Enviva Inc.

Good day and welcome to the Enviva Partners LP fourth quarter and full year 2020 earnings conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note this event is being recorded. I would now like to turn the conference over to Wishma, Vice President and Treasurer. Please go ahead.

Thank you. Good morning and welcome to the InViva Partners IOP fourth quarter and full year 2020 financial results conference call. We appreciate your interest in InViva Partners and thank you for participating today. On this morning's call, we have John Kepler, Chairman and CEO and Shai Evans, Chief Financial Officer. Our agenda will be for John and Shai to discuss our financial results and provide an update on our current business outlook. Then we will open up the phone lines for questions. During the course of our remarks and the subsequent Q&A session, we will be making some forward-looking statements which are subject to a variety of risks. Information concerning the risks and uncertainties that could cause our actual results to differ materially from those in our forward-looking statements can be found in our earnings release as well as in our other filings with the ICC. We assume no obligation to update any forward-looking statements to reflect new or change the events or circumstances. In addition to presenting our financial results in accordance with GAAP, we will also be discussing adjusted EBITDA and certain other non-GAAP measures pertaining to completed fiscal periods, as well as our forecasts. Information concerning the reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and other relevant disclosures are included in our earnings release. I would like to now turn it over to John.

Thank you, Woosh. Good morning, everyone, and thanks for joining us today. A hallmark of NViva's culture is keeping promises. At this time last year, we committed to achieving a certain set of operational and financial targets for the partnership. When we completed two transformative acquisitions in the middle of the year, We made additional promises and increased our guidance. As I hope you saw in our earnings release, we kept the promises we made. Against the very challenging COVID-19 backdrop that continues to persist, we are very proud to report that we had our safest year ever. We did not miss a single customer delivery. We increased the fully contracted production capacity of the partnership by more than 30%. We increased our year-over-year adjusted EBITDA by more than 30%, and we kept our promise to our unit holders, distributing $3 per unit for full year 2020, extending our track record of 22 consecutive quarterly distribution increases at a compound annual growth rate of 13% since our IPO, and delivered a total unit holder return of 30% in 2020. We were able to achieve this in the face of broad economic and market volatility in large part because of the fully contracted nature of our business and its durable, sustainable operating profile that together generates stable, growing cash flows. Turning to 2021, we're making new promises about what we expect to achieve, not just in terms of operating and financial performance, but also to align ourselves with the global community's escalating commitments to limit global warming in order to avoid the most devastating impacts of climate change. As a result, we are proud to join with other leaders in committing ourselves to net zero emissions in our operations by 2030, by following a measured, achievable, and efficient plan. At the same time, we are undertaking to deliver meaningful growth in our adjusted EBITDA in 2021, as we realize the anticipated benefits of the growth initiatives we undertook over the last few years. Specifically, our guidance for 2021 is an increase of 25% over 2020, at the midpoint of our range of $230 to $250 million in adjusted EBITDA, before accounting for additional dropdowns or other acquisitions you have come to consistently expect from us. We believe the resulting cash flow profile will enable us to distribute at least $3.17 per unit for full year 2021, again, before considering the benefit of additional dropdowns or other acquisitions. Moreover, I'm very excited about the new expansion projects we have commenced within the partnership. Now that we have completed construction at the Northampton and Southampton expansion projects, we are turning our attention to targeted opportunities at our Sampson, Hamlet, and Cottondale facilities, where through innovative projects that are intended to optimize our manufacturing processes, eliminate certain costs, and expand our production capacity, we expect to deliver substantial incremental margins. On the basis of approximately $50 million of investment, we believe we will generate an additional $20 million in annual run rate adjusted EBITDA as these projects are completed and fully ramped by the end of 2022. Looking ahead, despite the global pandemic, the tailwinds for our industry are remarkable. In the macro context, each member nation of the EU, the United Kingdom, Japan, South Korea, and other potential markets across the globe have pledged to become net zero. The US itself has recommitted to the Paris Agreement. And one of the most cost-effective and immediate ways to decarbonize continues to be the conversion of existing coal and other fossil fuel-fired plants to biomass. The progress to date has been remarkable, and not just in traditional applications. While customers around the world are recycling existing energy infrastructure, and building new, bespoke, biomass-fired assets. We are also increasingly seeing innovations like biomass energy generation coupled with carbon capture and sequestration, one of the few ways in the near term to achieve carbon-negative energy at scale, as well as projects that use biomass energy in combined heat and power applications, which are key to decarbonizing the industrial energy sector. We are also seeing major manufacturers around the world looking to substitute renewable bio-based carbon for fossil fuel-based carbon as direct material inputs for the production of core commodity products like chemicals, cement, and steel. This is exciting and has the potential to open up new markets and new customer segments. I will take some time later in the call to provide an update on how these long-term market drivers are influencing our contracting activities as well as to bring you up to speed on the development and expansion projects taking place at the partnership and our sponsor. I will also elaborate on our net zero commitment and its related action plans. Hopefully, as we wrap up today, we can tie all the pieces we have underway together in a way that can make you as excited as we are about 2021 and beyond. But first, I would like to turn it over to Shai to discuss our financial results for the fourth quarter and for full year 2020, and to provide more details on our guidance.

