Fitch Ratings has assigned a 'BB-'/'RR4' rating to Enviva Inc.'s (EVA; Issuer Default Rating BB-) issuance of $100 million of 30-year tax-exempt unsecured notes due in 2052.
The senior unsecured notes rank pari passu with existing senior unsecured debt. Proceeds will be used in part to fund the construction of a new 1.1 million metric tons per year (MTPY) pellet production plant in Bond, Mississippi. Enviva continues to accelerate their growth plans and increase production capacity as they scale the business to meet rising demand. The Rating Outlook is Stable.
EVA's ratings reflect the stable and predictable nature of contracted cashflows generated by its growing portfolio of wood pellet production plants, and also reflect its growing customer base, increasing scale of operations and regulatory support for biomass.
Key Rating Drivers
New Plant Increases Scale: Enviva is moving forward with the construction of its new 1.1 million MTPY pellet production plant in Bond, Mississippi to meet growing customer demand in Europe, Caribbean and Asia. The Bond plant is the third of four planned pellet production facilities at company's growing Pascagoula cluster of assets which includes a deep-water shipping terminal. This will be the second production plant that will be under construction at the Pascagoula terminal after the company broke ground on its plant in Epes, Alabama earlier this year. The Bond plant is fully contracted and will further increase production capacity by approximately 15%-20%.
The plant is projected to generate approximately $65 million of EBITDA per annum, representing an EBITDA investment multiple of approximately 5.0x, a savings of roughly two turns as compared to previous investment multiples for new plants under the old MLP structure.
The equity component of the financing for the new plant was provided in part through an issuance of $346 million of common stock in January. The new plant is expected to enter service in mid-2024.
Volume Growth Under Long-Term Contracts: EVA maintains a robust pipeline of projects and contracts under negotiation that provide a pathway for significant growth over the next few years. EVA has a weighted average remaining term of approximately 14.5 years and contracted revenue backlog of approximately $21 billion for its overall contract portfolio. In addition, EVA has a robust backlog of contracts under negotiation that, if finalized, will allow for accelerated intermediate-term growth.
EVA's counterparty contracts are primarily take-or-pay contracts with a fixed price for the entire term of the contract subject to annual inflation-based adjustment and price escalation.
Creditworthy Counterparties: Enviva's contracts are primarily with large creditworthy counterparties, and Fitch expects a significant increase in the diversification of EVA's customer base over the next few years as Enviva continues to sign additional contracts and expands its operations in the U.K., Europe (mainly Germany) and, increasingly, Japan. Enviva continues to grow its customer base and recently announced four new contracts with European customers including two in Germany collectively totaling approximately 1 million MTPY with deliveries slated to begin in 2022-2024.
Additionally, Enviva is currently in negotiation with a prospective state-owned utility customer in Taiwan to supply fuel for its generating facilities after they announced plans to convert a large coal plant totaling 4GW to biomass by 2025. The conversion of the plant to biomass will require the consumption of roughly 1.8 million MTPY of biomass annually and if a contract is finalized, will result in the need for additional production capacity.
By 2025, the company projects that 50% of its revenues will come from Japanese customers, with the largest customers representing no more than 15% of its contracts mix. In 2021, nearly all of EVA's revenue was generated from six major customers, including Drax Power Limited (a subsidiary of Drax Group Holdings Limited [BB+/Stable]), Lynemouth Power Limited, MGT Power, RWE AG (BBB+/Stable), Orsted A/S (BBB+/Stable) and Sumitomo Corp.
Corporate Reorganization Neutral to Ratings: Enviva's organizational transformation to a corporate structure from an MLP is manageable within its current credit profile. In Fitch's view, construction risk is largely mitigated by EVA's portfolio of long-term contracted cashflows with creditworthy counterparties, the experience of the management team, and the maturity of the design of the wood pellet production facilities including a relatively short 18-month construction timeline.
Limited Size Constrains Ratings: EVA is growing rapidly, but at this time its limited size constrains its ratings, with projected EBITDA ranging from $240 million to $260 million in 2022. This is modestly lower than prior expectations of $275 million-$300 million in EBITDA as the company has faced pandemic-related labor, production, and logistics challenges, a three-month delay of the in-service date of their Lucedale production plant and higher costs for purchased wood pellets. These headwinds are largely expected to be temporary with EBITDA projected to increase to $305 million-$335 million in 2023, consistent with prior expectations.
Leverage Pressured; Deleveraging Expected: Fitch expects leverage metrics to remain elevated over the next two years as Enviva focuses on accelerating its capital spending program to support its growing contract backlog. Fitch expects EBITDA leverage to increase to 4.5x in 2023 as capex peaks and decline to less than 4.0x in 2025 as capital spending subsides. Due to strong demand the company is moving forward with ongoing plant expansions and the construction of its Epes and Bond plants in Alabama and Mississippi, each with a 1 million MTPY capacity, respectively.
Deleveraging will be primarily due to the realization of a full year of earnings following the in-service date of the new production plants, but also reflects organic growth, including ongoing plant expansions, and assumes the company will maintain its conservative acquisition financing mix and lower its future plant EBITDA investment multiples to approximately 5.0x from 7.0x as a result of the simplification of its organizational structure.
