ENVIVA INC. OnDecember 31, 2021 ,Enviva Partners, LP (the "Partnership") converted from aDelaware limited partnership to aDelaware corporation (the "Conversion") named "Enviva Inc. " References to "Enviva ," the "Company," "we," "us," or "our" refer to (i)Enviva Inc. and its subsidiaries for the periods following the Conversion and (ii) the Partnership and its subsidiaries for periods prior to the Conversion, except where the context otherwise requires. References to common units for periods prior to the Conversion refer to common units of the Partnership, and references to common stock for periods following the Conversion refer to shares of common stock ofEnviva Inc. As a result of the Conversion, the primary financial impact to the consolidated financial statements contained herein consisted of (i) reclassification of partnership capital accounts to equity accounts reflective of a corporation and (ii) income tax effects. References to "our former sponsor" or "Holdings" refer toEnviva Holdings, LP , and, where applicable, its wholly owned subsidiariesEnviva MLP Holdco, LLC andEnviva Development Holdings, LLC . References to "our former GP" refer toEnviva Partners GP, LLC , formerly a wholly owned subsidiary of Holdings. The following discussion and analysis should be read in conjunction with Management's Discussion and Analysis ("MD&A") in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 as filed with theU.S. Securities and Exchange Commission (the "SEC"). Our 2021 Form 10-K contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates. You should also read the following discussion and analysis together with the risk factors set forth in the 2021 Form 10-K, Item 1A. "Risk Factors" and the factors described under "Cautionary Statement Regarding Forward-Looking Information" and Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q for information regarding certain risks inherent in our business.
Basis of Presentation
The following discussion about matters affecting the financial condition and results of operations of the Company should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this report and the audited consolidated financial statements and related notes that are included in the 2021 Form 10-K. Among other things, those financial statements and the related notes include more detailed information regarding the basis of presentation for the following information.
C-Corporation Conversion
We converted from aDelaware limited partnership to aDelaware corporation effectiveDecember 31, 2021 ; consequently, results for periods prior toDecember 31, 2021 reflectEnviva as a limited partnership, not a corporation. The primary financial impacts of the Conversion to the consolidated financial statements were (i) reclassification of partnership capital accounts to equity accounts reflective of a corporation and (ii) income tax effects. On the date of the Conversion, each common unit representing a limited partner interest in the Partnership issued and outstanding immediately prior to the Conversion was exchanged for one share of common stock of the Company, par value$0.001 per share. Simplification Transaction OnOctober 14, 2021 , the Partnership acquired our former sponsor and the former GP, and the incentive distribution rights held by our former sponsor were cancelled and eliminated (collectively, the "Simplification Transaction") in exchange for 16.0 million common units, which were distributed to the owners of our former sponsor. In connection with the Simplification Transaction, we acquired certain assets under development, as well as off-take contracts in varying stages of negotiation. Additionally, our existing management services fee waivers (the "MSA Fee Waivers") and other support agreements with our former sponsor were consolidated, fixed, and novated to certain owners of our former sponsor. Under the consolidated support agreement, we are entitled to receive quarterly payments (the "Support Payments") in an aggregate amount of$55.5 million with respect to periods from the fourth quarter of 2021 through the first quarter of 2024. The consolidated financial statements have been retroactively recast to reflect the Simplification Transaction as if the Simplification Transaction occurred onMarch 18, 2010 , the date on which Holdings was originally organized, instead ofOctober 14, 2021 , the closing date of the Simplification Transaction.
Business Overview
We develop, construct, acquire, and own and operate, fully contracted wood pellet production plants where we aggregate a natural resource, wood fiber, and process it into dry, densified, uniform pellets that can be effectively stored and transported around the world. We primarily sell our wood pellets through long-term, take-or-pay off-take contracts with creditworthy customers in theUnited Kingdom , theEuropean Union , andJapan , who use our pellets to displace coal and other fossil fuels to generate renewable power and heat as part of their efforts to accelerate the energy transition from conventional energy 22 -------------------------------------------------------------------------------- generation to renewable energy generation. Increasingly, our customers are also using our pellets as renewable raw material inputs to decarbonize hard-to-abate sectors like steel, cement, lime, chemicals, and aviation fuels. Collectively, the wood pellets we produce are viewed by our customers as a critical component of their efforts to reduce life-cycle greenhouse gas emissions in their core energy generation or industrial manufacturing processes, and mitigate the impact of climate change. We own and operate ten plants (collectively, "our plants") with a combined production capacity of approximately 6.2 million metric tons ("MT") of wood pellets per year ("MTPY") inVirginia ,North Carolina ,South Carolina ,Georgia ,Florida , andMississippi , the production of which is fully contracted, with many of our contracts extending well into the 2040s. We export our wood pellets to global markets through our deep-water marine terminal at thePort of Chesapeake, Virginia , terminal assets at thePort of Wilmington, North Carolina and thePort of Pascagoula, Mississippi , and from third-party deep-water marine terminals inSavannah, Georgia ,Mobile, Alabama , andPanama City, Florida . InJuly 2022 , we commenced construction of our fully contracted