Enviva reviews solid year, sees global pellet market growth
Enviva Partners LP reported solid operational performance and financial results for full year 2016, with net revenue increasing 1.5 percent from 2015 to $464.3 million, and an adjusted EBITA increase of 16 percent, or $12.4 million, from 2015, excluding the Sampson drop-down acquisition, which Enviva recognized as a major highlight of the year.
The Sampson acquisition included a wood pellet production plant in Sampson County, North Carolina, a 10-year, 420,000-metric-ton-per-year (MTPY) off-take contract with DONG Energy Thermal Power A/S, a 15-year, 95,000-MTPY offtake contract with the Hancock JV, and matching third-party shipping contracts. The Sampson plant is expected to produce approximately 500,000 MTPY of wood pellets in 2017, and to reach its full production capacity of approximately 600,000 MTPY in 2019.
CEO John Keppler said the partnership is pleased with what Enviva accomplished in 2016, the headline of which was making more tons of wood pellets at lower costs, with higher margins. He said Enviva met all of the specific and aggressive objectives it had set for 2016, which included growing adjusted EBITA substantially, and increasing production across its fleet of plants.
Keppler discussed Enviva’s sustainability initiatives, which, on top of investment in third-party certifications from sustainability organizations, includes a recently launched track-and-trace program. “To our knowledge, it’s a first-of-its-kind system not only for the pellet industry, but the broader forest products industry as a whole,” Keppler said. “This system provides complete detail of the wood we buy, where it comes from, how it was harvested, and what impact our activities have on the broader forest landscape. We think the initiative publishing the results online, in detail, provide unpresented transparency into our fiber sourcing, and the action was met with universally positive feedback across our stakeholder base.”
Keppler said the favorable reaction wasn’t a surprise, because the dataset demonstrates “there are larger, healthier forests growing in our supply area than there were before we started up.”
On growth opportunities, abroad Keppler said Enviva’s strategy continues to focus on fully contracting production capacity of the partnership, though production is fully balanced, for the foreseeable future, with current contracts. “We’re also focused on diversifying our consumer base with new potential customers in Europe and Asia….in particular, contracting to sell volume in the growing Japanese market,” he said.
Keppler outlined a few major developments in Europe, Enviva’s core market, that occurred in 2016, including: current customer DONG Energy stating it will phase out coal by 2023 and replace the fuel with biomass in all of its combined-heat-and-power generation assets; Drax receiving state aid approval for a contract for difference to convert its third unit to pellets—driving an additional demand of 2 million metric tons of wood pellets per year—and suggestions that, under the right conditions, it would convert its remaining three units to biomass over the next several years; and the Netherland’s renewable incentive program, which awarded 5 billion euros to biomass cofiring projects in 2016, and is expected to significantly increase program funding in 2017.
Keppler added that Enviva aims to capitalize on short-term market opportunities as they arise, such as the spikes in residential pellet demand. “The cold winter in Europe is increasing demand for pellets, and given their fungibility, they are increasingly migrating from the utility sector to the thermal retail sector at increased prices. A trend that, should it continue, could lead to short- and medium-term opportunities for the partnership.”
Strong growth is materializing outside of Europe, according to Keppler, particularly in Asia. “Japan continues to confirm its commitment to reducing emissions, and officially ratified the Paris climate agreement last fall,” he said, pointing to the country’s 20-year feed-in tariff (FIT) system as one driving force, which is driving “typically 50- to 100-MW new builds, sponsored by utilities and independent power producers, often in joint ventures with major trading houses, which are expected to support long-term offtakes for wood pellets for numerous projects around the country.”
He said projects totaling 3.2 gigawatts (GW) have already been approved through Japans FIT, implying market demand of more than 10 million metric tons, and that “many other projects are either awaiting approval, or are expected to apply prior to the deadline for the 2017 awards later this fall.”
Another major segment of the Japanese market is being driven by cofiring plans at major utilities seeking to comply with increasing restrictions on emissions for large coal- and fossil fuel-fired baseload generation fleets. “This segment looks and feels like the European model, and several large creditworthy sponsors like J-Power have announced projects in Japan,” Keppler said.
In South Kora, several new large-scale biomass projects have been announced, according to Keppler, increasing potential demand there to 6 million metric tons by 2020, which he said “is expected to shift the market mechanics for fulfilling demand from short-term tenders to long-term contracts.”
And while early in development, Keppler added, China has made several announcements that could quickly create a large market for wood pellets, notably, a plan to spend at least $360 billion on renewable energy through 2030, and increase in biomass-fired generation to 15 GW. “As one of the larges importers of wood and pulp, Chinese demand for wood pellets is expected to be principally important.”
In the U.S., additional port plant sites in Mississippi and Alabama are being surveyed by Enviva, as well as sites positioned around existing terminal capacity, Keppler said. Several Enviva investors have inquired about the partnership’s interest in a few of the distressed assets on the market, Keppler said, but while Enviva maintains “an open mind on opportunities, to date, much of what we’ve seen contain inherent, fatal flaws, and if they remain unremediated, it limits our enthusiasm.”
When asked whether he thought states moving forward with their own decarbonization mandates could lead to U.S. utilities, whether a customer of Enviva’s or not, becoming candidates for pellet fuel prior to the end of the decade, Keppler said, “absolutely…there are some interesting things happening here [in the U.S.]…look at activities underway in Oregon and Utah, there’s a team mindset to go and figure that one out.”