I’ve focused attention mainly on growth-oriented themes such as coal, oil services and exploration and production (E&P). In this issue, I take a slightly different tack, examining one of my long-time favorite groups, the master limited partnerships (MLPs). See Making Partner.

In particular, I examine a relatively new class of partnership stock–the general partners. These firms offer the potential for strong current income and distribution growth as high as 30 percent to 35 percent annualized. This is an underowned and misunderstood subgroup of the MLP sector. See The Generals.

Several opportunities have arisen for individual investors to become general partners and receive the increased dividend such partners are privy to. I highlight three of my favorite plays from this section of partnerships, one of which will be added to the Portfolios. See Cream Of The Crop.

I see the recent election of French President Nicolas Sarkozy as a major positive for our nuclear power plays. Below, I re-print a letter written by President Sarkozy to the Environmentalists for Nuclear Energy (EFN). In the letter, he details his energy policy and offers a strong endorsement for nuclear power. It’s important that France–long a nuclear leader–remains a key promoter of nuclear technology within Europe. After reading the newly elected president’s letter, I’m convinced that’s the case. See French Election.

In this issue, I’m recommending or reiterating my recommendation on the following stocks:

• Alliance GP Holdings (NSDQ: AHGP)
• Hiland GP (NSDQ: HPGP)
• Magellan Midstream GP (NYSE: MGG)
  Making Partner
  
  My favorite long-term income-oriented group within the energy patch remains the MLPs. I highlighted this group at great length in the Nov. 22, 2006, issue of TES, Leading Income, so I won’t repeat that entire analysis here.
  
  MLPs offer yields in the 6-percent-to-8-percent range, coupled with the potential for annualized distribution growth as high as 15 percent to 20 percent. That’s far better than what’s available from other traditional income-oriented sectors, such as real estate investment trusts (REITs).
  
  Returns in recent years have been impressive. Since 2000, the Alerian MLP Index–an index of most publicly traded MLPs–has returned an annualized 25.9 percent, including dividends and capital gains. In the same time period, the S&P 500–the benchmark for most mutual funds–is up less than 14 percent; that’s roughly 1.75 percent annualized.
  
  Granted, these figures are skewed by the 2000-02 bear market in the US stock market. But even if we measure returns from the S&P 500’s low in 2003, MLPs totally outshine the broader market: Since then, the Alerian MLP Index is up more than 22 percent annualized against just 16.7 percent for the S&P.
  
  But even better, the MLPs have been far less volatile than the broader market averages over just about any time frame you’d care to investigate. For example, during the late February/early March selloff in global stock markets this year, the MLPs were among the only groups that remained largely unscathed.
  
  I currently recommend a total of 11 MLPs in the TES Portfolios. All of them are listed in the table below:
  
  
  
  
  

  TES Partners
  Company Name (Exchange: Symbol)	Indicated Yield (%)	Change From November 22 Issue (%)	Portfolio
  Duncan Energy Partners (NYSE: DEP)	6.5	33.0*	Proven Reserves
  Enterprise Product Partners (NYSE: EPD)	5.9	17.3	Proven Reserves
  Hiland Holdings GP (NSDQ: HPGP)	2.8	NEW	Proven Reserves
  Natural Resource Partners (NYSE: NRP)	5.0	43.7	Proven Reserves
  Penn Virginia Resources (NYSE: PVR)	5.6	20.1	Proven Reserves
  Teekay LNG (NYSE: TGP)	5.0	23.4	Proven Reserves
  Tortoise Energy Infrastructure (NYSE: TYG)	5.4	19.6	Proven Reserves
  NuStar Energy LP (NYSE: NS)	5.7	20.1	Proven Reserves
  Eagle Rock Energy Partners (NSDQ: EROC)	6.2	25.6	Wildcatters
  Sunoco Logistics (NYSE: SXL)	5.4	31.0	Wildcatters
  Williams LP (NYSE: WPZ)	4.2	26.6	Wildcatters
  Linn Energy (NSDQ: LINE)	5.5	49.1	Wildcatters

  
  * Return since January IPO
  
  Source: The Energy Strategist
  
  I strongly recommend that all new subscribers, or those unfamiliar with MLPs, review the November 22 issue of TES in full. I regard it as one of the single most important issues of this newsletter in the past year. And without a complete understanding of MLPs, my explanation of general partner stocks won’t make any sense.
  