Thank you, John. For the fourth quarter of 2020, we generated net revenue of $277.3 million, an increase of $76.8 million from the corresponding quarter of 2019. The increase in net revenue was primarily driven by sales volume that were 29.4% higher as well as an $11.2 million increase in other revenue. Included in other revenue for the fourth quarter of 2020 were $15.4 million in payments to the partnership for adjusting deliveries under our take-or-pay off-take contracts, which otherwise would have been included in product sales. For the fourth quarter of 2020, gross margin was $26.6 million as compared to gross margin of $28.2 million for the corresponding period of 2019. Adjusted gross margin was $72.8 million for the fourth quarter of 2020, as compared to $55 million for the fourth quarter of 2019, an increase of $17.8 million, or 32.3%. Adjusted gross margin per metric ton was $54.02 for the fourth quarter of 2020, as compared to $52.83 for the fourth quarter of 2019. The increase in adjusted gross margin was primarily attributable to higher sales volumes and higher pricing due to customer contract mix, partially offset by a corresponding increase in cost of goods sold. Net loss for the fourth quarter of 2020 was $0.4 million as compared to net income of $0.9 million for the fourth quarter of 2019. Adjusted net income was $11.1 million for the fourth quarter of 2020 as compared to adjusted net income of $17.2 million for the corresponding quarter of 2019. For the fourth quarter of 2020, the partnership generated a record quarterly adjusted EBITDA of $69.3 million, up 30.1% for the same period of 2019. The increase in adjusted EBITDA was driven primarily by the same factors that increased adjusted gross margins. Distributable cash flow prior to any distribution attributed to incentive distribution rights paid to a general partner was $54.8 million, which results in a fourth quarter 2020 distribution coverage ratio of 1.5 times. For the full year 2020, net revenue was $875.1 million, an increase of $190.7 million from 2019. The increase in net revenue was primarily driven by sales volume that were 21.5% higher as well as a $34.4 million increase in other revenue. Included in other revenue for full year 2020 were $32.5 million in payments to the partnership for adjusting deliveries under our take-or-pay off-take contracts, which otherwise would have been included in product sales. was $107.1 million for full year 2020, as compared to $81.1 million for 2019. Adjusted gross margin was $204.9 million for full year 2020, as compared to $151.6 million for 2019, an increase of $53.2 million, or 35.1%. Adjusted gross margin, Prismatic Stone, was $47.29 for full year 2020 as compared to $42.54 for 2019. Gross margin and adjusted gross margin increased primarily due to higher sales volume and higher pricing due to customer contract mix partially offset by a corresponding increase in cost of goods sold. For full year 2020, net income and adjusted net income were $17.1 million and $46 million, respectively. For full year 2019, net loss and adjusted net income were $2.9 million and $39 million, respectively. Adjusted EBITDA for full year 2020 was also a record high, $190.3 million, up 34.7% from 2019. The increase in adjusted debita was primarily due to the same factors that increased adjusted gross margin. Distributable cash flow prior to any distributions attributable to incentive distribution rights paid to our general partner was $141.6 million for full year 2020, up 43.8% as compared to 2019. At the end of 2020, the partnership's liquidity, which includes cash on end and availability under our $350 million revolving credit facility, was $239.7 million. Moving on to guidance. For full year 2021, the partnership expects net income to be in the range of $42.3 to $62.3 million, adjusted EBITDA to be in the range of $230 to $250 million, and distributable cash flow to be in the range of $160 to $180 million prior to any distributions at reasonable incentive distribution rights paid to our general partner. The partnership also expects to distribute at least $3.17 per common unit for full year 2021. The guidance amounts do not include the impact of any additional acquisitions or drop-downs Consistent with prior years, we expect the second half of 2021 to be a significant step up from the first half. Our ability to access the capital markets, even amid turbulent market conditions, is in part a result of our conservative financial policies, which remain unchanged. We continue to expect to fund drop-down acquisitions and major expansion using 50% equity and 50% debt. We also continue to target a conservative leverage ratio of 3.5 to 4 times and a distribution coverage ratio of 1.2 times on a forward-looking annual basis. As you have seen in our financial results, the partnership's distributive cash flow, net of amounts attributable to incentive distribution rights, was $114.6 million for full year 2020, which covered the distribution for full year 2019 at 1.29 times. Now, I would like to turn it back to John. Thanks, Shai.

