Enviva filed for Chapter 11 bankruptcy on March 14th following several months of financial difficulties and a missed interest payment in January. The company has been burdened by high levels of debt, rising costs, and lower pellet prices. What are the implications for wood pellet markets?
Enviva is the largest wood pellet producer in North America and globally, with an annual capacity of more than 6 million tonnes, mostly in the US South. We estimate that Enviva owns more than 30% of North American wood pellet capacity (Figure 1). Enviva’s capacity has grown rapidly in recent years with new mills in Sampson, NC (600 kt in 2017) and Hamlet, NC (600 kt in 2019), as well as expansions of existing mills (+400 kt in Northampton, NC and Southampton, VA in 2019). It also has a greenfield mill under construction in Epes, AL (1100 kt) and had plans for another in Bond, MS (1000 kt).
This expansion was funded largely by debt, with Enviva’s long-term debt rising from 0.5 to 1.8 USD billion between 2018 and Q3 2023, and debt-to-equity ratio rising from 3 to 7. This made the company vulnerable to higher interest rates, with annual interest expenses rising from around 35 to 80 USD million.
Meanwhile, pellet prices in Europe, while still relatively high, fell in 2023 from the very high levels seen in 2022 following restrictions on Russian gas imports. Enviva’s revenue per tonne of pellets sold fell from 259 USD/t in 2022 Q3 to 224 USD/t in Q3 2023. Enviva also faced operational problems at some mills, including the permanent closure of an underperforming dryer line at their Southampton, VA plant.
To compound matters further, sources indicate that Enviva’s wood sourcing costs possibly increased, with higher harvest and haulage rates, and changes in sourcing practices in response to criticism from environmental groups.
In January, Enviva failed to pay interest of 24 USD million on a loan, and its credit rating was downgraded by Fitch (from ‘CCC-‘ to ‘C’). Investors have become increasingly wary, with Enviva’s share price falling from a peak of around $80 per share in 2022 to $0.39 cents on the day of the bankruptcy announcement (March 14th).
Through Chapter 11 bankruptcy, Enviva reportedly hopes to restructure debt and renegotiate some contracts, probably including a challenging contract with German utility RWE to purchase pellets, made when pellet prices were much higher than today.
The potential impact on wood pellet markets remains unclear. Some likely results include:
- Lower capacity growth in wood pellets. Enviva plans to continue construction of the new pellet plant in Epes, Alabama (1100 kt), but the Bond, MS project (1000 kt) will be put on hold. That one project represents around 5% of North American capacity.
- Higher financing costs for pellets projects. Enviva’s bankruptcy will impact investor appetite for investing in the wood pellets industry. Shareholders have already lost significant value with the share price collapse. Some debt holders will inevitably lose some of the value of their loans when debt is restructured.
- Tighter European and Asian pellet markets. We expect Enviva’s mills to continue operating at near-normal capacity throughout the process to maintain cash flow and meet supply contracts. In the longer term, however, the cancelled expansion project and increased finance costs for pellet projects industry-wide will impact supply growth in North America—at a time when European and East Asian demand is growing by 2 to 3 million tonnes per year. In our recent European wood pellets study, we forecast European demand growth of more than 10 Mt in 2022-2030, most of which will be imported from North America.
Enviva’s bankruptcy, while widely anticipated, represents a significant disruption to the pellet industry. In our view, the main longer-term impact will be lower than expected supply growth and tighter global markets.