  Back To In This Issue
  
  The Generals
  
  Recall two distinct parts really comprise MLPs: a limited partner (LP) and a general partner (GP). As an LP unitholder, you’re entitled to cash flows that arise from the operation of the MLP’s assets. For example, if the MLP owns a series of gas pipelines, LP untiholders are entitled to receive a good chunk of the cash that comes from operating those pipes.
  
  But as an LP unitholder, you don’t actually manage the assets in the MLP; that’s the function of the GP. GPs typically own LP units as well in what are known as incentive distribution rights (IDRs). IDRs are a fee charged by the GP for managing the assets of the LP.
  
  Typically, IDR payments are structured to encourage the GP to manage the partnership’s assets in a way that’s also beneficial to the LP unitholders. Most investors hold LP units because of the impressive quarterly distributions offered; investors want to see steady growth in distributions.
  
  IDR payments are usually based on the quarterly distributions paid to LP unitholders–the higher the distributions, the more the GP gets paid. This way the GP and LP are both directly incentivized to increase distributions.
  
  The best way to illustrate this is with an example. Let’s take Enterprise Products Partners (NYSE: EPD), my longest-standing MLP recommendation within TES. Enterprise Products Partners incentive distributions to its GP are based on the following formula, applied to each quarterly distribution:
  
  • Tier 1: 2 percent of each quarterly distribution under 25.3 cents.
  • Tier 2: 15 percent of each quarterly distribution between 25.3 cents and 30.85 cents.
  • Tier 3: 25 percent of each quarterly distribution totaling more than 30.85 cents per unit.
  
  Enterprise Products Partners’ most-recent quarterly payout was 47.5 cents per LP unit. In the table below, I calculate what that means in terms of IDRs for the company’s GP. Please don’t be put off by the mathematics here; I’m including this table and the following analysis for the sake of completeness.
  
  
  
  
  

  Enterprise Product Partners’ IDR Split
  		LP Piece	GP Piece	Total Distribution
  Tier 1	< 25.3 cents	25.3 cents	0.516 cent	25.816 cents
  Tier 2	25.3 cents – 30.85 cents	5.55 cents	0.979 cent	6.529 cents
  Tier 3	> 30.85 cents	16.65 cents	5.55 cents	22.2 cents
  Totals	—	47.5 cents	7 cents	54.5 cents

  
  Source: The Energy Strategist
  
  Each quarter, the MLP will announce the distribution for LP unitholders. This is the actual amount you’ll receive as a unitholder; the GP IDRs are in addition to this amount.
  
  In the case of Enterprise, the GP receives just 2 percent of the first 25.3 cents in quarterly distributions. Therefore, the 25.3-cent payment made to LP unitholders represents 98 percent of the actual amount that Enterprise pays out; the final 2 percent is the GP IDR.
  
  We can calculate the total payment by dividing 25.3 cents by 0.98 (98 percent). The result is 25.816; 25.3 cents goes to the LP unitholders, and a little more than a half cent (0.516 cents) goes to the GP holders. This is the Tier 1 distribution for Enterprise.
  
  As you can see, the amount the GP gets in IDRs increases rapidly as LP distributions rise. Enterprise is currently paying out more than its 30.85-cent high split; the GP receives some 25 percent of each quarterly distribution above 30.85 cents.
  
  The important point to note from all this is that the GP’s IDRs increase at an accelerating rate as the LP boosts its distributions. As an LP’s distributions move through the tiers, the GP’s take becomes larger at an accelerating pace. Therefore, it’s possible for a GP’s cash flows to grow far faster than the underlying LP.
  
  Let’s again illustrate with a simple example. Hiland Partners LP (NSDQ: HLND) pays the following IDRs to its GP:
  
  • Tier 1: 2 percent of the first 49.5 cents in quarterly distributions.
  • Tier 2: 15 percent of the distribution between 49.5 cents and 56.25 cents.
  • Tier 3: 25 percent of the distribution between 56.25 cents and 67.5 cents per unit.
  • Tier 4: 50 percent of each distribution is more than 67.5 cents.
  
  A year ago, Hiland LP paid a quarterly distribution of 65 cents to its unitholders. At that time, its IDRs were in the Tier 3 split level (less 67.5 cents per unit). If we calculate the total IDRs per unit using the same methodology we used for Enterprise, Hiland’s GP received roughly 5.12 cents per outstanding LP unit.
  