Five years into the Paris Agreement, the world has come to the realization that it is no longer enough to just set long-term ambitions, and it is no longer enough to just replace coal with renewables. To get to net zero by 2050, we must take more aggressive actions now and fully utilize everything in our toolbox. The United Kingdom, which has been at the forefront of the renewable energy transition and just raised its commitment to cut greenhouse gas emissions to at least 68% by 2030 relative to 1990 levels, is again leading the charge. In a series of important energy policy announcements over the last few months, the UK government outlined its intention to not only support bioenergy with carbon capture and storage, or BECCS, which is a key negative emissions solution, but also to explore bioenergy's role in hydrogen production. At the same time, across the English Channel, the European Union took another major step towards legislating the 2050 net zero target into the European climate law, when EU leaders from all 27 member states including heavily coal-dependent countries like Poland and the Czech Republic, agreed to the target of 55% greenhouse gas emissions reductions by 2030, again, as compared to 1990 levels. Germany also continues to progress towards its legally binding 2038 coal phase-out target, and we expect that the final legislative process regarding the related enabling policies will conclude over the next several months. The partnership and its sponsor remain in ongoing dialogue with multiple large utilities and power and heat generators about their plans to convert existing coal-fired assets to biomass. And we expect to enter into take-or-pay off-take contracts with these customers in the 6- to 12-month period following completion of that legislative process. In Japan, following Prime Minister Suga's Net Zero Pledge in October of 2020, METI quickly unveiled a green growth strategy. The strategy sets a target for renewable energy sources to make up 50 to 60 percent of the nation's power supply by 2050 and proposes various related tax incentives and other support. However, Japan's energy grid, which is still quite fossil fuel dependent, has very little excess capacity. Last month, power prices more than quadrupled during a period of particularly cold and bad weather, when intermittent renewable energy generation became limited, and when the grid was barely able to avoid blackouts, even after Japanese utilities ran thermal power generation at maximum capacity. The ability to generate baseload, dispatchable, renewable power and ensure grid stability is a key reason our customers, including those in Japan, turned to Enviva for long-term contracted supply. Our existing contracts with these customers are generally for power projects under the 20-year feed-in tariffs. However, as the Japanese government sets significantly more ambitious climate targets, our customers have engaged us in discussions about a broader range of projects. The MOU our sponsor just executed with a major Japanese trading house is intended to provide up to 1 million metric tons per year of wood pellets to support decarbonization of the manufacturing sector, a brand new market segment for us in Japan. We are currently underway with test deliveries for new customers in new jurisdictions and for new applications. While these efforts will take time to mature, the macroeconomic trend towards decarbonization continues to accelerate, and we believe that will lead to substantial new contract executions in current and emerging geographies. Partnership's current contract portfolio has a total weighted average remaining term of 12.8 years and a total contracted sales backlog of $14.6 billion. With the contracts just announced by our sponsor, including the new 20-year contract with a major Japanese trading house for 240,000 metric tons per year and the expansion of volumes under an existing off-take agreement, the combined contract portfolio, including all volumes under the firm and contingent offtake contracts held by the partnership and our sponsor, now has a total sales backlog of $19.9 billion, with a weighted average contract maturity of 14 years. To supply this growing offtake portfolio, the partnership continues to increase its production capacity. The production ramp of the expansions at our Northampton and Southampton plants is ongoing, and we expect each to reach its expanded nameplate production capacity of approximately 750,000 metric tons per year by the end of 2021. The Greenwood expansion is also on track for completion by the end of this year. In addition, the partnership has