Enviva reports net income of $8.5M in Q2 2020
August 6, 2020
Enviva Partners, LP, today reported financial and operating results for the second quarter of 2020.
- For the second quarter of 2020, the Partnership reported net income of $8.5 million, as compared to net loss of $3.8 million for the second quarter of 2019
- The Partnership reported adjusted EBITDA of $37.4 million for the second quarter of 2020, an increase of 38.7 per cent from the corresponding quarter of 2019
- The Partnership completed the previously announced Greenwood and Georgia Biomass Acquisitions and associated financing
- The Partnership’s sponsor executed a new long-term take-or-pay off-take contract with a new creditworthy customer, which is a major Japanese electric utility
“The resilience of the business model we have built enabled us to continue to operate our plants and port terminals uninterrupted, to deliver strong results quarter-over-quarter, and to execute our long-term strategy even amidst heightened market volatility and the uncertainty of the evolving coronavirus pandemic,” said John Keppler, chairman and chief executive officer of Enviva. “At the same time, with the transformative Greenwood and Georgia Biomass acquisitions, we have increased the Partnership’s production capacity by one third and added approximately $5.3 billion dollars to our fully contracted revenue backlog. When combined with the robust recapitalization of our sponsor, our success in the second quarter quite dramatically sets the stage for substantial growth for the Partnership for many years to come.”
Second quarter financial results
For the second quarter of 2020, the Partnership generated net revenue of $167.7 million, as compared to $168.1 million for the corresponding quarter of 2019. The $0.4 million decrease was primarily attributable to an increase in sales volumes produced by the Partnership, offset by a reduction in sales volumes procured from third parties during the second quarter of 2020. Other revenue was $12.1 million for the second quarter of 2020, as compared to other revenue of $0.9 million for the second quarter of 2019. Included in other revenue for the second quarter of 2020 was $8.9 million in payments from customers associated with modifying shipments under take-or-pay off-take contracts, which otherwise would have been presented in product sales.
For the second quarter of 2020, Enviva generated gross margin of $27.7 million, as compared to $16.5 million for the corresponding period in 2019, an increase of approximately $11.2 million. Adjusted gross margin was $42.0 million for the second quarter of 2020, as compared to $28.0 million for the second quarter of 2019. Adjusted gross margin per metric ton was $49.55 for the second quarter of 2020, as compared to adjusted gross margin per metric ton of $32.26 for the second quarter of 2019. The increase in adjusted gross margin per metric ton principally was due to the favourable customer contract mix, as well as an increase in sales volumes produced by the Partnership, which had higher adjusted gross margin per metric ton, offset by a reduction in sales volumes procured from third parties, which had a lower adjusted gross margin per metric ton.
For the second quarter of 2020, net income was $8.5 million, as compared to net loss of $3.8 million for the second quarter of 2019. Adjusted net income was $8.7 million for the second quarter of 2020, as compared to adjusted net income of $7.0 million for the second quarter of 2019. Adjusted EBITDA for the second quarter of 2020 was $37.4 million, as compared to $27.0 million for the corresponding quarter of 2019. The increase was primarily due to the same factors that contributed to the higher adjusted gross margin for the second quarter of 2020.
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 and all of its customers have performed, and continue to perform, in accordance with their contracts with them.
Although the full implications of the novel coronavirus 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.
Acquisition and financing activities
On July 1, 2020, the Partnership completed the previously announced transaction to purchase a wood pellet production plant in Greenwood, S.C. from Enviva’s sponsor for cash consideration of $132.0 million and the assumption of a $40.0 million third-party promissory note. The Partnership plans to invest $28.0 million to expand the Greenwood plant’s production capacity to 600,000 metric tons per year (MTPY) by the end of 2021, subject to receiving the necessary permits.
In addition, in connection with the Greenwood Acquisition, Enviva’s sponsor assigned to the Partnership five firm, long-term, take-or-pay, fixed-price off-take contracts with creditworthy Japanese counterparties that have maturities between 2031 and 2041 and aggregate annual deliveries of 1.4 million MTPY.
On July 31, 2020, the Partnership completed the previously announced transaction to purchase a wood pellet production plant in Waycross, Ga., and a long-term terminal lease and associated services agreement at the Port of Savannah, for a purchase price of $175.0 million in cash. As part of the Georgia Biomass Acquisition, the Partnership also acquired long-term, take-or-pay off-take contracts with an existing Partnership customer for annual deliveries of approximately 500,000 MTPY through 2024.