  In the most-recent quarter, Hiland paid 71.25 cents per LP unit. That represents a solid 9.6 percent year-over-year increase in Hiland’s distribution. But 71.25 cents also vaults Hiland’s GP from a Tier 3 to a Tier 4 split.
  
  Using the same calculations, Hiland’s GP is now receiving 9.7 cents per unit in incentive distributions. The bottom line: While Hiland’s distributions increased by 9.6 percent, Hiland’s GP saw a near 90 percent jump in the incentive distributions it receives per unit outstanding.
  
  But it doesn’t stop there. Consensus analysts expect Hiland to grow its distributions to around 93 cents per unit by the end of 2008. Let’s check out what that means for Hiland GP’s IDR payments:
  
  
  
  
  

  Hiland Partners’ IDR Split
  		LP Piece	GP Piece	Total Distribution
  Tier 1	< 49.5 cents	49.5 cents	1.01 cents	50.51 cents
  Tier 2	49.5 cents – 56.25 cents	6.75 cents	1.19 cents	7.94 cents
  Tier 3	56.25 cents – 67.5 cents	11.25 cents	3.75 cents	15 cents
  Tier 4	> 67.5 cents	25.5 cents	25.5 cents	51 cents
  Totals	—	93 cents	31.45 cents	$1.2445

  
  
  Source: Hiland company filings, The Energy Strategist
  
  As you can see, at a quarterly distribution rate of 93 cents, Hiland’s GP receives more than 31 cents in IDR payments per unit outstanding. So although Hiland is expected to grow its distribution by a touch more than 30 percent in the next year and a half, the GP will see a 222 percent jump in incentive distributions. It’s the simple mathematics of IDR splits.
  
  Just a few years ago, there was no real way to participate directly in GPs. But that’s changed; several GPs are now publicly traded.
  
  These GPs are also organized as publicly traded partnerships. Their tax treatment is identical to that of the LPs I recommend in TES. These securities also offer tax-deferral advantages. (Again, see the November 22 issue for a complete rundown of how LPs are taxed.)
  
  Most of the publicly traded GPs offer current yields that are lower than your average LP. However, as you might expect, GPs offer the potential for distribution growth that’s far higher than your average LP as well. In the table below, I list all of the publicly traded GPs currently in my coverage universe.
  
  
  
  
  

  Become A GP
  General Partner (Exchange: Symbol)	GP Yield (%)	Underlying LP (Exchange: Symbol)	LP Yield (%)	IDR Leverage
  Alliance Holdings GP (NSDQ: AHGP)	3.5	Alliance Resource Partners (NSDQ: ARLP)	5.1	1.27
  Atlas Pipeline Holdings GP (NYSE: AHD)	3.6	Atlas Pipeline Partners (NYSE: APL)	7.0	1.02
  Buckeye GP Holdings (NYSE: BGH)	3.9	Buckeye Partners (NYSE: BPL)	6.1	1.20
  Crosstex Energy (NSDQ: XTXI)	2.9	Crosstex Energy LP (NSDQ: XTEX)	6.3	1.25
  Energy Transfer Equity (NYSE: ETE)	3.6	Energy Transfer Partners (NYSE: ETP)	5.2	1.19
  Enterprise GP Holdings (NYSE: EPE)	4.0	Enterprise Product Partners (NYSE: EPD)	5.9	1.23
  Inergy Holdings (NSDQ: NRGP)	3.7	Inergy LP (NSDQ: NRGY)	6.2	1.35
  Hiland Holdings GP (NSDQ: HPGP)	2.8	Hiland Partners (NSDQ: HLND)	5.2	1.73
  Magellan Midstream Holdings (NYSE: MGG)	3.6	Magellan Midstream Partners (NYSE: MMP)	5.2	1.24
  Markwest Hydrocarbon (AMEX: MWP)	2.1	Markwest Partners (NYSE: MWE)	6.0	1.30
  NuStar GP Holdings (NYSE: NSH)	3.7	NuStar Energy LP (NYSE: NS)	5.5	1.30
  Penn Virginia GP (NYSE: PVG)	4.1	Penn Virginia LP (NYSE: PVR)	5.7	1.62

  
  Source: The Energy Strategist, company filings
  
  Much of the information in this table is self-explanatory. However, I’ve also developed a measure known as IDR leverage. This is a simple calculation that tells you how rapidly each GP’s incentive distributions will grow relative to a given increase in the underlying LP’s payouts.
  