wood pellet production plant inEpes, Alabama (the "Epes plant"). All of our facilities are located in geographic regions with low input costs and favorable transportation logistics. Owning these cost-advantaged assets in a rapidly expanding industry provides us with a platform to generate stable and growing cash flows. Our plants are sited in robust fiber baskets providing stable pricing for the low-grade fiber used to produce wood pellets. Our raw materials are byproducts of traditional timber harvesting, principally low-value wood materials, such as trees generally not suited for sawmilling or other manufactured forest products, and tree tops and limbs, understory, brush, and slash that are generated in a harvest. Our sales strategy is to fully contract the wood pellet production from our plants under long-term, take-or-pay off-take contracts with a diversified and creditworthy customer base. Our long-term off-take contracts typically provide for fixed-price deliveries that often include provisions that escalate the price over time and provide for other margin protection. For 2022, our production capacity from our wood pellet production plants is contracted under our existing long-term, take-or-pay off-take contracts. Our largest customers use our wood pellets as a substitute fuel for coal in dedicated biomass or co-fired coal power plants. Wood pellets serve as a suitable "drop-in" alternative to coal because of their comparable heat content, density, and form. Due to the uninterruptible nature of our customers' fuel consumption, our customers require a reliable supply of wood pellets that meet stringent product specifications. We have built our operations and assets to deliver and certify the highest levels of product quality and our proven track record of reliable deliveries enables us to charge premium prices for this certainty. In addition to our customers' focus on the reliability of supply, they are concerned about the combustion efficiency of the wood pellets and their safe handling. Because combustion efficiency is a function of energy density, particle size distribution, ash/inert content, and moisture, our customers require that we supply wood pellets meeting minimum criteria for a variety of specifications and, in some cases, provide incentives for exceeding our contract specifications. Recent Developments
Product Sales Contracted Backlog
Our volumes under our firm and contingent long-term, take-or-pay off-take contracts provide for a product sales backlog of$21.7 billion and have a total weighted-average remaining term of 14.2 years fromJuly 1, 2022 . This amount includes forward prices related to variable consideration including inflation, foreign currency, and commodity prices. Also, this amount includes the effects of the related foreign currency derivative contracts.
Financing Activities
InJune 2022 , we amended our senior secured revolving credit facility to extend the maturity date fromApril 2026 toJune 2027 , and to increase the maximum Total Leverage Ratio (as defined in the credit agreement) from 5.00:1.00 to 5.50:1.00 (and from 5.25:1.00 to 5.75:1.00 during a Material Transaction Period (as defined in the credit agreement)).
New Markets Tax Credit ("NMTC") Loans
InJune 2022 , we borrowed$42.0 million where the net proceeds are generally restricted to funding a portion of the costs of the acquisition, construction, equipping, and financing of theEpes plant. The NMTC financing accrues interest at a weighted average rate of 2.9% per annum. Of the$42.0 million ,$34.1 million matures in its entirety inJune 2029 , while$7.9 million could be prepaid quarterly starting in 2029 and through 2052.
Issuance of Common Shares
InJanuary 2022 , we issued 4,945,000 shares of common stock at a price of$70.00 per share for total net proceeds of$332.8 million , after deducting$13.4 million of issuance costs. We intend to use the net proceeds of$332.8 million to fund a portion of our capital expenditures related to ongoing development projects. 23 --------------------------------------------------------------------------------
Tax-Exempt Green Bond Offering
InJuly 2022 , theIndustrial Development Authority of Sumter County, Alabama issued its Exempt Facilities Revenue Bonds (the "Tax-Exempt Green Bonds") in the aggregate principal amount of$250.0 million . The proceeds of the offering were loaned to us pursuant to a Loan and Guaranty Agreement constituting a senior unsecured obligation to fund a portion of the costs of the acquisition, construction, equipping, and financing of theEpes plant and to pay costs of the offering. The Tax-Exempt Green Bonds, which were issued at par, bear interest at an annual rate of 6%, and mature in 2052, with the option for holders to redeem at par in 2032.
Factors Impacting Comparability of Our Financial Results
Omicron Variant of Novel Coronavirus
During the three months endedMarch 31, 2022 , the Omicron variant of COVID-19 significantly impacted our operations and resulted in$15.2 million of incremental costs. Our contractors and supply chain partners experienced labor-related and other challenges associated with COVID-19 that had a more pronounced than anticipated impact on our operations and project execution schedule. In addition, the prevalence of the Omicron variant of COVID-19 and increased rates of infection across areas in which we operate affected the availability of healthy workers from time to time at our facilities and we experienced increased rates of absence in our hourly workforce as workers who contracted COVID-19 quarantined at home. These absences contributed to reduced facility availability and, in some cases, reduced aggregate production levels. For more information about the effects of COVID-19 on the six months endedJune 30, 2022 , please see below under "Results of Operations."
How We Evaluate Our Operations
Adjusted Net Income (Loss)
We define adjusted net income (loss) as net income (loss) excluding acquisition and integration costs and other, early retirement of debt obligation, effects of COVID-19 and the war inUkraine , and Support Payments. We believe that adjusted net income (loss) enhances investors' ability to compare the past financial performance of our underlying operations with our current performance separate from certain items of gain or loss that we characterize as unrepresentative of our ongoing operations.
