EON’s Russian Slump Bodes Ill for Uniper Fossil-Fuel Spinoff

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EON SE’s Russian operations are hurting profit at Germany’s largest utility, a sign of future pain for its fossil-fuel spinoff Uniper that’s set to take control of the eastern assets.

First-half earnings before interest, taxes, depreciation and amortization fell 15 percent from a year ago at the Dusseldorf-based company, according to the average estimate of five analysts compiled by Bloomberg before results are published Wednesday. Earnings outside Europe in 2015 will be “significantly below” last year’s due to Russia’s weakening currency, EON said in May.

EON joins Italian utility Enel SpA in reporting a hit to earnings from Russia, where the ruble lost about 30 percent versus the euro in the past year amid falling oil prices, a slowing economy and international sanctions. At Uniper, which is taking over EON’s fossil-fuel plants, Russia will make up 43 percent of Ebitda in 2016, according to Sanford C. Bernstein & Co.

“The Russian operations, which I consider underperforming, are problematic,” said Sven Diermeier, an analyst at Independent Research GmbH in Frankfurt. “They will have more weight for Uniper than they have had for EON.”

Russia’s regulatory framework and electricity demand have been “stable and calculable” for years, said Georg Oppermann, a spokesman for EON. “Our commitment in Russia is longterm.”

EON is spinning off nuclear and fossil-fuel power plants to focus on renewable energy in response to Germany’s shift toward wind and solar output. Almost a third of Uniper’s staff will be employed in Russia when it assumes EON’s power generation, energy trading and oil and gas production next year.

Shares Fall

EON fell 0.6 percent to 12.015 euros by the close in Frankfurt trading. The stock has declined 15 percent this year, the second-biggest retreat in the German benchmark DAX Index after rival power producer RWE AG.

Investments in Russia by EON have totaled about 10 billion euros ($11 billion) since 2007, including the 800-megawatt Berezovskaya lignite power plant to be commissioned in late summer, which will be “promptly and perceptibly recognized in profit,” according to Oppermann.

EON Russia, which says it’s the biggest foreign investor in the nation’s power industry, reported a 15 percent year-on-year drop in electricity output in the first six months of 2015, and a 21 percent slump in ruble-denominated net income.

Exchange Rates

“What substantially drives profitability is the foreign exchange rate,” said Elchin Mammadov, a London-based analyst at Bloomberg Intelligence, refering to foreign utilities’ Russian operations.

Enel, Italy’s biggest utility, on July 30 reported a 23 percent decline in first-half Ebitda at its Eastern Europe business due to the Russian currency’s depreciation. Finnish power producer Fortum Oyj said that while operating profit rose in Russia in the six months through June, ruble weakness reduced the figure by almost a third.

Russia faces its first recession in six years. The Energy Ministry said in June that domestic electricity use is unlikely to grow more than 1 percent on average in coming years. Consumption will increase only 0.3 percent in 2016, according to the Federal Tariff Service.

The potentially reduced power demand “may prove a heavy burden for Uniper,” said Guido Hoymann, an analyst at B. Metzler Seel Sohn & Co. KGaA in Frankfurt.

Once sanctions are lifted and the ruble recovers, it may make sense for Uniper to sell the Russian business “as they aren’t among the country’s top three generators and there’s no significant growth opportunity,” said Mammadov.


Russia would be another setback for EON’s international expansion, meant to provide relief from upheaval in the energy industry at home. In Brazil, where the company’s capital spending has ballooned to almost four times the original plan, its 43 percent stake in bankrupt utility Eneva SA may be diluted to about 10 percent by a restructuring plan.

While EON wrote down 5.41 billion euros last year on generation assets abroad, Uniper also faces risks at home, Ingo Kepler, a Frankfurt-based analyst at Kepler Cheuvreux, said by e-mail.

“As we expect cash funding to become a requirement for nuclear operators in Germany, the prospect of a much-higher, long-term dividend payout for the two companies seems unrealistic to us.”

(An earlier version of this story was corrected to fix the spelling of the spokesman’s surname in the eighth paragraph.)