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Edited Transcript of EVA earnings conference call or presentation 9-May-19 2:00pm GMT

Q1 2019 Enviva Partners LP Earnings Call

Bethesda Jun 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Enviva Partners LP earnings conference call or presentation Thursday, May 9, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John K. Keppler

Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC

* Raymond J. Kaszuba

Enviva Partners, LP - Senior VP of Finance & Treasurer - Enviva Partners GP LLC

* Shai S. Even

Enviva Partners, LP - Executive VP & CFO of Enviva Partners GP LLC

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Conference Call Participants

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* Derrick Laton

Goldman Sachs Group Inc., Research Division - Associate

* Pavel S. Molchanov

Raymond James & Associates, Inc., Research Division - Energy Analyst

* Ryan Michael Levine

Citigroup Inc, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Enviva Partners First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Ray Kaszuba, Treasurer. Please go ahead.

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Raymond J. Kaszuba, Enviva Partners, LP - Senior VP of Finance & Treasurer - Enviva Partners GP LLC [2]

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Thank you. Good morning and welcome to the Enviva Partners LP First Quarter 2019 Financial Results Conference Call. We appreciate your interest in Enviva Partners and thank you for participating today. On this morning's call, we have John Keppler, Chairman and CEO; and Shai Even, Chief Financial Officer. Our agenda will be for John and Shai to discuss our financial results released yesterday and provide an update on our current business outlook. Then, we will open up the phone lines for questions.

Before we get started, a few housekeeping items. During the course of our remarks and the subsequent Q&A session, we'll 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 issued yesterday in the IR section of our website, as well as in our most recent 10-K and other filings with the SEC. We assume no obligation to update any forward-looking statements to reflect new or changed 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 the most directly comparable GAAP measures and other relevant disclosures are included in our press release issued yesterday.

I would now like to turn it over to John.

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [3]

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Thank you, Ray. Good morning, everyone, and thanks for joining us today. Since our last call, we took important steps towards executing our long-term growth plan, including completing the dropdown of our sponsors' interest the Hamlet plant, making the second payment for the Wilmington terminal and issuing $200 million of equity consistent with our conservative financial policies, our sponsor plans to recycle its proceeds from the transaction into the build-out of the Pascagoula Cluster including the Port of Pascagoula terminal and a plant in Lucedale, Mississippi and additional sites in and around the region.

As a result, the Partnership is well positioned to grow production and throughput capacity over the next few years to serve the tremendous demand for wood pellets that is materializing around the world. Shai will take some time to detail the financial results for the first quarter, but the quarter shaped up largely as expected, particularly given the impact of seasonal factors, which were more significant and longer lasting than in the past. Given our confidence in the underlying business and our expectations for full year 2019 and beyond, our Board declared a quarterly distribution of $0.645 per unit for the first quarter of 2019, representing the Partnership's 15th consecutive distribution increase.

In addition, as previously announced, with the benefit of the Hamlet Transaction and incremental throughput from the Hamlet plant at our Wilmington terminal, the Partnership now expects to distribute at least $2.65 per unit for full-year 2019. On the contracting front, all of our previously announced contracts with Japanese customers are firm and we have about 2 million metric tons per year of long-term off-take contracts with investment grade counterparties like Marubeni, Mitsubishi, Sumitomo and Toyota Tsusho. We're particularly proud of the recently executed Sumitomo contract for which our sponsor is the sole source of fuel supply to a new biomass power plant to be built in Fukushima, providing incremental renewable generation in a region or community that continues to rebuild following a significant national tragedy. While we continue to make strong progress in growing our contracted position in Japan, we are just as excited about the continued growth opportunities in the European market. The Partnership recently executed a new firm 5-year take-or-pay off-take contract totaling 1 million metric tons with RWE to service its growing demand for wood pellets in the Netherlands and elsewhere. Netherlands is a great example of an early adopting market that has continued to renew its commitment to biomass.

Our proven ability to consistently increase our long-term contracted position continues to extend the runway for durable cash flow growth, well beyond the expected doubling of adjusted EBITDA over the next few years that we discussed last quarter. I'll take some time at the end of the call to discuss the organic growth, additional dropdown acquisitions and capacity expansion that will be required to realize these significant customer opportunities and our plan to serve the increasing global demand, but I would like to now hand it over to Shai to discuss our financial results.