begun expansion projects at our Sampson, Hamlet, and Cottondale plants and expects to complete these projects by the end of 2022. Moreover, the construction of the fully contracted Losedale plant and Pauskagoula terminal is progressing as expected, and our sponsor expects these assets to be completed mid-year 2021. Our sponsor has also completed the purchase of the project site and commenced pre-construction activities at its fully contracted EPS plant. With the newly executed contracts, complemented by material contract volumes in negotiation with utilities and power generators in current and evolving markets around the globe, we expect our sponsor to continue to develop incremental production and terminal capacity in and around our and our sponsor's existing footprint. To maintain its fully financed growth profile, our sponsor recently closed a $325 million green term loan and used a portion of the proceeds to buy out its development joint venture partner, further reducing its cost of capital. With the balance of the green term loan and the $300 million in undrawn equity capital raised during our sponsor's recapitalization transaction announced last year, our sponsor remains extremely well-positioned to deliver a large and growing pipeline of development projects, which by design, the partnership expects to have the opportunity to acquire, along with the associated off-tech contracts. Our sponsor has consistently recycled proceeds from drop-down transactions into the development and construction of new plants and terminal assets. Our scale is large and growing and unmatched anywhere in the industry, The existing assets in operation and under expansion at the Partnership, together with the sponsors Losedale Plant, Pascagoula Terminal, and Epps Plant, will have a combined production capacity of more than 7 million metric tons per year, with total terminal throughput capacity of about 11 million metric tons per year. For reference, that is more than double the size of the Partnership's production capacity just one year ago. But with this scale also comes obligation. And consistent with the global community's commitments and our own mission to displace coal and limit the impact of climate change, we and our sponsor have committed ourselves to become carbon neutral, or net zero, in our operations by 2030. This is an ambitious but attainable goal, backed by a detailed plan to tackle our scope one, two, and three emissions. It will take time. But like any journey, it begins with a first step. For us, this means we will immediately start to mitigate 100% of direct emissions from assets owned and controlled by us, or our Scope 1 emissions. We are already underway with continuous improvement efforts to minimize the use of fossil fuels, adopt lower carbon processes, and improve the efficiency of our operations. And while permanent reductions in process emissions may take time, in the interim, we will also look to create emissions reductions with high-quality offsets. To address the emissions arising from electricity purchases in our operations, or our scope 2 emissions, we have pledged to source 100% of the energy needed for our operations from renewable sources by 2030, with an interim goal of 50% by 2025. To address emissions generated by our upstream and downstream supply chain, or our scope 3 emissions, We are actively engaging with our commercial partners and other key stakeholders to accelerate the development and adoption of new clean energy solutions for our supply chain. Finally, consistent with our current sustainability practices, we pledge to be transparent and track and publish our progress through annual reporting. As I often mention to my team, although Envita is an organization that does a great job setting high standards and delivering good results, We're not very good with taking the time to celebrate success. Looking back at 2020, I do want to pause and thank the tremendous team we have at InViva. They have a lot to be proud of. 2020 was a remarkable year where we not only operated our business uninterrupted and produced financial results as expected, but we laid a solid foundation for tremendous growth in 2021 and beyond and made an essential commitment about how we will do so in the next phase of our sustainability journey by becoming net zero on our operations by 2030. Making good on our promises takes diligent execution in any environment. But in the global pandemic, it requires unwavering dedication. We have a strong and durable business model made stronger by the people at Enviva. Thank you. Operator, can you please open the line for questions?