  To calculate leverage, I took the current distribution for each LP and added 10 percent. I then calculated what effect this would have on the GP’s IDRs. A ratio of 2, for example, means that the GP IDRs would grow by 20 percent given a 10 percent rise in LP distributions—the higher the ratio, the more leveraged the underlying GP is to increases in LP distributions.
  
  Of course, you can’t just analyze GP stocks in a vacuum. Growth in IDRs is totally dependent on growth in LP distributions. Those distributions are totally dependant on the quality of assets owned by the underlying MLP and the potential for the LP to grow its business.
  
  All the growth and stability factors outlined in the November 22 issue with respect to LPs are equally applicable to their GPs. GPs are simply a derivative of LPs that offer more leverage to distribution growth.
  
  Back To In This Issue
  
  Cream Of The Crop
  
  Of the 12 GPs listed in my table, I rate three as buys: Hiland Holdings GP, Alliance Holdings GP and Magellan Midstream Holdings GP. Here’s a rundown of each of my buy-rated GP recommendations:
  
  Hiland Holdings GP
  
  As the table reflects, Hiland is the most leveraged to its underlying LP of any GP stock I follow. The reason: The GP is just entering its top tier of IDRs. The GP now gets 50 percent of each incremental cent paid out by the LP. Up until the first distribution payment of 2007, Hiland LP was still in the 25 percent split tier.
  
  But as I noted above, this leverage to the LP means nothing if the partnership doesn’t have the scope to raise its distributions. In this case, I see plenty of growth potential for Hiland in the next three to five years. That includes both the potential to grow via small, tuck-in acquisitions in its core markets as well as the potential for organic expansion.
  
  Hiland is a relatively young MLP; its initial public offering was in early 2005, and it’s grown rapidly since that time. The LP’s quarterly distribution was 45 cents per unit in the first quarter of 2005 and now stands at 71.25 cents.
  
  The MLP is focused mainly on natural gas pipelines and processing facilities. The company owns a total of 13 natural gas-gathering systems, mainly in Oklahoma and the Rocky Mountains.
  
  As I explained in the November 22 issue, natural gas-gathering systems are networks of small diameter pipelines that connect individual gas wells to processing facilities and, eventually, larger diameter pipes. Gathering lines are highly sensitive to drilling activity; strong drilling activity in a region spells more gas wells that need to be hooked up to gathering lines.
  
  The key to a successful, growing gathering system is akin to a successful real estate deal: It’s all about location. In Hiland’s case, the MLP owns gathering systems in some of the hottest-growing natural gas plays in the US right now, including the Woodford Shale and the Rocky Mountains. These hot drilling areas are seeing plenty of development interest, which is certain to translate into more demand for gathering.
  
  Strength in the MLPs gathering assets is also supported by two additional factors. First, Hiland was originally a private partnership designed to support the drilling activities of Continental Resources–a large, private exploration and production firm. Although Hiland and its GP have since been taken public, the partnership still derives as much as a third of its gas volumes from Continental.
  
  The good news here is that Continental is operating mainly in regions where there are no current gathering systems other than Hiland’s. And Continental also has a relatively aggressive $265 million drilling program slated for 2007. This should mean there’s opportunity for further expansion of its gathering systems in core regions.
  
  Second, as long-term subscribers are well aware, I’m turning increasingly bullish on natural gas prices. With gas recently hovering near the $8 per million British Thermal Units, I expect to see drilling activity in the US start to pick up again later this year. Drilling activity was hurt by weak gas prices in the second half of 2006.
  
  In addition to gathering lines, Hiland also owns natural gas processing and fractionation facilities. This is important for two reasons.
  
  First, processing remains an attractive business; the margins available for processing natural gas have been elevated in general for much of the past year. And second, companies such as Hiland that can offer gathering and processing services in a sort of one-stop shop can have the potential to earn higher margins than firms that only offer gathering lines.
  
  Finally, Hiland offers some services related to secondary and tertiary oil recovery. This involves injecting pressurized air and water into a reserve to boost oil recovery from mature wells. This is mainly a pure fee-based business that offers steady cash flows with minimal exposure to commodity prices or leverage to drilling activity.
  
  The bottom line: Hiland’s current yield looks light at 2.8 percent, equivalent to 83 cents per unit annualized. But given the GP’s leverage to Hiland’s growth, that distribution should grow roughly 30 percent to 35 percent annualized through the end of this decade.
  
