By Enviva Partners
By Enviva Partners
U.S. wood pellet producer Enviva Partners has signed new long-term off-take contracts with existing and new customers in Japan totalling an additional 1,010,000 metric tons per year commencing between 2022 and 2024, company announced in its Q2 2019 report.
“Solid operating performance drove a 25 per cent increase in adjusted EBITDA for the second quarter, a substantial improvement over the first quarter of 2019 and over the second quarter of 2018,” said John Keppler, chairman and chief executive Officer of Enviva. “For the second half of 2019, we expect a significant increase over the first half with the benefit of the now-ramping Hamlet facility in the fourth quarter of 2019. The Hamlet facility is the eighth operating plant in our broader organization, and we expect it to be followed by additional plants in Lucedale, Mississippi and elsewhere to fulfill the continued increases in demand for our product, evidenced again by the more than one million tons per year of long-term contracted deliveries we and our sponsor recently executed.”
Second quarter financial results
For the second quarter of 2019, Enviva generated net revenue of $168.1 million, an increase of 24.0 per cent, or $32.5 million, from the corresponding quarter of 2018. Included in net revenue were product sales of $167.2 million on 869,000 metric tons of wood pellets sold during the second quarter of 2019, as compared to $133.2 million on 699,000 metric tons of wood pellets sold during the corresponding quarter of 2018. The $34.0 million increase in product sales was primarily attributable to a 24.3 percent increase in sales volumes. Other revenue was $0.9 million for the second quarter of 2019, as compared to $2.4 million for the corresponding quarter of 2018. The decrease was primarily due to lower fees received from off-take customers requesting scheduling accommodations.
For the second quarter of 2019, the company generated gross margin of $16.5 million, as compared to $19.8 million for the corresponding period in 2018, a decrease of approximately $3.3 million. Adjusted gross margin was $28.0 million for the second quarter of 2019, as compared to $25.6 million for the second quarter of 2018. Adjusted gross margin per metric ton was $32.26 for the second quarter of 2019, as compared to adjusted gross margin per metric ton of $36.63 for the second quarter of 2018. Adjusted gross margin per metric ton decreased primarily due to increased costs attributable to seasonal factors that were more significant and longer lasting than during the second quarter of 2018. These seasonal factors were largely behind us at the end of the second quarter. The increased costs were partially offset by $2.7 million of MSA Fee Waivers as consideration for an assignment of two shipping contracts to our sponsor.
For the second quarter of 2019, net loss was $3.8 million, as compared to net income of $3.5 million for the second quarter of 2018. Adjusted net income for the second quarter of 2019 was $7.0 million, as compared to an adjusted net income of $2.7 million for the second quarter of 2018. Adjusted EBITDA for the second quarter of 2019 was $27.0 million, as compared to $21.1 million for the corresponding quarter of 2018. The increase was primarily due to higher sales volumes, $2.7 million of MSA Fee Waivers as consideration for an assignment of two shipping contracts to our sponsor, and $8.3 million of MSA Fee Waivers for general and administrative expenses, partially offset by increased costs attributable to seasonal factors described above. Distributable cash flow, prior to any distributions attributable to incentive distribution rights paid to our general partner, was $17.2 million for the second quarter of 2019, as compared to $11.1 million for the corresponding quarter of 2018.
Market and contracting update
Enviva’s strategy is to fully contract the wood pellet production from its plants under long-term, take-or-pay off-take contracts. The partnership’s current production capacity is matched with a portfolio of firm off-take contracts that has a total weighted-average remaining term of 10.4 years and a total product sales backlog of $9.6 billion as of August 5, 2019. Assuming all volumes under the firm and contingent off-take contracts held by our sponsor and the Second JV, which the company expects to have the opportunity to acquire, were included, the total weighted-average remaining term and product sales backlog would increase to 13.2 years and $17.9 billion, respectively.
In addition to the approximately 2,000,000 metric tons per year (“MTPY”) of firm, long-term off-take contracts with Japanese counterparties the partnership and its sponsor have previously announced, the partnership’s sponsor has recently executed several agreements with Japanese counterparties totalling more than 1,000,000 MTPY of additional volumes, including:
- A 15-year, take-or-pay off-take contract with a major Japanese trading house that is a new customer to supply a new biomass power plant, subject to certain conditions precedent, which the sponsor expects to be met in the fourth quarter of 2019. Deliveries under the contract are expected to commence in 2022 with average volumes of 60,000 MTPY of wood pellets.
