Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.47pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
+0.01pp
Flat
Net-tone change vs last year's 10-K.
MD&A
-0.96pp
Lean -
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
bankruptcy+36
loss+10
unable+9
claims+9
restructuring+8
Positive rising
satisfy+9
effective+7
able+5
regain+4
achieved+3
Risk Factors (Item 1A)
14,819 words
ITEM 1A. RISK FACTORS
There are many factors that could have a material adverse effect on our business, financial condition, and results of operations. New risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect financial performance. Each of the risks described below could adversely impact the value of our common stock.
Summary Risk Factors
Our business is subject to numerous risks and uncertainties, including those described in this Item 1A “Risk Factors.” These risks include the following:
• The Chapter 11 Cases may have a material adverse impact on our business, financial condition and results of operations.
• Delays in the Chapter 11 Cases may increase the risks of our being unable to reorganize our business and emerge from bankruptcy and increase our costs associated with the bankruptcy process.
• We may be subject to the risks and uncertainties associated with our exclusive right to file a plan of reorganization.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
bankruptcy+28
restructuring+25
impairment+19
standstill+13
termination+7
Positive rising
beneficial+8
favorable+6
improvement+4
positive+3
satisfaction+2
MD&A (Item 7)
10,574 words
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Enviva Inc. is a Delaware corporation and references to “ Enviva, ” the “ Company, ” “ we, ” “ us, ” or “ our ” refer to Enviva Inc. and its subsidiaries. Please read Cautionary Statement Regarding Forward‑Looking Statements beginning on page 1 and Item 1A. “Risk Factors” for information regarding certain risks inherent in our business.
Business Overview
We develop, construct, acquire, and own and operate, contracted wood pellet production plants where we aggregate a natural resource, wood fiber, and process it into dry, densified, uniform pellets that can be effectively stored and transported around the world. We primarily sell our wood pellets through long-term, take-or-pay off-take contracts with customers in Japan, the United Kingdom, and the European Union, who use our wood pellets to generate power and heat. Our wood pellets meet the criteria put forth by the European Union’s Renewable Energy Directive (“RED III”), which includes biomass in its definition of renewable energy.
We own and operate ten plants (collectively, “our plants”) strategically located in Virginia, North Carolina, South Carolina, Georgia, Florida, and Mississippi. We export our wood pellets to global markets through our deep-water marine terminal at the Port of Chesapeake, Virginia, terminal assets at the Port of Wilmington, North Carolina and the Port of Pascagoula, Mississippi, and from third-party, deep-water marine terminals in Savannah, Georgia, Mobile, Alabama, and Panama City, Florida. In 2022, we commenced construction of a wood pellet production plant near Epes, Alabama (the “Epes plant”), which is designed and permitted to produce more than one million metric tons (“MT”) per year of wood pellet s. Our facilities are located in geographic regions with low input costs and transportation logistics. Our raw materials are byproducts of the sawmilling process or traditional timber harvesting, principally low-value wood materials, such as trees generally not suited for sawmilling or other manufactured forest products, and treetops and limbs, understory, brush, and slash that are generated in a harvest.
• Adverse publicity in connection with the Chapter 11 Cases or otherwise could negatively affect our business.
• Trading in our common stock during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks and the Chapter 11 Cases may render the common stock worthless.
• There can be no assurance that we will be able to regain compliance or comply with the continued listing standards of the NYSE, which could result in the delisting of our securities, limit investors’ ability to make transactions in our securities, and subject us to additional trading restrictions.
• Upon emergence from bankruptcy, the equity interests in the reorganized company may not be listed on the NYSE or any other stock exchange and we may no longer be a SEC reporting company.
• The RSA is subject to significant conditions and milestones that may be difficult for us to satisfy, which—if the Company fails to satisfy them—could lead to termination of the RSA and a default or accelerated maturity under the DIP Credit Agreement.
• The Plan may not become effective.
• Even if the Plan or another Chapter 11 p lan of reorganization is consummated, we may not be able to achieve our stated goals.
• Our long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time.
• In certain limited instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code or a third-party trustee may be appointed under Chapter 11 of the Bankruptcy Code, preventing the Company from continuing to act as debtors in possession.
• As a result of the Chapter 11 Cases, our historical financial information may not be indicative of our future performance, which may be volatile.
• The actual results achieved during the periods covered by our recently issued projections will vary from those set forth in those projections, and such variations may be material.
• We may be subject to claims that will not be discharged in the Chapter 11 Cases, which could have a material adverse effect on our business, cash flows, liquidity, financial condition, and results of operations.
• The Chapter 11 Cases limit the flexibility of our management team in running our business.
• Upon emergence from bankruptcy, the composition of our board of directors may change significantly.
• As a result of the implementation of the Plan, our ability to utilize our net operating loss carryforwards and certain other tax attributes to reduce our income tax obligations may be subject to limitations under Section 382 of the Internal Revenue Code.
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• We expect to derive substantially all our revenues from four customers in 2024, three of which are located in Europe. If we fail to continue to diversify our customer base, our results of operations, business and financial position could be materially adversely affected.
• Changes in laws or government policies, incentives and taxes related to low-carbon and renewable energy may affect customer demand for our products.
• Challenges to or delays in the issuance of air permits, or our failure to comply with our permits, could impair our operations and ability to expand our production.
• Federal, state, and local legislative and regulatory initiatives relating to forestry products and the potential for related litigation could result in increased costs, and additional operating restrictions and delays, which could cause a decline in the demand for our products and negatively impact our business, financial condition, and results of operations.
• Increasing attention to environmental, social, and governance (“ESG”) matters could adversely affect our business.
• We may be unable to complete our construction projects on time, and our construction costs could increase to levels that make the return on our investment less than expected.
• The satisfactory delivery of substantially all of our production is dependent on continuous access to infrastructure at our owned, leased, and third-party-operated terminals. Loss of access to our ports of shipment and destination, including through failure of terminal equipment and port closures, could adversely affect our financial results and cash flows.
• Failure to maintain effective quality control systems at our production plants and deep-water marine terminals could have a material adverse effect on our business and operations.
• Our business is subject to operating hazards and other operational risks, which may have a material adverse effect on our business and results of operations. We may also not be adequately insured against such events.
• Significant increases in the cost, or decreases in the availability, of raw materials or sourced wood pellets could result in lower revenue, operating profits, and cash flows, or impede our ability to meet commitments to our customers.
• We are exposed to the credit risk of our contract counterparties, including the customers for our products, and any material nonpayment or nonperformance by our customers could adversely affect our business and results of operations.
Risks Related to the Chapter 11 Cases
The Chapter 11 Cases may have a material adverse impact on our business, financial condition, and results of operations.
As previously disclosed, we engaged legal and financial advisors to assist us in evaluating potential strategic alternatives available to us to reduce or restructure our outstanding indebtedness. These efforts led to the execution of the RSAs and the commencement of the Chapter 11 Cases on March 12, 2024. The Chapter 11 Cases are ongoing.