With the Associated Off-Take Contracts and the Acquired Waycross Contracts, the Partnership’s total product sales backlog will increase by approximately $5.3 billion, on a pro forma basis as of July 1, 2020, and the production from the Greenwood plant and the Waycross plant is expected to be fully contracted through 2035. In 2021, the Acquisitions are expected to generate net loss in the range of $13.7 million to $17.7 million and adjusted EBITDA in the range of $39.0 million to $43.0 million. In 2024, once the Acquisitions and Associated Off-Take Contracts are fully ramped and integrated, the Acquisitions are expected to generate net income in the range of $18.7 million to $22.7 million and adjusted EBITDA in the range of $56.0 million to $60.0 million. On that basis, the combined purchase price for the Acquisitions, including the expected costs to expand the Greenwood plant, represents an adjusted EBITDA multiple of approximately 6.5 times.
Outlook and guidance
On June 18, 2020, in conjunction with the announcement of the Acquisitions, the Partnership provided updated guidance for full-year 2020, after accounting for the expected benefit of the Acquisitions.
The Partnership reaffirms the guidance provided on June 18, 2020 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.
Market and contracting update
The growth of the Partnership’s business continues to be driven by the commitment and significant progress made by regulators, policymakers, utilities, and power generators across the globe to phase out coal, limit the impact of climate change, and cut greenhouse gas (GHG) emissions to achieve “net-zero” by 2050.
In June 2020, the United Kingdom completed a record-breaking 67-day period without coal-fired power, representing the longest period the country has operated without coal power since the Industrial Revolution. During this period, biomass provided approximately 11 per cent of the UK’s electricity on average and up to 16 per cent on days when the availability of wind and solar was limited.
More recently, in order to end coal-fired power generation, on July 3, 2020, Germany passed legislation (the “Coal Exit Law”) that explicitly recognized the use of sustainable biomass as part of the transition. The Coal Exit Law lays out a rapid timetable to phase out hard coal by 2033 and lignite by 2038, requiring an unprecedented shut-down of 43.9 gigawatts (GW) of coal capacity operating on the grid today. Mechanisms are in place to potentially lead to an earlier final phase-out date and to deliver a EUR 40 billion support program to assist coal plant operators with shutting down capacity or converting to non-fossil fuel fired generation alternatives, including biomass.
The Netherlands Environmental Assessment Agency (PBL), after an extensive review process that involved joint fact-finding with 150 non-governmental organizations, research institutes, businesses, and other stakeholders, and testing its arguments against more than 400 scientific studies and reports, concluded in a report published in May that the country will not be able to achieve its climate targets without substantially increasing biomass utilization and that a significant role for biomass is a “prerequisite” for a climate-neutral circular economy.
In Asia, Japan’s Ministry of Economy, Trade and Industry (METI) announced in early July that the Japanese government would set policies aimed at the closure or suspension of low-efficiency coal-fired power plants by 2030 following the establishment of a framework expected by the end of 2020. Japan currently has 152 coal-fired power plants and it is estimated that approximately 100 of them, with total estimated capacity of approximately 23 to 25 GWs, may be targeted for such closure or suspension, creating new potential opportunities for recycling this infrastructure into biomass-fired renewable power generating assets.
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’s sponsor recently executed a firm, 10-year, take-or-pay off-take contract with a major, creditworthy electric utility company in Japan to supply a coal and biomass co-fired power plant. Sales under this contract are expected to commence in 2024 with annual deliveries of 120,000 MTPY of wood pellets.
Enviva’s strategy is to fully contract the wood pellet production from our plants under long-term, take-or-pay off-take contracts. As of July 1, 2020 and pro forma for the Georgia Biomass Acquisition, the Partnership’s current production capacity is matched with a portfolio of firm and contingent off-take contracts that has a total weighted-average remaining term of 12.7 years and a total product sales backlog of $15.3 billion. Assuming all volumes under the firm and contingent off-take contracts held by Enviva’s sponsor and the Sponsor JV, including the new 10-year, 120,000 MTPY off-take contract described above, were included, Enviva’s total weighted-average remaining term and product sales backlog would increase to 13.6 years and $19.7 billion, respectively. The Partnership expects to have the opportunity to acquire off-take contracts from our sponsor and the Sponsor JV.
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