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

When Eon said almost two years ago it would split in two -- separating its traditional business of generating power into a new company, to leave it with renewables and electricity grids -- the embattled German utility seemed on the cusp of fresh start.

The 3 billion-euro ($3.4 billion) first-half net loss Eon posted on Wednesday shows just what an unhappy and expensive divorce this is.

Painful Loss
Eon's first-half loss dwarfed the profit it made in the year-earlier period
Source: company reports

The company booked 3.8 billion euros in writedowns on its fossil-fuel power stations. These probably won't be the last. A fundraising now looks inevitable and will further dilute Eon's long-suffering shareholders. The shares have lost more than 80 percent of their value since their peak in 2007. 

Shrinking Value
Eon's market capitalization has shrunk since 2007
Source: Bloomberg

Worryingly, plunging interest rates have joined falling wholesale power prices, weak electricity demand, Germany's nuclear phase-out and the rise of renewables on the company's mammoth list of problems.

Eon has provisioned for the nuclear shutdown costs, but low interest rates could cause the liability to increase by forcing the company to adjust the discount rate it uses to estimate how much those costs are worth in today's money. In addition it's probably going to have to pay about 2 billion euros to put a cap on any further nuclear liabilities as part of a deal with the German government.

Meanwhile, low interest rates have also caused the company's unfunded pension liabilities to balloon to 5.6 billion euros.

As a result, the economic net debt of "future Eon" swelled by 3.5 billion euros during the first six months to 24.8 billion euros, about five times estimated 2016 Ebitda. That figure could yet rise further.

The impairments reduce the book value of Uniper, the fossil fuel power business, to about 12 billion euros. Eon's managers said on Wednesday it's too early to say what Uniper's actual market value will be when it starts trading next month. Guido Hoymann, analyst at Bankhaus Metzler, estimates it will be about 3 billion euros. So Uniper's birth looks set to crystallize more pain for shareholders.

Subtracting Uniper's book value from Eon's almost 10 billion euros in shareholders' equity means that under IFRS accounting rules, core Eon now has a negative equity value. Eon says that's misleading -- it would book a big profit if it tried to sell the grids business, for example -- but a capital increase is surely now unavoidable.  

Perhaps if Eon had succeeded with its plan to inject its legacy nuclear business into Uniper things might look a bit sunnier for the remaining Eon.

But the German government stymied that plan and the nuclear liabilities stay with the renewables, grid and customers solutions businesses. 

Splitting up was supposed to create clarity and give investors a chance to invest in two different companies with different risk, growth and cash generation profiles. But it also creates two lots of corporate costs, and both companies have to pay dividends.  Divorce is a costly business.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Of course, Uniper will pay a chunk of those dividends to Eon as it will retain a 47 percent stake

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Chris Bryant in Frankfurt at

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