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Graanul Post 2027 Uncertainty Mounts as Drax Weighs UK Production Cuts, Baltic Subsidies Set to Wind Down

Reporting: Robert Schach

Estonian wood pellet producer Graanul Invest faces a challenging refinancing of its 2026 bond maturities. Earnings are rebounding after the group managed to finally renegotiate its contract with U.K. based energy producer Drax, its biggest customer, which is starting to improve leverage. However, changes to biomass energy subsidies in the U.K. in 2027 could result in Drax curtailing power generation and relying on its own pellet production, while direct subsidies in the Baltics will start being phased out at the same time, sources said.

The U.K.’s current subsidies for biomass energy production expire at the start of 2027. The government has given Drax permission to fit carbon capture and storage, or CCS, technology at its Yorkshire plant, and is expected to provide some continued subsidies to Drax to support its bioenergy with carbon capture, or BECCS, project, until it starts in 2030. However, the level of support is expected to be far lower, sources noted.

The U.K. currently subsides biomass energy generation via two mechanisms – Renewal Obligation Certificates (ROC), which are granted per unit of power generated using pellets, and Contracts for Difference (CfD) – under which the government guarantees a price for power generated using pellets and Drax receives (or pays) the difference versus the strike price.

ROC payments are far more generous, accounting for about £400 million to £500 million of the roughly £700 million of total subsidies Drax currently receives, whereas the CfD payments account for just roughly £150 million per year. Drax generated £1.2 billion of adjusted EBITDA last year but just £696 million during 2022 and £398 million in 2021, hence is highly dependent on the subsidies, sources noted.

While the U.K. government has not yet taken its final decision, Drax expects it to end the ROC subsidies and only continue the CfD scheme in 2027, with some constraints on minimum and maximum volumes to prevent producers from arbitraging the scheme, like they did during 2023.

That would have a huge impact on the profitability of Drax. As a result, the group plans to cut its biomass power production from 14 TWh currently to a range of 8-12TWh in 2027. It would mean its wood pellet usage will go down from 7 million tons per year currently to 4-6 million tons. However, Drax, which is also a global wood pellet producer (having acquired Pinnacle in 2021), is ramping up its own pellet production, which is already at around 5 million tons per annum and is projected to reach up to 8 million tons per annum by 2030, sources said. Hence, it would no longer need to buy in any pellets by 2027 (unless it doesn’t want to be 100% dependent on internal resources), which means Graanul could lose all if not most of its volumes in the U.K., which accounted for 60% of its first half sales in 2024.

The Dutch government is also ending subsidies for biomass energy generation in 2027, which means that Graanul’s sales to German energy utility RWE for its plant in the Netherlands are expected to end in 2027 as well. RWE will unlikely look to convert its plant into BECCS given that any future subsidies in the Netherlands will be limited to small-scale biomass combustion plants with an electrical capacity below 100 MW. The Netherlands accounted for around 14% of Graanul’s sales historically, although its share of total revenue declined to 6% in 2023 and has fallen further over the first half of 2024. RWE is expected to shut down the plant in 2027, sources said.

The Dutch government is working on pushing the EU to follow suit, filing a motion to ask the EU to exclude woody biomass from renewable energy sources.

The regulatory regime in Denmark, Graanul’s second biggest market, remains supportive for the time being, sources noted. However, first-half sales to Danish energy group Orsted are down 22% year over year.

In the Baltics, Graanul currently receives around €10 million of direct subsidies for producing its pellets, however these are being successively wound down starting in 2027 and are set to fully expire in 2029, putting another 14% of its current LTM EBITDA at risk, according to sources.

Graanul was 8.2x net levered as of June 30, 2024, but metrics are improving partly as a result of restored profitability under the group’s Drax contract, which Graanul managed to renegotiate to offset rising input costs, and partly as a result of normalizing raw material costs, as reported.

Biomass-fueled generation made up 11% of the U.K.’s electricity generation in 2022, according to the government’s biomass strategy report. As a result, despite pellet-based generation’s alleged environmental shortcomings, it is unlikely that there will be a radical change in its classification, sources noted.

There is also the possibility that more coal-fired power plants will be converted to biomass plants. In France, EDF and Paprec submitted a bid to convert EDF’s 1.2 GW Cordemais coal-fired power plant to biomass in Loire-Atlantique (western France), dubbed the Ecocombust project. The plans for the conversion were authorized by the Loire-Atlantique prefecture in February this year.

EDF planned to construct a facility to produce wood pellets on the Cordemais site as part of the project, which was expected to start in early 2023 and be commissioned in 2025. That could mean that the new bioenergy plant will not result in much if any additional demand for wood pellets, however there are limited supplies in Europe, so if the conversion of the power plant does go ahead, it would likely still be positive for Graanul, sources noted.

Apollo acquired an 80% stake in Graanul in 2021 in a deal that valued the company at €852.5 million, which it part funded with €300 million of equity while the seller rolled over €75 million of equity. Graanul generated €129.8 million of adjusted EBITDA in the June 2021 LTM period.

The group’s FRNs are quoted at 91.75/92.5 and the fixed-rate notes at 89/90, according to one of the sources.

Graanul’s capital structure as of June 30:

Graanul Invest
06/30/2024
EBITDA Multiple
(EUR in Millions)
Amount
Maturity
Rate
Book
€100M Super Senior Revolving Credit Facility
5.0
Mar-2026
EURIBOR + 3.500%
Total Super Senior Debt
5.0
0.1x
€250M Floating Rate Sustainability-Linked SSN due 2026 1
250.0
Oct-15-2026
EURIBOR + 4.750%
€380M Sustainability-Linked SSN due 2026 1
380.0
Oct-15-2026
4.625%
Total Senior Secured Debt
630.0
8.6x
IFRS 16 Leases
4.2
Total Lease Liabitlies
4.2
8.7x
Total Debt
639.2
8.7x
Less: Cash and Equivalents
(35.5)
Net Debt
603.7
8.2x
Operating Metrics
LTM Revenue
507.3
LTM Reported EBITDA
73.6
Liquidity
RCF Commitments
100.0
Less: Drawn
(5.0)
Plus: Cash and Equivalents
35.5
Total Liquidity
130.5
Credit Metrics
Gross Leverage
8.7x
Net Leverage
8.2x
Notes:
Capital structure is post-IFRS 16. The group holds an overdraft facility at Euribor + 3.5% interest, maturing in 2026, with €4.3 million outstanding as of June 30, 2024.
1. Subject to a 0.750% step up per annum from and including Oct. 30, 2025, subject to certain conditions.

The group’s largest bondholders include OFI Invest, Nordea, BlackRock and Abrdn, according to Bloomberg.

Graanul did not respond to a request for comment.