  There’s upside to that estimate because young, small partnerships such as Hiland have the opportunity to rapidly increase cash flows via organic projects and acquisitions. Hiland is a new addition to the Proven Reserves Portfolio and a buy up to 32.50.
  
  Magellan Midstream Holdings
  
  Magellan Midstream Holdings owns the GP IDRs for Magellan Midstream Partners. Although it’s not as leveraged to its underlying LP as Hiland, the GP should be able to grow distributions at least 25 percent faster than the LP. Moreover, the GP’s current yield of 3.6 percent is near the high end of my GP coverage universe.
  
  The underlying MLP owns primarily refined products pipelines—pipes that carry gasoline, kerosene, diesel and a host of other products from refineries. In particular, Magellan owns the Magellan and Osage pipeline networks that lead from the Texas Gulf Coast through Okalahoma and into the Midwest.
  
  These pipeline networks also include a host of storage assets and blending facilities for mixing motor gasoline to meet local blending requirements. In total, Magellan’s pipes serve nearly half the refineries in the US—a solidly diversified customer base.
  
  The refined products pipeline business doesn’t offer quite the growth potential of natural gas gathering, but it’s far more stable. Refined product transport contracts tend to be largely based on simple fees multiplied by the volume of product transported.
  
  And volume growth is stable. US refined product demand grows at a slow but steady pace. Therefore, the MLP’s 8,700 miles of refined product pipes are a valuable asset with dependable cash flows and low leverage to commodity price volatility.
  
  Magellan has been growing through a combination of organic growth projects and acquisitions. On the organic front, there are opportunities to add to its terminals and storage assets. Terminals for blending gasoline and refined products represent a value-added service.
  
  There are a host of regional environmental blending mandates in the US. Meeting these laws is complex.
  
  On the acquisition front, Magellan has recently acquired some smaller refined product pipelines and a handful of storage facilities. These assets aren’t currently running as efficiently as Magellan’s own systems. Bringing performance up to the company average represents another growth opportunity. I’ll continue to track Magellan Midstream Holdings GP in my How They Rate coverage universe; it’s a buy.
  
  Alliance GP Holdings
  
  In the most-recent issue of TES, King Coal, I highlighted the coal industry at some length, including my favorite coal mining plays, Peabody Energy and Consol Energy. Recall that there are three major coal-producing regions in the US: the Appalachia, Illinois and Powder River basins (western US).
  
  Appalachia–in particular, Central Appalachia (CAPP)–coal is becoming increasingly difficult to mine because seams in the region are mature. Thinning underground mining seams require specialized labor; the dip in coal prices last year made many such operations uneconomic.
  
  For example, International Coal Group recently shuttered the Sago, WV, mine. This mine was a high-cost underground operation that was the scene of a major mining accident at the beginning of 2006. That mining accident just serves to highlight another problem leading to rising cost inflation: Mining accidents are most common in CAPP, making it tough to attract labor.
  
  The Powder River Basin (PRB) is the most-promising, fastest-growing region of US coal production. PRB coal can be surface-mined, a process that requires less-skilled labor and presents fewer dangers for miners. Even better, PRB coal is low-sulphur coal, making it attractive for power plants with less-advanced scrubbers for removing sulphur-dioxide effluent.
  
  But as I mentioned in the most-recent issue, I also see upside for the Illinois and Northern Appalachian (NAPP) coal-producing regions. Although neither is as promising as the PRB, there are advantages.
  
  First, the Illinois and NAPP basins are located relatively close to their key markets along the Eastern seaboard and upper Midwest. PRB coal must be hauled thousands of miles by rail, and rail infrastructure in the region still isn’t sufficient to meet demand. Coal from Illinois and NAPP has a far-shorter and less-expensive journey to market.
  
  Second, although many mines in these regions are underground, the mining cost inflation that’s been plaguing CAPP hasn’t been as apparent. That’s not to say there hasn’t been cost inflation; rather, inflation just hasn’t been as sudden or extreme.
  
  And most important, scrubbed capacity east of the Mississippi is rising. For years, it’s been tough for Eastern coal plants to burn predominately high-sulphur coal from NAPP and the Illinois basin. But many of these plants are now installing scrubbers that can remove 90 percent or more of the sulphur-dioxide emissions from their plants. That means these plants can burn high-sulphur coal and still meet environmental regulations, which has led to renewed interest in sourcing coal from these high-sulphur basins.
  