The Chapter 11 Cases could have a material adverse effect on our business, financial condition, and results of operations. So long as the Chapter 11 Cases continue, our management will be required to spend a significant amount of time and effort focused on the restructuring, which may limit their ability to focus on our ongoing business operations. Bankruptcy Court protection and operating as debtors-in-possession also may make it more difficult to retain management and the key personnel necessary to the success of the business. In addition, during the pendency of the Chapter 11 Cases, our customers and suppliers may lose confidence in our ability to reorganize our business successfully and may seek to establish alternative commercial relationships, renegotiate the terms of our agreements, terminate their relationships with us, or require financial assurances from us. Customers may lose confidence in our ability to provide them the quality of product and level of service they expect, resulting in a significant decline in our revenues, profitability, and cash flow.
Other significant risks include or relate to the following:
• the effects of the filing of the Chapter 11 Cases on our business and the interests of various constituents, including our stockholders;
• Bankruptcy Court rulings in the Chapter 11 Cases, including with respect to our motions and applications and third-party motions, as well as the outcome of other pending litigation;
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• our ability to operate within the restrictions and the liquidity limitations of the DIP Credit Agreement and any related orders entered by the Bankruptcy Court in connection with the Chapter 11 Cases;
• our ability to maintain strategic control as debtor-in-possession during the pendency of the Chapter 11 Cases;
• the length of time that we will operate with Chapter 11 protection and the continued availability of operating capital during the pendency of the Chapter 11 Cases;
• increased advisory costs during the pendency of the Chapter 11 Cases;
• the risks associated with restrictions on our ability to pursue some of our business strategies during the pendency of the Chapter 11 Cases;
• our ability to complete the financing and to satisfy all other conditions to consummation of the Plan;
• the potential adverse effects of the Chapter 11 Cases on our business, cash flows, liquidity, financial condition, and results of operations;
• the ultimate outcome of the Chapter 11 Cases in general;
• the ultimate treatment of our existing equity in the Chapter 11 Cases;
• the potential material adverse effects of claims, if any, that are not discharged in the Chapter 11 Cases;
• uncertainties regarding the reactions of our customers, prospective customers, suppliers, and service providers to the Chapter 11 Cases;
• uncertainties regarding our ability to retain and motivate key personnel;
• uncertainties and continuing risks associated with our ability to achieve our stated goals and continue as a going concern;
• employee attrition and our ability to retain senior management and other key personnel due to distractions and uncertainties associated with the Chapter 11 Cases, including our ability to provide adequate compensation and benefits during the Chapter 11 Cases; and
• we may experience employee attrition as a result of the Chapter 11 Cases.
Further, under Chapter 11, transactions outside the ordinary course of business are subject to the prior approval of the Bankruptcy Court, which may limit our ability to respond in a timely manner to certain events or take advantage of certain opportunities or to adapt to changing market or industry conditions.
Because of the risks and uncertainties associated with the Chapter 11 Cases, we cannot predict or quantify the ultimate impact that events occurring during the Chapter 11 Cases may have on our business, cash flows, liquidity, financial condition, and results of operations, nor can we provide any assurance as to our ability to continue as a going concern.
As a result of the Chapter 11 Cases, realization of assets and liabilities are subject to uncertainty. While operating under the protection of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as permitted in the normal course of business, we may sell or otherwise dispose of assets or liquidate or settle liabilities for amounts other than those reflected in our consolidated financial statements.
As a result of the Chapter 11 Cases, we may experience employee attrition, and our employees may face considerable distraction and uncertainty. Our ability to engage, motivate, and retain key employees or take other measures intended to motivate and incentivize key employees to remain with us through the pendency of the Chapter 11 Cases is limited by restrictions on the implementation of incentive programs under the Bankruptcy Code. The loss of services of members of our senior management team could impair our ability to execute our business strategies and implement operational initiatives, which may have a material adverse effect on our business, cash flows, liquidity, financial condition, and results of operations.
While we have maintained our operations as “debtor in possession” since the Chapter 11 Cases were filed, the filing of the
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Chapter 11 Cases and related changes have been disruptive to our employees. In addition, we have undertaken, and may undertake in the future, restructuring, reorganization, or other strategic initiatives and business transformation plans. As a result of these restructuring initiatives, we may experience a loss of continuity, loss of accumulated knowledge and proficiency, loss of key employees, and/or other retention issues during transitional periods. Further, reorganization and restructuring can impact a significant amount of management and other employees’ time and focus, which may divert attention from operating and growing our business.
Delays in the Chapter 11 Cases may increase the risks of our being unable to reorganize our business and emerge from bankruptcy and increase our costs associated with the bankruptcy process.
There can be no assurance that the Plan will become effective in accordance with its terms on the timeline we anticipate or at all. Prolonged Chapter 11 proceedings could adversely affect our relationships with customers, subcontractors, suppliers, and employees, among other parties, which in turn could adversely affect our business, competitive position, financial condition, liquidity, and results of operations and our ability to continue as a going concern. A weakening of our financial condition, liquidity, and results of operations could adversely affect our ability to implement the Plan (or any other Chapter 11 plan of reorganization). If we are unable to consummate the Plan (or any other Chapter 11 plan of reorganization), we may be forced to liquidate our assets.
Adverse publicity in connection with the Chapter 11 Cases or otherwise could negatively affect our business.
Adverse publicity or news coverage relating to us or our business, including, but not limited to, publicity or news coverage in connection with the Chapter 11 Cases, may negatively impact our efforts to establish and promote a positive image after emergence from the Chapter 11 Cases, including with respect to our current and future employees, existing customers, prospective customers, suppliers, and service providers.
Trading in our common stock during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks and the Chapter 11 Cases may render the common stock worthless.
All of our indebtedness is senior in priority to the existing common stock in our capital structure. The Proposed Plan, the currently expected valuation, contemplates that the holders of equity interests, including the holders of common stock would be entitled to only a de minimis recovery. The recovery would be significantly less than the previous trading value of such existing equity interests. We expect that potential revisions to the Plan will result in equity receiving no recovery. The amount and nature of any potential recovery is subject to approval by the Bankruptcy Court and there can be no certainty that holders of equity interests will receive any recovery in the Chapter 11 Cases. Accordingly, any trading in our common stock during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risk to purchasers of our common stock.
There can be no assurance that we will be able to regain compliance or comply with the continued listing standards of the New York Stock Exchange, which could result in the delisting of our securities, limit investors’ ability to make transactions in our securities, and subject us to additional trading restrictions.
