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Edited Transcript of EVA earnings conference call or presentation 21-Feb-19 3:00pm GMT

Q4 2018 Enviva Partners LP Earnings Call

Bethesda Apr 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Enviva Partners LP earnings conference call or presentation Thursday, February 21, 2019 at 3:00:00pm 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

* Elvira Scotto

RBC Capital Markets, LLC, Research Division - Director

* 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, LP Fourth Quarter and Full Year 2018 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 Enviva Partners, LP Fourth Quarter and Full Year 2018 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 will 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 10-K and our 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, the partnership adopted ASC 606 on January 1, 2018. So the financial results for the three and 12 months ended December 31, 2018 are prepared on this basis. In addition to presenting our financial results in accordance with GAAP, we will also be discussing non-GAAP figures on this call, and want to be clear on the basis of each. In certain cases, we refer to our results excluding the impact of the Chesapeake incident and the hurricanes, where we exclude the approximate costs incurred during the fourth quarter or full year 2018, offset by insurance recoveries.

Furthermore, we will be discussing adjusted net income, adjusted EBITDA and certain other non-GAAP measures pertaining to completed fiscal periods as well as our forecast. Information concerning the reconciliation 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. With our full year and fourth quarter results reported yesterday, 2018 is now on the books, and in many ways, thankfully behind us. We printed adjusted EBITDA slightly ahead of the $100 million we communicated on our last conference call. We are still pursuing roughly $27 million in claims outstanding, following what was a tough string of events, including the Chesapeake fire, direct hits to our port operations by hurricanes Florence and Michael and all-time record rainfall in many of our key fiber sourcing areas that created supply chain and logistical pressures on our operations. But despite the distraction of those challenges and managing their impact on our production and shipping schedules, we reported adjusted EBITDA of close to $34 million for the fourth quarter.

More importantly, since our last call, we were able to continue setting the stage for a strong 2019 and beyond. Within the partnership, we made important progress on the expansions of our Northampton and Southampton production plants with major pieces of equipment now on order and detailed engineering packages prepared to be issued for construction. We expect expansion activities to be complete in the first half of 2020, with startup and commercial operation shortly thereafter, subject to receiving the necessary permits.

We also completed the installation of additional equipment at our Sampson plant that will enable higher utilization of softwood and production of higher energy wood pellets, driving increased margin per tonne at this facility. Additionally, we executed a new 17-year offtake contract with a premier Japanese trading house, adding another major investment grade counterparty to our growing and diverse list of customers. Deliveries under this contract are expected to start in 2023 with initial volumes of 100,000 metric tons per year for the first 5 years, increasing to 175,000 metric tons per year thereafter.

Given the financial performance of the partnership for 2018 and our expectations for 2019 and beyond, our Board declared a quarterly distribution of $0.64 per unit for the fourth quarter of 2018 at a coverage of 1.26x. This distribution meets full year 2018 distribution guidance of $2.53 per unit and represents a compound annual growth rate of more than 13% since our IPO. We've increased our quarterly distribution each of the 14 quarters since we went public, and this is a track record we expect to continue in 2019 and beyond.

But as many of you know, I'm fond of saying we're just getting started and here's what we expect for 2019. As the foundation of what we do, we expect to safely and sustainably produce and sell more high quality tonnes at higher margin per tonne. We expect to maintain our leadership position as the preferred supplier in our industry, extending our fully contracted position and further diversifying our portfolio of long-term customers around the world.

We expect to complete the Port of Wilmington dropdown with the second and final payment mid-year and benefit from the associated incremental adjusted EBITDA from the increased throughput at our Wilmington terminal. On this basis, we expect to generate between $127 million and $135 million in adjusted EBITDA and to increase our distribution each quarter, distributing at least $2.61 per unit for the year, before accounting for any drops or acquisitions.

And importantly, we also expect to materially progress the 400,000 tonne per year expansion of our Northampton and Southampton plants, which will deliver an incremental $30 million in adjusted EBITDA annually, once the assets are ramped, following completion of expansion activities in early 2020. And we expect to pursue at least one dropdown acquisition of a contracted production facility into the partnership in 2019, the benefit of which is not included in the guidance I mentioned a moment ago.