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing a key. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question is from Moses Sutton with Barclays. Please go ahead.

Hi, John and Shai. It's great catching up here. On the next expansions, so it's $20 million adjusted EBITDA from $50 million investment. Obviously, these expansions are at much higher IRRs than the mid-Atlantic expansions, or maybe I'm misreading that on the basic cash-on-cash calculations. What would that be testament to? This is something we could have sort of maybe figured out before, but maybe you could give any color there. Maybe it's effective scale, any low-hanging fruit opportunities on some of those.

Yeah, Moses, thank you. Really great to catch up with you as well. The multi-plant expansions that we just announced are a little bit different than what we did at Northampton and Southampton. The Northampton and Southampton expansions were principally about capacity expansions. And so you had a higher component of equipment purchases and large-scale installation of new assets. Whereas in what we've just announced, while there is a modest capacity expansion, you should be thinking about, you know, kind of 100,000, 150,000 metric tons per year. What these are really about is process improvements, cost efficiencies, and reductions in things like the intensity of energy required for pellet production. That means we're driving margin at the bottom line on cost improvements. And what's really great about this, of course, is that because it's a build and copy approach, We do think that there are opportunities to continue to replicate investments like this as we continue to roll it out through the fleet. A couple of those particular investments that we're making as part of this, we learned and are deriving directly from the Waycross acquisition that we just completed. Part of the attractiveness of that was that they were doing a particular process step even a bit better than we are, and we're now incorporating that into our broader fleet.

That's very helpful, actually. So that 100 metric tons per day, 100,000 metric tons per day is from Hamlet, so 50 comes from which of the other plants?

No, it's actually about 150,000 metric tons per year spread across all three of those plants, Cottondale, Sampson, and Hamlet, with perhaps the biggest portion of that coming from our Cottondale facility.

Okay, great. And you mentioned in the release that, you know, subject to permitting, Are you, I couldn't tell if it's specifically Cottondale that needs more permitting or it's also North Carolina for Hamlin and Sampson?

So we have expanded permits on file and have received across a number of those facilities. I think that the Cottondale one is still under review.

Got it. Great. Shifting gears a bit to inflation, can you sort of remind us the effect of inflation on the enterprise? Let's say we head into a massive inflation increase hypothetically. Indexing on contracts, expected effect on cost profile, just anything there would be helpful.

Yeah, absolutely. As you may recall, all of our agreements have in place escalators. Most of them are, in fact, tied to inflationary indices, so you'd see an uplift in the offtake pricing associated with that. As a practical matter on our cost position, we tend to fix our costs, things like shipping and elsewhere, on a U.S. dollar-denominated basis. It gives a significant amount of cost protection against that. And obviously, with the continued scale and cost efficiency improvements that we target year on year, what we've demonstrated historically and what we'd expect to continue is a stable cost position, if not declining over time, providing for durable margin expansion.

Great, great. And if commodities prices rise, I mean, they are rising. So I can usually contract out, you know, you hedge out the diesel price. Is that the case as well? I know it's a small part of the COG stack, but just wondering if there's any effect there to look out for.

Yeah, where you'd see sort of the quantity increase is on our shipping components, obviously the bunker fuel component of that. But that is under our shipping and commercial agreements. We pass any volatility or variability in bunker fuel directly through to our customers.

Great, great. And last one, I'll take the rest offline. It's a great update on Japan continuing to contract at the sponsor level. At the EVA level, 2025 offtake is already set to be around 50% from Japan. If we thought even longer term and we extrapolated for future drop-downs and so on, how might Japan comprise the percentage of total mix? I know that there are other initiatives in other countries that can be challenged too, but could we see Japan go well above 50% at any, you know, call it 2025 to 2030 timeframe?

What I would say is that I think that we will be relatively well-balanced between Europe and Asia, roughly 50-50 on a long-term go-forward basis. Because some of the jurisdictions emerge at different times, you may see one year where you see some imbalance, but that's more temporal, just about how regulations, how conversions happen, that given we're still a modest-sized industry. An increase in demand, for instance, in Germany will skew it for perhaps a year, but I think that On a longitudinal basis, you're about 50% to Asia, 50% to Europe, with, of course, Japan being our largest customer in Asia.

