Uniper’s €10bn credit call signals strains on Europe’s energy sector
State lender’s role in German utility’s dash for cash raises fears of an industry scramble for finance
German utility Uniper’s admission that it had been forced to seek €10bn in new credit lines was a stark reminder that the threat posed by Europe’s energy crisis is not limited to consumers.
The dash for cash last week by one of Europe’s largest energy companies comes as unprecedented rises in natural gas and power prices prompt a sudden swelling of it liabilities on futures contracts.
With state-backed lender KfW providing €2bn of the mammoth financing alongside €8bn from Uniper’s Finnish owner Fortum, bankers now fear a scramble for credit among the region’s smaller companies as private-sector banks back away.
“The moves have been so extreme that even the normal, most cautious day-to-day business of locking in the spread requires you to raise so much money just to hold the position to delivery,” said Lueder Schumacher, analyst at Société Générale.
“I’d be surprised if everybody in the market who needs access to credit lines will actually get it.”
European gas prices have surged more than 400 per cent over the past year, as demand rebounded from the pandemic and Asian customers snapped up additional cargoes of liquefied natural gas.
At the same, Russia’s Gazprom has restricted sales only to those covered by long-term contracts, while letting its storage facilities in Europe drop to unusually low levels. More than a third of the EU’s gas supplies come from Russia.
German energy companies say Uniper’s huge financing needs were not unique. RWE, like Uniper, has sought extra financing on expectations that gas prices would remain volatile not just this winter but even into the next as Europe seeks to refill its depleted gas storage facilities.
Regarded by analysts as one of the sector’s more conservative companies, Uniper sells most of its power production years before delivery.
Once it agrees an electricity price with one of its industrial customers or municipal utilities, Uniper hedges its variable production costs and then instructs its traders to lock in a spread, or margin, via a forward power sale on futures markets, such as Germany’s EEX. The company does broadly the same with gas, using exchanges such as ICE Futures Europe.
These forward sales are subject to a variation margin, a cash deposit that protects the buyer from the risk of default by the seller. The amount of cash collateral deposited fluctuates with the underlying commodity prices.
For example, if Uniper agrees to sell German baseload power for €50 per megawatt hour in 2023 and the forward price rises in the meantime to €100, it will have to deposit with the exchange a variation margin of €50 — the difference between the two prices.
The Düsseldorf-based utility said in November it had sold 90 per cent of its German power for 2023 at €51 a megawatt hour, leaving it heavily exposed as the price soars far beyond that level, with German power futures for that year settling on Friday at €137.3 a megawatt hour.
This does not change the economics of the original transaction, as the cash collateral is returned when Uniper delivers the power. But it can lead to a large temporary cash outflow, especially in volatile markets. In the nine months to September, Uniper reported cash outflows for collateral of €4.4bn.
This figure will have risen significantly when gas and electricity prices soared to record levels in the run-up to Christmas and in part explains why Uniper was forced to seek extra liquidity.
As private sector banks have exposure limits to individual clients and sectors — and the credit facilities required by Uniper were so large — it was easier to secure the financing through Fortum and a state-backed German lender, said one person familiar with the situation.
“No one has any doubt that the underlying business at Uniper is sound, this is just a big hiccup caused by the wild swings of electricity and commodity prices,” the person said.
Uniper says the credit line from KfW is a back-up facility in case of “further extreme commodity market developments”, something few analysts are prepared to rule out, especially if there is a cold snap in Europe — or if Russia invades Ukraine.
Should the company access that funding, executives would have to forfeit their bonuses.
Other big utilities have not been hit to the same extent as Uniper, however, either because they have large retail businesses or, in the case of RWE, have offsetting variation margin inflows from hedging carbon emissions related to its power plants that burn lignite, the lowest grade of coal.
“As the CO2 price rose another 31 per cent in the fourth quarter of 2121, the pressure on working capital should be significantly less for RWE,” Schumacher said.
For Germany, gas price volatility has sparked concerns over its energy plans — it is phasing out nuclear power by the end of 2022 even as the new government accelerates its coal exit, to 2030. That leaves the country more dependent on renewable energy and natural gas.
Michael Pahle, of the Potsdam Institute for Climate Impact Research, said the current shocks should speed up state preparations for extended volatility and high prices, which would continue during the shift to renewables.
He expects the government to plan more measures for cushioning low-income citizens, while backing research projects and businesses working on reducing consumption levels.
“As always with a crisis,” he said, “you hope something good will come out of it.”