Conservative Financial Strategy: Fitch expects that Enviva will build six new greenfield plants over the next five years (averaging one new plant per year), that FCFs will be fully contracted with creditworthy counterparties, and that they will be financed by a balanced 50/50 mix of equity and debt. Fitch believes EVA's publicly stated financial policy supports the current ratings. This includes achieving a 3.5x-4.0x leverage ratio, maintaining a forward-looking annual dividend coverage of 1.5x, and targeting a balanced 50/50 capital structure of equity and debt.
Regulatory Environment Should Remain Supportive: Fitch is concerned about nascent proposals in the European Union to legislate biomass as a carbon emitting fuel and not as renewable resource but believes the regulatory environment in jurisdictions that EVA serves should remain favorable in the near term. The proposed change in law can be approved as soon as September as part of the EU's Renewable Energy Directive and could serve to damper strong customer demand. However, the backdrop of rising energy prices in Europe could forestall any changes to regulating biomass in the near term.
Meanwhile, EVA's core markets in Germany, the U.K. and Japan have announced aggressive renewable targets and carbon reduction goals, which should allow EVA to continue to gain market share as European and Asian utilities, power generators and industrial customers increasingly use biomass as an economic replacement in coal-fired generating facilities to meet emissions targets.
The U.K. recently announced that it will cease all coal-fired generation by October 2024, Germany will phase out coal generation by 2038 and Japan recently doubled its renewable target to 36%-38% by 2030.
Derivation Summary
EVA is the world's leading supplier of utility-grade wood pellets to major power generators across the globe. The company's cash flow is supported by long-term take-or-pay contracts with utilities and power generators that are currently subsidized by their local government to produce electricity using renewable energy sources, such as biomass. There are limited publicly traded comparable companies for EVA given the size of the biomass sector as well as the competitive landscape.
EVA is growing rapidly, but exhibits a much smaller scale of operations than peers with expected annual EBITDA of more than $300 million in the near term. While EVA's credit profile is currently hindered by its small scale of operations, its ratings are reflective of long-term take-or-pay contract profile and a supportive regulatory environment for the biomass industry. Atlantica Sustainable Infrastructure Plc (AY; BB+/Stable) is a comparable for EVA in the renewable energy space.
AY is a dividend, growth-oriented company that owns and manages a diversified portfolio of contracted assets underpinned by long-term contracts with credit-worthy counterparties in the power and energy markets. Like EVA, AY generates cash flow under contract prices with counterparties that benefit from supportive government policies. However, AY is roughly 3.0x larger than EVA by size and cash flow.
Fitch projects EVA's FFO leverage will average 4.4x over the next three years (2022-2024), which is higher compared to AY's gross leverage ratio (HoldCo debt/CAFD) in the mid- to high-3x range but is positioned well with respect to the higher rated YieldCo's negative sensitivity threshold of 4.0x. Sunoco LP (BB+/Stable) is a comparable within the midstream space, given that Sunoco also operates in a highly fragmented, competitive wholesale motor fuel sector. Similar to EVA, Sunoco also has 12-year, take-or-pay fuel supply agreement with a 7-Eleven subsidiary, under which Sunoco will supply approximately 2.2 billion gallons of fuel annually.
While EVA's projected leverage is similar to Sunoco's, with YE 2021 FFO leverage at 4.3x and a long-term target of 4.0x, EVA is one-third the size of Sunoco. Additionally, Fitch also does not expect Sunoco to have major funding needs in the near term.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer:
Revenue and EBITDA growth driven by increasing wood pellet export volumes as well as annual inflation and price adjustment under existing and new contracts;
Accretive cash flow from construction of new wood pellet production plants;
Future construction of production plants averaging one per year are assumed in forecast periods financed with 50/50 mix of equity and debt;
Capex averages $338 million per annum in 2022-2025 with peak spending in 2023 and declines thereafter;
Regulatory environment remains supportive for the biomass industry in the jurisdictions that EVA's customers operate in.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Continued increase in size and scale of operations with EBITDA greater than $300 million;
Total debt with equity credit to EBITDA below 4.3x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Significant credit event with counterparties, including multi-notch downgrade at EVA's major counterparties, which will impair FCF into EVA;
Unfavorable changes in regulatory environment with regard to treatment and subsidies supporting biomass power generation as renewable generation;
Capex spending or unfavorable dividend policy that significantly reduces liquidity or increases leverage;
Total debt with equity credit to EBITDA above 5.0x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Enhanced Liquidity: Since late 2021, EVA has increased its financial flexibility by amending and extending its secured revolving credit facility. The credit facility was upsized to $570 million from $525 million, borrowing costs remain the same, and the maturity was extended by approximately one year to June 2027.
As of Sept. 30, 2022, EVA had approximately $106 million of liquidity available under its $570 million revolving credit facility including $8 million of unrestricted cash and cash equivalents. Fitch expects the company to have adequate liquidity to finance plant expansions and construction, fund its working capital needs and dividend distributions in the near term.
To alleviate financing needs in the short term, management has issued approximately $346 million of equity in January.
Issuer Profile
Enviva Inc. is the world's largest supplier of utility-grade wood pellets to major power generators by production capacity. The company procures wood fiber and processes it into utility-grade wood pellets, which are then transported to their customers overseas through vessels via its deep-water ports in Virginia, North Carolina and Mississippi and marine terminals in Georgia, Alabama and Florida.
Date of Relevant Committee
21 January 2022
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
ENVIVA INC. 