- A 20-year, take-or-pay off-take contract with a major Japanese trading house to supply a new biomass power plant, subject to certain conditions precedent, which the sponsor expects to be met during the first half of 2020. Deliveries under this contract are expected to commence in 2024 with volumes of 400,000 MTPY of wood pellets.
- A 10-year, take-or-pay off-take contract with a major Japanese trading house to supply a biomass co-firing power plant, subject to certain conditions precedent, which the sponsor expects to be met in the third quarter of 2019. Deliveries under this contract are expected to commence in 2022 with volumes of 210,000 MTPY of wood pellets.
- A 17-year, take-or-pay off-take contract to supply a coal-to-biomass conversion power plant project currently being developed by a group of Japanese industry leaders. The contract is subject to certain conditions precedent, which the sponsor expects to be met in the fourth quarter of 2019. Deliveries under this contract are expected to commence in 2022 with volumes of 340,000 MTPY of wood pellets.
In addition, the Partnership executed a firm two-year take-or-pay off-take contract with Albioma Le Moule, a leading renewable energy generator in Guadeloupe, to supply a power plant currently being converted from coal-fired to biomass-fired, which Albioma reports will increase the share of renewable energy on the island from 20 per cent to 35 percent. Deliveries under the contract are expected to commence in 2020 with volumes of 130,000 MTPY of wood pellets.
In addition to phasing out nuclear energy generation, nations in Europe and Asia continue to progress towards phase-out of coal generation in an effort to reduce greenhouse gas (“GHG”) emissions and, in some cases, achieve “net zero” emissions. Recent developments that underline the continued strong growth expected in global demand for industrial-grade wood pellets, which the partnership and its sponsor expect will underpin additional long-term off-take contracts, include the following:
- In June 2019, the UK became the first major economy in the world to pass a law to bring GHG emissions to net zero by 2050, compared with its previous target of at least an 80 per cent reduction from 1990 levels. The government’s advisory Committee on Climate Change estimated that, in order for the country to achieve the net zero emissions target, 15 per cent of the UK energy mix would need to come from biomass, up from approximately 7 per cent today.
- The newly elected President of the EU Commission has announced the goal to make Europe the first climate-neutral continent by 2050. To make this happen, she has committed to propose, in her first 100 days in office, a European Green Deal, which is expected to include the first European Climate Law that will set the 2050 climate-neutrality target into legislation. This enhanced EU climate goal could lead to increased carbon pricing over time and improve the competitive position of biomass, especially in countries such as Germany, where coal continues to form a significant portion of the electricity and heat generation mix.
- Germany’s Federal Minister for Economic Affairs and Energy expects the law adopting the goals recommended by its Commission on Growth, Structural Economic Change and Employment to phase out coal will come into force by early 2020. The law is expected to provide specific dates for the shut-down of coal- and lignite-fired power plants. Several German utilities have publicly confirmed they are assessing options to replace coal with biomass for some of their combined heat and power assets.
- In June 2019, Poland’s government published the draft amendment to its Renewable Energy Sources Act as the government seeks to accelerate renewable energy development to avoid the cost of missing the renewable energy targets set by the EU’s Renewable Energy directives. During the first quarter of 2019, over 100 megawatts of new biomass generation capacity was launched in Poland, bringing total biomass capacity in the country to more than 1.4 gigawatts.
Partnership Development Activities
Enviva’s Hamlet plant is now operating, and the partnership expects the plant to exit 2019 with a production run-rate of approximately 500,000 MTPY and to reach its nameplate production capacity of approximately 600,000 MTPY in 2021.
The partnership’s previously announced projects to increase the aggregate production capacity of its wood pellet production plants in Northampton, North Carolina and Southampton, Virginia by approximately 400,000 MTPY (Mid-Atlantic Expansions) are progressing, as detailed engineering is in process, major pieces of equipment are being delivered, and site preparation work is advancing. The partnership expects to complete the construction of the expansion activities in the first half of 2020 with startup thereafter, subject to receiving necessary permits.
The U.S. Department of Commerce’s Economic Development Administration recently awarded a $10.0 million grant to the Panama City Port Authority in Panama City, Florida to support the development of a new biomass bulk storage dome at the marine export terminal from which the partnership exports wood pellets produced at its plant in Cottondale, Florida. The project is expected to increase the storage capacity at the terminal by approximately 20,000 metric tons and provide increased protection against extreme weather conditions. The grant is expected to be matched with $2.75 million in state investment. The increase in terminal throughput capacity made possible through the port improvements funded by this grant will enable the Partnership to consider opportunities to expand its production in the region.