A Pulp Fiction - Pt. 2
The world's largest wood pellet producer for "biomass renewable energy" files for bankruptcy.
“If something cannot go on forever, it will stop.” - Herb Stein
When Enviva filed for Chapter 11 bankruptcy protection on March 12 it was not exactly a surprise. In early May 2023, Enviva reported a $117 million loss for its first quarter (~2.5 times the loss reported over the same period in 2022), and announced it was eliminating its quarterly dividend. Immediately, the stock crashed almost 60% in one day. By the morning after that first quarter 2023 earnings release, the stock had dropped ~90% from its Spring 2022 high of about $87 per share.
Enviva lost $258 million on revenue of nearly $900 million through the first nine months of 2023. Its first “going concern” warning came in the third quarter 2023, its last complete SEC quarterly (10Q) filing.
In that filing’s “Liquidity and Going Concern Evaluation”, the company details a transaction it entered into with a customer in the fourth quarter of 2022 (“the Q4 2022 Transactions”) involving series of purchase and sales agreements. What started out as a form of hedge turned into a weighty anchor around the neck of a company already underwater.
Enviva was attempting to restructure the terms of the purchase and sales agreements associated with the “Q4 2022 Transactions” when the counterparty notified the company in early November that it was in material breach of the contract. As noted in the Q3 2023 Enviva 10Q, the alleged breach, “if not cured or waived, would allow the customer to terminate its purchase and sale contracts with us and accelerate the payment thereunder”, and that a default or termination of these contracts could result in a default under the senior secured credit facility, which may result in cross-defaults or other consequences under the Company’s other debt facilities”.
Enviva last quarterly filing also notes that it was in compliance with its secured credit and other debt facilities’ covenants as of the filing date. But, absent a “cure” for wood pellet market prices and the underwater Q4 2022 Transactions, the company “may be in breach of each of these covenants under its senior secured credit facility as early as the reporting date for the measurement period ending December 31, 2023. It also noted that “a “going concern” or similar qualification in the audit opinion with respect to our financial statements for the year ended December 31, 2023 would be an independent event of default under our senior secured credit facility”.
The audit opinion never came. Apparently, the company could not renegotiate better terms with the customer involved in the “Q4 2022 Transactions” and was either in breach of its loan covenants or was about to be. It filed for Chapter 11 reorganization in March and its full year 2023 audited financial statements have yet to be filed.
The Enviva bankruptcy filing lists its 30 largest unsecured creditors. The second is ~$350 million owed to RWE Supply & Trading GmbH, a division of German utility RWE which is in the process of converting two former coal-fired power plants to run on wood pellets. The 30th is Drax Power Limited, an unspecified amount listed as litigation. It is likely that these are the parties referenced in the “Q4 2022 Transactions”.
With the EU’s increasingly higher renewable energy targets partly relying on biomass, and REDIII continuing to green light the burning of live trees categorized as “low value roundwood” and “thinning”, the world’s largest wood pellet producer filing bankruptcy creates some anxiety for Drax and EU biomass power generators. Any disruptions to the wood pellet supply chain have serious implications for these electricity producers.
Enviva’s pellet production had already fallen from ~6 million tons exported in 2022 to ~5 million tons in 2023. After Enviva warned shareholders last November there was “substantial doubt” over its ability to continue as a going concern, Drax said it was “well insulated” from potential supply disruptions, even though Enviva supplies ~15% of its fuel. Before cancelling its contracts with Enviva and demanding >$350 million in damages, RWE had been a major importer of the company’s wood pellets.
Enviva operates ten wood pellet production facilities in the Southeast U.S. with nameplate capacity of 6 million MT annually. It also owns one port facility (Chesapeake, VA) and terminal assets at two others, contracting for services at three other port locations. The below graph shows the locations of Drax’s and Enviva’s wood pellet production plants in the Southeast (see graph depicting Drax facilities in the Pacific Northwest in Part 1.)
In the Southeast U.S, Enviva has faced similar allegations as those asserted against Drax in British Columbia as respects using whole trees to make wood pellet fuel. The Dogwood Alliance and Southern Environmental Law Center websites document their extensive efforts to fight the company’s wood pellet production in the Southeast.
Enviva has yet to file its required 2023 financial statement with the Securities and Exchange Commission. Despite benefitting substantially, if indirectly, from EU and UK “Directives” and the ensuing subsidies that drove the wood pellet supply chain, its last quarter producing positive net income from operations was the second quarter of 2021, and last full year profits was 2020.
But at the end of 2021, Enviva converted from a Limited Partnership to a Corporation, and in the process restated 2020 and 2019 results. 2020’s prior full year profit of $17 million flipped to a $106 million loss, while 2019’s net loss of $3 million was increased to $135 million (a factor of over forty).