Successfully executing these 2019 milestones will keep us on track towards our expectations that we will more than double the partnership's adjusted EBITDA over the next few years driven by organic growth, expansions of the partnership's fully contracted assets, and of course dropdown acquisitions from our sponsor. I'll take some time at the end of the call to discuss the substantially increasing backlog of fully contracted assets that are both operating and under development and construction at our sponsor, along with a broader market update.

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 full year 2018, on a GAAP basis, net revenue was $573.7 million, representing an increase of 5.6% over 2017. Product sale revenue was $564 million as compared to product sales revenue of $522.3 million last year. For the year, we sold 3 million metric tons of wood pellets as compared to pellet sales of 2.7 million metric tons in 2017. The increase in product sales revenue was primarily attributable to a 9.5% increase in sales volume partially offset by a decrease in pricing due primarily to customer contract mix.

Gross margin was $69.4 million for the full year 2018 as compared to $78.8 million in 2017. Adjusted gross margin, which exclude the impact of the Chesapeake incident and the hurricanes, was $115.8 million for the full year 2018 as compared to $123.6 million for 2017. Adjusted gross margin per metric ton was $38.81 for the full year 2018 as compared to $45.38 for the full year 2017. Excluding the impact of ASC 606 for comparison purposes, adjusted gross margin per metric ton would have been $42.19 for the full year 2017. Adjusted gross margin decreased primarily as the result of lower pricing due to customer contract mix and decreases in purchase and sale transactions.

Net income for 2018 was $7 million as compared to $14.4 million in 2017. Adjusted net income for 2018, which excludes the impact of the Chesapeake incident and the hurricane, was $21.5 million. Adjusted EBITDA for the full year 2018 was $102.6 million as compared to $102.4 million for the full year 2017 as higher sales volume were offset by lower pricing due to customer contract mix and decreased purchase and sale transaction. Distributable cash flow, prior to any distribution attributable to incentive distribution rights paid to our general partner, was $63.8 million.

For the fourth quarter of 2018, net revenue was $168.7 million, representing an increase of 4.8% over $161 million for the corresponding period of 2017. Product sales revenue was $166 million as compared to product sales of $156.1 million for the fourth quarter of last year. For the quarter, we sold 874,000 metric tons of wood pellets as compared to 805,000 metric tons during the fourth quarter of 2017, an increase of 8.6%.

For the fourth quarter of 2018, we generated gross margin of $24.5 million as compared to $25.7 million for the fourth quarter of last year. Adjusted gross margin was $31.7 million for the fourth quarter as compared to $38.2 million for the same period of 2017. Adjusted gross margin per metric ton was $36.23 for the first quarter of 2018 as compared to $43.88 for the fourth quarter of 2017 as adjusted for the impact of ASC 606 for comparison purposes. Adjusted gross margin decreased primarily due to a lower pricing, due to customer contract mix and higher production costs.

For the fourth quarter of 2018, on a GAAP basis, net income was $9.4 million as compared to net income of $7.9 million for the corresponding quarter of 2017. Adjusted net income for the fourth quarter of 2018 was $13.6 million. Adjusted EBITDA for the fourth quarter of 2018 was $33.8 million as compared to $31.9 million for the corresponding quarter of 2017. Distributable cash flow, prior to any distribution attributable to incentive distribution rights paid to the general partner, was $23.2 million for the fourth quarter of 2018 on a reported basis which results in a fourth quarter 2018 distribution coverage ratio of 1.26x.

From a liquidity perspective, at the end of the fourth quarter of 2018, we had approximately $2.5 million of cash on hand with $73 million drawn under our $350 million revolving credit facility. The increase in borrowings during the fourth quarter of 2018 is primarily due to repayment of $41 million of existing term loans which revolver draws in connection with the amendment and upsizing of our revolving credit facility in October 2018.

Moving on to guidance. For 2019, given the production profile of our fully contracted assets, we are projecting to a net income in the range of approximately $31 million to $39 million with associate adjusted EBITDA of between $127 million and $135 million. The partnership expects to incur maintenance capital expenditures of $6.3 million and interest expense net of amortization of debt issuance costs and original issuance discount of $38.6 million in 2019. As a result, the partnership expects full year distributable cash flow to be in the range of $82.1 million to $90.1 million, prior to any distributions attributable to incentive distribution rights paid to our general partner. For the full year 2019, we expect to distribute at least $2.61 per common unit.

