Ovo Group, the owner of the UK’s third-largest energy supplier, feared breaching its financial covenants in the months before the government announced unprecedented support for British households and businesses to pay soaring energy bills.
Newly released accounts for Ovo show it was at risk of not being able to meet its lending requirements this year, as it feared a sharp rise in bad debt if households were unable to afford record electricity and gas bills.
The business warned that it expected to breach banking covenants during 2022 because of soaring prices, according to accounts filed for 2021 and published by Companies House on Sunday.
“High energy prices resulted in [an] over 50 per cent increase in bills in April 2022, which means that millions more households will struggle to heat their homes in winter”, the company said, with “a further increase in bad debt” expected during the year.
Breaching its covenants would risk putting the viability of the business, whose core operations are still lossmaking, in “material uncertainty”, Ovo said in its accounts.
Its warnings demonstrate the fragility of the UK’s energy supply industry, which has seen more than 30 businesses cease trading in the past two years because of rising costs.
Earlier this month ministers unveiled an estimated £150bn package designed to partly shield households from energy prices that have spiralled since Russia’s full-scale invasion of Ukraine. The measures will limit the price per unit that energy suppliers can charge customers, with the government making up the difference between that and the actual cost of providing electricity and gas to their customers at current wholesale prices.
The pledge is designed to limit domestic energy bills to an average of £2,500 a year per household, although actual bills will depend on usage.
In a statement on Sunday following the release of its accounts, Ovo said: “We have not breached any covenants and we do not expect to breach any covenants in the next 12 months.
“At the time of signing our accounts [in June 2022], Russia’s war on Ukraine sent energy prices rising even further and our auditors were right to flag concerns about the impact of these market uncertainties.
“Since the end of our financial year, we have seen significant steps by the government and the regulator to create more certainty for customers and for companies.”
The company added: “Our auditors have made clear that despite the unprecedented challenges we face in the energy markets, they are confident in our ability to operate.”
The company reported a pre-tax profit of £370mn for 2021, compared with a loss of £176mn a year earlier, the accounts show.
However, the number was boosted by a £372mn revaluation of its energy derivative contracts, which do not reflect the company’s trading. Ovo said its underlying business made a pre-tax loss of £2mn, which compares with a loss of £66mn during 2020.
Weeks after closing its books on 2021, the company cut 1,700 jobs in January, about a quarter of its workforce.
This came on top of the 2,600 roles it shed during 2020 in the midst of the coronavirus pandemic. The 2020 cuts were made in order for it to speed up the integration of the UK energy retail arm of SSE, a deal that propelled Ovo, founded in 2009 by former City trader Stephen Fitzpatrick, to the top flight of Britain’s energy providers.
The 2021 accounts also showed that the highest-paid director — believed to be Adrian Letts, who stepped down as chief executive in February — received a 50 per cent pay increase, from £379,000 to £573,000.
Ovo also paid £21mn during the year to Imagination Industries, a holding company owned by Fitzpatrick, for branding rights.