Great, great. Very helpful. Thank you.

Moses, always good to connect. Thank you so much.

The next question is from Ryan Levine with Citi. Please go ahead.

Good morning. What's your Drax exposure through 2026? And what would be the impact to NViva if they cancel their contracts and supply volumes from other sources?

As I think we've articulated, the partnership is fully contracted through 2026. The DRACS has a series of agreements with us, as do a host of other obviously European and Asian utilities. As a practical matter, our re-contracting experience has been that at every point in time that a contract has come up for renewal, our customer has renewed, typically at larger volumes and longer tenor. But to the extent that Drax elected to pursue a different approach, we of course have a very significant contracted backlog and we would not see a degrade in terms of the overall contracted position of the enterprise. given the pipeline that exists behind the existing contracts today?

Is there a way to quantify what the exposure is today and how the contracts work with regard to if they have a change in procurement strategy?

Well, so I think the way to look at that is to address the overall partnership contract backlog, right? You know, a year ago, the partnership's contract backlog was $9.5 billion with a weighted average remaining term of 10.4 years. And over the last 12 months, we've grown that backlog by 50% so that the partnership's backlog today is $14.6 billion and extended the weighted average remaining term to just shy of 13 years. So the backlog's growing, and it's a question of whether or not we would seek to build incremental new capacity or whether we would use the existing backlog to stand in place of a contract to the extent that a customer, which would be unique and has not ever happened, to the extent a customer chose not to renew with us.

And as you know, Orion, based on our firm contract backlog, by 2025, our largest customer will drop under 15%.

Okay, okay. Yeah, I mean, is that information disclosed in terms of the contractual breakup fee or any type of terms or something?

Well, to the extent that any customer chose to terminate an agreement with us, there's a make-hole fee associated with price times quantity times remaining term of delivery. Okay, that's a tough one. Yeah, it's the nature of a take-or-pay agreement with us. Of course, someone could terminate an agreement, but they owe us a very significant take-or-pay make-whole fee. Okay, appreciate that.

Switching gears, what has been the recent trends around fiber and timber costs within your supply territory, and have you seen any uptick there? And can you remind us how you're exposed to that, given some of the baskets that your contracts are structured around?

Yeah, absolutely. And so as you may recall, our procurement strategy is a residuals-based procurement strategy where we're aggregating the byproducts of a traditional saw timber harvest. And so the underlying commodity price of lumber or timber really doesn't have a direct impact on the price of fiber that we're buying. What we're obviously picking up is the leftovers behind that. And what we've noticed is a very significant uptick in harvesting activity. And so over time, of course, that should generate an incremental residual stream. And we would hope to benefit from a greater availability of supply with very few buyers, which should put downward pressure on pricing over a longer period of time. Naturally, Q1 is what is our seasonally soft quarter. It's colder. It's wetter weather. So I don't think we'd necessarily see a read through that in Q1. But over time, we would expect to see fiber presses continue to decline.

I appreciate that. And the last question, in terms of the new Japanese MOU, is there a contract duration that's being discussed or anticipated that you're able to share? Or is it only the volume that's spelled out in the MOU?

So we would obviously look at substantial duration consistent with the broader contracting profile that we have. So you'd be looking at 10 plus years of duration. What I think is particularly interesting around this particular market segment for us is that it's very, very consistent with what the world's commitment to net zero really means. Is that so much of the early greenhouse gas emissions reduction climate change effort has been on the energy sector. And what I think the world has really concluded is, given the urgency of action, sectors like the manufacturing sector, large-scale industrials, substitution for fossil fuels and other commodity products is going to be essential to meeting that net zero commitment. It's going to be much beyond just traditional energy. And so with a company like Enviva, who has built a global scalable supply chain for delivery of biomass into all sorts of different applications around the world, this is one of the first really interesting large-scale market opportunities for us that we're pretty excited to talk about. Hopefully, as technologists and other innovations occur around the world, we'll continue to be a large-scale enabler of a move to net zero across a lot of different industries. Okay, great.

Thank you.

Thanks, Ryan.

