Energy

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

 

"Conventional generation of power faces the risk of losing competitiveness against renewable energy and thus market share, and, over the long term, even faces the risk of disappearing completely from the market.

No, this isn't a Greenpeace pamphlet. It's taken from the prospectus for Uniper, the awkward new name for Eon's fossil-power business, which is being spun off on Monday.

It's not every company that announces its own birth by foreshadowing its death. But that's what makes the Uniper divorce such a landmark moment in the utilities world. German rival RWE, also planning a split, won't be alone in watching the experiment closely.

Separating Eon's renewable, power grids and retail operations from Uniper's conventional generation and energy trading business is reasonable. Investors can decide where opportunity and risk lies. Still, the break-up won't be pretty.

Some index funds will have to sell their new shares on Monday as Uniper won't be a Dax member. Analysts polled by Bloomberg forecast a market cap of just 4 billion euros ($4.5 billion). That will oblige Eon to book another big writedown because the Uniper assets are valued at about 12 billion euros on its books.  All pretty devastating for Eon, a company worth more than 100 billion euros at its 2007 peak. Though it's no longer Uniper's problem.

Energy Shift
The rise of renewables, Germany's nuclear exit and falling power prices have hit Eon hard
Source: Bloomberg

In the long run, the risks for fossil-power generation may be existential  but that doesn't mean there's no value in the Uniper "bad bank". The only question is how much is left and for how long. A perfect storm of falling wholesale electricity prices, weak demand and the rise of renewables meant the Uniper assets posted 11.5 billion euros in pro forma net losses between 2013 and June 2016, mostly because of writedowns. 

Seeing Red
Writedowns have caused Uniper 's assets to consistently post losses
Source: Bloomberg

But commodity prices have rebounded lately, which bodes well for electricity prices if sustained.

Power Down
The rebound in electricity prices may mean less pain for Uniper's fossil power plants
Source: Bloomberg

Regulatory changes should also mean there's profit to be made from supplying back-up fossil power when the sun isn't shining and the wind doesn't blow, in some markets at least.

Uniper predicts conventional fuel will still make up more than half the generation in its big markets in 2025. Compared to RWE, it has far less capacity powered by lignite, a dirty fuel whose future looks very uncertain. Plus those stonking great German nuclear liabilities stay with Eon.

Meanwhile, Uniper's Russian business, including 11 gigawatts of assets and a quarter share in a big gas field, should throw off cash for a while yet. The new company promises 200 million euros of dividends this year (0.55 euros a share). With 3.6 billion euros in net debt (twice Ebitda) and not much need for capex, Uniper can afford more payouts. With yield so scarce, that shouldn't be dismissed.

Still, it's best not to get carried away. There are sound reasons why the new Eon is betting on renewables and not carbon. Ingo Becker, a Kepler Cheuvreux analyst ,  estimates that Uniper's Ebitda will shrink almost two-thirds by 2030. Reading the prospectus risk section is sobering. Uniper can't rule out more writedowns if renewables increase market share faster than expected, or governments devise new costly regulations.

If there's a lesson from the Eon share price collapse, it's to not underestimate solar and wind power and the tendency of governments to inflict pain on conventional power suppliers.

Uniper is entering a brave new world but it remains a relic of the old one.

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

  1. Eon is spinning off a majority of Uniper but will retain a 47 percent stake for the time being. Eon shareholders get one Uniper share for every 10 Eon shares they hold.

  2.  Germany's target is that renewables will account for at least 80 percent of gross power consumption by 2050.

  3. The bad news for Uniper is so far Germany has declined to follow the UK's lead in creating a so-called "capacity market". 

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net