Enviva reports adjusted EBITDA of $54.4M in Q3 2020

Enviva Partners, LP has reported financial and operating results for the third quarter of 2020.

Highlights:

• For the third quarter of 2020, the Partnership reported net income of $1.4 million, as compared to net income of $8.9 million for the third quarter of 2019
• The Partnership reported adjusted EBITDA of $54.4 million for the third quarter of 2020, an increase of 38.0 per cent from the corresponding quarter of 2019
• The Partnership declared a quarterly distribution of $0.775 per unit for the third quarter of 2020, an increase of 15.7 per cent from the corresponding quarter of 2019
• The Partnership’s operating and financial results to date have not been materially impacted by COVID-19 and the Partnership reaffirms previously provided full-year guidance for 2020
• The Partnership announced the addition of Gerrity Lansing of BTG Pactual to the board of directors of the Partnership’s general partner

“Driven by our continued safe and stable operations, we are very pleased to report strong financial performance in line with our expectations for the quarter,” said John Keppler, Chairman and Chief Executive Officer of Enviva. “We believe that the durability of our contracted cash flows, combined with the progress we are making on integrating the recently acquired Greenwood and Waycross production plants, and the processes and procedures we put in place to protect all our people and facilities against the ongoing impact of COVID-19, enabled us to stay firmly on track to deliver results within our full-year guidance range.”

Third quarter financial results

For the third quarter of 2020, the Partnership generated net revenue of $225.6 million, as compared to $157.4 million for the corresponding quarter of 2019. The $68.2 million increase was primarily attributable to a 40 per cent increase in metric tons sold during the third quarter of 2020, as compared to the corresponding quarter of 2019. Other revenue was $9.4 million for the third quarter of 2020, as compared to other revenue of $2.2 million for the third quarter of 2019. Included in other revenue for the third quarter of 2020 was $8.2 million in payments to the Partnership for modifying shipments under our take-or-pay off-take contracts, which otherwise would have been included in product sales.

For the third quarter of 2020, Enviva generated gross margin of $25.6 million, as compared to $26.5 million for the corresponding period in 2019, a decrease of approximately $0.9 million. Adjusted gross margin was $56.8 million for the third quarter of 2020, as compared to $41.0 million for the third quarter of 2019. The increase in adjusted gross margin during the third quarter of 2020 was primarily due to increased metric tons sold and higher other revenue. Adjusted gross margin per metric ton was $50.13 on 1,133,000 metric tons sold for the third quarter of 2020, as compared to adjusted gross margin per metric ton of $50.56 on 811,000 metric tons sold for the third quarter of 2019.

For the third quarter of 2020, net income was $1.4 million, as compared to net income of $8.9 million for the third quarter of 2019. Adjusted net income was $11.2 million for the third quarter of 2020, as compared to adjusted net income of $17.4 million for the third quarter of 2019. The lower net income and adjusted net income for the third quarter of 2020 were primarily due to $4.9 million of acquisition and integration costs and $9.3 million of incremental depreciation, amortization, and interest expenses mainly associated with the recent acquisitions, as well as changes in certain non-cash expenses.

Adjusted EBITDA for the third quarter of 2020 was $54.4 million, as compared to $39.4 million for the corresponding quarter of 2019. The increase was primarily due to higher metric tons sold and the resulting higher adjusted gross margin, as described above. Distributable cash flow, prior to any distributions attributable to incentive distribution rights paid to Enviva’s general partner, was $42.2 million for the third quarter of 2020, as compared to $30.0 million for the corresponding quarter of 2019.

As previously announced, the Partnership completed the acquisitions of a wood pellet production plant in Greenwood, S.C. and a wood pellet production plant in Waycross, Georg., in July 2020. The integration of these production plants into the Partnership is progressing as expected and their operating results for the third quarter of 2020 were consistent with the Partnership’s expectations prior to the acquisitions.

The Partnership continues to report that, to date, its operating and financial results have not been materially impacted by the outbreak of a novel strain of coronavirus (COVID-19) and all of Enviva’s customers have performed in accordance with their contracts. Although the full implications of COVID-19 are not yet known, Enviva has contingency and business continuity plans in place that they believe would mitigate the impact of potential business disruptions if necessary.

Outlook and guidance

The Partnership reaffirms its previously provided guidance and continues to expect full-year 2020 net income to be in the range of $33.9 million to $43.9 million, adjusted EBITDA to be in the range of $185.0 million to $195.0 million, and distributable cash flow to be in the range of $134.0 million to $144.0 million, prior to any distributions attributable to incentive distribution rights paid to our general partner. The Partnership also continues to expect to distribute at least $3.00 per common unit for full-year 2020, before considering the benefit of any additional acquisitions or drop-down transactions, and to target a distribution coverage ratio of 1.20 times on a forward-looking annual basis.

Market and contracting update

Even amidst the ongoing global COVID-19 pandemic, regulators, policymakers, utilities, and power generators continue to make incremental commitments and significant progress to phase out coal, cut greenhouse gas (GHG) emissions, and limit the impact of climate change to achieve “net-zero” by 2050.

The most recent example of such commitments is Japan’s goal to become carbon neutral by 2050, which was announced by its new prime minister in his first policy speech to the parliament since taking office. This goal brings the country in line with the net-zero targets set by other major economies including the European Union.

