Enviva provides second quarter earnings, development update

By Katie Fletcher | July 30, 2015

On July 30, Enviva Partners LP released its second quarter financial results, reporting revenue of $109.7 million, an increase of 60 percent over the corresponding quarter in 2014, on sales of 560,000 metric tons of pellets.

“The market for our products has been growing rapidly,” said John Keppler, chairman and CEO of Enviva. “The demand for utility-grade wood pellets was about 12 million tons last year, an increase of approximately 20 percent over the prior year.” Keppler added that the market is forecasted to grow at roughly 20 percent through 2020.

He began the investor call by providing background on Enviva Partners, the company’s future outlook and why Enviva’s customers are investing in biomass. The partnership closed its initial public offering (IPO) in May of this year.

Keppler stated that although progress has been made in the EU on the 20/20 goal, there are many shortfalls in meeting requirements. “Shortfall problems are not going away, and in some jurisdictions it’s only becoming more challenging,” he said. “Fortunately converting existing coal assets to dedicated or cofiring biomass assets provides a quick and cost-effective solution to the challenge of meeting these binding renewable levels, but without the reliability issues inherent to solar and wind.”

He said on the call that customers like Drax and others choose to enter into long-term—often 10 or more year—take-or-pay contracts with Enviva because unlike coal, global wood pellets supply is not adequate for the growing demand and there are few suppliers of any scale. “With our cost advantage, processing and terminal assets throughout the southeast U.S., we’re on track to deliver more than 2 million tons this year to power generators in Europe and increasingly in Asia and the U.S.,” Keppler said.

Steve Reeves, chief financial officer of Enviva Partners, shared the quarters financial results on the call stating that the second quarter demonstrated solid run-rate performance for the current business. The $109.7 million in revenue was up $41.1 million from quarter two of the prior year. “The increases in revenue was a result of fulfillment under contracts we assumed as part of the Cottondale acquisition, increased fulfillment under existing offtake agreements and one shipment under a new contract,” Reeves said. “The increased sales enabled production from our Cottondale facility as well as improved throughput from our existing facilities.”

Adjusted earnings before interest, depreciation, taxes and amortization (EBIDTA) improved to $16 million on reported net income of $1 million for the second quarter of 2015, from $5.2 million in the corresponding quarter of the prior year, or a 210 percent increase. This increase was attributed to higher product sales as well as improved cost position and a favorable mix of offtake and shipping contracts.

The increase in net income was partially offset by increases in general and administrative expenses, largely due to forming and being a public company and costs associated with higher sales volumes.

The partnership’s distributable cash flow for the post-IPO portion of the second quarter was $10.7 million. The company said that had it been public for the full quarter, distributable cash flow would have amounted to $12.4 million.

Highlighted in the quarter two earnings was the declaration that the company was making an initial quarterly cash distribution of 26 cents per unit and maintained a strong balance sheet with $76.7 million of cash for future growth.

Besides its quarterly results, Enviva Partners provided 2015 outlook and guidance. For the second half of 2015, Enviva projects earned income in the range of $11.5 million to $13.5 million, adjusted EBIDTA in the range of $30 million to $32 million, maintenance capital expenditures in the range of $1.5 million to $2 million and interest expense net of amortization of debt issuance costs and original issue discount of $4.7 million. Reeves stated that the partnership expects to generate distributable cash flow of $23 million to $25 million for the second half of 2015.

Keppler rounded off the earnings call discussing various development activity with the partnership’s sponsor and by providing a market outlook for the company’s growing demand overseas. “When we think longer term, we think about growth,” he stated on the earnings call. “We expect a preponderance of our growth to come from drop downs from our sponsor. Here we look to acquire fully contracted replicas of our long-life production plants and deep-water marine terminals in order to materially increase our per unit distributions overtime.”

Enviva Partners’ sponsor, through its joint venture with affiliates of John Hancock Life Insurance Company, owns and operates a fully operational 510,000-metric-ton-per-year wood pellet production plant in Southampton County, Virginia, from which the partnership currently purchases pellets at its Port of Chesapeake terminal. On the call, Keppler stated that the sponsor made a proposal regarding the potential acquisition of the Southampton plant, together with a 10-year, 500,000-metric-ton-per-year offtake has been formed in response to evaluate the proposal. This follows the announcement that there was interest of the sponsor selling the plant in the fourth quarter of this year, during the company’s quarter one earnings call.

Keppler said the Southampton plant is essentially a copy of the North Hampton facility with a current capacity of 510,000 metric tons per year. That facility is fully operational with an offtake contract with Drax.

In addition to the Southampton plant, Keppler said, the company’s sponsor is constructing another 500,000-metric-ton-per-year wood pellet plant and also a deep-water export terminal in the Wilmington, North Carolina, region. At the port, the first of two storage domes was inflated last month and the second was inflated this week. “Our sponsor advises that it continues to expect the facilities to be operational in the first quarter of next year,” Keppler said.

A draft permit was also received for its Hamlet production facility, a building copy replica, which when constructed will ship its 500,000 tons of production via rail to the sponsor’s Port of Wilmington terminal. “That continued development activity is an important part of Enviva’s growth platform and to the industry as a whole, where the supply chain generally isn’t keeping up with the potential demand profile of our customers,” Keppler stated on the call.

Several recent announcements and actions in key markets highlighted the growth potential in the industry Enviva Partners serves. Keppler said the combination of new large-scale biomass plants currently moving forward in the U.K., all of which have received a U.K. government-backed, long-term contract for difference (CfD) will add several million tons of new demand to the market.

An example provided in the earnings was affiliates of Macquarie Bank Ltd. recently signing an agreement to support MGT Power Limited in the financing of the 299-MW Teesside Renewable Energy Plant, which has received a U.K. government-supported CfD. The EU completed its state-aid review process for the CfD earlier this year, and MGT announced its intent to reach financial close on the project by the end of the year, according to the release. This project is expected to consume more than 1 million tons of wood pellets annually, commencing in 2018.

The EU state-aid review processes are currently underway for the CfDs that the U.K. government has awarded to RWE’s 420 MW Lynemouth coal facility, which is expected to generate approximately 1.5 million tons of new wood pellet demand, and to Drax’s ongoing biomass conversion of a third coal unit at its power station. The U.K. government recently confirmed that both the Lynemouth and Drax projects are eligible for the renewable obligation certificate (ROC) subsidy as an alternative to their CfDs should they decide to opt for this route and reach commercial operation before March 31, 2017. “We believe this is an important confirmation by the government on the importance of these biomass conversions to the U.K.,” Keppler said. “When you add this U.K. demand to what we see happening in the Netherlands where several utility-led, large-scale biomass cofiring projects and a number of biomass-based industrial steam projects are bidding for new government-backed contracts, there is pretty clear visibility and approximately 7 million tons of new demand over the next several years in just these two markets.”

Keppler added that Enviva Partners also sees growth in other parts of Europe, Asia and the U.S. from broader utility heating and retail sectors. “We and our sponsor are in active negotiations for additional fuel supply contracts principally for these next major utility conversions for which deliveries will begin in late 2017,” Keppler said. “In an industry that is growing at approximately 20 percent per year we expect to not only re-contract the volumes within our portfolio, but also for our sponsor to enter into material additional volumes that underpin its capacity development activities and provide a foundation and opportunities for longer term growth for the partnership.”