BETHESDA, Md.–(BUSINESS WIRE)–Enviva Partners, LP (NYSE: EVA) (“Enviva,” the “Partnership,” or “we”) 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 percent from the corresponding quarter of 2019
- The Partnership completed the previously announced Greenwood and Georgia Biomass Acquisitions and associated financing
- The Partnership declared a quarterly distribution of $0.765 per unit for the second quarter of 2020, an increase of 15.9 percent from the corresponding quarter of 2019
- 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 our take-or-pay off-take contracts, which otherwise would have been presented in product sales.
For the second quarter of 2020, we 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 favorable 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. Distributable cash flow, prior to any distributions attributable to incentive distribution rights paid to our general partner, was $25.9 million for the second quarter of 2020, as compared to $17.2 million for the corresponding quarter of 2019.
As of June 30, 2020, the Partnership had $98.1 million of cash on hand and no borrowings outstanding under its $350.0 million senior secured revolving credit facility.
The Partnership continues to report that, to date, our operating and financial results have not been materially impacted by the outbreak of a novel strain of coronavirus and all of our customers have performed, and continue to perform, in accordance with their contracts with us.
Although the full implications of the novel coronavirus are not yet known, we have contingency and business continuity plans in place that we 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, South Carolina (the “Greenwood plant”) from our sponsor for cash consideration of $132.0 million and the assumption of a $40.0 million third-party promissory note (the “Greenwood Acquisition”). 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 (the “Greenwood Expansion”).
To support the Partnership during its completion of the Greenwood Expansion, our sponsor agreed to (i) waive certain management services and other fees that otherwise would be owed by the Partnership through December 31, 2021 and (ii) continue to waive certain management services and other fees that otherwise would be owed by the Partnership if the Greenwood plant’s actual production volumes are lower than expectations (such waivers, the “Fee Waivers”). Our sponsor also has agreed to reimburse the Partnership for any construction costs incurred for the Greenwood Expansion in excess of $28.0 million.
In addition, in connection with the Greenwood Acquisition, our sponsor assigned to the Partnership five firm, long-term, take-or-pay, fixed-price off-take contracts (the “Associated 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, Georgia (the “Waycross plant”) 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 (the “Georgia Biomass Acquisition” and, together with the Greenwood Acquisition, the “Acquisitions”). As part of the Georgia Biomass Acquisition, the Partnership also acquired long-term, take-or-pay off-take contracts with an existing Partnership customer (the “Acquired Waycross Contracts”) 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.
To finance the Acquisitions, on June 18, 2020, the Partnership signed a purchase agreement for the sale of an aggregate of 6,153,846 common units in a private placement (the “Equity Offering”) in exchange for gross proceeds of $200.0 million at a purchase price of $32.50 per unit, representing a 5.6% discount to the 20-day volume-weighted average price of the Partnership’s common units as of June 17, 2020. The Equity Offering closed on June 23, 2020. In addition, on June 29, 2020, the Partnership, with its wholly owned subsidiary Enviva Partners Finance Corp., announced the offering of an additional $150 million in aggregate principal amount of its 6.5% senior unsecured notes due 2026 (the “Additional Notes”) in a private placement to eligible purchasers. The Partnership priced the Additional Notes at an offering price of 103.75% of the principal amount, which implied an effective yield to maturity of approximately 5.7%. The Additional Notes offering closed on July 15, 2020.
“Our ability to close the Equity Offering at a tight discount and the Additional Notes offering at a strong premium in volatile market conditions demonstrates an increasing recognition by the capital markets of the underlying strength of the Partnership’s business,” said Shai Even, Chief Financial Officer of Enviva. “We appreciate the support from our growing and increasingly ESG-focused investor base and remain committed to maintaining our conservative financial policies and our 50/50 equity/debt capital structure for drop-downs and acquisitions.”
The board of directors of our general partner (the “Board”) declared a distribution of $0.765 per common unit for the second quarter of 2020. This distribution represents the twentieth consecutive distribution increase since the Partnership’s initial public offering. The Partnership’s distributable cash flow, net of amounts attributable to incentive distribution rights paid to our general partner, of $18.4 million for the second quarter of 2020 covers the distribution for the quarter at 0.61 times. The quarterly distribution will be paid on Friday, August 28, 2020, to unitholders of record as of the close of business on Monday, August 17, 2020.
When determining the distribution for a quarter, the Board evaluates the Partnership’s distribution coverage ratio on an annual basis, after taking into consideration its expected distributable cash flow, net of expected amounts attributable to incentive distribution rights paid to our general partner, for the full year.
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. The Partnership also continues to expect to distribute at least $3.00 per common unit for full-year 2020, before considering the benefit of any additional acquisitions or drop-down transactions, and to target a distribution coverage ratio of 1.20 times on a forward-looking annual basis.
The guidance amounts provided above, including the distribution expectations, include the benefit of the Acquisitions and the Fee Waivers and reflect the associated financing activities. The guidance amounts provided above do not include the impact of any additional acquisitions by the Partnership from our sponsor, its joint venture (the “Sponsor JV”), or third parties. The Partnership’s quarterly income and cash flow are subject to seasonality and the mix of customer shipments made, which vary from period to period. Similar to previous years, the Partnership expects net income, adjusted EBITDA, and distributable cash flow for the second half of 2020 to be significantly higher than for the first half of the year.
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 (the “UK”) 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% of the UK’s electricity on average and up to 16% 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 (“GWs”) 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.
Our 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 our sponsor and the Sponsor JV, including the new 10-year, 120,000 MTPY off-take contract described above, were included, our 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.
The Partnership and its sponsor continue to prioritize efforts to safeguard and enhance the sustainability of wood pellet production in the United States. This ensures the long-term availability of the forest resources in our production areas while also creating a reputation for environmental best practice among policymakers and our customers.