  Alliance GP controls the GP stake of Alliance Resources LP. This MLP has some 640 million short tons of proven and probable coal reserves located mainly in the Illinois and NAPP regions. Although the LP owns both low- and high-sulphur coal, its reserves are predominately of the high-sulphur variety.
  
  The LP is engaged in the actual production and sale of coal sourced from these mines. The partnership also leases coal-producing lands, runs a handful of coal terminals and offers mine design and other services to third-party operators.
  
  Alliance has been following a conservative policy of opening up new mines only once its contracted volumes from those mines. In other words, it’s building a contracted customer base before it actually opens up a mine. This reduces exposure to volatile commodity prices.
  
  That said, for reasons I outlined in the May 2 issue of TES, I’m bullish on coal prices. Alliance has positive exposure to rising coal prices.
  
  With Alliance GP likely to grow its distributions at a rate 30 percent faster than its underlying LP, I see it as an income-oriented way to play the coal bull market in NAPP and the Illinois Basin. I’m also adding Alliance to the How They Rate Coverage universe as a buy.
  
  Back To In This Issue
  
  French Election
  
  The recent election of Nicolas Sarkozy as president of France has bullish implications for the future of nuclear power. France remains a global leader in the use of nuclear energy, garnering more than 80 percent of its electricity from nuclear plants.
  
  The president’s main opponent, Socialist candidate Ségolène Royal, had voiced a rather ambiguous position on nuclear energy. She had called, at one point, for a major reduction in the nuclear share of the French electric grid from 80 percent closer to the 50 percent level. Even worse, she called for construction of a new advanced reactor–a European Pressurized Reactor (EPR)–in the nation to be stopped or, at least, delayed.
  
  Either of these policies would have been disastrous. Leaving aside the issue of global warming and pollution, eliminating significant nuclear power capacity in France would almost undoubtedly mean a massive increase in the need to import natural gas from Russia.
  
  And it’s not just an issue for the French republic. Thanks to France’s reliable nuclear plants, the nation is a major exporter of electricity to neighboring countries. France is, in fact, the largest exporter of power in the European Union (EU). Bottom line: What’s bad for France’s electric grid is also bad for Italy, Spain, Germany and a host of other major EU nations.
  
  Uranium, the fuel for nuclear plants, remains in short supply globally; only about 110 million pounds are produced from mines worldwide compared to demand closer to 190 million pounds. This imbalance is increasing as a wave of new plant construction gets underway.
  
  For a more-detailed rundown of this imbalance and how to play it, check out the April 4 issue, Oil, Nuclear And Alternatives, and the July 22, 2006, issue, The Nuclear Option.
  
  Of course, most of this new plant construction is slated to come from the developing world. China, India and Russia, among others, plan to build dozens of new plants each in the next two decades. But that doesn’t mean the developed world is to be ignored; developed countries still have far more nuclear plants in absolute terms and remain the world’s primary consumers of uranium.
  
  In this regard, the recent French election is extremely important. It’s the latest evidence that public sentiment in the developed world in general and Europe in particular continues to turn more in favor of nuclear energy.
  
  Of course, we can’t sidestep the global warming issue. Views on warming differ wildly, and as investors, we really have no need to enter this debate. But the global warming issue remains at the center of EU politics, and there’s considerable debate over how best to reduce carbon-dioxide emissions.
  
  It’s also becoming a more important issue in the US following the recent Supreme Court ruling instructing the Environmental Protection Agency to regulate carbon emissions as a pollutant. This debate has important investment implications, particularly for my recommended nuclear power, alternative energy and biofuels plays. (Whitney, can we link to the field bet tables?)
  
  Some groups have sought to exclude and/or minimize nuclear power’s role in Europe’s carbon-dioxide reduction schemes. This is particularly problematic when you consider that nuclear power is an even-more-important share of the electric grid in the largest EU countries than it is in the US. France has been a key voice in promoting the recognition of nuclear power as a logical means of reducing carbon emissions.
  
  I’ve long followed the activities of a group called Environmentalists for Nuclear Energy (EFN). In studying the nuclear power industry, I found many prominent environmental organizations, such as Greenpeace, have long opposed the further expansion of nuclear power. But I’ve also found several references to a group of highly respected and prominent environmentalists from all over the world who took the opposite view that nuclear power is actually key to saving the environment and reducing pollution.
  