Adjusted Gross Margin and Adjusted Gross Margin per Metric Ton
We define adjusted gross margin as gross margin excluding loss on disposal of assets, equity-based compensation and other expense, depreciation and amortization, changes in unrealized derivative instruments related to hedged items, acquisition and integration costs and other, effects of COVID-19 and the war inUkraine , and Support Payments. We define adjusted gross margin per metric ton as adjusted gross margin per metric ton of wood pellets sold. We believe adjusted gross margin and adjusted gross margin per metric ton are meaningful measures because they compare our revenue-generating activities to our cost of goods sold for a view of profitability and performance on a total-dollar and a per-metric ton basis. Adjusted gross margin and adjusted gross margin per metric ton primarily will be affected by our ability to meet targeted production volumes and to control direct and indirect costs associated with procurement and delivery of wood fiber to our wood pellet production plants and our production and distribution of wood pellets.
Adjusted EBITDA
We define adjusted EBITDA as net income (loss) excluding depreciation and amortization, interest expense, income tax expense (benefit), early retirement of debt obligation, equity-based compensation and other expense, loss on disposal of assets, changes in unrealized derivative instruments related to hedged items, acquisition and integration costs and other, effects of COVID-19 and the war inUkraine , and MSA Fee Waivers and Support Payments. Adjusted EBITDA is a supplemental measure used by our management and other users of our financial statements, such as investors, commercial banks, and research analysts, to assess the financial performance of our assets without regard to financing methods or capital structure.
Distributable Cash Flow
We define distributable cash flow as adjusted EBITDA less cash income tax
expenses, interest expense net of amortization of debt issuance costs, debt
premium, and original issue discounts, and maintenance capital expenditures. We
use distributable cash flow as a performance metric to compare our
cash-generating performance from period to period and to compare the
cash-generating performance for specific periods to the cash dividends (if any)
that are expected to be paid to our shareholders. We do not rely on
distributable cash flow as a liquidity measure.
24
--------------------------------------------------------------------------------2021 Non-Recast Presentation
The three and six months endedJune 30, 2021 were calculated on a recast basis in accordance with accounting principles generally accepted inthe United States ("GAAP") to reflect the consolidated performance ofEnviva and our former sponsor as ifEnviva had bought the former sponsor at inception instead ofOctober 14, 2021 , the closing date of the Simplification Transaction. In addition, we are also presenting results for the three and six months endedJune 30, 2021 , calculated on a non-GAAP basis that combines (i) the actual performance ofEnviva for the three and six months endedJune 30, 2021 on a non-recast basis, and (ii) our consolidated performance, calculated on a recast basis in accordance with GAAP, inclusive of the assets and operations acquired as part of the Simplification Transaction, for the three and six months endedJune 30, 2021 (the "Non-Recast Presentation"). We believe the Non-Recast Presentation provides investors with relevant information to evaluate our financial and operating performance because it reflectsEnviva's actual and historically reported performance on a stand-alone basis and on a consolidated basis for the three and six months endedJune 30, 2021 .
The Non-Recast Presentation does not reflect the recast of our historical results required under GAAP due to the Simplification Transaction and accordingly contains non-GAAP measures. Unless expressly stated otherwise, all results are presented on a recast basis.
Limitations of Non-GAAP Financial Measures
Adjusted net income (loss), adjusted gross margin, adjusted gross margin per metric ton, adjusted EBITDA, and distributable cash flow, as well as our Non-Recast Presentation, are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures provides useful information to investors in assessing our financial condition and results of operations. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measures. Each of these non-GAAP financial measures has important limitations as an analytical tool because they exclude some, but not all, items that affect the most directly comparable GAAP financial measures. You should not consider adjusted net income (loss), adjusted gross margin, adjusted gross margin per metric ton, adjusted EBITDA, or distributable cash flow, or our Non-Recast Presentation, in isolation or as substitutes for analysis of our results as reported in accordance with GAAP. Our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. Please see above for a reconciliation of the Non-Recast Presentation to the Recast Presentation and below for a reconciliation of each of adjusted net income (loss), adjusted gross margin and adjusted gross margin per metric ton, adjusted EBITDA, and distributable cash flow to the most directly comparable GAAP financial measure. Results of Operations Three Months EndedJune 30, 2022 Compared to Three Months EndedJune 30, 2021 Three Months Ended June 30, 2022 2021 (Recast) Change (in thousands) Product sales$ 293,615 $ 271,242 $ 22,373 Other revenue 2,706 14,721 (12,015) Net revenue 296,321 285,963 10,358 Cost of goods sold, excluding items below 250,276 234,564 15,712 Loss on disposal of assets 2,282 1,701 581 Selling, general, administrative, and development expenses 27,704 34,548 (6,844) Depreciation and amortization 28,833 23,179 5,654 Total operating costs and expenses 309,095 293,992 15,103 Loss from operations (12,774) (8,029) (4,745) Interest expense (13,959) (17,481) 3,522 Other (expense) income, net (611) 399 (1,010) Net loss before income tax benefit (27,344) (25,111) (2,233) Income tax benefit (2) (260) 258 Net loss$ (27,342) $ (24,851) $ (2,491) 25
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Net revenue
Revenue related to product sales for wood pellets produced or procured by us increased to$293.6 million in the three months endedJune 30, 2022 from$271.2 million in the three months endedJune 30, 2021 . The$22.4 million , or 8%, increase was primarily attributable to a 16% increase in average sale price per MT, partially offset by a 7% decrease in product sales volumes for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 . The increase in average sales price per MT was primarily due to addressing dislocations in our customers' and other producers' supply chains, rescheduling certain contracted deliveries into future periods, enabling prompt deliveries to other customers requiring incremental deliveries at elevated spot pricing. Recent biomass spot market prices, as well as the forward curve pricing of certain European indices, have exceeded$300 per MT, representing a substantial premium to the current long-term contracted pricing of roughly$200 to$220 per MT acrossEnviva's weighted average portfolio, and we have been able to capture some of that differential during the three months endedJune 30, 2022 . The decrease in product sales volumes was primarily due to the timing of shipments that has resulted in an increase in finished goods inventory and less volumes procured from third parties to fulfill product sales during the three months endedJune 30, 2022 than during the three months endedJune 30, 2021 . The decrease in procured volumes was due to a lower availability of third-party pellets resulting from the war inUkraine and related sanctions. Other revenue for the three months endedJune 30, 2022 and 2021 included$1.5 million and$13.2 million , respectively, in payments to us for adjusting deliveries under our take-or-pay off-take contracts, which otherwise would have been included in product sales and which was recognized under a breakage model based on when the pellets would have been loaded.