Our common stock is listed on the NYSE under the symbol “EVA.” On January 23, 2024 we received a written notice from the NYSE that because the average closing price for our common stock had fallen below $1.00 per share for 30 consecutive trading days, we no longer comply with the minimum share price criteria of Section 802.01C of the NYSE Listed Company Manual (the “NYSE Manual”) for continued listing on the NYSE. On April 2, 2024 we received a second written notice from the NYSE that due to the delay in filing this Annual Report on Form 10-K for the year ended December 31, 2023 with the SEC, we were no longer in compliance with Section 802.01E of the NYSE Manual. If we fail to regain compliance with Section 802.01C and Section 802.010E of the NYSE Manual during a 6-month cure period, the NYSE may commence suspension and delisting procedures.
In addition, if our total market capitalization falls below an average of $50 million for 30 consecutive trading days and we are unable to regain compliance during an 18-month cure period, the NYSE may commence suspension and delisting procedures pursuant to Section 802.01B of the NYSE Manual. As of August 30, 2024, our 30 day average market capitalization was approximately $36.0 million. Lastly, if (i) the price per share of our common stock falls to an “abnormally low price,” (ii) our market capitalization falls below an average of $15 million for 30 consecutive trading days, or (iii) we choose to liquidate the Company, the NYSE may immediately commence suspension and delisting procedures pursuant to Section 802.01D, 802.01B, and 802.01D, respectively.
If the NYSE delists our common stock from trading on its exchange for failure to meet the continued listing standards, we and our stockholders could face significant material adverse consequences, including: a limited availability of market quotations for our securities; reduced liquidity for our securities; a determination that our common stock is a “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules and regulations, possibly resulting in a
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reduced level of trading activity in the secondary trading market for shares of our common stock; a limited amount of analyst coverage; a decreased ability to issue additional securities or obtain additional financing in the future; and a negative impact to, or termination of, our critical business relationships.
Upon emergence from bankruptcy, the equity interests in the reorganized company may not be listed on the NYSE or any other stock exchange and we may no longer be a SEC reporting company.
Based on the terms of the Proposed Plan, Enviva may emerge from the Chapter 11 Cases as a private company not subject to reporting requirements under Sections 12 or 15 of the Exchange Act. As a nonpublic company, the equity interests in the reorganized company and the New Warrants would not be listed on the NYSE or any other stock exchange and there can be no assurance as to the development of or liquidity of any market for such equity interests or warrants. Further, the reorganized company may enter into a stockholders agreement, which may significantly restrict trading in the equity interests. Our listing and SEC registration status upon emergence from bankruptcy are subject to negotiation with creditors, approval of the Bankruptcy Court and affirmative vote of certain parties and may change materially from the terms set forth in the Proposed Plan.
The RSA is subject to significant conditions and milestones that may be difficult for us to satisfy.
There are certain material conditions we must satisfy under the RSA, including the timely satisfaction of milestones in the Chapter 11 Cases, which include the consummation of the financing contemplated by the DIP Facility and other transactions contemplated by the Plan. Our ability to timely satisfy such milestones is subject to risks and uncertainties, many of which are beyond our control, and it is possible that the failure to timely complete such milestones or comply with other conditions of the RSA may give rise to termination events thereunder.
The Plan may not become effective.
Even if the Plan is confirmed by the Bankruptcy Court, it may differ materially from the Plan filed by the Company and may not become effective because it is subject to the satisfaction of certain conditions precedent (some of which are beyond our control). There can be no assurance that such conditions will be satisfied and, therefore, that the Plan will become effective, and that the Debtors will emerge from the Chapter 11 Cases as contemplated by the Plan. If the Effective Date is delayed, the Debtors may not have sufficient cash available to operate their businesses. In that case, the Debtors may need new or additional post-petition financing, which may increase the cost of consummating the Plan. There can be no assurance of the terms on which such financing may be available or if such financing will be available. If the transactions contemplated by the Plan are not completed, it may become necessary to amend the Plan. The terms of any such amendment are uncertain and could result in material additional expense and result in material delays to the Chapter 11 Cases.
Even if the Plan or another Chapter 11 plan of reorganization is consummated, we may not be able to achieve our stated goals.
Even if the Plan or any other Chapter 11 plan of reorganization is consummated, we may continue to face a number of risks, such as changes in economic conditions, changes in our industry, changes in demand for our services, and increasing expenses. Some of these risks become more acute when a case under the Bankruptcy Code continues for a protracted period without indication of how or when the transactions under the Plan or any other Chapter 11 plan of reorganization will actually close. As a result of these and other risks, we cannot guarantee that the Plan or any other Chapter 11 plan of reorganization will achieve our stated goals. Furthermore, even if our debts are reduced or discharged through the Plan or any other Chapter 11 plan of reorganization, we may need to raise additional funds through public or private debt or equity financing or other various means to fund our business after the completion of the Chapter 11 Cases. Our access to additional financing may be limited, if it is available at all. Therefore, adequate funds may not be available when needed or may not be available on favorable terms, which could have a material impact on our operations and financial results, including our ability to continue as a going concern.
Our long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time.
We face uncertainty regarding the adequacy of our liquidity and capital resources and have extremely limited, if any, access to additional financing. In addition to the cash requirements necessary to fund our ongoing operations, we have incurred significant professional fees and other costs in connection with preparation for the Chapter 11 Cases and expect that we will continue to incur significant professional fees and costs throughout the Chapter 11 Cases. We cannot assure you that cash on hand and cash flow from operations will be sufficient to continue to fund our operations and allow us to satisfy our obligations related to the Chapter 11 Cases. Although we entered into the DIP Credit Agreement providing for an aggregate principal amount of up to $500 million pursuant to the DIP Facility in connection with the Chapter 11 Cases, we cannot assure you that such financing sources will be sufficient, that we will be able to secure additional interim financing, or adequate exit financing sufficient to meet our liquidity needs (or if sufficient funds are available, that they will be offered to us on acceptable terms).
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Our liquidity, including our ability to meet our ongoing operational obligations, depends on, among other things: (i) our ability to comply with the terms and conditions of any order governing the use of cash collateral that may be entered by the Bankruptcy Court in connection with the Chapter 11 Cases, (ii) our ability to access credit under the DIP Facility, (iii) our ability to maintain adequate cash on hand, (iv) our ability to generate cash flow from operations, (v) our ability to consummate the Plan or other alternative restructuring transaction, and (vi) the cost, duration and outcome of the Chapter 11 Cases.
In certain limited instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code.
Upon a showing of cause, the Bankruptcy Court may convert the Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution to our creditors in accordance with the priorities established by the Bankruptcy Code. We believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to our creditors than those provided for in the Plan because of: (i) the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than in a controlled manner and as a going concern; (ii) additional administrative expenses involved in the appointment of a Chapter 7 trustee; and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of executory contracts in connection with a cessation of operations.
As a result of the Chapter 11 Cases, our historical financial information may not be indicative of our future performance, which may be volatile.
