In the United States (US), Enviva Inc. has released its financial and operating results for the third quarter of 2023 and announced a comprehensive review of its capital structure to improve the company’s financial position. Enviva also announced a realignment of leadership as the company focuses on executing a multi-faceted transformation plan to address significant near-term headwinds.
Enviva’s board of directors has appointed Glenn Nunziata as interim CEO in addition to his role as CFO, succeeding Thomas Meth, who has served as CEO since November 2022.
Glenn Nunziata will focus primarily on strengthening the company’s balance sheet by partnering with advisors to execute strategic and operational initiatives that ensure sufficient capital to fund ongoing operations, meet financial covenants and advance greenfield projects.
He will also oversee all aspects of Enviva’s day-to-day operations.
I am deeply honored to become interim CEO of Enviva. Since joining Enviva approximately two months ago as CFO, I have devoted my full attention to analyzing our operations, performance, and financial profile. While we have a great deal of work to do, we are encouraged by the progress being made through our cost reduction and productivity initiatives. At the same time, we are actively addressing the Company’s cash flow and liquidity challenges as well as working with customers to renegotiate contracts. The decisive steps we are taking are expected to better position Enviva to continue leading the industrial biomass sector through its next leg of growth. We look forward to providing updates on our progress along the way, Glenn Nunziata said.
Thomas Meth will remain President and will focus his time on renegotiating existing customer contracts with the intent of improving Enviva’s profitability and returning the business to one that generates the majority of its cash flow from predictable, profitable take-or-pay contracts.
This was a disappointing quarter as our results came in meaningfully below our expectations due primarily to weakness in commercial activities. Given the significant near-term headwinds we’re addressing, I am focused on engaging with customers to ensure that our contracts reflect the value our product provides customers and returning to a business model centered on predictable, profitable take-or-pay contracts, commented Thomas Meth, President of Enviva.
Mark Coscio, Enviva’s Chief Development Officer, will assume the role of Chief Operating Officer and he will continue to lead the company’s growth projects while taking on responsibility for plant and port operations.
These leadership changes are effective as of November 9, 2023.
Higher volumes but lower revenue
Net revenue for third-quarter 2023 was US$320.6 million as compared to US$325.7 million for third-quarter 2022, a decrease of approximately 2 percent year-over-year.
Tonnes sold during the third quarter of 2023 were 1.433 million tonnes, as compared to 1.256 million tonnes during the third quarter of 2022, representing a 14 percent increase in volumes year-over-year.
Third-quarter 2023 volumes increased by approximately 10 percent as compared to second-quarter 2023, with volume uplift driven by production improvements implemented across Enviva’s plant fleet.
Net revenue for third-quarter 2023 was lower than third-quarter 2022 despite volumes sold being higher due to spot market wood pellet pricing in 2023 being well below 2022 pricing, with the average price for the three months and nine months ended September 30, 2023, approximately 51 percent and 50 percent lower, respectively, than the fourth quarter of 2022.
Net loss for third-quarter 2023 was US$85.2 million as compared to US$18.3 million for third-quarter 2022.
According to Enviva, the increase in net loss year-over-year was primarily attributable to four factors:
- US$21.2 million of asset impairment charges primarily related to shutting down a dryer line at Enviva’s Southampton, Virginia plant;
- higher interest expense, including US$22.1 million of interest expense related to repurchase accounting;
- restructuring costs, inclusive of severance expenses, of $6.3 million, and;
- higher cost of goods sold as a result of selling more volume.
Gross margin was US$14.2 million for third-quarter 2023 as compared to US$31.8 million for third-quarter 2022. The decrease in gross margin year-over-year was primarily driven by lower revenue per tonne coupled with higher cost of goods sold given more tonnes sold in third-quarter 2023 as compared to third-quarter 2022.
Gross margin per tonne for third-quarter 2023 was US$9.90 as compared to US$25.28 for third-quarter 2022, with the decrease year-over-year attributable to the same factors that impacted gross margin.
Adjusted gross margin for third-quarter 2023 was US$56.8 million as compared to US$75.4 million for third-quarter 2022. The decrease year-over-year in adjusted gross margin was primarily due to a significant reduction in pricing.
During the three months ended September 30, 2022, biomass spot market prices, as well as the forward curve pricing of certain European indices, exceeded US$400 per tonne, representing a substantial premium to the current long-term contracted pricing of roughly US$200 to US$220 per tonne across Enviva’s weighted average portfolio.
Enviva captured some of this differential during the three months ended September 30, 2022.
Lower DAP cost
Adjusted gross margin per tonne for third-quarter 2023 was US$39.66, as compared to US$59.99 for third-quarter 2022, with the reduction primarily attributable to a 17 percent decrease in sales price year-over-year, partially offset by a 9 percent decrease in fiber procurement and plant and port operating costs.
The delivered at port (DAP) cost per tonne, which includes expenses associated with the cost of goods sold excluding port terminal costs and shipping costs, were lower. For third-quarter 2023, DAP per tonne was US$152, down US$9 per tonne from US$161 per tonne reported for second-quarter 2023.
Improvement quarter-over-quarter was primarily driven by increased production along with lower fixed costs such as repairs, maintenance, and contract labor.
These DAP figures are not adjusted for net calorific value (NCV), which is a component of Enviva’s sales price related to the energy content of the fiber used in the pellets. NCV typically ranges from US$6 to US$8 per tonne in additional revenue.
When DAP figures are reflected on an NCV-adjusted basis, the cost of fiber reported is typically reduced by US$6 to US$8 per tonne.
Adjusted EBITDA for third-quarter 2023 was $36.6 million as compared to $60.6 million for third-quarter 2022.
The year-over-year decrease of US$24.0 million was primarily driven by the reduction in adjusted gross margin of US$18.5 million coupled with higher selling, general, and administrative expenses associated with financial and legal advisors.
