Enviva Q2 results highlight long-term offtake pellet contracts

On Aug. 4, Enviva Partners LP announced financial and operating results for the second quarter of 2016, reporting an increase in net income, quarterly distribution and overall outlook for the remainder of the year, driven by higher wood pellet sales volumes. The partnership reported its pellet volumes are fully contracted for 2016 and its current capacity of 2.3 million metric tons per year is matched with a portfolio of offtake contracts that has a weighted-average remaining term of eight years from July 1. John Keppler, chairman and CEO of the partnership, emphasized during the earnings call that Enviva’s current production capacity is “substantially balanced with its sales book for the foreseeable future.”

Keppler began the call by stating the quarter’s results demonstrate the stability of the company’s contracted cash flow position. “Our business is underpinned by robust, long-term, take-or-pay energy supply contracts with large, credit-worthy counterparties that contain strong provisions designed to preserve the stability of our cash flows over long periods of time and insulate the partnership from volatility—be that from crude oil swings or political issues like Brexit,” he said. “Bottom line is that they work and our business is able to distribute stable and growing cash flow to our investors without the volatility and fossil fuel exposure experienced in the traditional energy sector.”

For the second quarter of 2016, Enviva Partners generated net revenue of $119.7 million, an increase of 9.2 percent, or $10 million, from the comparable period in 2015. A majority of this net revenue came from $116.2 million in product sales on 620,000 metric tons of wood pellets, an increase in volume from quarter two during the prior year due to shipment timing, but partially offset by a higher percentage of free on board (FOB) shipments, which exclude shipping from revenue and cost of goods sold. Net revenue of $107.3 million on sales of 560,000 metric tons of wood pellets was reported in the first quarter of the year.

Net income increased from $2.9 million in quarter two of 2015 to $12 million this year. A 23 percent hike to $23.5 million from $19.1 million in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was also reported for quarter two of 2016. These increases were driven by higher wood pellet sales volumes under long-term, take-or-pay contracts; increased other revenue, primarily derived from shipment purchased and sold to third parties; and lower general and administrative expenses, partially offset by contract pricing mix. According to the company, the cost position of its delivered wood pellets was consistent between periods, driven by plant utilization and raw material costs.

Enviva Partners updated its full-year 2016 guidance due to better-than-expected performance during the first half of the year. The partnership now expects net income to range between $40 million and $42 million and adjusted EBITDA in the range of $86 million and $88 million, excluding any impact of potential drop-downs or other acquisitions.

Keppler began discussing the current market opportunities for Enviva’s pellets by identifying Europe as the market leader that continues to drive the bulk of the demand for industrial wood pellets underpinned by the supportive regulatory framework at the EU and individual country levels.

The aforementioned eight-year weighted-average remaining contract term includes the recently announced 9.5-year contract to supply 800,000 metric tons per year to Lynemouth Power Ltd., but excludes potential sales under Enviva Partners’ 15-year contract to supply MGT Power’s Teeside Renewable Energy plant in the U.K., which continues toward financial close. Keppler shared that the contract with MGT is an approximately 1 million-ton-per-year contract with 375,000 tons per year provided by the partnership. In May, MGT Power appointed the consortium led by Samsung as its preferred bidder for design, engineering and construction of the plant. According to Keppler, firm deliveries under this contract are estimated to begin in 2019 and continue through 2034.

The market and contracting update Enviva Partners shared during the earnings call included mention of other activity in Europe. Subsidiaries of Graanul Invest Group announced the purchase of the Langerlo power station in Genk, Belgium, and its intent to convert the power station from coal to biomass. “This sale greatly improves the likelihood that the plant will be converted,” Keppler stated. Some reasons for this are that the power station has received a subsidy from the Flemish government to support the conversion and the project is a critical component of Belgium’s plan for meeting its binding European Union renewable energy consumption requirements. Enviva disclosed that it’s in discussions with Graanul to potentially supply a portion of the Langerlo power station’s wood pellet fuel needs, which is expected to be 1.8 million metric tons per year commencing in the second half of 2018.