The guidance I just mentioned include the benefit of additional throughput at the Wilmington terminal by mid-year 2019, but does not include the impact of any additional dropdown acquisition or the Northampton and Southampton plant expansions or recoveries on claim associate with the Chesapeake incident and the hurricane. While we continue to execute on this growth strategy, maintaining a balanced capital structure and conservative financial policy will be a key focus of ours.

As we have said in the past, seasonality and the mix and timing of customer shipment can impact results, which may vary from quarter-to-quarter. During the mid -- winter months, cost of producing pellets tend to be higher due to colder, wetter weather and given the increase in demand for [power needs] during that time of the year, cost to source third-party wood pellet for our purchase and sales transaction can also be higher. Although we expect full year 2019 distribution coverage to be around our annual target, we expect 2019 to look a lot like previous year, where the back half was a significant step-up from the first half, and some quarters may have coverage below 1x. As we have described previously, our Board evaluates our distribution and coverage on an annual basis.

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. As we've described, our sales strategy is to fully contract the production capacity of the partnership and its current book remains well balanced through 2025. The weighted average remaining term of the partnership's offtake contracts now stands at 9.7 years and our revenue backlog is now $7.9 billion, including the new Japanese contract I mentioned at the beginning of the call that was signed by the partnership. In addition to that contract, our sponsor recently executed a new 18-year contract with a major Japanese trading house that is expected to commence in 2022 with annual volumes of 440,000 metric tons.

With these new contracts, assuming we include volumes under the firm and contingent contracts held by the partnership, our sponsor and the Hancock JVs, the partnership's weighted average remaining contract term and product sales backlog would extend to 12.3 years and $14.6 billion, respectively. Clearly, we continue to take advantage of tremendous interest in the marketplace for proven, sustainable solutions to mitigate climate change. A few notable highlights from around the world illustrate some of these demand drivers.

The 2018 United Nations Climate Change Conference, or COP24, that concluded in December, established the implementation plan for the Paris Agreement. There was clear recognition that in order to achieve the Paris Agreement's goal to limit global warming to 1.5 degree Celsius, a range of other technologies, including sustainable bioenergy must be deployed at scale. Many believe to hit that mark, negative emissions technologies, meaning those that remove more CO2 from the atmosphere than they emit will be needed. One of our largest customers, Drax, announced that it has successfully piloted the capture of its first tonne of carbon from its biomass-fired power station, an important milestone towards achieving a negative emissions profile.

In Europe, the final text of RED II became legally binding on December 24, 2018. This landmark legislation is expected to drive continued growth in biomass energy across the European Union through the 2020s as a necessary complement to other forms of renewable energy, which almost account for at least 32% of the EU's gross consumption by 2030. In Germany, the Coal Commission agreed on a final report that proposes to end coal-fired power production in Germany by no later than 2038. Now that the mandate is in place, this is a case of the government moving from what to do about coal to how to do it. As expected, several major utilities are already evaluating biomass solutions.

In Japan, the Ministry of Economy, Trade, and Industry, has approved more than 700 projects to build new biomass generation capacity under the country's feed-in-tariff system. Given the pressing timeline and milestones that METI requires generators to meet in order to preserve their FiT awards, we expect some projects, including those with more challenging logistics or disadvantaged economics to be rationalized. However, total biomass generation capacity under Japan's feed-in-tariff scheme is still more than 11 gigawatts, significantly higher than the country's target of 6 to 7.5 gigawatts of biomass power by 2030. To help serve this demand, in just the last year the partnership and our sponsor have announced agreements with four major investment grade Japanese trading houses, totaling more than 2 million metric tons per year. We expect this pace to continue for the next 18 to 24 months, complemented by substantial growth in South Korea and in our proven markets across Continental Europe, including emerging demand in the Netherlands, Germany and France.