In retrospect, the signs of Enviva’s growing desperation were everywhere for anyone caring to look. Reviewing Enviva’s annual reports for the period 2015 – 2023, it is clear that the company was fighting a losing battle with extremely high costs.
While comparison to pure play U.S. publicly traded wood pellet manufacturers is not possible, we checked how Cost of Goods Sold (CGS, a measure of input and plant operating costs) compares to Product Sales for the two largest U.S. lumber companies. While not perfect analogies, in their 2023 Annual Reports, Weyerhaeuser and West Fraser show CGS of 78% and 73%, respectively. From 2015 to 2023, Enviva’s CGS never fell below 80%. By 2023 it was over 90%.
Enviva’s choice of Chapter 11 implies the company intends to shed its liabilities, restructure, and emerge as a going concern. Some are not convinced that will be so easy.
Since late 2022, nonprofit environmental science and conservation news platform Mongabay has run several exclusive stories about Enviva from a former maintenance manager at its plants in North Carolina and Virginia. The earliest stories allegedly blew the whistle on the use of whole trees versus sawmill residues, fallen trees and slash from harvesting.
But a Mongabay story about the fallout from Enviva’s bankruptcy last month provided more detail from their alleged former whistleblower that emerging from Chapter 11 given the condition of its plant facilities will not be so easy. It notes:
As many as eight of Enviva’s 10 pellet mills in the U.S. Southeast, he said, are in such poor condition that they are producing fewer pellets monthly at a much higher cost due to intractable and costly maintenance issues.
“There’s no way Enviva is coming out of Chapter 11,” the former employee told Mongabay, referring to a court-ordered reorganization process by which the firm has a set time to restructure its debt and begin paying back creditors. “Their manufacturing equipment is not fit for the service it’s required to deliver. Only two of its 10 plants (one in Florida, one in Georgia, neither built by Enviva) are hitting their maximum achievable targets for pellet production.”
He added: “They also are not replacing equipment at the plants with the materials that will fix the problems. Plants keep going out of service for days at a time, and Enviva keeps spending millions to patch them up. Every ton of pellets they produce is at a loss. The more they produce, the more money they lose.”
If the whistleblower is correct, a large part of Enviva’s production problems have to do with the use of carbon steel vs. stainless steel in its plants, and a change in the mix of wood supply, with more pine and less hardwood than planned. As the story notes:
But here’s the crux of the problem, yet unaddressed by Enviva: Most Enviva production facilities are built with carbon steel, which is less expensive (though less durable) than stainless steel, explained the former employee, who remains in close touch with plant management inside the company.
When it built its plants, Enviva planned to mostly use hardwood trees to make pellets. But when the price of hardwood rose sharply, the firm to control costs shifted to processing 80% pine and 20% hardwoods, instead of the opposite. But pine resins and added moisture quickly corroded and degraded the carbon steel equipment, especially in Southampton, Virginia, a plant Enviva said it has partially shuttered. Its four plants in North Carolina must also now close several times a year for maintenance, thus reducing annual production.
“Those plants need to be rebuilt with stainless steel, but that comes with a huge cost,” said the former employee, who declined to be named for reasons of family and professional privacy. “These plants are wearing down at an alarming rate. And the more pine they push through, the faster it wears. Maintenance costs keep piling up.”
Setting aside for the moment the absurd idea that CO2 emissions from the stacks at Drax do not count toward “climate change”, by virtue of nothing more than government diktat. There are other legitimate environmental concerns with burning wood for electricity generation.
Burning trees to generate electricity creates more CO2 emissions per unit of energy. Per megawatt hour (MWh) of electricity, burning wood creates ~3 times the CO2 emissions of natural gas, or ~1.5 times the emissions of coal.
Harvesting trees for energy is a lost opportunity cost for carbon sequestration. It releases carbon that was sequestered and would have remained stored. It foregoes additional sequestration had the trees been left standing.
It takes a long time to re-sequester carbon from burning trees for energy into newly planted trees. Depending on tree types, latitude and other factors, the payback period can range from 40 - >90 years.
Even when using dead trees and slash, removing forestry residues robs forest soils of carbon and nutrient rebuilding. It also impacts water quality. Bottomland hardwoods provide significant wildlife habitat, as well as water filtration and storm buffering.
The burning of solid fuels of any type results in air emissions including particulate matter (PM), sulfur dioxides (SO2), nitrogen oxides (NOX), lead, mercury, and other emissions defined by U.S. EPA as “criteria” and “hazardous air pollutants”. Burning wood biomass for electricity generation is, as a general rule, always more polluting than burning natural gas, and on par with coal, though the concentrations of some air pollutants (sulfur, mercury) are lower in wood biomass than in coal.
