Enviva reports production increase, lower fiber costs for Q1

By Katie Fletcher | May 09, 2016

On May 5, Enviva Partners LP released its first quarter financial and operating results, with Chairman and CEO John Keppler noting that as Enviva just completed its first year as a public company, it has established an early track record of increasing distribution every quarter, and with strong operational performance, expects to continue to do so while building coverage throughout the year.

Keppler said momentum continued through the winter, where the company has historically seen a high cost quarter due to seasonality given colder, wetter weather. The quarter’s results, according to Keppler, lays a strong foundation for the remainder of the year and the company continues to expect to distribute at least $2.10 per unit for 2016.

“In what is historically our highest cost quarter, our underlying operating performance was strong,” said Stephen Reeves, executive vice president and CFO with Enviva LP, on the investor call. “Our production was up and fiber operating costs were down compared to last year, and although we sold fewer tons due to ship timing and inventory carry-in, the underlying fundamentals reflect our commitment to continuous improvement.”

For the first quarter of 2016, Enviva LP generated net revenue of $107.3 million on sales of 560,000 metric tons of wood pellets, representing a decrease of 6 percent, or $7.1 million, from the corresponding quarter of 2015 with net revenue of $114.3 million on 583,000 metric tons sold. “The reduction in net revenue is a function of lower sales volume, the mix of FOB versus CIF shipments compared to last year and pricing,” Reeves said.

Enviva LP generated net income for quarter one 2016 of $7.5 million compared to $2.5 million for the corresponding quarter in 2015. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) improved to $18.5 million in the first quarter of 2016, a 10 percent increase compared to the corresponding period in 2015. “The improvement in adjusted EBIDTA from the corresponding quarter of last year was a function of improved operational performance somewhat offset by higher general and administrative expenses associated with being a public company,” Reeves said.

Gross margin increased $4.1 million to $15.8 million for the first quarter of 2016 as compared to the corresponding quarter of 2015. Reeves stated this was “principally driven by a favorable cost position of our delivered pellets as a result of increased plant utilization and lower fiber costs, lowered depreciation and amortization, increased revenue from purchase and sale transactions, and the termination payment ($1.7 million) from a supplier.” This was partially offset by contract mix and lower sales volumes for the quarter, primarily due to lower carry-in inventory balances at the beginning of the year.

Keppler began the call by commenting on the current status of upcoming pellet projects. “Forecast demand continues to outstrip available supply, underpinning our primary driver of long-term cash flow growth, new contracts and drops of newly built, contracted production plants and ports developed by our sponsor,” he stated.

Keppler added that two of these are on the near-term horizon, the 515,000-metric-ton-per-year Sampson Plant and the deep-water marine terminal in Wilmington, North Carolina, which he provided an update on during the quarter four 2015 and year-end financial earnings call. “The Sampson plant has begun commissioning, in fact, wood deliveries begin next week, and we expect to have the opportunity to acquire the Sampson plant along with a 10-year offtake contract with an affiliate of DONG Energy in late 2016 and the Wilmington terminal in 2017,” he said. “In addition our sponsor recently received the air permit required to construct our next plant, the 500,000-ton-per-year facility in Hamlet County, North Carolina, that, when completed, will ship the pellets it produces through the Wilmington terminal.”

Keppler also provided investors with a market and contracting update on the earnings call. Enviva LP is fully contract for 2016, with a portfolio of contracted sales weighted average remaining term of seven years from April 1, 2016. This excludes sales under the partnership’s 15-year contract to supply MGT Power’s Teeside Renewable Energy plant in the U.K., the 10-year contract to the Langerlo facility in Belgium and the 10-year contract with an affiliate of DONG Energy hold by the sponsor. According to Keppler, Enviva LP is about 85 percent contracted for 2017, not including the Langerlo contract, which due to the owner filing for insolvency, the company expects, at a minimum, delay in the commencement of wood pellet deliveries under the offtake contract.

As for the markets, Keppler said, in the U.K., the Competition and Markets Authority recommended that the U.K. government, which has announced plans of phasing out all coal-fired power generation by 2025, allocate future new contract for difference (CfD) auctions based on the cost-effectiveness of the renewable technology. “If this recommendation is adopted by the U.K. government, new biomass conversion and cofiring projects could be positioned to receive future CfD incentives, especially if total system costs of renewable technologies are taken into account, which is currently under discussion within the U.K. government,” Keppler stated. “In addition, the U.K. government confirmed that biomass combined heat and power projects would be eligible to compete for new CfD incentives in an auction planned for late 2016, which may result in additional industrial-scale pellet demand.”

Keppler noted that in the Netherlands, the first of two rounds of applications in 2016 for the renewable incentive program (SDE+) commenced in March. Biomass cofired projects are eligible for the incentive and applied for the renewable incentive program and more are believed to apply in the second round in September. The program received a significant budge boost from 3.5 billion euros ($3.99 billion) in 2015 to 8 billion euros for 2016. Adding to this momentum is the possibility of the country considering an eventual phase-out of coal-fired power generation.

Energetický a průmyslový holding (EPH), a vertically integrated energy utility with operations throughout Europe, continues to move forward with plans to convert the 420 MW Lynemouth coal facility to wood pellet fuel by the end of 2017. After conversion, this project is expected to generate demand for approximately 1.5 million tons of wood pellets annually.

A few other markets were mentioned as well. “In Japan, some are now expecting demand for wood pellets to grow to 10 million tons per year by 2030 due to government’s drive to reduce carbon emission and replace nuclear power generation,” Keppler said. In the Caribbean, Keppler added, French power plant developer Albioma has announced a 40 MW biomass power conversion with operation expected in 2017. “Island nations in this region, as well as the South Pacific and Indian oceans have a high cost of electricity, as much as $47 per kWh using very environmentally challenging fuel sources like imported diesel and heavy fuel oil,” Keppler said. He stated that this could be an interesting emerging customer set.

Stateside, even though the Clean Power Plan is still continuing its path through the courts, biomass policy is gaining important foot holds, according to Keppler. “The U.S. senate recently passed a bill with significant bipartisan support to classify biomass as carbon neutral, consistent with EU policy and a preponderance of peer-reviewed science,” he stated. Keppler added that the state of Oregon recently passed legislation that makes biomass immediately part of its renewable portfolio standard, as well as plans to phase out use of coal by 2030 and mandates 50 percent of the states’ power come from renewable sources by 2040.

“While we were pleased with our accomplishments, I’m even more excited for the future,” Keppler said. “We are just getting started. The tailwinds behind conversions and cofiring are strong both in our core European market and other geographies.  We believe this demand along with stable cash flows built on strong operating performance from our contracted asset base and conservative financial policies will enable us to continue to increase our per unit distributions in 2016 and beyond.”