We expect to serve some of this incremental contracted demand directly with our annual productivity increases and the capacity expansions underway in our Northampton and Southampton production plants. But given that the partnership sales and production books remain well balanced through 2025, the growing contracted backlog at our sponsor will require investment into substantial new plants and port capacity. As a quick reminder, the backlog at our sponsor includes the majority of the million tonne per year MGT contract, the 520,000 tonnes annually contracted to Sumitomo, the 450,000 tonnes contracted to be delivered each year under the Mitsubishi IOT contract and the 440,000 metric ton per year contract we just announced.

The weighted average term of these contracts is 15.8 years, with a product sales backlog of $6.4 billion. For context, the sponsor's current contracted position in revenue backlog are about 4 times the contracted revenue backlog of the partnership at the time of its IPO. To fulfill this backlog, the sponsor and its joint ventures have a significant development program underway for projects you've heard us describe previously that include the roughly 600,000 metric ton per year Hamlet, North Carolina plant that is nearing completion and is expected to begin operation in the first half of this year, the 500,000 metric per year Greenwood, South Carolina plant, which is currently operating and has the potential to be expanded to about 600,000 metric tons per year subject to receiving necessary permits, the proposed Pascagoula Cluster, which includes a new deepwater marine terminal in Pascagoula, Mississippi with 3 million metric tons per year throughput capacity and a large production plant in Lucedale, Mississippi following completion of the final investment decision process.

In addition, our sponsor is actively developing sites for additional wood pellet production plants in Epes, Alabama and Taylorsville, Mississippi within the Pascagoula Cluster as well as others in and around the partnership's terminals in Chesapeake, Virginia and Wilmington, North Carolina. By design, the expectation is that all of these assets developed by the sponsor and its joint venture as well as their related contracted backlog will be made available to the partnership for dropdown acquisitions, which, along with the expansions and organic growth we profiled within the partnership, is a pretty clear path to seeing the partnership's adjusted EBITDA more than double in size over the next few years.

Before I close, I would like to take a minute to highlight some of our accomplishments in sustainability. Sustainability is the foundation of our business and is increasingly an area of focus for our investors, who place a great deal of value on having Enviva as in ESG investment in their portfolio. With the wood pellets we have committed to deliver under our contracted backlog, we will displace more than 64 million tonnes of coal. That's an amazing statement about sustainability, but exactly how we're doing that showcases some of our innovation and leadership on the topic.

Some of our most visible sustainability elements are our efforts on forest land certification and the promotion of sustainable forestry management, and several years ago, our sponsor launched an Independently Managed Group certification program called an IMG. During 2018, our sponsor nearly doubled the total acres enrolled in our IMG to more than 66,000 acres. And now one out of every 10 acres of American Tree Farm System certified forest land in North Carolina is enrolled in our sponsor's IMG.

Programs like the IMG, the Enviva Forest Conservation Fund and our industry-leading track and trace system, tangibly and transparently illustrate our innovation on and commitment to sustainability in ways that extends far beyond third-party audits, and legal and regulatory compliance. So in sum, we've come through the challenges of 2018, building a solid platform to capitalize on the significant visible growth opportunities ahead. We are focused on sustainable, durable cash flow generation through reliable operating performance and a production capacity that is fully contracted with a global set of credit-worthy, diversified long-term offtake agreements.

Coupled with organic growth and opportunities to acquire contracted production in terminal assets, we believe we have a proven approach to delivering long-term unitholder value and continuing to increase our per unit distributions over time. It's a track record we have maintained for the 14 quarters since our IPO and one we expect to continue. As we close, I would like to thank all the great people at Enviva for their commitment and hard work, keeping our plants, our ports and most importantly, each other safe every day.

Operator, can you please open the line for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today will come from Brian Maguire with Goldman Sachs.

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

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It's Derrick Laton sitting in for Brian. Just one on margins, I know you guys have mentioned some higher production costs that you encountered in the quarter. Just curious if you could [parse] -- is that something that's more transitory in nature, given some of the headwinds from the hurricane or something more structural that you're seeing out there? And then also, I think you called out customer mix has been a little bit of a hindrance to margins in the last couple of quarters. So wondering if this is a result of maybe some of the newer business that you guys are winning and are those volumes coming in at a lower margin, or maybe just kind of help me parse that out.