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Shai S. Even, Enviva Partners, LP - Executive VP & CFO of Enviva Partners GP LLC [4]

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Thank you, John. For the first quarter of 2019, net revenue was $158.4 million, representing an increase of 26.4% over the first quarter of 2018. Product sales revenue was $156.6 million as compared to product sales revenue of $122.3 million for the first quarter of last year. For the quarter, we sold 843,000 metric tons of wood pellets as compared to 648,000 metric tons in the first quarter of 2018. The increase in product sales revenue was primarily attributable to a 30% increase in sales volume partially offset by a decrease in pricing due primarily to customer contract mix.

Gross margin was $9.9 million for the first quarter of 2019 as compared to a negative gross margin of $5 million for the same period in 2018. Adjusted gross margin was $27.6 million for the first quarter of 2019 as compared to $21.6 million for the first quarter of 2018. Adjusted gross margin per metric ton was $32.73 for the first quarter of 2019 as compared to $33.40 for the first quarter of 2018. Adjusted gross margin per metric ton decrease primarily as a result of lower pricing due to customer contract mix and higher production costs associated with seasonal factors that were more significant and longer lasting than in the past. Net loss for the first quarter of 2019 was $8.9 million as compared to a net loss of $19.3 million for the first quarter of 2018. Adjusted EBITDA for the first quarter of 2019 was $21.6 million as compared to $17.6 million for the first quarter of 2018. Distributable cash flow, prior to any distributions attributable about incentive distribution rights paid to our general partner, was $11.8 million, which results in the first quarter of 2019 distribution coverage ratio of 0.51 times, which reflect the impact of the units issued in the registered direct offering in late March.

Consistent with prior years, our plan is for the second quarter to be step-up from the first and for the back half of 2019 to be significantly better than the first half of year. For the full year 2019, with the benefit of Hamlet Transaction and incremental throughput at our Wilmington terminal form Hamlet plant, the Partnership expects full-year 2019 net income to be in the range of $18.9 million to $26.9 million. The Partnership continues to expect full-year 2019 distributable cash flow to be in the range of $92 million to $100 million prior to any distributions attributable to incentive distribution rights paid to our general partner.

In guidance issued in our release on March 25, we limited the approximately $10.7 million benefit of the MSA Fee Waivers to our estimated distributable cash flow, but we now believe the benefit of those waivers should also be reflected in adjusted EBITD. As a result, the Partnership is updating the range for expected full-year 2019 adjusted EBITDA to $140.7 million to $148.7 million. For full-year 2019, the Partnership continues to expect to distribute at least $2.65 per common unit. The guidance I just mentioned includes the benefit of Hamlet Transaction and incremental throughput at the Wilmington terminal from the Hamlet plant, but does not include the impact of the Northampton and Southampton plant expansion or any additional drop-downs or other acquisitions.

From a liquidity perspective, at the end of the first quarter of 2019, we had approximately $106.7 million of cash on hand, following the $100 million registered direct offering with $119 million drawn under our $350 million revolving credit facility. The increase in borrowings during the first quarter of 2019 is due primarily to funding of capital expenditures associated with the Northampton and Southampton plant expansion and the timing of changes in working capital.

While we continue to execute on our growth strategy, maintaining a balanced capital structure and conservative financial policies remains a key focus. Our target financing for drop-down acquisitions and major development activities within the Partnership is 50-50, equity and debt. By issuing $200 million of equity, we have pre-funded equity capital needs associated with Hamlet Transaction and the expansion in the Northampton and Southampton production plant. While we expect incremental units issued to temporarily lower distribution coverage, we also expect much stronger adjusted EBITDA and distribution coverage for the second half of 2019 and continue to target a distribution coverage ratio of 1.2 times on a forward-looking annual basis. With pre-funded equity capital and the flexibility provided by our $350 million revolver, we have mitigated capital markets uncertainty with respect to financing our growth and can continue on our [bet] of doubling our adjusted EBITDA over the next few years as we discussed last quarter.

Now, I would like to turn it back to John.

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [5]

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Thanks, Shai. Before spending some time on the development activities at the Partnership and at our sponsor and its joint venture, I wanted to provide an update on the market and our contracted position. Our sales strategy remains to fully contract the production capacity of the Partnership and our current book is well balanced through at least 2025. With the Hamlet Transaction and the associated MGT contract as well as the new RWE contract I mentioned earlier on the call, the weighted average remaining term of the Partnership's off-take contracts stands at 10.5 years and our revenue backlog is $9.9 billion.