  Many of the most prominent members of the pro-nuclear camp are members of EFN, headed by nuclear physicist Bruno Comby. A few weeks prior to the French election, EFN sent a questionnaire to all French presidential candidates, asking a series of questions about their stance on nuclear power and energy policy in general. Several candidates answered, including President Sarkozy.
  
  His answer to the questionnaire was the most pro-nuclear of any answer received. I think it’s far to say that France will remain a key positive voice for nuclear power within the EU.
  
  Comby and EFN have graciously permitted me to re-print President Sarkozy’s lengthy written response to the questionnaire. EFN has been a long-time friend of this newsletter; Comby also agreed to contribute a detailed treatise on the world’s urgent need for nuclear power in the July 22, 2006, issue.
  
  I encourage all readers to check out the EFN Web site and consider signing up for its free e-mail list. I’ve found its periodic e-mails an invaluable way to keep on top of the latest news on nuclear power and environmental policy.
  
  I first saw this letter from President Sarkozy in its original French a week or so before the election. I’d also like to thank EFN for sending around a translated version shortly thereafter; this has saved us all from my attempts to translate it directly with my somewhat rusty French.
  
  Without further introduction, here’s President Nicolas Sarkozy’s written response to EFN’s survey:
  
  You have called to my attention the goals furthered by your organization in the field of ecology and sustainable development. In particular, you insist on the much needed changes to be undertaken in our energy policy, and you especially underline the environmental benefits of nuclear energy.
  
  I thank you for your interest and for writing to me. The defense of the environment has too often in the past been opposed to hunters, farmers, the industries, etc. I can no longer accept this old-fashioned and conflicted vision of ecology. It is a paradox to oppose hunters and environmentalists (protectors of nature).
  
  There is no ecological logic in thinking that farmers are satisfied with farming pollution, of which they are the first victims. And one really has to hate enterprises to think that they are by nature hostile to environmental protection when, for 20 years, enterprises are perhaps the actors in our society that put forth the greatest number of initiatives to deal with environmental concerns.
  
  I was particularly glad to read your open and pragmatic letter. I have often mentioned that our action against global warming ought to be one of the priorities of the government’s program. And in fact, all environmentalists share this view. Nevertheless, for purely ideological reasons, these same environmentalists want to close down our nuclear industry, with the consequences we can imagine on climate change.
  
  I am perfectly aware of the fact that renewable energies, in their present state of development, cannot seriously hope to replace nuclear energy. To replace one single nuclear reactor, one would have to install about a thousand wind turbines. [Comment from EFN: This is true for equal installed capacity, but to produce the same number of kilowatts, one would need about 5,000 wind turbines, not just 1,000.] And even then, the production would be irregular. We should obviously continue to support the development of renewable energies; but at least for the medium term, they will be nothing more than a rather small contribution to our energy.
  
  I cannot accept the idea of replacing nuclear power stations by coal or gas. Let me repeat that my priority is to counter climate change.
  
  More exact, you are asking me the orientations of the energy policy that I would like to see implemented. Let me give you a precise answer.
  
  You know that nuclear energy provides 80 percent of the electricity in France. That largely explains why France emits 18 percent less greenhouse gas per inhabitant than the average of the European Union countries. If our nuclear power plants were to be replaced tomorrow by coal plants, our greenhouse gas emissions would rise by 25 percent.
  
  Renewable energies are one solution, but they would not be able to satisfy the entire energy needs of France. We must keep all our options open for replacing our present fleet of nuclear power plants starting about 2015, beginning with the construction of the EPR to come on line in 2012. In terms of safety (prevention of accidents) and for the protection of the environment against waste, it is my position that the EPR reactor represents a great step forward.
  
  It is clear that we must at the same time reassure all our citizens who expect to be better informed about the disposal of nuclear waste and more closely associated with decisions concerning nuclear waste. I propose, therefore, to create an independent agency that would guarantee that nuclear energy is properly dealt with. This agency would have a freedom of information and mission, sorting out those documents which can be communicated to the citizens from those which cannot, for obvious reasons of national security.
  
  In any event, taking in consideration the many benefits of this source of energy, I do not contemplate any rapid abandonment of nuclear power. I cannot forget that nuclear energy contributes in a decisive manner to the three objectives of our energy policy as defined in the French law: to guarantee national independence in energy and the security of supply;
  to take action against the greenhouse effect; and to make sure that the price
  of electricity remains competitive and stable.
  