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Shai S. Even, Enviva Partners, LP - Executive VP & CFO of Enviva Partners GP LLC [3]

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Yes. Thank you for the question. So first I'll say that there is no really a change to our business, we have the same customer, it's just the timing of where we are selling to different customers with different contract pricing. So that's why we are referring to the effect of pricing on the customer contract mix. And then second, we mentioned on the call, though, already that we have some seasonality in our business and that was exacerbated by the hurricanes that affected our business there during the fourth quarter; we had the Florence at the end of the third quarter and then Michael in the fourth quarter, which caused higher moisture and higher wet weather in our operating region, which has some effect on [our drier] operational activities, and as a result we had the lower production during the fourth quarter this year. When we have a lower production, of course, that will add to our fixed-cost absorption. As you know, most of our operating costs are on the fixed operating expenses, so not only we are at a lower production cost, which will lower our total gross margin dollar amount, but that will affect, together with the fixed cost absorption that will affect our gross margin per metric ton.

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

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And then just one on the distribution per unit guidance. I think you guys have said maybe previously that your long-term goal is for some double-digit annual increases in this distribution. It looks like your guidance for this year is sort of implying about 3% year-over-year growth from '18, just wondering how we should think about the distribution going forward as you begin to fold in some of these new customer wins and some of the potential dropdowns in the years ahead. Are we getting closer to that sort of double-digit growth anytime soon or is that more of a longer-term goal in the years out?

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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, I think, look, great question. The guidance that we provided, as we tried to clarify, is specifically without accounting for the benefits of incremental drops or other acquisitions. As we've tried to communicate in the past, the growth in the underlying business comes in essentially kind 3 buckets. The first being the organic growth profile, you see our annual target is sort of 7% to 10% underlying EBITDA growth, if you map midpoint of the range 2018, the midpoint of the range 2019 are right in line with that. Then you have the benefits of incremental drops and other acquisitions. And as we've described previously, for 2019, we do expect to have the opportunity to acquire at least one fully contracted production asset into the partnership and with the dropdown pipeline that continues to grow, the combination of Hamlet, which is coming online first half of this year, in fact, parts of that facility are already in commissioning, you've got the Greenwood asset as well, which is up and operating, potential to expand that from 500,000 to 600,000 tonnes. And then you've got the substantial backlog at the sponsor. I think the sponsor levels, think about $6.4 billion in revenue backlog that will ultimately need to have capacity built underneath it. We talked a little bit about Lucedale and Pascagoula, given some visibility into perhaps Epes and Taylorsville as well as additional sites around the partnership Cluster. So we feel pretty good about the long-term growth profile -- the combination of underlying 7% to 10% organic growth, the dropdown pipeline and of course, the material expansions underway at Northampton and Southampton that should drive an incremental $30 million once they get ramped on construction. So that combination, you get pretty close to a doubling of EBITDA. You translate that right through to many of the metrics on DCF and ultimately distributions per unit that you're walking to.

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

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And then maybe just one last one for me, sort of more conceptual. There's been a heightened focus on environmental sustainability here in the U.S. in the last year or 2, just curious how you guys view the potential opportunity for biomass here in the domestic market? And has that changed at all recently, given this increased environmental focus?

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

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Derrick, look, I think the U.S. in many ways continues to play a bit of catch-up from the perspective of renewable energy, investment in regulation, as compared to what we've seen go on in Europe and increasingly in Asia, both -- most recently with RED II, following RED I, very stringent and aggressive renewable energy targets and a focus on sustainable energy generation, complemented by of course what we see in Japan, that's driving that market so robustly, South Korea and elsewhere. I think here in the U.S. biomass continues to have a tremendous opportunity to play a role, but I think we have a ways to go, and certainly the activities of the EPA, and whether it's agriculture and others, really kind of banging the drum that biomass is an important part of delivering a low carbon future. We're excited to be part of that today and we're excited to be a part of the solutions that frankly can help mitigate so much of the intermittency associated with other technologies like wind and solar and the base load generation of both thermal and electric power on the basis of biomass, proven around the world, maybe here as well.

