Graanul Highlights UK Supply Contract Renewal, M&A and Diversification Plans as Contracted Volumes Face Cliff in 2027; Highest Production Costs Cast Doubt Over Export Plans

Reporting: Robert Schach

Graanul Invest’s management team attempted to present an upbeat outlook at its capital markets day hosted by Goldman Sachs last Wednesday, Feb. 12, after its biggest customer, Yorkshire-based Drax, said it plans to cut biomass energy production by almost 60% in 2027 when the U.K. government’s new subsidy framework for biomass energy kicks in, sources said.

The Estonian wood pellet producer is in the process of trying to re-contract its existing volumes, as based on current contracted volumes, sales are set to fall off a cliff in 2027.
 


At the capital markets day, Graanul’s management claimed that Drax would continue to buy around 2 million tons of pellets a year under the new subsidy framework. While the new subsidy regime still needs to be ratified, Graanul said it expects to sign a new post 2027 supply contract with Drax in the coming months.

That figure is at odds with the level communicated by Drax, which has told equity analysts that it plans to source around two-thirds of its wood pellets needs from its own production after April 2027, and that the contracted amount of pellets it will buy from third parties will be just 1 million tons, a drop of 80%, several sources noted.

The utility plans to reduce its wood pellet supply chain to around three suppliers from around 16 to 20 suppliers, which means the remaining 1 million tons of demand will be split between three suppliers. Graanul will likely remain one of the suppliers, but will unlikely be supplying the full 1 million pellets Drax plans to buy in from 2027 onwards, the sources added.

Graanul’s management said that it expects to remain a key supplier to Drax as a result of its wood pellets being 100% sustainably sourced and benefitting from lower CO2 emissions than its competitors, which ship the pellets from the U.S. and Canada.

Under the U.K. government’s new low-carbon dispatchable contract for difference, or CfD, agreement with Drax, the level of biomass sourced sustainably needs to increase to 100% from 70% currently, while the supply chain CO2 emission threshold has been tightened to 36.6 grams of CO2 per Megajoule from 55.6 gCO2/MJ currently.

Drax’s current supply of wood pellets is already around 99% sustainably sourced. While the group produces part of its wood pellets in Canada, which the EU considers as sourced from primary forests and hence not compliant, its U.S. production is deemed sustainably sourced. Drax already provides its entire internal supply for its U.K. power plants from its Southeastern U.S. production facility, since it is cheaper to ship to the U.K. than from Canada, sources said. Enviva, another wood pellet supplier to Drax, produces all its wood pellets in the U.S.

Drax’s current supply chain emission level is at around 27 gCO2/MJ and as such also already well below the tighter new criteria, which suggests that Graanul does not have any meaningful competitive advantage in terms of sustainability, sources noted.

Drax is still waiting for the government’s new biomass framework to be ratified by the U.K. parliament before it plans to start negotiating new contracts, which is not expected to happen until the summer, sources noted.

Graanul’s management also told investors that it will shortly announce an MOU with another major U.K. utility for a 10-year contract to supply 500,000 tons of pellets per year starting in 2027.

This contract is likely with Lymemouth Power Station, the only other large-scale U.K. biomass energy producer that the U.K. is currently considering supporting with a new CfD subsidy beyond 2027, sources said.

Lymemouth currently consumes around 1.4 million tons of wood pellets per year, of which Enviva supplies around 800,000 tons, with Drax and Graanul providing roughly 300,000 tons each, sources noted. It is still in negotiations with the U.K. government over an agreement to extend subsidies post 2027 but given that the utility has not yet committed to carbon capture utilization and storage, or CCUS, measures – unlike Drax – there is still some uncertainty over whether it will ultimately be able to secure new subsidies and continue operating beyond 2027, sources said.

If Lymemouth does end up securing an extension, the level of subsidies are expected to drop by a similar order of magnitude to Drax under the new regime in 2027, which means its wood pellet demand would drop to around 550,000 tons per year. Drax, and likely Enviva too, are planning to bid to continue supplying Lymemouth from 2027 onwards if it does secure new subsidies, which suggests that it’s still far from certain whether Graanul would win any new contract and what share of it, the sources said.