During the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the filing of the Chapter 11 Cases. In addition, if we emerge from Chapter 11, the amounts reported in subsequent consolidated financial statements may materially change relative to our historical consolidated financial statements. We also will be required to adopt fresh start accounting, in which case our assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on our historical consolidated balance sheets. Our financial results after the application of fresh start accounting may be different from historical trends.
The actual results achieved during the periods covered by the projections included as an exhibit to the Disclosure Statement will vary from those set forth in those projections, and such variations may be material.
In connection with the filing of the Plan, we filed a Disclosure Statement that included projections for the annual periods ending December 31, 2024 (fiscal year 2024) through December 31, 2028 (fiscal year 2028) the (“Financial Projections”). Unanticipated events and circumstances occurring after the date hereof may affect the actual financial results of our operations. These variations may be material and may adversely affect our ability to, among other things, consummate our business plan to make payments with respect to our indebtedness. Because the actual results achieved may vary from projected results, perhaps significantly, the Financial Projections should not be relied upon as a guarantee or other assurance of the actual results that will occur.
Further, during the Chapter 11 Cases, we expect that our financial results will continue to be volatile as restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance likely will not be indicative of our financial performance after the emergence. In addition, if we emerge from the Chapter 11 Cases, the amounts reported in subsequent consolidated financial statements may materially change relative to historical consolidated financial statements, including as a result of revisions to our operating plans pursuant to a plan of reorganization. We also may be required to adopt fresh start accounting, in which case their assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on our consolidated balance sheets. Our financial results after the application of fresh start accounting also may be different from historical trends.
Finally, our business plan was developed with the assistance of our advisors. There can be no assurances that our business plan will not change, perhaps materially, as a result of decisions that the board of directors may make after fully evaluating our strategic direction and our business plan. Any deviations from the Debtors’ existing business plan would necessarily cause a deviation in the Financial Projections.
We may be subject to claims that will not be discharged in the Chapter 11 Cases, which could have a material adverse effect on our business, cash flows, liquidity, financial condition and results of operations.
The Bankruptcy Code provides, subject to certain limited exceptions, that the confirmation of a plan of reorganization pursuant to Chapter 11 may discharge a debtor from, among other things, substantially all debts arising prior to consummation of a plan of reorganization. Except where otherwise contemplated by the Plan, it is expected that claimsagainst the Debtors that
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arose prior to March 12, 2024 or before consummation of the Plan would be subject to discharge pursuant to confirmation of the Plan. It is possible, however, that certain claims may not be subject to discharge or that parties in subsequent litigation could argue that they were not ultimately discharged. Such claims could be asserted against the reorganized entities and may have an adverse effect on our business, cash flows, liquidity, financial condition, and results of operations on a post-reorganization basis.
The Chapter 11 Cases limit the flexibility of our management team in running our business.
While we operate our businesses as debtor-in-possession under supervision by the Bankruptcy Court, we are required to obtain the approval of the Bankruptcy Court, and in some cases certain lenders, prior to engaging in activities or transactions outside the ordinary course of business. Bankruptcy Court approval of non-ordinary course activities entails preparation and filing of appropriate motions with the Bankruptcy Court, negotiation with the various creditors’ committees and other parties-in-interest, and one or more hearings. The creditors’ committees and other parties-in-interest may be heard at any Bankruptcy Court hearing and may raise objections with respect to these motions. This process may delay major transactions and limit our ability to respond quickly to opportunities and events. Furthermore, in the event the Bankruptcy Court does not approve a proposed activity or transaction, we would be prevented from engaging in activities and transactions that we believe are beneficial to us.
Upon emergence from bankruptcy, the composition of our board of directors may change significantly.
The composition of our board of directors may change significantly following the Chapter 11 Cases. Any new directors may have different backgrounds, experiences, and perspectives from those individuals who previously served on our board of directors and, thus, may have different views on the issues that will determine the future of our company. As a result, our future strategy and plans may differ materially from those of the past.
As a result of the implementation of the Plan, our ability to utilize our net operating loss carryforwards and certain other tax attributes to reduce our income tax obligations may be subject to limitation under Section 382 of the Internal Revenue Code.
Under U.S. federal income tax law, a corporation is generally permitted to offset all or a portion of its net taxable income in a given year with net operating losses carried forward from prior years. As of December 31, 2023, we had U.S. federal net operating loss carryforwards of approxi mately $407.1 million. Our abili ty to utilize our net operating loss carryforwards and certain other tax attributes to offset future taxable income and reduce U.S. federal income tax liability is subject to certain requirements and restrictions. In particular, if we experience an “ownership change,” as defined in section 382 of the U.S. Internal Revenue Code (generally, a cumulative change of ownership of greater than 50% of our capital stock over a three-year testing period), then our ability to use our net operating loss carryforwards and certain other tax attributes may be substantially limited, which could have a negative impact on our financial position and results of operations.
We expect that we may undergo an ownership change under Section 382 of the U.S. Internal Revenue Code in connection with the consummation of the Plan. On April 12, 2024, the Bankruptcy Court entered an order that sets forth procedures (including notice requirements) with which certain existing and potential shareholders must comply regarding transfers of, or declarations of worthlessness with respect to, our common stock, as well as certain obligations with respect to notifying us of current share ownership (the “Stock Procedures”). The Stock Procedures are designed to protect our net operating loss carryforwards (and other tax attributes) from the effect of a premature ownership change and to preserve our ability to rely on certain favorable rules that can apply to ownership changes occurring in connection with the implementation of the Plan. However, there is no assurance that the Stock Procedures will prevent all transfers or declarations of worthlessness that could result in such an ownership change.
In addition, our net operating losses (and certain other tax attributes) will be reduced by the amount of any cancellation of indebtedness income we recognize as a result of the implementation of the Plan. As such, at this time, there can be no assurance regarding the amount of net operating loss carryforwards and other tax attributes that will be available to offset future taxable income.
Risks Related to Our Business
Goodwill and other long-lived assets are subject to impairment risk.
During the fourth quarter of 2023, the Company performed an interim goodwill impairment test, which indicated that the carrying value of its sole reporting unit was above its fair value. On December 4, 2023, the Board concluded that a material charge for impairment to goodwill would be required for the fourth quarter of 2023. As a result, the Company recorded a material non-cash pretax impairment charge related to goodwill of $103.9 million in the fourth quarter of 2023.
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The assessment for potential impairment of other long-lived assets requires management to make judgments on a number of significant estimates and assumptions, including projected cash flows, discount rates, and projected long-term growth rates. We may be required to record a significant charge in our consolidated financial statements during the period in which any impairment of our other long-lived assets is identified and this could negatively impact our financial condition and results of operations.
We expect to derive the majority of our revenues from four customers in 2024, three of which are located in Europe. If we fail to continue to diversify our customer base, our results of operations, business and financial position could be materially adversely affected.