Cost of goods sold
Cost of goods sold increased to$250.3 million for the three months endedJune 30, 2022 from$234.6 million for the three months endedJune 30, 2021 , an increase of$15.7 million , or 7%. The increase in cost of goods sold was primarily a result of incremental fiber procurement and energy costs. In addition, we incurred incremental cost of goods sold from the on-going ramp of theLucedale plant and the commencement of operations ofEnviva's new deep-water marine terminal inPascagoula, Mississippi (the "Pascagoula terminal").
Adjusted gross margin and adjusted gross margin per metric ton
Three
Months Ended
2022 2021 (Recast) Change
(in thousands, except per metric ton)
Reconciliation of gross margin to adjusted gross margin
and adjusted gross margin per metric ton:
Gross margin(1) $ 16,816 $ 27,824 $ (11,008)
Loss on disposal of assets 2,282 1,701 581
Equity-based compensation and other expense 567 568 (1)
Depreciation and amortization 26,948 21,872 5,076
Changes in unrealized derivative instruments 2,145 (362) 2,507
Acquisition and integration costs and other (244) 72 (316)
Support Payments 6,236 - 6,236
Adjusted gross margin $ 54,750 $ 51,675 $ 3,075
Metric tons sold 1,275 1,367 (92)
Adjusted gross margin per metric ton $ 42.94 $ 37.80 $ 5.14 (1)Gross margin is defined as net revenue less cost of goods sold (including related depreciation and amortization and loss on disposal of assets).
We earned adjusted gross margin of$54.8 million , or$42.94 per MT, for the three months endedJune 30, 2022 compared to$51.7 million , or$37.80 per MT, for the three months endedJune 30, 2021 . The increase in adjusted gross margin was primarily due to the aforementioned increase in net revenue, as well as due to the increase in Support Payments for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 , partially offset by the aforementioned increase in cost of goods sold. 26 --------------------------------------------------------------------------------
Selling, general, administrative, and development expenses
Selling, general, administrative, and development expenses were$27.7 million and$34.5 million for the three months endedJune 30, 2022 and 2021, respectively. Selling, general, administrative, and development expenses include costs to develop new markets, corporate and other overhead expenses, and costs of developing new plants or ports (for those that have not yet met the capitalization threshold or costs that are not eligible for capitalization). Once the plant or port is placed in-service, the expenses of a plant or port are classified as cost of goods sold. The$6.8 million decrease in total selling, general, administrative, and development expenses is primarily associated with decreased cash-based compensation and related expenses primarily due to the elimination of activities resulting from the Simplification Transaction.
Depreciation and amortization
Depreciation and amortization expense were$28.8 million and$23.2 million for the three months endedJune 30, 2022 and 2021, respectively, primarily due to theLucedale plant,Pascagoula terminal, and expansion assets placed in service during 2022. Interest expense We incurred$14.0 million and$17.5 million of interest expense during the three months endedJune 30, 2022 and 2021, respectively. The decrease in interest expense from the prior year was primarily attributable to a lower cost of borrowing due to the extinguishment of the higher rate senior secured green term loan facility as part of the Simplification Transaction.
Income tax
We recorded an insignificant and
Adjusted net loss
Three Months Ended June 30,
2022 2021 (Recast) Change
(in thousands)
Reconciliation of net loss to adjusted net loss:
Net loss $ (27,342) $ (24,851) $ (2,491)
Acquisition and integration costs and other 3,591 1,338 2,253
Support Payments 6,236 - 6,236
Adjusted net loss $ (17,515) $ (23,513) $ 5,998
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Adjusted EBITDA
Three Months Ended June 30,
2022 2021 (Recast) Change
(in thousands)
Reconciliation of net loss to adjusted EBITDA:
Net loss $ (27,342) $ (24,851) $ (2,491)
Add:
Depreciation and amortization 28,833 23,179 5,654
Interest expense 13,959 17,481 (3,522)
Income tax benefit (2) (260) 258
Equity-based compensation and other expense 9,763 7,504 2,259
Loss on disposal of assets 2,282 1,701 581
Changes in unrealized derivative instruments 2,145 (362) 2,507
Acquisition and integration costs and other 3,592 1,338 2,254
Support Payments 6,236 - 6,236
Adjusted EBITDA $ 39,466 $ 25,730 $ 13,736
We generated adjusted EBITDA of $39.5 million for the three months ended June
30, 2022 compared to $25.7 million for the three months ended June 30, 2021 . The
$13.7 million increase was primarily attributable to the factors described above
under the headings "Adjusted gross margin and adjusted gross margin per metric
ton" and "Selling, general, administrative, and development expenses."