Adjusted EBITDA for third-quarter 2023 excludes US$3.8 million of cash-based employee severance expenses incurred as part of the company’s corporate restructuring initiative.
Cash flow and liquidity
Enviva’s liquidity was US$440.7 million as of September 30, 2023, which included US$315.2 million unrestricted cash and US$125.5 million cash restricted to funding a portion of the costs of the acquisition, construction, equipping, and financing of its greenfield plants in Epes, Alabama (Epes) and near Bond, Mississippi (Bond).
As of September 30, 2023, Enviva had drawn the full amount available under its US$570.0 million senior secured revolving credit facility. As of September 30, 2023, the company was in compliance with its covenants under the senior secured revolving credit facility.
The company’s leverage ratio, as calculated under the revolving credit facility agreement, was 5.11 times, with an interest coverage ratio of 2.56 times.
According to Enviva, the construction of Epes is “progressing well” and is expected to be operational in mid-2024. Approximately 40 percent of the total investment has been made to date with the remaining investment scheduled throughout the next seven quarters.
Enviva is evaluating a potential deferral of up to 12 months related to the construction of Bond in light of ongoing liquidity management initiatives.
In connection with a broader effort to eliminate operational inefficiencies, during the third quarter of 2023, the company determined that its Southampton plant operated most cost-effectively with a single dryer line.
Therefore, it permanently shut down the second, underperforming dryer line and as a result, it recognized an impairment expense of US$21.2 million in the three and nine months that ended September 30, 2023.
The Q4 2022 Transactions
As previously disclosed, during the three months ended December 31, 2022, Enviva entered into agreements with a customer to purchase approximately 1.8 million tonnes of wood pellets between 2023 and 2025 which were priced at market prices in effect at the time of the agreements.
At that time, Enviva entered into additional wood pellet sales contracts that, together with the existing sales contracts, totaled approximately 2.8 million tonnes with deliveries between 2022 and 2026 (these new sales contracts, together with the new purchase agreements, the Q4 2022 Transactions).
However, the Q4 2022 Transactions have had a significant negative impact on the company’s profitability, cash flows, and liquidity due to the negative current spread between the sale and purchase prices of the agreements and the anticipated loss on resale of those volumes within an unfavorable pricing environment in the wood pellet spot market.
Absent a significant and near-term increase in wood pellet market pricing, Enviva expects the Q4 2022 Transactions will continue to hurt its profitability, cash flows, and liquidity through 2025.
In addition, as a result of operational challenges experienced at the Company’s plants during the first and second quarters of 2023 and a wood pellet market dynamic that has largely held market prices at levels “unsupportive of creating margin through spot purchases or spot sales”, Enviva anticipates that absent a cure, it may be in “breach of certain of its covenants under its senior secured credit facility as early as the reporting date for the measurement period ending December 31, 2023.
These conditions and events in the aggregate raise “substantial doubt regarding the Company’s ability to continue as a going concern.”
Evaluating options
The company is evaluating several potential alternatives to maintain its compliance with the covenants and restrictions under the senior secured credit facility and to alleviate the adverse liquidity impact of the Q4 2022 Transactions, including:
- Negotiating with the existing customer to restructure or renegotiate the terms of the Q4 2022 Transactions, or to seek other alternatives to mitigate the potential impact of the Q4 2022 Transactions on the company’s liquidity;
- Renegotiating the terms of existing customer contracts to improve Enviva’s profitability and to better protect against future inflation and other cost risks;
- Enviva is prioritizing high-quality, long-term contracted relationships with the intention of returning to a business model of primary cash flow generation from predictable, profitable take-or-pay contracts;
- Continuing to advance cost-reduction and productivity initiatives designed to improve the financial and operating performance of the company’s fully contracted assets;
- Engaging with Lazard, Alvarez & Marsal, and Vinson & Elkins LLP in a comprehensive review of alternatives to enhance Enviva’s capital structure (including debt maturities in 2026), augment liquidity, address contractual liabilities, and increase long-term profitability.
Withdrawing previous full-year 2023 guidance
Due to the liquidity factors and comprehensive review outlined above, together with lower commercial activity in the third quarter of 2023 and the first part of the fourth quarter of 2023, the company is withdrawing previous sales price per tonne, net loss, adjusted EBITDA, and total capital expenditures guidance for 2023 and future years.
Enviva generally experiences an uptick in biomass consumption in the fourth quarter of each year as winter heating demand coupled with seasonal impacts to the amount of solar and wind energy available to power grids drives higher commercial value and allows the company to capitalize on increased wood pellet demand and higher spot prices.
This dynamic, which was particularly pronounced in the fourth quarter of 2022, has not materialized to date in 2023, Enviva is therefore expecting a significantly lower sales price per tonne in the fourth quarter of 2023.
As a result, it is expecting a significantly higher net loss, lower sales price per tonne, and lower adjusted EBITDA for full-year 2023 as compared to full-year 2022, and from what was included in our prior guidance.
Additionally, Enviva anticipates that fourth-quarter 2023 results, excluding any impacts from the Q4 2022 Transactions, could potentially be weaker than results for third-quarter 2023, as higher spot prices have not materialized while it expects to incur higher sales, general, and administrative expenses associated with the engagement of financial and legal advisors in connection with the aforementioned review.
In terms of total capital expenditures, the company is “being extremely vigilant with cash management while navigating through leverage and liquidity headwinds.”
Enviva remains focused on investing in the construction of Epes and the development of Bond, as well as maintaining the health of its current fleet of plants for optimal production as it believes the cash flow contribution of its greenfield plants is important to its path forward, and therefore intends to maintain momentum in a disciplined way; however, it will continually re-evaluate all material capital expenditures.