The next question is from Pavel Mokunov with Raymond James. Please go ahead.

Thanks for taking the question. First, to follow up on one of the earlier points about inflation rearing its head, the price of coal is, spot price at least, is about as high as it's been in, I think, two or three years now. Does that make any difference vis-a-vis your margins under any of your supply contracts?

Not at all. The pricing of our supply under our long-term take-or-pay agreements is not influenced by commodity prices like coal or otherwise.

Okay. So commensurately, if it were to come back down, there would be no impact either.

That's right.

And going back to what you said a minute ago about decarbonizing outside of the electric power sector, If you were to get an opportunity to sign a contract with a non-utility customer, I know you've been very careful about evaluating utility customers from a kind of credit worthiness, bankability perspective. How would you do that given the very different regulatory and economic dynamics if you're dealing with commercial or industrial enterprises?

It's a great question, Pavel, and I'd answer it the same way we do the credit workups on any of our utility counterparties, which is we're really not taking the regulatory risk associated with the jurisdictions in which they operate. What we're taking is the balance sheet risk. The change in law is not a risk that we accept under the terms of our uptake agreements. And so the analysis that we would undertake for entry into a long-term take-or-pay uptake agreement with a major industrial company In the same credit workup, we would say, you know, what is the balance sheet? What is the strength? What is the overall security package and their underlying cost position? And as you and I have shared in some of our conversations in the past, you know, we get to unit-level economics for the power plants that we're evaluating to whom we ultimately sell because we want to be highly convicted that across a broad range of economic circumstances that they remain just as capable of paying. And so these are, the folks that we'd be talking with are the blue-chip companies. They would be the ones that would be the market leaders that want to ensure that their margin profile remains as durable and strong on a go-forward basis across a broad range of commodity cycles and have the creditworthiness to stand behind that long-term obligation.

Understood. And lastly, about net zero, in the announcement from last week, about that target for 2030. You mentioned that forestry would naturally play a role in the roadmap. Would you consider providing direct funding for reforestation? And if so, would that be on a nonprofit basis? Or would you actually want to own some forestry assets as a company?

Well, I don't think that our business strategy, certainly from a procurement basis, would be to own timber or fiber resources. But what I would say is that the idea of providing direct additionality in terms of reforestation, of conversions of perhaps marginal agricultural land into forestry, can be a really important part of how we mitigate our Scope 1 and Scope 2 emissions. Fortunately, as I think you've studied our profile in the past, fortunately, our scope one emissions are relatively modest. We're a fraction of a similarly sized industrial. And so we do believe that our most recently announced expansions are a good part of that. Part of that expansion profile is going to be reducing the greenhouse gas emissions intensity of the electricity purchases and the electricity load of pellet production of these assets. And so on the one hand, there's some low-hanging fruit that's easy to access. By the same token, given our energy load generally for our Scope 2, there's some really interesting opportunities for us to think about to solar on our sites, to combine heat and power on our sites. Again, we're utilizing biomass as a resource for thermal generation today. A bunch of this begins to pencil out. And so I wouldn't look at necessarily our investment in a net zero commitment As a nonprofit investment, I would look at this as something entirely consistent with our business strategy, where we're delivering to our customers a low-carbon alternative. To the extent that we can make that even lower carbon, our margins should ultimately expand because that's ultimately what our customers are buying from us around the world.

Good to hear. Thank you, guys.

Thanks, Lavelle.

The next question is from Alvira Scoto with RBC Capital Markets. Please go ahead.

Hey, good morning, everyone. A couple of follow-up questions. So can you provide some more detail on that new $50 million expansion and the EBITDA contributions, specifically around the cadence of CapEx spend and then the timing of EBITDA contributions? I know you said that you'll conclude by the end of 2022. Do those EBITDA contributions come on all at once? Are they phased in? And I'll leave it at that for now.

Elvira, thanks. Always good to connect with you as well. I think we can think about the spend curve as roughly linear over the next two years. You look at the spend curve roughly linear and you can think about the margin profile to sort of be back-up weighted. So you'd see an uptick in 2022 and then the balance in Oh, great.