Distributable cash flow
The following is a reconciliation of adjusted EBITDA to distributable cash flow:
Three Months Ended June 30,
2022 2021 (Recast) Change
(in thousands)
Reconciliation of adjusted EBITDA to distributable cash flow
attributable to Enviva :
Adjusted EBITDA $ 39,466 $ 25,730 $ 13,736
Less:
Interest expense, net of amortization of debt issuance
costs, debt premium, and original issue discount 13,348 16,075 (2,727)
Maintenance capital expenditures 4,787 3,940 847
Distributable cash flow attributable to Enviva Inc. 21,331 5,715 15,616
Less: Distributable cash flow attributable to incentive distribution rights
- 10,708 (10,708)
Distributable cash flow attributable to
$ 21,331
28
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The following table presents a reconciliation of net loss to adjusted EBITDA and
distributable cash flow for the three months ended June 30, 2021 , on a recast
basis and non-recast basis:
Three Months Ended June 30, 2021
Recast Adjustments Non-Recast
(in millions)
Net (loss) income $ (24.8) $ 27.5 $ 2.7
Add:
Depreciation and amortization 23.2 (0.9) 22.3
Interest expense 17.4 (4.7) 12.7
Income tax benefit (0.2) 0.2 -
Equity-based compensation and other expense 7.5 (4.8) 2.7
Loss on disposal of assets 1.7 - 1.7
Changes in unrealized derivative instruments (0.4) - (0.4)
Acquisition and integration costs and other 1.3 (0.4) 0.9
MSA Fee Waivers - 6.3 6.3
Adjusted EBITDA 25.7 23.2 48.9
Less:Interest expense, net of amortization of debt issuance costs, debt premium, and original issue discount
9.8 2.2 12.0
Maintenance capital expenditures 3.9 - 3.9
Distributable cash flow $ 12.0 $ 21.0 $ 33.0 The following is a reconciliation of net loss to adjusted EBITDA and
distributable cash flow for the three months ended
Three Months Ended June 30,
2022 2021 Change
(in millions)
Net (loss) income $ (27.3) $ 2.7 $ (30.0)
Add:
Depreciation and amortization 28.8 22.3 6.5
Interest expense 14.0 12.7 1.3
Equity-based compensation and other expense 9.8 2.7 7.1
Loss on disposal of assets 2.3 1.7 0.6
Changes in unrealized derivative instruments 2.1 (0.4) 2.5
Acquisition and integration costs and other 3.6 0.9 2.7
Support Payments and MSA Fee Waivers 6.2 6.3 (0.1)
Adjusted EBITDA 39.5 48.9 (9.4)
Less:Interest expense, net of amortization of debt issuance costs, debt premium, and original issue discount
13.3 12.0 1.3
Maintenance capital expenditures 4.8 3.9 0.9
Distributable cash flow $ 21.4 $ 33.0 $ (11.6)
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Results of Operations
Six Months Ended
Six Months Ended June 30,
2022 2021 (Recast) Change
(in thousands)
Product sales $ 524,527 $ 495,772 $ 28,755
Other revenue 4,776 31,812 (27,036)
Net revenue 529,303 527,584 1,719
Cost of goods sold, excluding items below 461,312 432,266 29,046
Loss on disposal of assets 3,183 3,345 (162)
Selling, general, administrative, and development
expenses 61,395 65,890 (4,495)
Depreciation and amortization 51,392 44,700 6,692
Total operating costs and expenses 577,282 546,201 31,081
Loss from operations (47,979) (18,617) (29,362)
Interest expense (23,929) (30,858) 6,929
Other (expense) income, net (727) 508 (1,235)
Net loss before income tax expense (benefit) (72,635) (48,967) (23,668)
Income tax expense (benefit) 14 (941) 955
Net loss $ (72,649) $ (48,026) $ (24,623)
Net revenue
Revenue related to product sales for wood pellets produced or procured by us
increased to $524.5 million in the six months ended June 30, 2022 from $495.8
million in the six months ended June 30, 2021 . The $28.8 million , or 6%,
increase was primarily attributable to a 12% increase in average sale price per
MT, partially offset by a 6% decrease in product sales volumes for the six
months ended June 30, 2022 as compared to the six months ended June 30, 2021 .
The increase in average sales price per MT was primarily due to addressing
dislocations in our customers' and other producers' supply chains, rescheduling
certain contracted deliveries into future periods, enabling prompt deliveries to
other customers requiring incremental deliveries at elevated spot pricing.
