Financial downturn at Enviva could mean trouble for biomass energy

Enviva, the world's largest maker of wood pellets for bioenergy, is struggling through its most significant financial downturn ever, a problem potentially compounded by a class-action lawsuit alleging the company has misrepresented its environmental sustainability and growth potential.

Wall Street reacted harshly on May 3 when Enviva announced a first-quarter loss of $117 million, nearly three times worse than predicted. Enviva also eliminated its shareholder dividend, a red flag for a company in distress.

The firm's balance sheet also indicates trouble. In April, Enviva management had been buoyant with investors about its revenue prospects for 2023. But one month later, it projected an annual net loss of between $136 million and $186 million. Its original annual net-loss projection was far smaller; just $18 million to $48 million, associated largely with new plant construction in the U.S. Deep South.

As a result, Enviva's stock price, which has been sliding since late last year, plunged from $21 per share to less than $8, an all-time low since the company went public in 2015. In April of last year, Enviva's stock peaked at $85 a share. Its shares have since dropped about 90%.

"We know what the specific issues are," CEO Thomas Meth said in a statement. "Contract labor is too high, discipline around [pellet mill] repairs and maintenance spend[ing] is insufficient, wood input costs need to come down further and stay there, and [production] rates at specific plants need to improve and stabilize at those improved levels."

Meth noted optimistically that Enviva is experiencing increased demand for its pellets from European and Asian countries and is taking the necessary steps to improve plant productivity and control costs.

He added: "Worldwide demand for our product continues unabated. Yesterday [May 3], we announced a new sizable contract with an existing Japanese customer for 300,000 metric tons per year with deliveries starting in tandem with new capacity we have coming online.

"In Europe, the European Union will finalize the text related to the Renewable Energy Directive III over the next month," Meth noted, "which we expect will continue to provide demand tailwinds to woody biomass, given how important this renewable resource is to the net-zero targets of EU member nations."

Though 60% of EU renewable energy comes from burning forest biomass, some Wall Street analysts are unconvinced of how quickly Enviva can bounce back financially. Once bullish on Enviva as a profitable company with climate-friendly credentials as an alleged carbon neutral energy source, Fitch Ratings — a top credit ratings agency — downgraded Enviva to a negative outlook regarding its near-term ability to manage its debt. Also, analyst Jordan Levy, who follows Enviva for Truist Securities in Houston, changed his investment rating from buy to sell, given the company's financial condition.

"While we continue to see the long-term market for biomass as supportive," Levy wrote to investors, "we believe that recent downtrends in Enviva's margin profile coupled with continued production shortfalls … call into question [its] longer-term ability to drive growth and returns."

A recently updated map and chart of wood pellet manufacturing plants and harvest areas in the U.S. Southeast, indicating that Enviva plans four new pellet plants in the region, with at least one already under construction in Mississippi. Images courtesy of the Southern Environmental Law Center.

A question left unanswered by both Enviva management and analysts is whether the company will be able to meet its long-term biomass contracts with EU nations and Japan in the coming years. Enviva now operates 10 wood pellet plants in the U.S. Southeast, and is expanding its capacity with a $250 million plant in Mississippi, while three more facilities have been approved in the Deep South.

However, a former Enviva plant employee, who spoke only on the condition of anonymity, told Mongabay that the problems with mill maintenance and production reliability that CEO Meth confirmed are endemic at most Enviva plants, not just a few. The process of drying and compressing wood chips into solid pellets takes a corrosive toll on manufacturing equipment, the source said. If the equipment is not constantly maintained, the mills slow down or shut down.

If that analysis is correct, the company may continue to struggle to produce the thousands of tons of pellets it needs to fulfill its overseas contracts. Enviva says it will double wood pellet production from 6 million metric tons annually today to 13 million metric tons by 2027, though that growth spurt may prove challenging as a cascading range of operational, financial, legal and public relations problems pile up.

In December, a Mongabay investigation — featuring the first-ever whistleblower account from within the multibillion-dollar global biomass giant — contradicted Enviva's green claims of being "a renewable alternative to fossil fuels." Those claims include the company's assertion of rarely using whole trees from native forests to make pellets, of not contributing to net deforestation in its harvest areas, and of regrowing trees on Enviva harvest sites.

A week later, partly prompted by Mongabay's reporting, the Dutch legislature voted to compel its government to stop paying subsidies to wood-pellet manufacturers found to be untruthful in their wood-harvesting practices. The Netherlands is a top consumer of U.S. wood pellets.

Adding to Enviva's woes, in April, a Chicago law firm representing Enviva shareholders filed a class-action lawsuit in the U.S. District Court of Maryland, where Enviva is based. The suit alleges that the company has misrepresented its climate-friendly credentials as well as its environmental and financial sustainability. The suit is seeking unspecified damages in a jury trial; Mongabay's reporting is cited in the lawsuit.

Enviva has not yet responded publicly to the class-action lawsuit. Yet in addressing such issues recently, the company stated: "Enviva remains steadfast in its continued and unwavering commitment to maintaining the highest standards of corporate governance, integrity, sustainability, forest stewardship, and continuous improvement."

On the investor call on May 4, CEO Meth remained focused solely on company financials: "I am personally overseeing our operations team now. I know there is a lot of ground we can make up in the near term to get back on track. And it's my responsibility to do just that. As I’ve said, we’re making progress."

Andrew Behar, who leads As You Sow, a California-based shareholder advocacy group that emphasizes corporate responsibility toward environmental and social values, told Mongabay he's not surprised by Enviva's myriad misfortunes.

"The company has a fundamentally flawed business model," Behar said. "Cutting down trees, grinding them into wood pellets and then burning them creates more carbon going into the atmosphere than coal. That's a fundamental bottom line that's been proven by science."

Behar noted that the biomass industry depends on a loophole first written into the Kyoto Protocol in 1997 that deemed forest biomass a renewable energy source on par with zero-carbon wind and solar. The idea then, and adopted as policy since, in the United Kingdom, the EU, Japan and South Korea, is that so long as trees are replanted, burning forest biomass is carbon neutral. Studies have found this to be true — but only in 44-104 years — far too long to mitigate the rapidly worsening climate crisis.

"A bunch of investors have said they are going to take advantage of this loophole, even though we know biomass is polluting more," Behar added. "But investors are just getting wise to it. The financial risk is there, maybe not today, but in the future, where countries may say, ‘This massive loophole is making the climate crisis worse. Let's close it.’ When that happens, Enviva and all other pellet manufacturers are out of business. Investors are carrying this risk and starting to realize this investment doesn't address climate in their investment portfolios."

It isn't possible to determine how much, if any, of Enviva's stock plunge is related to environmentally conscious and risk-averse investors. And international policy changes are not imminent that would threaten biomass economic viability. In April, the EU renewed its definition of forest biomass as a renewable, carbon-neutral energy source — a decision that Enviva publicly applauded, and which the scientific community and public opposed.

Jeffrey Ubben, a San Francisco-based billionaire investor, is Enviva's single-largest shareholder with 5.74 million shares of common stock. Ubben, who is on the board of the E.O. Wilson Biodiversity Foundation, was appointed to the Enviva board of directors in 2020. His shares are worth an estimated $46 million at current market value. That's down from an estimated $480 million about a year ago.

Ubben declined to take questions from Mongabay. But he said he remains committed to the company and is "bullish on Enviva as a responsible biomass producer."

Banner image: Wood pellets for biomass energy. Image courtesy of Dogwood Alliance.

Justin Catanoso is a regular contributor to Mongabay and a professor of journalism at Wake Forest University in North Carolina.

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