Our contracts with four customers, three of which are located in Europe and one of which is located in Japan, represent the majority of our expected product sales volumes in 2024; as a result, we face counterparty and geographic concentration risk. The ability of each of our customers to perform its obligations under a contract with us will depend on a number of factors that are beyond our control and may include the overall financial condition of the counterparty, the counterparty’s access to capital, delay or shutdown of the counterparty’s operations due to regulatory, financial or operational challenges, the condition of the regional and global power, heat, and combined heat and power generation industry, continuing regulatory and economic support for wood pellets as a fuel source, pricing trends in the spot market for wood pellets and general economic conditions. In particular, in 2023 and 2024, certain of our counterparties experienced significant operational shutdowns of their facilities that impacted their ability to accept contracted volumes. In addition, in depressed market conditions, our customers may no longer need the amount of our products they have contracted for or may be able to obtain comparable products at a lower price. Should any counterparty fail to honor its obligations under a contract with us, we could sustain losses, which could have a material adverse effect on our business, financial condition, and results of operations.
In addition if we fail to continue to diversify our customer base geographically within and outside of Europe in the future, our results of operations, business and financial position could be materially adversely affected.
Upon the expiration of our off-take contracts, our customers may decide not to recontract on terms as favorable to us as our current contracts, or at all. For example, our current customers may acquire wood pellets from other providers that offer more competitive pricing or logistics or develop their own sources of wood pellets. Some of our customers could also exit their current business or be acquired by other companies that purchase wood pellets from other providers. The demand for wood pellets or their prevailing prices at the times at which our current off‑take contracts expire may also render entry into new long-term-off-take contracts difficult or impossible.
Any reduction in the amount of wood pellets purchased by our customers or our inability to renegotiate or replace our existing contracts on economically acceptable terms, or our failure to successfully penetrate new markets within and outside of Europe in the future, could have a material adverse effect on our results of operations, business and financial position.
Terminationpenalties within our off-take contracts may not fully compensate us for our total economic losses.
Certain of our off-take contracts provide the customer with a right of termination for various events of convenience or changes in law or policy. Although some of these contracts are subject to certain protective termination payments, the termination payments made by our customers may not fully compensate us for losses. In addition, if a contract is terminated due to financial distress of the counterparty, we may be unable to receive all or a portion of the compensation due to us under these contracts. We may be unable to re-contract our production at favorable prices or at all, and our results of operations, business and financial position, may be materially adversely affected as a result.
We may be unable to renegotiate our long-term contracts with our existing customers on favorable terms or at all.
In connection with our ongoing restructuring through Chapter 11, we are renegotiating many of our long-term contracts with the goal of improvingprofitability and to better protect against future inflation and other cost risks. We may be unable to complete these negotiations on the proposed terms, or at all. The Plan makes certain assumptions regarding the outcome of these negotiations. If we are unable to finalize these contracts on favorable terms, or at all, our results of operations, business and financial position, may be materially adversely affected and we may be unable to achieve the results anticipated by the projections set forth in the Plan.
Our long-term off-take contracts with our customers may only partially offset certain increases in our costs or preclude us from taking advantage of relatively high wood pellet prices in the broader markets.
Our long-term off-take contracts typically set base prices subject to annual price escalation and other pricing adjustments, which are intended to adjust for changes in certain of our underlying costs of operations, including, in some cases, for stumpage or diesel fuel. However, such cost pass-through mechanisms are typically adjusted based on changes to consumer price index,
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which may not reflect actual changes to our costs. If our operating costs increase significantly during the terms of our long-term off-take contracts beyond the levels of pricing and cost protection afforded to us under the terms of such contracts, our results of operations, business, and financial position could be adversely affected. Continued and increased inflation could decrease the profitability of our long-term off-take contracts.
Moreover, during periods when the prevailing market price of wood pellets is lower than the prices under our long-term off-take contracts, we may be unable to sell any cancelled volumes, or renew expiring contracts, at profitable prices or at all, and cancellation or termination fees may not fully compensate us for the lost revenue. In contrast, during periods when the prevailing market price of wood pellets exceeds the prices under our long-term off-take contracts, our revenues could be significantly lower than they otherwise would have been were we not party to such contracts for substantially all our production. In addition, our current and future competitors may be in a better position than we are to take advantage of relatively high prices during such periods.
Regulatory and Litigation Risks
Our business is subject to risks related to legal proceedings and governmental inquiries.
Our business is subject to litigation, regulatory investigations, and claims arising in the normal course of operations. The risks associated with these matters often may be difficult to assess or quantify and the existence and magnitude of potential claims often remain unknown for substantial periods of time. Our involvement in any investigations and lawsuits would cause us to incur additional legal and other costs and, if we were found to have violated any laws, we could be required to pay fines, damages, and other costs, perhaps in material amounts. Regardless of final costs, these matters could have an adverse effect on our business by exposing us to negative publicity, reputation damage, or diversion of personnel and management resources.
Changes in laws or government policies, incentives, and taxes related to low-carbon and renewable energy may affect customer demand for our products.
Consumers of utility-grade wood pellets currently use our products either as part of a binding obligation to generate a certain percentage of renewable energy or because they receive direct or indirect financial support or incentives to do so. Financial support is often necessary to cover the generally higher costs of wood pellets compared to conventional fossil fuels like coal. In most countries, once the government implements a tax ( e.g ., the U.K.’s carbon price floor tax) or a preferable tariff or specific renewable energy policy either supporting a renewable energy generator or the energy generating sector as a whole, such tax, tariff, or policy is guaranteed for a specified period of time, sometimes for the investment lifetime of a generator’s project. However, governmental policies that currently support the use of biomass may adversely modify their tax, tariff, or incentive regimes, and the future availability of such taxes, tariffs, or incentive regimes, either in current jurisdictions beyond the prescribed timeframes or in new jurisdictions, is uncertain. Demand for wood pellets could be substantially lower than expected if government support is removed, reduced, or delayed or, in the future, is insufficient to enablesuccessful deployment of biomass power at the levels currently projected.
In addition, regulatory changes such as new requirements to install additional pollution control technology could require us to curtail or amend operations to meet new GHG and other emission limits. This may also affect demand for our products in addition to increasing our operational costs. Regulatory directives may require certain biomass standards to be satisfied in order for our customers to capture any available direct or indirect regulatory incentives from the use of our products. This typically is implemented through biomass sustainability criteria, which either are a mandatory element of eligibility for financial subsidies to biomass energy generators or may be expected to become mandatory in the future. For more information, see our risk factor titled “Changes in the treatment of biomass could adversely impact our business.” As a biomass fuel supplier, the viability of our business is therefore dependent on our ability to comply with such requirements. These requirements may restrict the types of biomass we can use and the geographic regions from which we source our raw materials and may require us to reduce GHG emissions associated with our supply and production processes.