Recent biomass spot market prices, as well as the forward curve pricing of
certain European indices, have exceeded $300 per MT, representing a substantial
premium to the current long-term contracted pricing of roughly $200 to $220 per
MT across Enviva's weighted average portfolio, and we have been able to capture
some of that differential during the six months ended June 30, 2022 .
The decrease in product sales volumes was primarily due to the timing of
shipments that has resulted in an increase in finished goods inventory and less
volumes procured from third parties to fulfill product sales during the six
months ended June 30, 2022 than during the six months ended June 30, 2021 . The
decrease in procured volumes was due to a lower availability of third-party
pellets resulting from the war in Ukraine and related sanctions. For the three
months ended March 31, 2022 , product sales revenue from produced volumes were
dampened as a result of labor-related and other challenges associated with
COVID-19 experienced by our employees, contractors, and supply chain partners
that, in some cases, resulted in curtailment of our operations that had a more
pronounced than anticipated impact on our operations and project execution.
Other revenue for the six months ended June 30, 2022 and 2021 included $2.3
million and $29.3 million , respectively, in payments to us for adjusting
deliveries under our take-or-pay off-take contracts, which otherwise would have
been included in product sales and which was recognized under a breakage model
based on when the pellets would have been loaded.
Cost of goods sold
Cost of goods sold increased to$461.3 million for the six months endedJune 30, 2022 from$432.3 million for the six months endedJune 30, 2021 , an increase of$29.0 million , or 7%. The increase in cost of goods sold was primarily a result of incremental fiber logistics, energy, and wood pellet distribution costs. In particular, during the three months endedMarch 31, 2022 , we experienced labor-related and other challenges associated with COVID-19 with our employees, contractors and supply chain partners that had a more pronounced than anticipated impact on our operations and project execution. Furthermore, we incurred incremental cost of goods sold from the on-going ramp of theLucedale plant and the commencement of operations of thePascagoula terminal. 30 --------------------------------------------------------------------------------
Adjusted gross margin and adjusted gross margin per metric ton
Six Months Ended
2022 2021 (Recast) Change
(in thousands, except per metric ton)
Reconciliation of gross margin to adjusted gross margin and
adjusted gross margin per metric ton:
Gross margin(1) $ 16,555 $ 49,644 $ (33,089)
Loss on disposal of assets 3,183 3,345 (162)
Equity-based compensation and other expense 1,301 1,136 165
Depreciation and amortization 48,254 42,328 5,926
Changes in unrealized derivative instruments 535 798 (263)
Acquisition and integration costs and other 2,557 72 2,485
Effects of COVID-19 13,942 - 13,942
Effects of the war in Ukraine 5,051 - 5,051
Support Payments 14,085 - 14,085
Adjusted gross margin $ 105,463 $ 97,323 $ 8,140
Metric tons sold 2,371 2,516 (145)
Adjusted gross margin per metric ton $ 44.48 $ 38.68 $ 5.80 (1)Gross margin is defined as net revenue less cost of goods sold (including related depreciation and amortization and loss on disposal of assets).
We earned adjusted gross margin of$105.5 million , or$44.48 per MT, for the six months endedJune 30, 2022 compared to$97.3 million , or$38.68 per MT, for the six months endedJune 30, 2021 . The increase in adjusted gross margin was primarily due to the aforementioned increase in net revenue and due to the increase in Support Payments partially offset by incremental fiber logistics, energy, and wood pellet distribution costs. The Omicron variant of COVID-19 significantly impacted our operations and resulted in$13.9 million of incremental costs during the six months endedJune 30, 2022 , all of which were incurred during the three months endedMarch 31, 2022 . •The impact on our supply chain logistics within our fiber supply base as well as our truck and rail service providers was more pronounced than anticipated. Our third-party service providers' failure to perform resulted in unprecedented incremental costs to procure raw materials and produce and deliver our wood pellets to customers.
•We incurred incremental costs related to increased employee overtime and significant contract labor to partially offset plant employee absenteeism.
•We incurred incremental costs related to obtaining short-term rentals of equipment due to delayed delivery of acquired equipment to ensure continued operations.
The war in
•Severe dislocations within our third-party shipping partners' operations resulted in incremental distribution costs related to demurrage and to loading, transporting, and unloading our wood pellets.
•The immediate spike in energy prices negatively impacted the cost of our operations including incremental costs to support continued services from our third-party fiber suppliers and trucking service providers.
Due to the increased average sales price per MT and the reduction in sales volumes as described above and after excluding the aforementioned incremental fiber logistics, energy, and wood pellet distribution costs, adjusted gross margin increased during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 .
Selling, general, administrative, and development expenses
Selling, general, administrative, and development expenses were$61.4 million and$65.9 million for the six months endedJune 30, 2022 and 2021, respectively. The$4.5 million decrease in total selling, general, administrative, and development 31 --------------------------------------------------------------------------------
expenses is primarily associated with decreased cash-based compensation and consulting expenses primarily due to the elimination of activities resulting from the Simplification Transaction.
Depreciation and amortization
Depreciation and amortization expense were$51.4 million and$44.7 million for the six months endedJune 30, 2022 and 2021, respectively, primarily due to theLucedale plant,Pascagoula terminal, and expansion assets placed in service.
