Putin tears a giant hole in a critical German balance sheet

Compared to the heroics of Ukrainians resisting Vladimir Putin's abhorrent war, efforts to prevent German utility Uniper SE from imploding might seem trivial.

Yet few European businesses have suffered as great a financial calamity from the conflict as this fossil-fuel company spun out from E.ON SE in 2016. Sleep must be in short supply at the Dusseldorf headquarters.

On Thursday, Uniper reported a ghastly 12.4 billion-euro ($12.6 billion) loss for the six months through June, the bulk of which relates to anticipated losses from its Russian gas activities.

As some European peers reap windfall profits from high power prices, Uniper has bled 100 millions euros a day lately because Gazprom isn't delivering contractually agreed pipeline gas, forcing it to buy on the spot market at massively inflated prices to keep serving German customers. It's also been forced to write off a big loan to the cancelled Nord Stream II gas pipeline and impair the value of its Russian power generation unit.

It's only right that Uniper sees the consequences of its ill-advised dependence on cheap Russian gas, but there's a lot of blame to be apportioned for Germany's energy predicament. It's also worth having a debate about who should shoulder the costs.

Without a massive bailout coordinated last month between the German government and Finnish majority owner Fortum Oyj (which in turn is majority owned by the Finnish state), Uniper would have been sunk. Further credit rating downgrades risked triggering collateral calls, draining the company of cash.  

With Finland reluctant to dig too deeply, the German state has agreed to purchase a 30% equity stake (at a steep discount) and will backstop future Uniper losses beyond an agreed level. Meanwhile, German energy customers will also cover 90% of Uniper's extra cost burden from 1 October via a special surcharge on their bills.

Together with credit lines provided by Fortum and German development bank KfW, the rescue has put Uniper on more stable footing. Yet its woes aren't over because gas prices have continued to soar. Due to international sanctions on Russia, it's also unclear how Uniper will salvage value from its Unipro Russian power plant unit that it wants to exit. Expropriation remains a risk.

Important details of Uniper's bailout are still to be clarified, including how exactly the plan's loss backstop will function and the terms of an up to 7.7 billion-euro mandatory convertible bond issued to the German state. The company's market capitalisation has declined by more than 80% since the start of the year to just 2.6 billion euros. Analysts worry there's further pain in store for minority shareholders. 

Is that fair? Uniper has a vital role in helping end Germany's Russian energy dependency by, for example, constructing floating LNG terminals and ensuring the country's gas storage facilities are filled. Its coal plants will regrettably also be needed to keep the lights on this winter.

In trying to do the right thing, Uniper has also suffered setbacks that aren't of its own making — a fire at the Freeport LNG terminal in the United States in June caused an additional shortfall in gas deliveries, requiring Uniper to purchase substitute volumes at great expense (it expects to book hundreds of millions of euros of losses at a later date).

Uniper's management was admirably transparent about the difficulties Germany now faces. While the industry has already reduced gas consumption, private households haven't yet shown the same resolve, because long-term contracts have so far cushioned them against soaring market prices. However, the surcharge announced this week will add hundreds of euros to annual household bills and may yet need to be increased.

In short, Germans will need to burn the candle at both ends this winter. Uniper's weary management may have some tips.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

Disclaimer: This article first appeared on Bloomberg, and is published by a special syndication arrangement.