Assuming we include volumes under the firm contracts held by the Partnership, our sponsor and its development joint venture, which we would expect to be made available to the Partnership, our weighted average remaining contract term and product sales backlog would extend to 12.2 and $14.4 billion , respectively. From a broader market perspective, several recent developments highlight the clear growth and demand for wood pellets as a sustainable substitute for coal and other fossil fuels. With RED II finalized last December, EU Member States now have till June 2020 deadline to adopt a binding goals and targets into national law through integrated National Energy and Climate Plans. The resulting national policies are expected to provide further impetus for new biomass demand across the EU.

Several European countries are also making material progress towards phasing out coal altogether. The German government has declared it will adopt the Coal Commissions' goals into national law, providing a potential driver for utilities in Germany to develop industrial scale biomass projects to convert or replace coal-fired assets. As you may recall, the Coal Commission called for the decommissioning of 12.5 gigawatts of coal-fired power generation by 2022 and more than 25 gigawatts by the 2030.

In addition to the Netherlands progress on biomass co-firing, it is now evaluating a draft law submitted by its Ministry of Economic Affairs and Climate Policy that proposes is the end of coal-fired electricity by 2030. And several days ago, the UK government's Committee on Climate Change issued a net-zero report, which called for 15% of the UK energy mix, up from 7% to come from biomass in order for the country to achieve net-zero emissions by 2050.

Shifting to Japan, existing laws and regulations there require that all energy suppliers must achieve a minimum share of 44% of power generation from non-fossil fuel energy sources by 2030. In order to achieve and sustain the target energy mix beyond the 20-year term of the current feed-in tariff scheme, several leading firms have started to evaluate biomass projects without FiT support. Our sales team has a robust customer pipeline and we are in substantive negotiations on several new Japanese contracts we expect to be in a position to announce over the next couple of quarters, further diversifying and extending our long-term off-take position and adding to our contracted backlog. But even to fulfill its $4.6 billion backlog, our sponsor will need to make significant investments into new production and terminaling capacity. In addition to the potential expansion of the Greenwood facility, our sponsor plans to reinvest the proceeds we received from the recent drop-down transaction into the build-out of the Pascagoula Cluster.

Our sponsor has received its final permit for the Port of Pascagoula and expects its draft permit for the plant in Lucedale to become final in early summer. In the meantime, our sponsor is finalizing detailed engineering and has ordered major equipment and executed other key contracts. Finally, our sponsor continues to evaluate additional development locations in Alabama and Mississippi to fill out the cluster around the Pascagoula terminal as well as sites near the Partnership's existing terminals in the ports of Chesapeake and Wilmington.

By design, the expectation is that all of the assets developed by the sponsor and its joint venture, as well as the related contracted backlog will be made available to the Partnership for drop-down acquisitions. In addition to organic productivity growth underway as part of our continuous improvement practices, the Partnership's expansions at our existing Northampton and Southampton production facilities are progressing, with detailed engineering nearing completion and major equipment on order. Subject to the issuance of final permits, we expect the expansions to be complete in the first half of 2020 with start up shortly thereafter. Partnership is also finalizing construction and begin commissioning of the recently dropped Hamlet plant. With structural cash flow support from our sponsor through development and ramp, we expect the Hamlet plant to reach commercial operations in June and achieve nameplate production capacity of 600,000 metric tons per year in 2021.

Before we open up for questions, I would like to take a minute to highlight our efforts around sustainability. As a foundation of our business and an area of increasing focus for our investors, we place a great deal of value on having Enviva as in ESG investment in their portfolios. As a company, our purpose is simple, to improve the environment by displacing coal and run more trees. Enviva's wood pellets directly displace coal in power generation and heating applications and lower the life lifecycle greenhouse gas emissions profile of utilities. Wood pellets also effectively eliminate the emission of harmful trace elements, like mercury and arsenic that occur when coal is burned. Since our Partnership and our sponsor started delivering wood pellets to our customers, we have displaced approximately 14 million metric tons of coal, and with the wood pellets we have committed to deliver under a long-term contracted backlog, we expect to displace an additional 65 million tons.

So while we are making a significant dent in coal-fired emissions, at the same time, our activities are leading to more trees, which we once again demonstrated in the latest wood sourcing data we released from Enviva's industry-leading Track & Trace system. What the data tells us is that as Enviva's use of wood fiber grew from approximately 2.2 million metric tons in 2014 to approximately 5.4 million metric tons in 2018, forest inventory, the volume of standing trees in Enviva's sourcing region increased by 8.1% or approximately 160 million metric tons over the same period. The data shows that forest inventory growth and therefore increases in carbon stocks result directly from the market incentives created by a healthy forest products industry, of which our company is an integral part. That's something we can all be proud of.