Interest expense
We incurred$23.9 million and$30.9 million of interest expense during the six months endedJune 30, 2022 and 2021, respectively. The decrease in interest expense from the prior year was primarily attributable to a lower cost of borrowing due to the extinguishment of the higher rate senior secured green term loan facility as part of the Simplification Transaction.
Income tax
We recorded an insignificant income tax expense for the six months endedJune 30, 2022 and$0.9 million of income tax benefit during the six months endedJune 30, 2021 . Adjusted net loss Six Months Ended June 30, 2022 2021 (Recast) Change (in thousands) Reconciliation of net loss to adjusted net loss: Net loss$ (72,649) $ (48,026) $ (24,623) Acquisition and integration costs and other 14,369 1,495 12,874 Effects of COVID-19 15,189 - 15,189 Effects of the war in Ukraine 5,051 - 5,051 Support Payments 14,085 - 14,085 Adjusted net loss$ (23,955) $ (46,531) $ 22,576 Adjusted EBITDA Six Months Ended June 30, 2022 2021 (Recast) Change (in thousands) Reconciliation of net loss to adjusted EBITDA: Net loss$ (72,649) $ (48,026) $ (24,623) Add: Depreciation and amortization 51,392 44,700 6,692 Interest expense 23,929 30,858 (6,929) Income tax expense (benefit) 14 (941) 955 Equity-based compensation and other expense 20,917 15,192 5,725 Loss on disposal of assets 3,183 3,345 (162) Changes in unrealized derivative instruments 535 798 (263) Acquisition and integration costs and other 14,370 1,495 12,875 Effects of COVID-19 15,189 - 15,189 Effects of the war in Ukraine 5,051 - 5,051 Support Payments 14,085 - 14,085 Adjusted EBITDA$ 76,016 $ 47,421 $ 28,595 We generated adjusted EBITDA of$76.0 million for the six months endedJune 30, 2022 compared to$47.4 million for the six months endedJune 30, 2021 . The$28.6 million increase was primarily attributable to the factors described above under the headings "Adjusted gross margin and adjusted gross margin per metric ton" and "Selling, general, administrative, and 32 --------------------------------------------------------------------------------
development expenses."
Distributable cash flow
The following is a reconciliation of adjusted EBITDA to distributable cash flow:
Six Months Ended June 30,
2022 2021 (Recast) Change
(in thousands)
Reconciliation of adjusted EBITDA to distributable cash
flow attributable to Enviva :
Adjusted EBITDA $ 76,016 $ 47,421 $ 28,595
Less:
Interest expense, net of amortization of debt issuance
costs, debt premium, and original issue discount 22,670 28,710 (6,040)
Maintenance capital expenditures 6,682 7,844 (1,162)
Distributable cash flow attributable to Enviva Inc. 46,664 10,867 35,797
Less: Distributable cash flow attributable to incentive distribution rights
- 19,030 (19,030)
Distributable cash flow attributable to
$ 46,664
The following table presents a reconciliation of net loss to adjusted EBITDA and distributable cash flow for the six months endedJune 30, 2021 , on a recast basis and non-recast basis: Six Months Ended June 30, 2021 Recast Adjustments Non-Recast (in millions) Net (loss) income$ (48.0) $ 49.2 $ 1.2 Add: Depreciation and amortization 44.7 (1.5) 43.2 Interest expense 30.9 (5.6) 25.3 Income tax benefit (0.9) 0.9 - Equity-based compensation and other expense 15.2 (9.8) 5.4 Loss on disposal of assets 3.3 - 3.3 Changes in unrealized derivative instruments 0.8 - 0.8 Acquisition and integration costs and other 1.5 (0.5) 1.0 MSA Fee Waivers - 15.0 15.0 Adjusted EBITDA 47.5 47.7 95.2 Less:
Interest expense, net of amortization of debt issuance costs, debt premium, and original issue discount
28.7 (4.7) 24.0
Maintenance capital expenditures 7.8 - 7.8
Distributable cash flow $ 11.0 $ 52.4 $ 63.4
33--------------------------------------------------------------------------------
The following is a reconciliation of net loss to adjusted EBITDA and
distributable cash flow for the six months ended
Six Months Ended June 30,
2022 2021 Change
(in millions)
Net (loss) income $ (72.6) $ 1.2 $ (73.8)
Add:
Depreciation and amortization 51.4 43.2 8.2
Interest expense 23.9 25.3 (1.4)
Equity-based compensation and other expense 20.9 5.4 15.5
Loss on disposal of assets 3.2 3.3 (0.1)
Changes in unrealized derivative instruments 0.5 0.8 (0.3)
Acquisition and integration costs and other 14.4 1.0 13.4
Effects of COVID-19 15.2 - 15.2
Effects of the war in Ukraine 5.1 - 5.1
Support Payments and MSA Fee Waivers 14.1 15.0 (0.9)
Adjusted EBITDA 76.1 95.2 (19.1)
Less:
Interest expense, net of amortization of debt issuance costs, debt premium, and original issue discount
22.7 24.0 (1.3)
Maintenance capital expenditures 6.7 7.8 (1.1)
Distributable cash flow $ 46.7 $ 63.4 $ (16.7) Liquidity and Capital Resources
Overview
Our primary sources of liquidity include cash and cash equivalent balances, cash generated from operations, availability under our senior secured revolving credit facility and, from time to time, debt and equity offerings. Our primary liquidity needs are to fund working capital, service our debt, finance greenfield construction projects, growth initiatives, and maintenance capital expenditures, and pay dividends. We believe cash on hand, cash generated from our operations and the availability of our senior secured revolving credit facility will be sufficient to meet our primary liquidity requirements. Similar to previous years, we expect cash generated from operations for the second half of 2022 to be significantly higher than the first half of the year due to the predictable seasonality in our business as well as, in this case, the ramp of production at our newest plant inLucedale, Mississippi . However, future capital expenditures, such as expenditures made in relation to acquisitions of plants or terminals, plant development and/or plant expansion projects, and other cash requirements could be higher than we currently expect as a result of various factors. Additionally, our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive, and other factors beyond our control. Our liquidity as ofJune 30, 2022 , which included cash on hand (including cash generally restricted to funding a portion of the costs of the acquisition, construction, equipping, and financing of ourEpes plant) and availability under our$570.0 million senior secured revolving credit facility, was$184.1 million . Our liquidity as ofJune 30, 2022 does not include any proceeds resulting from the Tax-Exempt Green Bonds issued inJuly 2022 .