As part of our commitment to supply chain transparency, on June 5, 2020, our sponsor released its Track & Trace® data for the third and fourth quarters of 2019. In an effort to continue to drive improvements in this industry-leading program, our sponsor is underway with a project to convert this platform to blockchain technology to provide additional data integrity and chain of custody verification around the origin and characteristics of our feedstock.
On May 6, 2020, our sponsor published a white paper led by its Chief Sustainability Officer, Dr. Jennifer Jenkins, which provides an overview of the scientific basis for using bioenergy to mitigate climate change, including a framework for defining “good” and “bad” biomass. This white paper can be found on the Enviva website along with an accompanying webinar recording that expands on the topics covered in the paper.
In July 2020, we shared a recent independent study by Boundless Impact Investing (“Boundless Impact”), a third-party research firm specializing in climate analytics for investors. Boundless Impact initially was retained by one of our largest unitholders to evaluate the carbon impact of wood pellet energy and sustainability of our supply chain. We found its work of such high quality that we retained the firm to conduct a deeper analysis to enable its report to be peer reviewed and shared widely. In its report, Boundless Impact reviewed the estimated lifecycle GHG emissions reduction benefit of generating electricity using sustainable wood pellets produced in the United States. The report estimates GHG savings of 87% and 71% compared to electricity generation with coal and natural gas, respectively. Such GHG emissions reductions are estimated by Boundless Impact to further improve to 94% and 82%, respectively, in combined heat and power applications in the UK.
Since announcing its 2020 Responsible Sourcing Policy Implementation Plans earlier this year, our sponsor has made substantial progress toward its goals. As our sponsor reported in its 2020 Mid-Year Report on July 31, to date in 2020, it has added nearly 9,000 acres to the certified land base in our sourcing regions, helped to fund projects conserving 2,500 additional acres of bottomland hardwood forests through the Enviva Forest Conservation Fund, and announced a five-year partnership with the Longleaf Alliance to restore forests.
Partnership Development Activities
Our wood pellet production plant in Hamlet, North Carolina has proven its expected 600,000 MTPY capacity and we expect it to exit 2020 at this run rate.
The Partnership has begun commissioning certain fully constructed new process islands as part of its project to increase the production capacity of its wood pellet production plant in Northampton, North Carolina and similarly expects to begin the commissioning process for its project to increase the production capacity of its wood pellet production plant in Southampton, Virginia over the next several months (collectively, the “Mid-Atlantic Expansions”). The benefit of the commissioning volumes and incremental production from the Mid-Atlantic Expansions in 2020 is included in the Partnership’s updated guidance. The Partnership expects to benefit fully from the estimated incremental annual adjusted EBITDA of approximately $28 to $32 million associated with the 400,000 MTPY increased production from the Mid-Atlantic Expansions during 2021.
In addition, procurement and detailed engineering activities for the Greenwood Expansion are well underway and, subject to receiving the necessary permits, the expansion remains on track for completion by year-end 2021.
Sponsor Development Activities
As our sponsor announced on July 22, 2020, it recently completed a series of transactions with a diverse group of global investors that recapitalized the company (the “Recapitalization”). The Recapitalization includes approximately $300 million in new equity commitments that are available to finance our sponsor’s substantial pipeline of future growth projects. The Partnership expects these projects to be made available to the Partnership for drop-down acquisition under its existing purchase rights agreement with our sponsor.
“Our sponsor has played a critical role underwriting the growth profile of the Partnership by developing, de-risking, and making fully contracted production and terminal assets available for highly accretive drop-down acquisitions to the benefit of our common unit holders,” said Keppler. “With substantial new equity available for building new assets in our core business, we expect our sponsor to be similarly supportive of the Partnership’s growth long into the future.”
Our sponsor and the Sponsor JV continue to progress the development of wood pellet production plants and marine terminals, which the Partnership expects to have the opportunity to acquire along with the related off-take contracts, including by:
- Constructing a wood pellet production plant in Lucedale, Mississippi (the “Lucedale plant”) and a deep-water marine terminal in Pascagoula, Mississippi (the “Pascagoula terminal”). Civil work continues at both the Lucedale plant and Pascagoula terminal sites with construction work ramping up. The sponsor expects the construction of the Lucedale plant and the Pascagoula terminal to be completed mid-year 2021.
- Developing a wood pellet production plant in Epes, Alabama, with a final investment decision and pre-construction activities expected around the end of 2020.
Evaluating additional sites for wood pellet production plants in Alabama and Mississippi, the production of which would be exported through the Pascagoula terminal.
We will host a conference call with executive management related to our second quarter 2020 results and a more detailed market update at 10:00 a.m. (Eastern Time) on Thursday, August 6, 2020. Information on how interested parties may listen to the conference call is available on the Investor Relations page of our website (www.envivabiomass.com). A replay of the conference call will be available on our website after the live call concludes.
About Enviva Partners, LP
Enviva Partners, LP (NYSE: EVA) is a publicly traded master limited partnership that aggregates a natural resource, wood fiber, and processes it into a transportable form, wood pellets. The Partnership sells a significant majority of its wood pellets through long-term, take-or-pay off-take contracts with creditworthy customers in the United Kingdom and Europe. The Partnership owns and operates nine plants with a combined production capacity of approximately 4.9 million MTPY in Virginia, North Carolina, South Carolina, Georgia, Mississippi, and Florida. In addition, the Partnership exports wood pellets through its marine terminals at the Port of Chesapeake, Virginia and the Port of Wilmington, North Carolina and from third-party marine terminals in Savannah, Georgia, Mobile, Alabama, and Panama City, Florida.
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