That's helpful. And then, you know, as you mentioned, through a number of actions, your sponsor has lowered its cost of capital associated with renewable energy infrastructure development. So how do you think that lower cost of capital can benefit EBA or trickle down to the partnership? I mean, is it through increased investment opportunities or any other ways?

No, I think, again, it's a really important part of maintaining what has been a very beneficial relationship and enabled us to grow as a partnership quite rapidly. Given the opportunities that we see ahead, and certainly as the world moves and continues its efforts not only on coal displacement and renewable energy generation on the basis of biomass, but new markets, new segments, new opportunities, we tend to think that the growth curve has the opportunity to accelerate. And at the sponsor level, we'll go across the capital to the firm. So faster upstairs.

That's great. And then, you know, recently we saw the acquisition of a publicly traded wood pellet producer, and EVA has recently completed an acquisition. Can you give us your latest thoughts on the opportunity set for third-party M&A and how you see Enviva participating?

Yeah. We're obviously very proud of the acquisitions we've done, the Waycross, from a third-party perspective, the Waycross asset being a particularly interesting and robust one for us that has continued to meet or exceed all of our expectations. And again, the replication of some of their process aspects into our broader fleet is a good reflection of that. What I'd say is third-party acquisitions have been a part of our growth story. They have not been preponderance. And that's because The built and copy approach that we have means that we have a high degree of conviction around the cost of development as well as the market profile on every asset we build. And so we kind of know what we're getting. And that is not as wide perhaps available third-party acquisitions. And so we're much more opportunistic there. As a practical matter, we're obviously open-minded. But we've tended to focus on kind of what we're best at, which is building, owning, and operating things that we've built ourselves.

Yeah, great. That makes a lot of sense. And then just the last one for me, do you see any opportunity for Enviva in the U.S. now under the new administration and, you know, the push for more green energies?

Well, I think, I mean, look, the Biden administration's first actions really to rejoin the Paris Agreement are really important from our global positioning. It brings the U.S. closer to the rest of the world in thinking about net zero and the importance of climate change. You know, obviously, the incidents last week of Texas raised questions around dispatch of renewable energy and baseload, which is gosh, what our customers are so good at on the basis of biomass. I don't know that that's necessarily going to be a robust segment, but what I will say is what you see in the industrial segment around the world, whether it's cement or some of the other commodities we talked about, decarbonization of that sector is really, really hard to do. And so to the extent that biomass can play a role for it, well, you've got a scalable world leader in biomass supply. But what I will say is Obviously, that needs to get bid away from long-term, robust margin opportunities. We'll just have to see how that unfolds here.

Got it. Great connecting with you guys.

You're always good. Thanks so much.

As a reminder, if you do have a question, please press star then one. The next question is from Marshall Carver with Heineken Energy Advisors. Please go ahead.

Yes, thank you. I had a question about the EBITDA or earnings as we go through the year. You talked about it being back half-weighted, and I know you have some capacity expansions as we go through the year, but any color on how back half-weighted it would be? I mean, is it like a third, two-thirds, or 40-60? I know there's always some seasonality, but any color you could have on that? the expected change between first half and second half would be helpful.

I think, Marshall, thank you for the question. I think that you should expect to see similarly to previous years. You should expect to see the second half stronger compared to the first half of the year. And our expectation is that the same kind of ratio between the first half to the second half that you've seen for us in previous years, including 2020, you'll see the same in 2021.

All right. That's it for me. Thank you.

Marshall, thanks. Good to talk to you.

This concludes our question and answer session. I would now like to turn the conference back over to John Cutler for any closing remarks.

Well, thanks, everybody, again, for taking the time to join us today. We're very privileged to be in the position we're in, and as we've discussed in our prepared remarks and everything from net zero to the activities we have on our way for growth, we do believe we have an opportunity and a responsibility to keep that up. You know, given all that we've covered today and the opportunities ahead, I think that the statement that you guys know I'm fond of saying is that we're really just getting started. Nothing could be more true, and we're pretty excited about that. I'm looking forward to connecting again with everyone next quarter. And in the meantime, please stay safe. Please stay healthy. We're all in this together, and that's how we're going to get through it. So thanks, everyone.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.