Enviva Q3 results highlight increasing demand in core markets

By Katie Fletcher | November 07, 2016

On Nov. 3, Enviva Partners LP announced financial and operating results for the third quarter of 2016, reporting that despite a decrease in wood pellet sales revenue from the corresponding quarter of last year, the demand for wood pellets continues to grow, driven by recent developments in Enviva’s core markets.

Company chairman and CEO, John Keppler, shared a few of these market and contracting updates, including opportunities with new customers across Europe and Asia. Keppler began by mentioning the Paris climate agreement, which is now legally binding as of Nov. 4, and it’s been signed and ratified by 85 countries to date, including those in the European Union and the U.S. Japan isexpected to ratify the agreement before the end of the year.

Japan has emerged as a potential market opportunity for producers like Enviva. Nearly 3.2 GW of biomass-fired capacity have been approved through Japan’s 20-year feed-in tariff (FIT) program, of which approximately 500 MW are already commissioned. The Japanese government has set a 2030 biomass-fired capacity target of between 6 and 7.5 GW.

During the Q&A session toward the end of the earnings call, Keppler shared that Enviva’s Asian customers reside primarily in two jurisdictions, South Korea and Japan, and that “its sponsor continues to invest heavily in Asia, with resources now in Tokyo,” he said.

South Korea has been consuming roughly 1.5 to 2 million tons per year for the last several years under its renewable portfolio standard (RPS), which principally drives cofiring pellets alongside coal to meet its binding renewable obligations. In Japan, the country is focused on incremental capacity development, Keppler said. He added that Japan is not only short against its binding renewable energy obligation expectations, but also capacity giving the outcome of the Fukushima nuclear disaster.

As a result, Keppler stated that there are customers like Sumitomo Corp. and Mitsubishi investing alongside independent power producers and the major utilities in new distributed generation (typically power plants of 100 MW to 200 MW) distributed across the Japanese islands under the 20-year FIT system. He said these are new builds and projects, some of which are already online, principally procuring wood pellets from British Columbia and some volumes from Southeast Asia. Keppler sounded optimistic that Enviva may be able to take part in supplying the marketplace, however. “The preponderance of that growth is expected to come from the Southeast U.S., with a very stable marginal cost curve for the growing demand, one that we expect to receive roughly about 10 million tons per year in an as-built set of capacity,” he said.

According to the company, right now, they are able to deliver at cost parity. “That’s principally driven by the relative fiber advantage in the Southeast U.S., and the robust forestry sources that provide for that stability on a long-term basis and, frankly, driven by the ability for us to deliver under long-term contracted positions with our shipping partners into Asia,” Keppler said. He added that over time, in addition to the match of those volumes from places like BC, the marginal cost curve is very different in BC versus Southeast U.S. “In the BC market, it is principally based around sawmill residuals, so the supply of material able to be produced into wood pellets is inherently limited by the production profile, and one that I would say is declining in BC of that byproduct material,” Keppler explained. “The incremental cost of acquiring that ton of fiber in BC is just much more exorbitant than we see in the Southeast U.S.”

Today, Enviva’s business model is much more driven around the underlying level of harvesting activity that has continued to supply excess growth to drain ratio resulting in a very flat marginal cost curve, Keppler noted. “I would add that the increase in sustainability requirements that the Japanese market is seeing over the South Korean market, make places like the Southeast U.S., where we lead in sustainably certification and the ability to document the supply chain and generate products sustainably, provides for a durable competitive advantage as well,” he said.

For Japan’s FIT Program, the government receives applications from qualified projects, and those deadlines are within the first half of the year, so the company expects to describe more fully the opportunities and the specified contracted positions it’s expected to realize during the course of the first half next year.

Beyond Asia, other market developments in Europe were discussed. The Netherlands second and final round of 2016 applications under its renewable incentive program (SDE+) commenced in September, with 5 billion euros ($5.56 billion) in funding available—the budget for the second round increased from 4 billion euros after the first round was oversubscribed. First round funding was awarded to several biomass cofiring, dedicated biomass heat and combined-heat-and-power (CHP) projects, a total of 2.5 billion euros in subsidies. Several utility-scale projects are eligible for the program and expected to apply for second round funding.