So, reflecting on Q1, it was a busy quarter. We took important steps towards our long-term growth plan with the drop-down transactions and associated financing. We are focused on sustainable, durable cash flow generation, which when coupled with organic growth and the development activities highlighted on this call, we expect to double the adjusted EBITDA of the Partnership in a few years, as we discussed in last quarter, and continued to build on our track record of 15 quarters of distribution increases. As we close, I would like to thank all the great people at Enviva for their dedication and hard work, displacing coal, growing more trees, and just as importantly keeping our plants, ports and each other states every day.

Operator, can you please open the line for question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Brian Maguire with Goldman Sachs.

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Derrick Laton, Goldman Sachs Group Inc., Research Division - Associate [2]

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This is Derrick Laton sitting on for Brian. A quick one on the first quarter some of the cost impacts that you saw there from weather. I'm just wondering if you could maybe specifically break out what some of those were and if there's any way you could sort of quantify what that impact was to you in the first quarter?

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [3]

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No, absolutely, great question. You've heard us talk about seasonality as a part of our business. And when we talk about seasonality, what we're really talking about is the impact that colder temperatures and wetter weather have on our operations. The cost of producing wood pellets tends to be higher in the winter months because of the increase in the cost of delivered raw materials, which can result from a reduction in accessibility during that cold and wetter weather conditions. This really means that loggers have to go further to find drier tracks that can be logged in wet conditions and the freight component of that tends to drive up costs during that season.

So what we see in Q1 is an increase in delivery cost principally by the procurement radius of what has been a really quite significant series of wet months, some of the wettest weather on record. You combine that with the fact that our facilities tend to be bottlenecked in the winter period by that cold weather and the increased moisture content, which will degrade production. The net-net impact of that is we would quantify as roughly a $6 delta in our gross margin relative to Q1 of last year. And we would expect, as you would suspect, we'll expect to bring some of that back in as the pass-through provisions and index pricing provisions that some of our contracts hold on wood fiber will balance out during the course of the year. I think it's important to note that if you were in the business of fundamentally and favorably in effecting the impacts of climate change and if you believe that some of these weather -- somewhat of a new normal, it's important to talk about what we're doing to get well ahead of this.

And that's principally driven around 2 big pieces for us. One is inventory position, not just inventory on our wood yards themselves, but I would say inventory. We like to call it inventory on the stump where we and our logging partners are engaged in purchasing forward a whole portfolio of tracks that are accessible at all sorts of weather conditions to make sure that within a reasonable procurement radius we can durably preserve that cost position. The other piece of that of course is the expansions and the modifications in our facilities that you've heard us talk about, which will increase our ability to utilize soft woods, principally pine, which tends to grow on upland and tend to be on drier tracks that can be logged in a variety of conditions. So we think we have a number of quite important structural mitigants that will durably change our cost position and preserve that cost position in seasonal elements going forward.

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Derrick Laton, Goldman Sachs Group Inc., Research Division - Associate [4]

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And then just sort of looking ahead to the second quarter then, are you starting to see some of those higher costs abate a little bit at this point as the weather begins to clear up and things tend to get a little bit better on seasonality?

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [5]

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No, Derrick, that's exactly right. What you've seen coming out of the first quarter and into second is costs returning to sort of normal average position obviously as it's drawing out much more accessible cost returning to balance normal position and the production (inaudible) are largely behind us.

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Derrick Laton, Goldman Sachs Group Inc., Research Division - Associate [6]

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And then one other for me. You guys caught out a $4 million charge in the first quarter from evaluating a potential target acquisition of a third-party plant. As you guys continue to grow and win new contracts and you've got a lot of new business to fill. Is this something you're going to be looking at being a little bit more focused on going ahead or was this is more of a sort of a one-off opportunity that you guys had identified to take a look at?

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [7]

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No, I think very much the latter. As we've discussed in the past, from time to time, there may be select opportunities. And what I'd say is that that this one was a particularly unique circumstance and that it was a plant we looked at before, had a couple of questions about the logistics chain, really wanted to take a deep dive there, given what we thought would be a very, very positive plant profile, but its export logistics were challenged. We went in, we validated that and it's something we're no longer pursuing.

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Operator [8]

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And our next question comes from Ryan Levine with Citi.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [9]

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To follow up on some of your comments around the change in your cost structure, can you do any aid or speak to what type of organic growth then may be attributable to some of these initiatives that you just highlighted?

