Germany Set to Assume $230 Billion in Uniper Derivatives – Reuters

By John O’Donnell and Christoph Steitz

FRANKFURT – Germany, after allocating nearly half a trillion dollars to combat its energy crisis, is preparing to assume the risks associated with €216 billion ($229 billion) in derivatives amassed by the energy firm Uniper.

The German government is nationalizing Uniper, marking the largest corporate bailout in the nation’s history, spurred by disruptions in gas supplies from Russia that plunged Europe’s largest economy into turmoil.

Uniper has already incurred billions in losses from derivatives as it struggled to fill the gap left by the reduced Russian gas flow. The company was under financial strain even before the Ukraine crisis, prompting it to seek assistance from the state-owned bank KfW.

Recent calculations based on Uniper’s latest financial report revealed the full extent of the company’s derivatives exposure, which was confirmed by Uniper. Like many other energy companies, Uniper utilizes derivatives to hedge against fluctuations in energy prices, such as securing future sale prices for gas. However, these instruments come with their own risks and have proven costly to maintain.

“As of September 30, 2022, our derivative positions total approximately €216 billion,” Uniper’s spokesperson stated, indicating that the riskier components are minimal. Uniper’s accounts listed around €198 billion in receivables from derivative instruments as assets.

Regardless of their purpose—hedging or speculation—derivatives inherently carry risks. Sharp movements in market prices can dramatically increase the cost of maintaining such trades. To mitigate risks from price fluctuations, traders typically post collateral, often in cash, with clearinghouses. Recent surges in prices have escalated the demand for margin calls.

European utilities have seen their derivative positions swell due to soaring gas and electricity prices, necessitating increases in their reported values. A decline in market prices directly impacts the value of these derivatives.

Uniper’s outstanding derivative positions, the most recent data available, could potentially lead to additional losses depending on energy price trends. This comes as the German government, already investing over €51 billion to support and nationalize Uniper, could be faced with higher costs upon finalizing the acquisition of the utility, expected to happen soon.

Shareholder approval for Berlin’s bailout of Uniper, which plays a critical role in supplying gas to industries and homes across Germany, is anticipated at an extraordinary general meeting set for December 19.

Uniper reported a staggering €40 billion loss for the first nine months of this year, which includes €10 billion in losses from replacing Russian gas with much pricier alternatives. The report also highlighted expected future losses of €31 billion related to “valuation effects on derivatives and provision build-ups” due to Russian gas supply reductions, based on energy prices as of September’s end, which have since decreased significantly.

The spokesperson indicated, “We must anticipate continued non-delivery from Russia, leading to further losses. Absent gas deliveries from Russia, our gas operations could incur losses until at least the end of 2024.” In its nine-month report, Uniper noted significant writedowns and adjustments, including a €3 billion write-down on derivatives and a €9 billion loss from hedging derivatives, alongside an €11 billion impact on profits from other derivatives.

A source close to the government expressed concerns that Germany’s economy and energy ministry, operating under the Green party leader Robert Habeck, may have underestimated the associated risks. However, the Economy Ministry stated that all pertinent factors, including balance sheet risks from Uniper’s annual reports, were thoroughly considered in the decision to nationalize the company.

An Economy Ministry representative explained that Uniper’s use of derivatives is aimed at mitigating risks related to energy prices, delivery, and currency fluctuations. Potential losses could be offset by gains from financial instruments designed to stabilize energy price variations.

As of late September, Uniper’s liabilities linked to derivatives had roughly doubled since the end of 2021, far exceeding the €131 billion held by Germany’s RWE.

Uniper has caught the attention of officials at the European Central Bank and within the European Parliament, with some expressing concerns that energy companies may be operating as unregulated traders, similar to banks. This situation has raised questions regarding the nature of these trades, with a credit analyst highlighting the substantial risks tied to the scale of Uniper’s derivatives position.

Moody’s is currently assessing Uniper as part of Finnish firm Fortum, its majority shareholder until Germany completes the acquisition. Observers are calling for greater transparency from energy companies concerning their derivatives operations to better understand the associated risks.