Currently, some criteria with which we must comply, including rules relating to certain customer regulatory requirements, forestry best management practices, future adaption of climate smart forestry techniques and carbon accounting, are under revision. If different sustainability requirements are adopted in the future, demand for our products could be materially reduced in certain markets, and our results of operations, business and financial position, may be materially adversely affected.
Challenges to or delays in the issuance of air permits, or our failure to comply with our permits, could impair our operations and ability to expand our production.
Our plants are subject to the requirements of the Clean Air Act and must either receive minor source permits from the states in which they are located or a major source permit, which the U.S. EPA has the right to object to if it determines any proposed permit is not in compliance with applicable requirements. In general, our facilities are eligible for minor source
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permits following the application of pollution control technologies. However, we could experience substantial delays with respect to obtaining such permits, including as a result of any challenges issuing such permits to the Company or other factors, which could impair our ability to operate our wood pellet production plants or expand our production capacity. In addition, any new air permits we receive could require that we incur additional expenses to install emissions control technologies or limit our operations. Such new permits could also impede our ability to satisfy emission limitations and/or stringent testing requirements to demonstrate compliance therewith. Failure to meet such requirements could have a material adverse effect on our results of operations, business and financial position.
Federal, state, and local legislative and regulatory initiatives relating to forestry products and the potential for related litigation could result in increased costs and additional operating restrictions and delays, which could cause a decline in the demand for our products and negatively impact our business, financial condition, and results of operations.
Our raw materials are byproducts of traditional timber management and harvesting, principally the parts of the harvested wood that are not utilized in higher-value markets, such as the tops and limbs of trees, crooked or diseased trees, slash, understory, and thin tree lengths. Commercial forestry is regulated by complex regulatory frameworks at the federal, state, and local levels. Among other federal laws, the Clean Water Act and the Endangered Species Act have been applied to commercial forestry operations through agency regulations and court decisions, as well as through the delegation to states to implement and monitor compliance with such laws. State forestry laws, as well as land-use regulations and zoning ordinances at the local level, are also used to manage forests in the Southeastern United States, as well as other regions from which we may need to source raw materials in the future. Any new or modified laws or regulations at any of these levels could have the effect of reducing forestry operations in areas where we procure our raw materials and consequently may prevent us from purchasing raw materials in an economic manner, or at all. In addition, future regulation of, or litigation concerning, the use of timberlands, the protection of endangered species, the promotion of forest biodiversity and the response to and prevention of wildfires, as well as litigation, campaigns or other measures advanced by special interest groups, could also reduce the availability of the raw materials required for our operations.
Changes in the treatment of biomass could adversely impact our business.
Various rules have been issued or may be issued in the future by government agencies, including in the jurisdictions where we sell our products, to regulate the sustainability criteria associated with the use of biomass, which in turn may require us to adopt certain practices in our operations.
On October 18, 2023, the Council of the EU and Presidents of the Parliament signed the final text of RED III, which entered into force on November 20, 2023, although there is an 18-month period for member states to transpose the directives into law. Under RED III, wood biomass continues to be recognized as a renewable energy source in the EU and, therefore, can be used in meeting the EU’s climate targets. The EU’s directives establish, among other things, targets for renewable energy supply and certain sustainability requirements for biomass, including requirements related to carbon stocks and land use. If the wood pellets we produce do not conform to these or future requirements, our customers would not be able to count energy generated therefrom towards these renewable energy goals, which could decrease demand for our products. RED III also implements additional changes relating to subsidies of biomass—for example, no new subsidies for power biomass plants, no direct subsidies for industrial grade roundwood, and required application of the cascading principle to subsidy design. These provisions may impact our future operations and financial condition.
Additionally, the European Union’s Deforestation Regulation (“EUDR”) becomes effective from December 30, 2024. Because wood pellet production for different markets is not segregated, all raw material sourcing for all mills must be EUDR compliant. Providing compliance will be challenging, due to the need to provide geolocation data for all fiber sources. The way to do this is still being worked on with customers and the European Commission. For EUDR, we are making improvements to our proprietary Track & Trace® system data collection process to ensure more accurate and timely capture of tract level and geolocation data required under the regulation.
Updates made to the sustainability requirements of RED under RED III have mostly been incorporated during the implementation of RED II. Any additional requirements from Member State transposition of RED III will not become apparent until we get closer to the transposition deadline of May 2025.
Relatedly, biomass has been under additional regulatory scrutiny in recent years to develop standards to safeguard againstadverse environmental effects from its use, and certain special interest groups that focus on environmental issues have expressed their opposition to the use of biomass, both publicly and directly, to domestic and foreign regulators, policy makers, power, heat or combined heat, and generators and other industrial users of biomass. These groups are also actively lobbying, litigating, and undertaking other actions domestically and abroad in an effort to increase the regulation of, reduce or eliminate the incentives and support for, or otherwise delay, interfere with, or impede the production and use of biomass for or by
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generators. Any changes in the treatment of biomass in jurisdictions where we sell or plan to sell our products could materially adversely affect our results of operations, business and financial condition.
Notwithstanding the above, we cannot guarantee that our products will continue to be considered renewable in all jurisdictions where our customers consume them or meet future standards or the expectations of third parties, governmental authorities, and stakeholders, related to the same, especially with respect to potential regulatory changes. This may adversely impact our business, harming our reputation, restricting or limiting access to and the cost of capital, and subjecting us to potential litigation risk.
Our operations are subject to stringent environmental and occupational health and safety laws and regulations that may expose us to significant costs and liabilities.
Our operations are subject to stringent federal, regional, state, and local environmental, health, and safety laws and regulations. These laws and regulations govern environmental protection, occupational health and safety, the release or discharge of materials into the environment, air emissions, wastewater discharges, the investigation and remediation of contaminated sites, and allocation of liability for cleanup of such sites. These laws and regulations may restrict or impact our business in many ways, including by requiring us to acquire permits or other approvals to conduct regulated activities, limiting our air emissions or wastewater discharges or requiring us to install costly equipment to control, reduce, or treat such emissions or discharges and impacting our ability to modify or expand our operations. We may be required to make significant capital and operating expenditures to comply with these laws and regulations. Failure to comply with these laws and regulations may result in the assessment of administrative, civil, and criminalpenalties, imposition of investigatory or remedial obligations, suspension or revocation of permits, and the issuance of orders limiting or prohibiting some or all of our operations. Adoption of new or modified environmental laws and regulations may impair the operation of our business, delay or prevent expansion of existing facilities or construction of new facilities, and otherwise result in increased costs and liabilities, which may be material.
The actions of certain special interest groups could adversely impact our business.
Certain special interest groups that focus on environmental issues have expressed their opposition to the use of biomass, both publicly and directly to domestic and foreign regulators, policy makers, power, heat or combined heat and power generators, and other industrial users of biomass. These groups are also actively lobbying, litigating, and undertaking other actions domestically and abroad in an effort to increase the regulation of, reduce, or eliminate the incentives and support for, or otherwise delay, interfere with, or impede the production and use of biomass for or by heat and power generators. Such efforts, if successful, could materially adversely affect our results of operations, business and financial condition.