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Operator [8]

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Our next question will come from Ryan Levine with Citi.

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

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What's the market share that you're currently capturing in Japan with the recent announcements and how does that compare to what your expectations were going into this growth cycle?

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

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So I wouldn't have the market share quite just yet, what I'll tell you is that we've always believed that this market is ultimately going to require sort of 15 million, 20 million tonnes and 1 year in, we're sitting a little bit north of 2. As I mentioned in our prepared remarks, we generally think that for the segment that we are addressing right now, which is the FiT segment in Japan, which the feed-in tariff projects. We expect that contracting cycle to continue at about the same pace over the next 18 to 24 months. I would say that, that is -- that segment is also complemented by major utility decisions on larger scale coal-firing and as that market continues to consider adoption of a capacity market structure, we do believe that a third segment will continue to emerge. And so over time, we would expect this market to be 15 million, 20 million tonnes a year, maybe a little north of that. On a worldwide basis, we sit in the neighborhood of 20% and there is no reason to think that, that should be different in this market.

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

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And then regarding the higher production costs for the quarter, is there some seasonality that may explain partial rise? Would a lot of that reverse itself in the coming quarters that we should expect material growth in the gross margin as we look out into '19?

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Shai S. Even, Enviva Partners, LP - Executive VP & CFO of Enviva Partners GP LLC [12]

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Yes. We do -- thank you, Ryan. We do expect a little bit higher cost during the beginning of the year, and we expect a lower cost during the second half of the year. That's part of the seasonality that we've tried to highlight in our prepared remarks.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [13]

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Okay. And then in terms of the -- what's your longer-term funding plan and is there any near-term expectation to address the IDR burden or overhang on the funding capabilities?

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [14]

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With respect to our longer-term capitalization plans, we try to be relatively consistent, conservative financial policies, expecting dropdown acquisitions and the overall balance of that to exist at roughly 50-50 debt and equity basis. On the IDR front, I mean, I think, of course, we're certainly aware of recent transactions that some MLPs and those that are typically well into their high splits have executed with respect to IDRs, I don't want to comment any of this specifically, but what I would say is that generally the IDR burden for most of those MLPs are fairly significant priority into those restructurings and they may have a fundamentally different growth profile than a company like Enviva. And for us, if you look at 2018 for reference, our IDRs were less than $6 million or a little bit less than 8% of total distributions.

The combination of the growth profile of our business and the attractive returns on acquisitions from our sponsor, I think fundamentally distinguishes us in the marketplace and I believe that we can continue on this path for a considerable period of time. I also think it's essential to note the tremendously supportive nature of our sponsor and the alignment of interests between the sponsor and the partnership that has enabled such a robust growth profile. When we talk about frankly what's ahead and the capacity that needs to get built and the opportunity for us to continue to acquire those assets that alignment is really important and we're pretty excited about what's coming next.

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Ryan Michael Levine, Citigroup Inc, Research Division - Equity Analyst [15]

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Then last one from me, given the dynamics in Northern California around trying to mitigate wildfire risk, what's the -- is there any acceleration in exploring that opportunity and how do you assess that potential commercial opportunity for Enviva?

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [16]

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Thanks, Ryan, Great question. Look, the last season in 2018 was pretty tough all around for weather and fires. Obviously, the hurricanes in the southeast were complemented by tremendous fires out in the west and the opportunity to do better by force management I think presents a real opportunity. Getting from here to there in a market on the West Coast where fiber costs are much higher, logistic costs are much higher, the very nature of forestry activities is a more complicated business, makes it more challenging but not inherently ever insurmountable. And so the opportunity is there, I think it is a much more integrated approach with government and communities and landowners that include both state forests, national forests as well as private landowners can create better outcomes. Certainly, last year's extreme impacts provides a bit of a tailwind but still work to do.

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Operator [17]

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The next question comes from Pavel Molchanov with Raymond James.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [18]

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First, just kind of a small item on pricing. It looks like traditionally your sales price would kind of creep up year-on-year. Last year, it actually declined from [$192 to $188] per tonne. Is that onetime drop or in other words, should we assume that the upward trend resumes in 2019?

