Putin Sinks Uniper

Uniper, Olaf Scholz said Friday in Berlin, was experiencing “great difficulty” from Germany’s gas crisis.

It was an understatement. The energy giant, Germany’s largest buyer of Russian gas, was on the brink of failure, a scenario deemed unacceptably perilous by the government.

Economy Minister Robert Habeck described a Lehman-style domino effect last month, as bailout discussions picked up in earnest. If Uniper failed, the world’s fourth largest economy would plunge into a deep recession overnight. That’s just barely an exaggeration.

A rescue package, unveiled Friday, includes an upsized credit line with KfW totaling €9 billion. Prior to the bailout, Uniper tapped an existing, €2 billion facility with the state lender, as it incurred daily losses estimated by analysts at €30 million. The cash burn was the result of reduced Russian gas flows, which forced the company to procure missing volumes on the spot market, where prices are onerous.

The package includes a 30% stake for the German government following a capital raise. Berlin will issue €7.7 billion in convertible instruments in tranches depending on Uniper’s liquidity needs. Finland’s Fortum, Uniper’s parent, will continue to consolidate Uniper as a subsidiary, and agreed to see its 80% stake diluted to 56%. Fortum will retain its majority stake irrespective of subsequent developments — it has the option to convert a €4 billion loan made to Uniper against a portion of the convertible instruments. €4 billion in additional guarantees previously provided by Fortum are subordinate to KfW loans.

Fortum’s role in the deal could’ve been a sticking point, but the urgency of the situation overrode reservations harbored by the Finnish government. “Uniper’s gas trading activities are critical for Germany’s energy supply and play an important role for the European energy sector,” Fortum said Friday, calling the stabilization package “of utmost importance.” Uniper’s liquidity needs, Fortum emphasized, must be addressed “immediately.”

Uniper couldn’t agree more. For the past two weeks, CEO Klaus-Dieter Maubach and other officials, including deputy chairman of the supervisory board, Harald Seegatz, pleaded for immediate action. The company began drawing from its store of winter gas last week in order to meet customer needs and preserve cash. Pulling from storage sites meant not having to procure volumes in the expensive spot market, but it further jeopardized Germany’s efforts to secure adequate supplies for winter (figure below).

Uniper “needs help in a few days,” Seegatz said last Friday. Insolvency, he warned, was imminent. “We can’t wait weeks,” he insisted.

Although shipments through the Nord Stream resumed on Thursday following scheduled maintenance to the pipeline, flows remain subject to harsh curbs put in place by Moscow in June. Many worry the Kremlin still intends to curtail shipments altogether at some point. Although that would exhaust much of Vladimir Putin’s economic leverage, any decision by Moscow to annex large parts of Ukraine would doubtlessly prompt more sanctions and additional weapons shipments from the West, raising the odds of Kremlin retaliation via reduced gas flows.

“We were driven by urgency and the need to protect Europe’s security of supply in a time of war,” Fortum went on to say Friday, of their role in the bailout.

Starting later this year, German gas importers will be allowed to pass along the cost of replacing Russian volumes to customers. Habeck this month described “very, very heated debates” about whether and how to ask German consumers already dealing with the highest inflation in modern history to absorb those replacement costs.

“The German government informed Uniper during the negotiations that it intends to introduce a general mechanism for all gas importers to pass through 90% of the replacement costs for missing Russian gas as of October 1, 2022,” Uniper said Friday. In the event the company’s accumulated net operating losses from ongoing gas curbs exceed €7 billion, the German government will step in with “further support,” which won’t be dilutive to Uniper shareholders. The deal should preserve Uniper’s investment grade rating, which (obviously) is important for all parties.

Maubach described himself as “pleased and relieved.” “We now have a clear perspective on how the costs which arise due to the interrupted gas supplies from Russia can be shared by many shoulders going forward,” he remarked. “Uniper has so far borne the losses alone and will continue to bear the losses incurred until the general mechanism to pass through replacement costs is in place.”

As part of the deal, Uniper will waive dividend payouts and take a €6.2 billion hit prior to passing along costs. Executive bonuses are banned. Berlin will cover losses for gas volumes sold in Germany.