On the U.K. front, its parliament agreed to an amendment that extends the government’s powers to award new contract for difference incentives for new low-carbon energy projects out to 2026, compared to the original end date of 2020 outlined in the 2013 Energy Act. According to Enviva, this “confirms the U.K. government’s intention to continue to award long-term contracts to new renewable energy projects well into the future.”

Keppler also noted the partnership’s finalization of its 15-year contract with the Hancock JV to supply 375,000 metric tons per year to MGT Power’s Teeside Renewable Energy Plant in the U.K. in August. Deliveries under the contract are expected to commence in 2019, ramp up to full supply by 2021, and continue through 2034.

Enviva also has a firm offtake contract to supply 800,000 tons per year to the other upcoming biomass power generation plant in the U.K., the Lynemouth facility. This facility is expected to commence in 2017.

Denmark-based DONG Energy began substituting wood pellets for coal at its 350 MW Studstrup unit 3 CHP plant and is testing wood pellets at its 215 MW Avedore unit 1 CHP plant. Once fully ramped up, the two units are expected to have the capacity to consume up to 1.1 million metric tons per year of wood pellets.

The recent acquisition announcement of the Sampson, North Carolina, pellet plant was mentioned several times on the call. The Sampson plant is a party to a 10-year, 420,000 metric-ton-per-year offtake contract with an affiliate of DONG Energy; a 15-year, 95,000 metric-ton-per-year offtake contract with the Hancock JV; and matching third-party shipping contracts. The partnership expects the transaction to close around Jan. 3, subject to customary closing conditions. After completion of the Sampson acquisition, the weighted average remaining term of the partnership’s offtake contracts would extend to 9.7 years as of Jan. 1.

The Sampson plant is expected to produce approximately 500,000 metric tons per year of wood pellets in 2017 and to reach its full production capacity of approximately 600,000 metric tons per year in 2019.

In regards to Enviva’s sponsor activity, construction of the deep-water marine terminal in Wilmington, North Carolina, is substantially complete. The partnership expects to have the opportunity to acquire the Wilmington terminal in 2017. The sponsor is also currently completing the detailed design for a build-and-copy replica of the Sampson plant in Hamlet, North Carolina, and is evaluating additional production capacity investments at its sites in Lucedale, Mississippi, and Abbeville, Alabama, as well as other sites positioned to take advantage of the existing terminal capacity at the Port of Chesapeake and Port of Wilmington. In addition, the sponsor continues to evaluate its option to build and operate a marine export terminal at the Port of Pascagoula, Mississippi, according to the company.

Net revenue of the third quarter of 2016 was $109.8 million representing a decrease of 5.8 percent over the corresponding quarter of 2015. Pellet sales revenue was $102.6 million on sales of 534,000 metric tons of pellets for the third quarter of 2016, a decrease of $12.5 million from the corresponding quarter of 2015 of $115.1 million on 602,000 tons sold. “The decrease was driven by the timing and product delivered to our customers,” stated Stephen Reeves, company CFO. “We also had a partially deferred shipment which accounts for the actual results and the preliminary results provided in October.”

Other revenue of $5.7 million, due primarily to a payment from a third-party pellet producer, who because it was unable to meet the volume, quality and sustainability requirements of its counterparty, had committed to purchase a series of shipments from Enviva to supply into its own offtake contract. The third-party pellet producer then requested to delay, and ultimately cancel, the remaining shipments of wood pellets from Enviva in return for a $5.7 million make-whole payment.

For the third quarter of 2016, gross margin increased to $22.9 million, an improvement of $6.3 million from the corresponding period in 2015, and Enviva generated net income of $13 million compared to $8.8 million for the corresponding quarter in 2015. Adjusted EBITDA improved to $25.5 million in Q3 of 2016, a 28.9 percent increase compared to the corresponding period in the prior year. The increases in gross margin, net income and adjusted EBITDA were driven by increased other revenue, partially offset by lower wood pellet sales volumes as a result of shipment timing.

The partnership now expects full-year 2016 net income to be in the range of $34 million to $36 million, while adjusted EBITDA is now expected to be in or slightly above the range of $86 million to $88 million.