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Shai S. Even, Enviva Partners, LP - Executive VP & CFO of Enviva Partners GP LLC [19]

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Yes, thank you for the question. I think that some of -- when you're comparing year-to-year, we also need to neutralize the effect of ASC 606 on the -- on our calculation. As we recall last year, before the implementation of ASC 606, some of the sales -- some of our sales and purchase transactions were part of other revenue. We do expect in 2019 to see, with our structural contracts in place, as I recall, in our contracts we have escalation clauses and year-over-year we expect -- based on the contract that we have in place -- an increase in prices. We are expecting next year to see an increase in our sales price per metric ton.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [20]

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Okay. Okay. Perfect. And then, Germany, this is something we've obviously been talking about for a while and finally 2 weeks ago, we got the formal decision. What do you think is a realistic lead time, now that the decision has been made, before companies, you mentioned Vattenfall in the press release, for instance, begin to sign the same types of offtake deals that the Japanese have been so active in signing?

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [21]

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Pavel, that's a great question. I think you're going to have a mix. I think that there are a number of utilities and whether they are the large scale utilities like Vattenfall or some of the smaller [Stautberg] that will have -- some of them will be early adopters to this. Some of them have been working on plans, whether it's just [for team Epes] or some of the other smaller power stations that I think will have the opportunity to get there quicker and whether that's 18 to 24 months or 12 to 18 months, I don't have enough visibility yet, but I will tell you is that some will be early adopters and then some of the very large scale installations, I think will be in sort of the 18, 24, 36 month time frame, very similar to the way that we saw the U.K. market emerge following their decisions, well, whatever it was, 7 or 8 years ago. You had some folks that were ready to go right out of the gates and then much of the large-scale, the long-term volume at significant scale emerged sort of in the 2- to 3-year range.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [22]

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Okay. Okay. Interesting. And then lastly, this is on the Asian opportunity as well. As the U.S. and China talk trade, obviously there are a lot of raw materials that factor in that discussion; ethanol, soybeans et cetera. To your knowledge, has there have been any conversation at the political level with China talking about sourcing U.S. biomass as a way of achieving decarbonization on its coal plants?

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [23]

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Not that we're aware of. I would point out that China is one of the largest forest products consumers and so to the extent that China begins to adopt a more formalized structure for decarbonization and biomass energy becomes an important part of that, given the scale of their coal fleet, one could draw a conclusion that it would be a natural solution. I certainly think that opportunities are on the table longer term.

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Operator [24]

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The next question comes from Elvira Scotto with RBC Capital Markets.

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Elvira Scotto, RBC Capital Markets, LLC, Research Division - Director [25]

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Just one question from me. Kind of as the partnership itself gets larger and as you know, there's this big opportunity set, do you envision a time when you would actually construct the plants inside the partnership as opposed to having the sponsor construct and then drop down?

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John K. Keppler, Enviva Partners, LP - Chairman, CEO & President of Enviva Partners GP LLC [26]

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I think what you've seen from the partnership's activities over the last several years, as we have grown and you're kind of spotting that trend, that as we've grown, we have taken on increasing bite sizes of capital deployment within the partnership. So much of that is driven by our focus on insulating the partnership from development risk and volatility of cash flows during construction. Clearly, early on we were taking on smaller expansion activities at the plant level, whether it's incremental pellet prices, or truck drivers, your standard productivity improvements. I think the big step forwards have been certainly what we've done at Sampson in the last year and now with the North Hampton and Southampton expansions, we are looking to deploy about $130 million in capital, generating about $30 million EBITDA lift on an annual basis thereafter. Those are very attractive investment opportunities and certainly we continue to explore those within our broader assets inside the partnership and I think at some point in time, it is a natural extension to believe that the partnership will undertake development and construction activities on its own behalf as well.

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Operator [27]

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Ladies and gentlemen, this concludes our question-and-answer session. I would 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 [28]

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We certainly appreciate everyone's time and interest in Enviva and for joining us this morning. We hope it's coming through how excited we are about 2019 and beyond with the tailwinds we're experiencing in the industry and the tremendous growth we have ahead of us. We're looking forward to continuing that conversation and look forward to talking with you all next quarter. Thanks again.

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Operator [29]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.