MGT Teesside, the other large-scale U.K. biomass energy producer, began generating electricity under a CfD framework in September 2023, which runs until 2034. But it has already contracted Enviva as its sole pellet supplier, sources noted.

On top of a significant volume reduction, Graanul will likely also face a sharp drop in profitability in 2027, when excess supply will drive down prices. Since Drax accounts for around 15% of global wood pellet demand, its planned drop in consumption alone will likely lead to around 4 million tons of excess supply, but other producers like Lymemouth are facing similar if not deeper reductions.

And in terms of the cost curve, Graanul is currently the most expensive wood pellet producer at €122/ton compared with €84/ton in Vietnam and southeast Asia, €94/ton in the U.S. South Atlantic and €99/ton in the U.S. South Central, according to its own presentation.

 



Graanul hopes to offset some of the expected earnings losses in its core biomass power generation segment by expanding into new geographies and new markets. It is considering some M&A with three shortlisted potential targets, sources noted.

The group aims to capitalize on demand for biomass in Japan and South Korea, driven by stringent renewable energy targets and supportive policies. Japan remains supportive of biomass and plans to commission additional capacity, however South Korea is moving away from biomass energy generation due to environmental concerns. In any case, Graanul is not well positioned to supply Asian countries since its production costs are around 14% more expensive than the Vietnamese and other South East Asian producers, sources noted.

Graanul’s fixed rate notes and the floating rate notes are quoted at 96/97, sources noted.

Graanul’s capital structure is below:
 Graanul Invest
 
12/31/2024
 
EBITDA Multiple
(EUR in Millions)
Amount
Maturity
Rate
Book
 
€100M Super Senior Revolving Credit Facility ¹
10.0
Apr-2026
EURIBOR + 3.500%
 
Total Super Senior Debt
10.0
 
0.1x
€250M Floating Rate Sustainability-Linked SSN due 2026 ²
250.0
Oct-15-2026
EURIBOR + 4.750%
 
€380M Sustainability-Linked SSN due 2026 ²
380.0
Oct-15-2026
4.625%
 
Total Senior Secured Debt
630.0
 
5.4x
Vessel Financing ³
25.0
 
 
 
Total Other Debt
25.0
 
5.6x
IFRS 16 Leases
4.0
 
 
 
Total Lease Liabilities
4.0
 
5.7x
Total Debt
669.0
 
5.7x
Less: Cash and Equivalents
(65.0)
 
Net Debt
604.0
 
5.1x
Operating Metrics
LTM Revenue
491.3
 
LTM Reported EBITDA
118.0
 
 
Liquidity
RCF Commitments
100.0
 
Other Liquidity
20.0
 
Plus: Cash and Equivalents
65.0
 
Total Liquidity
185.0
 
Credit Metrics
Gross Leverage
5.7x
 
Net Leverage
5.1x
 

Notes:
Capital structure is post-IFRS 16. Reported EBITDA is PF Adj. EBITDA. Other liquidity is an undrawn supplier financing facility. Cash and cash equivalents includes €25 million from a vessel financing secured by certain owned shipping vessels.
1. The RCF has a leverage maintenance covenant set at 8.35x which only applies if the facility is over 40% drawn at a quarter end reporting date.
2. Subject to a 0.750% step up per annum from and including Oct. 30, 2025, subject to meeting certain sustainability performance targets.
3. The vessel financing is only recourse to the borrower under the financing as well as the underlying assets securing the financing, and not to the rest of the group or any of the group’s other assets.



Apollo acquired an 80% stake in Graanul in 2021 in a deal that valued the company at €970 million, and part-funded the transaction with €300 million of equity while the seller rolled over €75 million of equity. Graanul generated €130 million of adjusted EBITDA in the June 2021 LTM period, Apollo thus acquired the business at a 7.5x multiple.

Graanul did not respond to a request for comment.
Sectors: Energy