While wood biomass combustion has lower SO2 emissions than coal, it emits substantial amounts of organic micro-pollutants, including toxic compounds like polycyclic aromatic hydrocarbons (PAHs) and polychlorinated dibenzo-p-dioxins and dibenzofurans (PCDD/Fs). Organic hazardous air pollutants emitted in the greatest concentrations from burning wood biomass include acrolein, styrene and formaldehyde, and the acid gases hydrofluoric acid and hydrochloric acid.
A problem trying to compare emissions from different fuel sources is that most are denominated in pounds of pollutants as rates per million BTUs of heat input (as fuel), which can hide differences in efficiencies between facilities. For electricity generation facilities a more meaningful comparison can be gleaned by converting these rates to express them in terms of emissions per unit of electricity delivered to the grid.
The figures below from the Partnership for Policy Integrity (PFPI) compare the emissions of the key airborne pollutants between two electricity generation facilities. PFPI pulled the data from the air permit and application documents for the 102.5 Megawatt (MW) Gainesville Renewable Energy Center (GREC) biomass plant in Florida, contrasted with air permit numbers from the much larger Pioneer Valley Energy Center (PVEC), a 431 MW natural gas and diesel plant proposed in Westfield, Massachusetts. Both plants received state and federal permits around the same time. GREC, a wood biomass burning plant, was completed in 2013. PVEC, a hydrocarbon burning plant, was never built:
A fall 2023 paper in Renewable Energy titled Emissions of Wood Pelletization and Bioenergy Use in the United States notes:
“There are about 56 Hazardous Air Pollutants (HAPs) emitted by wood pellet manufacturing (WPM), with acetaldehyde, formaldehyde, methanol, acrolein, phenol, and propionaldehyde comprising up to 90% of total HAPs. Chloride compounds (hydrochloric acid, methyl chloride, methylene chloride) account for about 2% of total HAPs. Heavy metal compounds (mercury, cadmium, nickel, lead) comprise less than 0.01% of HAPs emissions. Processes commonly associated with HAP emissions include dryer, furnace, hammer mill, and pellet storage. Table 1 lists the facilities and the airborne contaminants”:
This is not the first dalliance the EU (and UK while it was still a member) have had under the blocs’ RED rules with deforestation and Europe’s “renewable energy” plans. The EU suffered a black eye from deforestation in Malaysia and Indonesia tied directly to EU biodiesel demand from palm oil, part of its “biofuels” initiative under the first RED. It is unclear how much the revisions to the EU’s REDII and REDIII dealing with “sustainable” sourcing of palm oil for biodiesel have changed the deforestation picture in Malaysia and Indonesia.
Mongabay reports that “according to environmental groups, Enviva is seeking subsidies under the IRA from the Department of Energy and Treasury Department to help pay for its new plant in Alabama and restart construction in Mississippi — plants with the potential to each make 1 million tons of pellets annually, far more than existing plants.” After receiving subsidies indirectly from Europe and the UK for more than a decade via the EU RED and Drax Power Station’s hunger for fuel, if the Mongabay reports from environmental groups are accurate, Enviva’s survival may depend on a bailout from U.S. taxpayers under the IRA. Your dollars. Your trees. Pelletized to be burned in a former coal-fired power plant in England. You can’t make it up. We tried.
We close by noting that any “green” business which loses money perennially absent government subsidies (or like Drax, makes money only due to subsidies) isn’t a business at all. It is an Organ of the administrative state, and a classic example of what we refer to as EcoStatism™. The old joke “Governments are lousy at choosing winners; losers are excellent at choosing government” applies in this case as well.
Advanced nations will not “save the planet and humanity” by chopping down trees and burning them in converted coal-fired power plants (Enviva & Drax) or ploughing up prairie and clearing rainforest for “biofuel” monoculture (corn ethanol in the U.S.; palm oil for EU “biodiesel”). It might be hard to find better examples of what we labeled Sustainabilchemy in our two-part series last year by the same name.
Future “environmentalists” will wonder what the hell we were thinking burning live trees to generate electricity under the pretense of “sustainability”. Shame on the UK and EU.
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Thanks. Very interesting. I love this paragraph, it's so well put:
"We close by noting that any “green” business which loses money perennially absent government subsidies (or like Drax, makes money only due to subsidies) isn’t a business at all. It is an Organ of the administrative state, and a classic example of what we refer to as EcoStatism™. The old joke “Governments are lousy at choosing winners; losers are excellent at choosing government” applies in this case as well."
Marvelous article. I had completely ignored the carbon sink to carbon dumpster fire in assessing the intentional stupidity of making and burning pellets for electricity. That fact and the obvious ecological malfeasance of scooping up vast quantities of slash and residual organic matter from forest floors to feed a plant make this look like more of clown show than ever.