Cash Dividends
We intend to pay cash dividends to holders of our common stock of$3.62 per common stock for 2022, except cash will not be paid on 9.0 million of the 16.0 million common units issued in connection with the Simplification Transaction where the former owners of our former sponsor have agreed to reinvest in our common stock all dividends paid for the period beginning with the third quarter of 2021 through the fourth quarter of 2024. 34 --------------------------------------------------------------------------------
Capital Requirements
We operate in a capital-intensive industry, which requires significant investments to develop and construct new production and terminal facilities, and maintain and upgrade our existing facilities. Our capital requirements primarily have consisted, and we anticipate will continue to consist, of the following: •Maintenance capital expenditures, which are cash expenditures incurred to maintain our long-term operating income or operating capacity. These expenditures typically include certain system integrity, compliance, and safety improvements; and •Growth capital expenditures, which are cash expenditures we expect will increase our operating income or operating capacity over the long term. Growth capital expenditures include acquisitions or construction of new capital assets or capital improvements such as additions to or improvements on our existing capital assets as well as projects intended to extend the useful life of assets.
The classification of capital expenditures as either maintenance or growth is made at the individual asset level during our budgeting process and as we approve, execute, and monitor our capital spending.
We plan to invest$255.0 million to$275.0 million in capital expenditures in 2022. Of that amount, we expect to invest (i)$210.0 million to$220.0 million primarily on the production plant inLucedale Mississippi which is in the process of ramping production, as well as thePascagoula terminal, and the construction of theEpes plant, (ii)$30.0 million to$35.0 million primarily on the Multi-Plant Expansions, and (iii)$15.0 million to$20.0 million on maintenance capital expenditures.
Our current financing strategy is to fund acquisitions and construction activities with a combination of cash from operations and debt.
Cash Flows
The following table sets forth a summary of our net cash flows from operating, investing and financing activities for the six months endedJune 30, 2022 and 2021: Six Months Ended June 30, 2022 2021 (Recast) (in thousands) Net cash (used in) provided by operating activities$ (68,891) $ 62,171 Net cash used in investing activities (102,405) (153,983) Net cash provided by financing activities 201,234 190,399
Net increase in cash, cash equivalents, and restricted cash
Cash Used in Operating Activities
Net cash used in operating activities was$68.9 million and net cash provided by operating activities was$62.2 million for the six months endedJune 30, 2022 and 2021, respectively. The$131.1 million decrease in net cash used in operating activities during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was primarily due to a decrease in cash from net loss adjusted for non-cash items of$11.5 million and a decrease in cash from changes in working capital of$119.6 million . The decrease in cash from changes in working capital was primarily attributable to a$71.1 million increase in accounts receivable and inventories due to the timing of shipments, and an$11.9 million decrease in accounts payable, accrued liabilities, other current liabilities, and accrued interest due to timing of payments.
Cash Used in Investing Activities
Net cash used in investing activities was$102.4 million and$154.0 million for the six months endedJune 30, 2022 and 2021, respectively. The$51.6 million decrease in cash used in investing activities during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was primarily due to the timing of capital expenditures at theLucedale plant,Pascagoula terminal, and on various expansion projects.
Cash Provided by Financing Activities
Net cash provided by financing activities was$201.2 million and$190.4 million for the six months endedJune 30, 2022 and 2021, respectively. The$10.8 million increase in net cash provided by financing activities during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was primarily attributable to cash used to acquire a 35 -------------------------------------------------------------------------------- noncontrolling interest of$130.1 million during the six months endedJune 30, 2021 , an increase in proceeds from the issuance of common shares or units of$118.1 million , a decrease in net proceeds from debt of$174.5 million , and an increase in cash dividends or distributions and equivalent rights of$60.7 million .
OffBalance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates, and assumptions that affect the amounts reported in our unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. We provide expanded discussion of our significant accounting policies, estimates, and judgments in our 2021 Form 10K. We believe these accounting policies reflect our significant estimates and assumptions used in preparation of our financial statements. There have been no significant changes to our critical accounting policies and estimates sinceDecember 31, 2021 .
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