Increasing attention to ESG matters could adversely affect our business.
Increasing social and political attention to climate change and other environmental and social impacts may result in increased costs, changes in demand for certain types of products or means of production, enhanced compliance obligations, or other negative impacts to our business or our financial condition. Although we may participate in various voluntary frameworks and certification programs to improve the ESG profile of our operations and product, we cannot guarantee that such participation or certification will have the intended results on our ESG profile.
We periodically create and publish voluntary disclosures regarding ESG matters and our goals, but many of the statements in those voluntary disclosures are based on our expectations and assumptions, which may require substantial discretion and forecasts about costs and future developments. Such expectations and assumptions are also complicated by the lack of an established framework for identifying, measuring, and reporting on many ESG matters. Our estimates concerning the timing and cost of implementing our goals are subject to risks and uncertainties, some of which are outside of our control. We cannot guarantee that such risks and uncertainties may not give rise to the need to restate or revise our goals, cause us to miss them altogether, or limit the impact of success of achieving our goals. We also may receive pressure from external sources, such as lenders, investors, or other groups, to adopt more aggressive climate or other ESG-related goals; however, we may not agree that such goals will be appropriate for our business, and we may not be able to implement such goals because of potential costs or technical or operational obstacles.
Relatedly, organizations that provide information to investors on corporate governance and related matters have developed rating processes on evaluating companies on their approach to ESG matters. Such ratings are used by some investors to inform their investment and voting decisions. Unfavorable ESG ratings could lead to increased negative investor sentiment toward us, our customers, or our industry, which could negatively impact our share price as well as our access to and cost of capital. Finally, to the extent ESG matters negatively impact our reputation, we may not be able to compete as effectively to recruit or retain employees, which may adversely affect our operations.
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Further, public statements with respect to ESG matters, such as emissions reduction goals, other environmental targets, or other commitments addressing certain social issues, are becoming increasingly subject to heightened scrutiny from public and governmental authorities related to the risk of potential “greenwashing,” i.e., misleading information or falseclaimsoverstating potential ESG benefits. For example, in March 2021, the SEC established the Climate and ESG Task Force in the Division of Enforcement to identify and address potential ESG-related misconduct, including greenwashing. Certain non-governmental organizations and other private actors have also filed lawsuits under various securities and consumer protection laws alleging that certain ESG-related statements, goals, or standards were misleading, false, or otherwise deceptive. As a result, we may face increased litigation risks from private parties and governmental authorities related to our ESG efforts. We could also face increasing costs as we attempt to comply with and navigate further regulatory focus and scrutiny.
Finally, any allegedclaims of greenwashing against us or others in our industry may lead to further negative sentiment and diversion of investments. For example, on November 3, 2022, a putative securities class action lawsuit was filed in federal district court in the District of Maryland against Enviva, John Keppler, and Shai Even. The lawsuit asserted claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder based on allegations that the Company made materially false and misleading statements regarding the Company’s business, operations, and compliance policies, particularly relating to its ESG practices. Specifically, the lawsuit alleged that the Company’s statements were misleading as to the environmental sustainability of the Company’s wood pellet production and procurement and the impact such statements would have on the Company’s financials and growth potential. The lawsuit sought unspecified damages, equitable relief, interest and costs, and attorneys’ fees. Lead plaintiff and lead counsel were appointed on January 31, 2023, and their amended complaint was filed on April 4, 2023. The parties completed briefing on the Company’s motion to dismiss on August 1, 2023, and the court granted the Company’s motion to dismiss on July 3, 2024. The plaintiffs voluntarily dismissed the lawsuit with prejudice on July 25, 2024.
Operational Risks
We may be unable to complete our construction projects on time, and our construction costs could increase to levels that make the return on our investment less than expected.
We may face delays or unexpected developments in completing the Epes facility or future construction projects, including as a result of inflation, supply chain issues, our failure to timely obtain the equipment, services, or access to infrastructure necessary for the operation of our projects at budgeted costs, maintain all necessary rights to land access and use and/or obtain and/or maintain environmental and other permits or approvals. These circumstances could prevent our construction projects from commencing operations or from meeting our original expectations concerning timing, operational performance, the capital expenditures necessary for their completion, and the returns they will achieve. In particular, the DIP Facility and the Plan contemplate include financing to complete the Epes facility. However, the amount and allocation of those funds are subject to the progress and timing of the Chapter 11 Cases and ultimate confirmation of the Plan by the Bankruptcy Court. Any material delay in the timing of the Chapter 11 Cases or material change in the proposed funding could have a material effect on the costs and timing of the completion of the Epes facility, and such delays may result in increased costs associated with the project.
Moreover, design, development, and construction activities associated with a project may occur over an extended period of time but may generate little or no revenue or cash flow until the project is placed into commercial service. This mis-match in timing could reduce our available liquidity. For example, we had incurred construction expenses related to the construction of the Bond facility, which development was ceased in connection with the filing of the Chapter 11 Cases. Our inability to complete and transition our construction projects into financially successful operating projects on time and within budget or the failure of our projects to generate expected returns could have a material adverse impact on our liquidity, results of operations, business, and financial position.
The satisfactory delivery of substantially all of our production is dependent on continuous access to infrastructure at our owned, leased, and third-party-operated terminals. Loss of access to our ports of shipment and destination, including through failure of terminal equipment and port closures, could adversely affect our financial results and cash available for dividends.
Substantially all of our production is dependent on infrastructure at our owned, leased, and third-party-operated terminals. Should we or a third-party operator suffer a catastrophicfailure of the equipment at these terminals or otherwise experience port closures, including for security or weather-related reasons, we could be unable to fulfill off‑take obligations or incur substantial additional transportation costs, which would reduce our cash flow. Moreover, we rely on various ports of destination, as well as third parties who provide stevedoring or other services at our ports of shipment and destination or from whom we charter oceangoing vessels and crews, to transport our product to our customers. Loss of access to these ports for any reason, or failure of such third-party service providers to uphold their contractual obligations, may impact our ability to fulfill our obligations under our off-take contracts, cause interruptions to our shipping schedule and cause us to incur substantial additional
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transportation or other costs, all of which could have a material adverse effect on our business, financial condition, and results of operations.
Failure to maintain effective quality control systems at our production plants and deep-water marine terminals could have a material adverse effect on our business and operations.
