Enviva reports financials for Q2/2018 and reveals new off-take contracts
US-based Enviva Holdings, LP (Enviva) the world’s largest producer of wood pellets, has released its financial statement for the second quarter 2018. It reveals continued cash flow growth despite the Chesapeake Terminal fire incident, new off-take contracts to the UK and Japan as well as production capacity increases. Combining the weighted average of all contract volumes would increase the remaining term and sales backlog to 11.7 years and almost double the current value, to US$12.2 billion.
According to a statement, the company increased revenue through increased pellet sales and volume compared to the same period in 2017 – sales of US$129.7 million on a volume of 699 000 tonnes of pellets during the second quarter of 2018, as compared to US$121.7 million on a volume of 628 000 tonnes during the corresponding quarter of 2017.
Higher sales volumes and lower production costs achieved during the second quarter of 2018 were offset by lower other revenue, lower pricing driven by customer contract mix, as well as expenses incurred related to the Chesapeake Terminal fire incident at the end of February 2018.
Enviva’s financial performance for the second quarter of 2018 was impacted by unrecovered business continuity costs related to the incident during the period, but “substantially all of the costs” resulting from the incident are expected to be recovered through insurance or other contractual rights in subsequent quarters. The terminal is back in operation as of the end of June.
Furthermore, Enviva points out that it has continued to meet every customer delivery required under its off-take agreements since the Chesapeake incident and, although the specific quarterly timing of shipments have been and likely will be affected by the incident, it expects to meet all of its contractual requirements for the full year of 2018.
New long-term take-or-pay contracts
Enviva revealed that it has recently extended its relationship with Drax Power Ltd in the UK by executing a firm, take-or-pay off-take contract to supply 650 000 tonnes-per annum starting in 2022 and continuing through 2026. Drax is currently converting its fourth unit at its Selby power station to run on pellets.
Enviva also revealed that it has concluded a 15-year, 180 000 tonnes-per-annum take-or-pay off-take contract commencing in 2022 with “a major Japanese trading house” to supply a new power plant in Japan, subject to certain conditions precedent, which it expects to be met in 2018.
Furthermore, that its sponsor executed two new take-or-pay off-take contracts with Sumitomo Corporation to supply a total of 520 000 tonnes-per-annum to new biomass power plants in Japan. These new contracts include a firm 15-year, 270 000 tonnes-per-annum contract commencing in 2022 and a second 15-year, 250 000 tonnes-per annum contract commencing in 2021, subject to certain conditions precedent, which Enviva expects to be met in 2018.
Significant policy drivers
According to Enviva, the strong growth expected in global demand for industrial-grade wood pellets is demonstrated by several recent significant events in the established European market and the rapidly developing Asian market.
- In the EU, the Renewable Energy Directive II (RED II) framework, including a binding EU-wide target share for renewables of 32 percent in the energy mix by 2030, up from the target of 20 percent by 2020. The agreement also reconfirmed that energy generated from biomass counts towards the renewable energy target and is eligible for support mechanisms.
- In Germany, a highly anticipated official task force, the Special Commission on Growth, Structural Economic Change, and Employment, will determine the approach for the phase-out of coal-fired generation.
- In the UK, the National Infrastructure Commission, in its recently published National Infrastructure Assessment, called for renewable generation to make up 50 percent of the country’s electricity systems by 2030.
- In Japan, the Japanese government approved the country’s fifth Strategic Energy Plan prepared by the Ministry of Economy, Trade, and Industry. In addition to confirming renewable energy’s target share of 22 to 24 percent in Japan’s 2030 energy mix, the plan designated renewables, including biomass, as a main source of power generation, indicating a major shift in government policy that recognizes renewable energy’s role as a baseload power source.
Increasing production capacity
Enviva also provided updates on its joint ventures between affiliates of its sponsor and John Hancock Life Insurance Company. The First Hancock JV, a 600 000 tonnes-per-annum plant currently under construction in Hamlet, North Carolina (NC) is expected to be operational in the first half of 2019.
The Greenwood facility in South Carolina (SC), the Second Hancock JV, a facility that was acquired at the beginning of 2018 from The Navigator Company, currently produces pellets for Enviva under a take-or-pay off-take contract. The plan is to increase production capacity to 600 000 tonnes-per-annum subject to receiving necessary permits.
In addition, the Second Hancock JV also continues to progress the development of a deep-water marine terminal in Pascagoula, Mississippi (MS) and a pellet production plant in Lucedale, Mississippi (MS) to serve growing demand from Asian and European customers. A final investment decision by the JV on these facilities is expected in late 2018 or early 2019.
Furthermore, the Second Hancock JV recently executed option agreements to potentially acquire development sites for wood pellet production plants in Epes, Alabama (AL) and Taylorsville, Mississippi (MS). Enviva says it expects to have the “opportunity to acquire” these assets from its sponsor and its joint ventures with John Hancock.
Doubling product sales backlog value
The company’s sales strategy continues to be to fully contract the production capacity with a “diversified, strong credit quality customer base.” Enviva says that its current production capacity is matched with a portfolio of firm off-take contracts that has a weighted-average remaining term of 8.5 years and a US$6.3 billion product sales backlog as of August 1, 2018, which includes the recently executed contract with Drax.
Assuming all volumes under the firm and contingent off-take contracts held by Enviva, its sponsor, and its joint ventures were included, the weighted-average remaining term and product sales backlog would increase to 11.7 years and US$12.2 billion, respectively. Enviva also expects to have the “opportunity to acquire” these contracts from its sponsor and joint ventures.