  Now to answer your questions about the development of civilian nuclear power world-wide, I am favorable to this development, with the obvious rule that we collaborate only with democratic governments and under strictly administered conditions. This kind of partnership backed by the strength of the French nuclear industry implies to maintain the leadership in this domain of our French nuclear constructor (AREVA) and our French nuclear utility (EDF). The construction of the first EPR reactor will help us keep our leadership.
  
  Concerning your questions about renewable energies, let me assure you that we will accelerate the efforts already underway and to which France is already engaged to achieve the European objective of 20 percent renewables. I contemplate investments aimed at biomass, wind power and solar energy while continuing to encourage geothermal energy.
  
  I would like priority to be given to making (these) clean energies available to our fellow citizens. I propose notably that all such clean installations be made more accessible by being subject to reduced VAT rate on both material and on installation. [Comment from EFN: The VAT rate in France is 19.6 percent; the current situation for encouraging the installation of renewable energies is a tax credit of 50 percent on the cost of material only, not installation. It’s not clear if this new, reduced VAT rate would be additional support added to the existing tax credit or if it would replace it.]
  
  Aside from renewable energies (water power, solar, wind, biomass, etc.) for which we should aim for a world leadership comparable to our leadership in nuclear, virtuous individual behavior and better insulation of old buildings will allow us to make great progress in reducing greenhouse gas emissions in the residential and tertiary sectors.
  
  The figures which you give in this respect are especially revealing. I would repeat that the cleanest energy is that which is not consumed. That’s why I propose to go ahead with improved insulation for old housing by creating an environmental income tax credit for such work, and by creating a system of loans at zero interest for that purpose. In the same vein, I promise that our citizens who have such energy work done shall be able to recover their upfront cost by the savings on their energy bills.
  
  Finally, you have questioned me about the taxation of [carbon dioxide (CO2)] emissions in Europe. Both taxation and the market are powerful tools to modify people’s behavior without restricting innovation, contrary to the making of laws and rules that are less efficient. It [Translator’s Note: a CO2 tax] would allow one to make the polluter pay a fair share for pollution.
  
  The environment is a resource. Pollution is a cost. Neither one is much taken into account by the market. Therefore, it is sometimes more profitable to pollute than to preserve the environment for future generations. So I would like to use tax policy in a virtuous sense, to internalize the external costs now unaccounted for and finally pressing on the environment and the collectivity.
  
  The countries of the EU have preferred a market of emission rights over taxation. I do not want to change that preference. Those countries have chosen to move forward and take the lead in countering greenhouse gas emissions. They should be congratulated.
  
  But I cannot accept the idea that European producers making a virtuous contribution to combat climate change should suffer in the international competition with countries that have decided not to apply the Kyoto Protocol.
  
  I know that the willingness of the countries of the European Union to abide by the Kyoto Protocol–that is, to reduce their greenhouse gas emissions by 8 percent between 2008 and 2012–imposes changes upon their industry which are not supported by other countries, especially the United States, which have not ratified the Kyoto Protocol.
  
  I find that that is an unacceptable inequality of treatment and a distortion of competition because the quotas of greenhouse gas emissions can legally be considered as a financial charge weighing down on the European industry.
  
  Therefore, I will ask the European Commission to propose an arrangement whereby imported goods shall be submitted to the same requirements
  of reduced greenhouse gas emissions for their fabrication as in Europe.
  
  I come now to the difficult question of transportation, which you have not raised but which I would like to address. Today our transportation system is 98 percent dependent on fossil energy. This shows the extent of the task which lies ahead of us. Here again we must develop substitutes to these fossil energies, and in particular biofuels, which on the other hand are also a source of hope for our agriculture.
  
  We must invest in research to quickly perfect innovations like the hydrogen fuel cell. We must encourage the French to use their private cars less by developing fast, safe and comfortable public transportation with frequent service; to promote ride sharing (by creating reserved traffic lanes in cities and reduced highway tolls); encourage the use of bicycles (with free bicycles made available to the population in towns, guarded bike parking, etc.).
  
  In this same spirit, I promise to exempt biofuels entirely from all taxation, and for emissions-free vehicles, to create a blue windscreen sticker authorizing free parking in town, reduced highway tolls, reserved traffic lanes and other advantages to make these vehicles more attractive than standard gasoline-powered vehicles.
  
  I hope I have answered your questions and would be pleased, Mister President of EFN, to hear further from you.
  
  Sincerely Yours,
  
  Nicolas Sarkozy
  
  Reprinted with the permission of Environmentalists for Nuclear Power.