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [10]

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Look, great question, Ryan. Particularly on the Northampton and Southampton expansions that we've articulated, which we'll do a combination of things, it will not only expand the underlying production capacity of those 2 clients by approximately 400,000 tons, we'll increase the net margin on those as well because of the higher NCV pine, which we'll be using in a greater percentage. We've guided to approximately $30 million EBITDA lift associated with those expansions. And of course, to the extent that we're able to execute those effectively in north and south, our existing portfolio of assets should provide additional opportunities to undertake similar investments across the fleet.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [11]

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And then just in terms of the back half of the year, how do you anticipate earning these benefits can be realized this year? Or is this more of a longer-term structural change over the next several years?

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [12]

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So what I'd say is with respect to the Northampton and Southampton expansions, we will guide to a startup and realization of those benefits beginning in the middle of 2020. I just want to know if Shai wants to talk about back half of 2019.

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Shai S. Even, Enviva Partners, LP - Executive VP & CFO of Enviva Partners GP LLC [13]

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Yes, so thank you for the question. We did mention that we're expecting second half of the year to be a significant step up compared to the first half of the year. We're also expecting second quarter to be much stronger compared to the first quarter of 2019. And with all of that, that's why we're very comfortable to reiterate our guidance for the year and keeping our DCF, distributable cash flow, for the year guidance of $92 million to $100 million.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [14]

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And then switching gears, can you speak to the contract negotiating dynamics for RWE and kind of what the background or history was that led to the announcement this morning?

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [15]

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No, sure. In our history, we've got a very strong relationship with RWE and have delivered to them under a variety of contracts. RWE is positioned in the Netherlands is really what ultimately drove the most recent contract execution. We've been talking about the Netherlands for some time for a little bit of a recap. That's a market that has continued to award on an auction basis, on a semi-annual basis, incentives for co-firing of biomass in major co-fired assets. RWE has a strong position there, was doing number of the European utilities. And what you see here is a reflection of that company and others getting through their conversion process and upgrade process and beginning to take deliveries of biomass fuel in the form of wood pellets to fuel that biomass co-firing. In RWE's perspective, 5-year contract made a time sense. It's a structure that we've used with them in the past.

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Operator [16]

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And our next question comes from Pavel Molchanov with Raymond James.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [17]

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Another one on RWE deal, if I may. This of course is a German-based company and we've been talking about the German coal phase out for several quarters now. Is this deal for the Netherlands, potentially a precursor to larger scale off-take agreements for RWE's operations in Germany itself?

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [18]

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Pavel, great question. What I would say is that at like the market in the UK, what we see on a quarterly basis is a progression towards certainty around how utilities will begin to comply with, in the case of Germany, the coal commissions report an implications on the shutdown of key system critical assets across the German landscape. And there we have a number of utilities that are intensely focused on the identification and planning process for conversion of coal fired generating assets, including CHP assets from coal to biomass as part of that shutdown process. And what we would expect is frankly a wide range of utilities given the reverse inquiry we're seeing today on the portfolio that we believe will develop in Germany. That's a market that could be a 5 million ton plus market.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [19]

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And in that same context as the footprint of coal to pellet conversions in Europe begins to broaden out beyond the kind of UK, Sweden, Denmark into our continental countries. Is there any opportunity for you guys to acquire and/or build physical assets in Europe itself rather than the US East Coast has always been the case for you?

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [20]

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No, Pavel, that's a great question. And what I would say is that the underlying cost position and defensibility of long-term margin really depends upon 2 factors, right. So the first is the ability to access on a design and long-term basis, sustainable wood fiber resources. And there's no better place in the world in the southeast United States. We talked about the sustainability during our prepared remarks and the tremendous growth that occurs even after accounting for all of the utilization of forest products resources and the forest products industry. That cost position and access to fiber is why the southeast US has been the fiber basket to the world.

What that means is the preponderance of our growth will continue to be most likely in the southeast US, but there are components of the value chain that we think may be appropriate for further extension downstream. We own terminals in the United States, thinking about those from a long-term asset base in Europe. As that market continues to grow, storage positions that can move volumes in all sorts of various forms and volumes to distribute to the various customers that continue to emerge across Europe could be something interesting and consistent with what we're pretty good at.

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Operator [21]

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And this will conclude our question-and-answer session. I'd like to turn the conference back over to John Keppler for any closing remarks.

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [22]

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Thank you very much. We certainly appreciate everyone taking the time this morning to join us. Clearly some pretty exciting things happening for the balance of the year with Hamlet coming online continued growth in the overall business. And as folks who know me pretty well know I'm pretty fond of saying, we're just getting started and that is very much still the case. We'll look forward to talking again next quarter. Thank you very much.

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Operator [23]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time and have a nice day.