This follows Enviva entering into an offtake contract with an affiliate of German Pellets GmbH that had the intention of using Enviva’s pellets at the Langerlo power station. As a result of the sale to Graanul, however, Enviva Partners stated it’s unlikely that the contract counterparty will perform its obligations under the contract and, although the company intends to preserve all of its rights against its counterparty, they do not expect its counterparty to take deliveries of wood pellets under it.

Another topic Keppler covered in his market discussion was progress in the Netherlands with the government awarding several biomass cofiring, dedicated biomass heat and combined-heat-and-power projects a total of 2.5 billion euros ($2.8 billion) in subsidies in the first two rounds of applications for the 2016 renewable incentive program SDE+. RWE- and Engie-owned biomass cofiring projects were amongst the initial recipients. The overall budget for the program had already been substantially increased to 8 billion euros for 2016 up from 3.5 billion euros in the prior year. However, the budget for the second round of applications (open from September through October 2016) was increased further to 5 billion euros from 4 billion after the first round was significantly oversubscribed.

Also on the European front, Keppler noted that in late June the European parliament voted in favor of increasing the European Union’s target for renewable energy to at least 30 percent by 2030. “Sending a clear message to the European Commission to be more ambitious than the 27 percent level currently binding on the EU when the commission brings the proposal forward at the end of the year,” he said.

Also, Keppler mentioned that a tender was issued in Belgium to support the establishment of new biomass units up to 20 MW in total capacity with dedicated government support lasting up to 20 years, and applications are expected by November of this year.

In addition, the U.K. government announced its 5th carbon budget with a target of 57 percent reduction in emissions from the 1990 levels by 2030. “It’s important to note that this announcement was after the Brexit results, confirming the U.K.’s commitments to its climate change goals and notably even more stringent than those of the EU,” Keppler stated during the earnings call.

Keppler said he believes capital markets were surprised by the outcome of the recent referendum of the U.K. on its EU membership, and it certainly created some volatility in the financial market. Even so, within industry, “it seems to be largely business as usual for the biomass power generators in the U.K.,” he stated. “The ROCs and CfD’s, the primary mechanisms received by our customers in the U.K., are entrained in U.K. law, not based on EU regulation and we do not expect Brexit to impact our firm, long-term offtake contracts.”

Outside of Europe, Enviva Partners expects significant demand to materialize in Asia. “Because of the cost advantage in fiber baskets in the Southeast U.S., we believe our cost position, including shipping to Asia, is cost competitive or even cost advantaged when compared to more proximate wood pellet producers,” Keppler said. He added that the Japanese market, in particular, appears to be maturing quickly, seeking long-term contracts driven by the 20-year feed-in-tariff system in place to incentivize carbon reductions and replace nuclear power generation.

Enviva’s quarter two sponsor activity included news that construction of the 515,000 metric-ton-per-year plant in Sampson County, North Carolina, and deep-water marine terminal in Wilmington is nearing completion. According to Keppler, they expect to assume full operational control of the Sampson plant later this month and for the first vessel to load at Wilmington terminal in October. The partnership also expects the opportunity to acquire the Sampson plant, along with its sponsor’s 10-year offtake contract with an affiliate of DONG Energy later this year and the Wilmington terminal next year. Another sponsor activity mentioned was an agreement with the Jackson County Port Authority granting an option to build and operate a marine export terminal at the Port of Pascagoula, Mississippi.

Enviva announced prior to the earnings call that its increased distribution over the previous quarter. A quarterly distribution of 53 cents per common and subordinated unit for the second quarter of 2016 was reported, representing a 15 cent, or 2.9 percent, increase from the partnership’s first quarter distribution.

Keppler closed the earnings call by stating, “We continue to demonstrate the durability of our cash flow portfolio derived from our long-term offtake contracts and the strong operational performance exhibited by our fleet of fully contracted production and terminal facilities.”