Sat. Jan 22nd, 2022

When the state has to step in to keep the lights on, one is worried. When two countries get involved, it’s a serious situation.

Nevertheless, shareholders in German gas and electric power company Uniper remained calm over news the company acquired € 10 billion in additional facilities. Shares fell just 2 percent. The funds came from its Finnish mother Fortum – which owns 76 percent – and the German state bank KfW. The funds will cover Uniper’s growing liabilities on forward and gas contracts.

Although Uniper is dependent on Russia for its gas, its minority shareholders have reason to remain optimistic. Its market value has climbed 30 percent since the beginning of July during the recent surge in European natural gas prices, 2.5 times higher. While higher energy prices should translate into more earnings, Uniper meaningfully hedges its commodity exposure. However, the use of these derivatives requires extra cash margin payments when potential losses climb too fast.

Uniper’s balance sheet recently contradicted the underlying risk of these derivative positions. In the nine months to September, it reported a net debt position of € 1.3 billion, not far above its ebitda for the same period. However, it also reported a net loss of € 4.7 billion due to brand-to-market losses on derivatives. Helping Uniper should not emphasize Fortum’s balance sheet. Net financial debt there, at just 0.6 times ebitda, is well below its twice target.

Lex charts showing: First chart European power two power companies Uniper and Fortum rebased to TTF Gas Futures price, next chart showing German power prices and last chart Fortum leverage showing forecast assuming Uniper stake purchase until 2025

Fortum, however, will find life more expensive. He hopes to complete a long-term takeover of Uniper, launched in 2017, shortly after his turnout by former owner Eon. Markets have expected a buyout of remaining minorities, another boost to Uniper’s shares over the past year. The deal gave Fortum access to continental European power markets. However, the purchase of Uniper nearly tripled Fortum’s carbon footprint, which raises some questions about Fortum’s plans for renewable energy and requires more purchases of carbon credits.

On top of that, Fortum’s financial buffer looks thinner if it buys out minorities soon. Using the three-month average Uniper share price, the cost would be € 3.4 billion. Net debt will then rise to 1.75 times this year’s expected ebitda, leaving less for its planned green investments.

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