As expected when the proposed European Climate Law was outlined earlier this year, in September, the European Commission officially proposed to increase the EU’s 2030 GHG emissions reduction target from 40 per cent to 55 per cent as compared to 1990 levels. Shortly thereafter, on Oct. 7, the European Parliament voted to further increase this target to 60 per cent. This proposal is now pending before the EU Council of Ministers for approval.

Following the early July passage of legislation to end coal-fired power generation in Germany by 2038 (the Coal Exit Law), several policy initiatives that focus on formulating detailed regulations on the subsidy framework are currently underway with a total estimated subsidy budget of approximately two billion euros having been earmarked to cover costs related to converting existing coal-fired assets to operate on low-carbon fuel, including woody biomass. The Partnership and its sponsor remain in ongoing dialogue with several large power and heat generators in Germany who intend to convert existing coal-fired assets to biomass, subject to the final legislative direction expected over the next several months.

The United Kingdom’s Department for Business, Energy and Industrial Strategy (BEIS), in its response to the annual progress report produced by the Committee on Climate Change, recently announced plans to publish a comprehensive net-zero strategy ahead of next year’s COP26 climate summit that will outline how it intends to decarbonize the economy while harnessing growth and employment opportunities over the next three decades. BEIS confirmed that several specific decarbonization strategies are forthcoming, including a biomass strategy to be published in 2022, and that it expects to examine support mechanisms for GHG removal technologies, including Bioenergy Carbon Capture and Storage.

In Denmark, the government recently reached the political agreement necessary to translate the EU’s Renewable Energy Directive II into Danish law and reaffirmed the sustainability requirements for woody biomass used to produce heat and electricity in the country. Under this agreement, biomass must continue to come from legally harvested timber where landowners intend to replant the forests. This new agreement provides a clear and long-term regulatory framework for the increased use of biomass in a leading country in mitigating climate change, where sustainable biomass is currently the largest contributor to its renewable energy mix.

In early September, Poland’s Ministry of Climate submitted an updated draft of the country’s energy policy through 2040. The policy aims to reduce the share of coal in electricity production from more than 70 per cent today to just 11 percent in 2040 and contemplates substantial increases in biomass-fired generation at both the utility scale as well as in the more than 100 combined heat and power assets across the country that are currently fuelled with coal.

These commitments and the corresponding policies and action plans underpin the continued strong growth expected in global demand for industrial-grade wood pellets. The Partnership and its sponsor continue to progress negotiations that Enviva anticipate will result in additional long-term off-take contracts at the Partnership and its sponsor.

The Partnership’s previously announced 20-year, take-or-pay off-take contract pursuant to which it will be the sole source supplier for Ichihara Yawatafuto Biomass Power GK is now firm, as all conditions precedent have been satisfied. Ichihara is a new biomass power plant project company developed by Equis Bioenergy that was recently acquired by a wholly owned subsidiary of an investment grade-rated major utility company in Japan. Sales under this contract are expected to commence in 2023 with deliveries of 270,000 metric tons per year (MTPY) of wood pellets.

As of Oct. 1, 2020, the Partnership’s current production capacity is matched with a portfolio of firm take-or-pay off-take contracts that has a total weighted-average remaining term of 12.8 years and a total product sales backlog of $14.9 billion. Assuming all volumes under the firm and contingent off-take contracts held by Enviva’s sponsor and the Sponsor JV were included, Enviva’s total weighted-average remaining term and product sales backlog would increase to 13.7 years and $19.4 billion, respectively. The Partnership expects to have the opportunity to acquire off-take contracts from its sponsor and the Sponsor JV.

Sustainability

The Partnership and its sponsor recently published their first Corporate Sustainability Report (the CSR Report) as part of its commitment to provide incremental transparency into its Environmental, Social, and Governance (ESG) practices. The CSR Report provides a description of Enviva’s 16-year sustainability journey from its beginnings as a start-up in 2004 to the publicly traded company that is Enviva today. It also features a comprehensive review of Enviva’s contribution to the fight against climate change, fibre procurement approach and forestland conservation efforts, environmental, heath, and safety processes, human capital and diversity policies, and corporate governance practices.

The Partnership and its sponsor also continue to prioritize efforts to deliver on its promise to promote forest growth and carbon sequestration and protect forest habitats in the U.S. Southeast. Enviva’s sponsor recently announced a partnership with Finite Carbon, North America’s leading developer of forest carbon offsets, to leverage its Core Carbon online platform to engage small forest landowners across the U.S. Southeast to voluntarily participate in global GHG reduction programs. Enviva is helping private landowners participate in the program to receive income in exchange for their commitment not to harvest particular tracts of their land, thereby facilitating the conservation and protection of forest habitats that are critically important to biodiversity, wildlife, and carbon storage, such as bottomland hardwood forests.

“Part of the reason we were so excited to bring Gerrity Lansing onto our board of directors was his tremendous experience building and growing BTG Pactual’s Timberland Investment Group, one of the world’s largest forestland owners and one that shares Enviva’s deep and values-driven commitment to sustainable forestry,” said Keppler. “I believe this perspective on sustainability, one that is so critical to our core value proposition, combined with Gerrity’s decades of experience and demonstrable track record in socially responsible investing, will bring important, incremental thought leadership to the board as we continue to work to build and maintain productive, respectful, and mutually beneficial relationships with a broad and increasingly diverse range of stakeholders.”