Our customers require a reliable supply of wood pellets that meet stringent product specifications. We have built our operations and assets to consistently deliver and certify the highest levels of product quality and performance, which is critical to the success of our business and depends significantly on the effectiveness of our quality control systems, including the design and efficacy of such systems, the success of our quality training program and our ability to ensure that our employees and contract counterparties adhere to our quality control policies and guidelines. Moreover, any significant failure or deterioration of our quality control systems could impact our ability to deliver product that meets our customers’ specifications and, in turn, could lead to rejection of our product by our customers, which could have a material adverse effect on our business, financial condition, and results of operations.
Our business is subject to operating hazards and other operational risks, which may have a material adverse effect on our business and results of operations. We may also not be adequately insured against such events.
Our business could be materially adversely affected by operating hazards and other risks to our operations. We produce a combustible product that presents a risk of fires and explosions or other hazards at our plants or terminals. Any such fire or explosion could cause injury, damage production plants or disrupt production or transportation, which could adversely impact our financial results or our ability to satisfy our obligations under our customer contracts. Moreover, severe weather, such as floods, earthquakes, hurricanes, or other natural disasters, climatic phenomena, such as drought, and other catastrophic events, such as plant or shipping disasters, could impact our operations by causing damage to our facilities and equipment, affecting our ability to deliver our product to our customers and impacting our customers’ ability to take delivery of our products. Floods, hurricanes, and wet conditions can damage production plants in the short term and forests in the long term, and result in increased costs associated with drying our product. Such events may also adversely affect the ability of our suppliers or service providers to provide us with the raw materials or services we require or the ability to load, transport, and unload our product.
In addition, the scientific community has concluded that severe weather will increase in frequency and intensity as result of increasing concentrations of GHGs in the Earth’s atmosphere, and that climate change will have significant physical effects, including sea-level rise, increased frequency and severity of hurricanes and other storms, flooding, drought, and forest fires. We and our suppliers operate in coastal and wooded areas in geographic regions that are susceptible to such climate impacts.
We maintain insurance policies to mitigate against certain risks related to our business, in types and amounts that we believe are reasonable depending on the circumstances surrounding each identified risk; however, we may not be fully insured against all operating hazards and other operational risks incident to our business. Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at reasonable rates, if at all. As a result of market conditions and certain claims we may make under our insurance policies, premiums and deductibles for certain of our insurance policies could escalate. In some instances, insurance could become unavailable or available only for reduced amounts of coverage or at unreasonable rates. If we were to incur a significant liability for which we are not fully insured, it could have a material adverse effect on our financial condition, results of operations, and cash available for dividends to our stockholders.
We may be required to make substantial capital expenditures to maintain and improve our facilities.
Although we currently use a portion of our cash generated from our operations to maintain, develop, and improve our assets and facilities, such investment may, over time, be insufficient to preserve the operating profile required for us to meet our planned profitability or meet the evolving quality and product specifications demanded by our customers. Moreover, our current and future construction and other capital projects may be capital-intensive or suffer cost overruns. Accordingly, if we exceed our budgeted capital expenditures and/or additional capital expenditures become necessary in the future and we are unable to execute our construction, maintenance, or improvement programs successfully, within budget, and in a timely manner, our results of operations, business and financial position, and our ability to generate cash flows, may be materially adversely affected. Our future success depends on our ability to continuously improve and upgrade our existing plants to meet customer demands while at the same time maintaining the reliability and integrity of our existing plants. We may not be able to maintain or replace key technology and infrastructure at our existing plants as quickly as we would like or in a cost-effective manner. The profitability of our business is dependent on the continuous improvement of both our supply and maintenance costs. We may not be able to continuously reduce costs as effectively as we need to increase profitability.
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Our business and operating results are subject to seasonal fluctuations.
Our business is affected by seasonal fluctuations. The cost of producing wood pellets tends to be higher in the winter months because of increases in the cost of delivered raw materials, primarily due to a reduction in accessibility during cold and wet weather conditions. Our raw materials typically have higher moisture content during this period, resulting in a lower product yield; moreover, the cost of drying wood fiber increases during periods of lower ambient temperatures.
The increase in demand for power and heat during the winter months drives greater customer demand for wood pellets. As some of our wood pellet supply to our customers are sourced from third-party purchases, we may experience higher wood pellet costs and a reduction in our gross margin during the winter months. These seasonal fluctuations could have an adverse effect on our business, financial condition, and results of operations and cause comparisons of operating measures between consecutive quarters to not be as meaningful as comparisons between longer reporting periods.
Market and Credit Risks
Significant increases in the cost, or decreases in the availability, of raw materials or sourced wood pellets could result in lower revenue, operating profits, and cash flows, or impede our ability to meet commitments to our customers.
We purchase wood fiber from third-party landowners and other suppliers for use at our plants. Our reliance on third parties to secure wood fiber exposes us to potential price volatility and unavailability of such raw materials, and the associated costs may exceed our ability to pass through such price increases under our contracts with our customers. Further, delays or disruptions in obtaining wood fiber may result from a number of factors affecting our suppliers, including extreme weather, production or delivery disruptions, inadequate logging capacity, labor disputes, impaired financial condition of a particular supplier, the inability of suppliers to comply with regulatory or sustainability requirements, or decreased availability of raw materials. In addition, other companies, whether or not in our industry, could procure wood fiber within our procurement areas and adversely change regional market dynamics, resulting in insufficient quantities of raw material or higher prices.
Any interruption or delay in the supply of wood fiber, or our inability to obtain wood fiber at acceptable prices in a timely manner, could impair our ability to meet the demands of our customers and expand our operations.
In addition to our production, we purchase wood pellets produced by other suppliers to fulfill our obligations under our portfolio of long-term off-take contracts or take advantage of market dislocations on an opportunistic basis. Any reliance on other wood pellet producers exposes us to the risk that such suppliers will fail to satisfy their obligations to us pursuant to the associated off-take contracts, including by failing to timely meet quality specifications and volume requirements. Any such failure could increase our costs or prevent us from meeting our commitments to our customers.
The materialization of any of the foregoing risks could have an adverse effect on our results of operations, business, and financial position, and cash generated from our operations.
We are exposed to the credit risk of our contract counterparties, including the customers for our products, and any material nonpayment or nonperformance by our customers could adversely affect our financial results and cash generated from our operations.
We are subject to the risk of loss resulting from nonpayment or nonperformance by our contract counterparties, including our long-term off-take customers and suppliers. Our credit procedures and policies may not be adequate to fully eliminate counterparty credit risk and we may be unable to enforce payment or performance from distressed counterparties. If we fail to adequately assess the creditworthiness of existing or future customers or suppliers, or if their creditworthiness deterioratesunexpectedly, any resulting nonpayment or nonperformance by them could have an adverse impact on our results of operations, business and financial position, and cash generated from our operations.
Impacts to the cost or availability of transportation and other infrastructure could reduce our revenues.
Disruptions to or increases in the cost of local or regional transportation services and other forms of infrastructure, such as electricity, due to shortages of vessels, barges, railcars, or trucks, weather-related problems, flooding, drought, accidents, mechanical difficulties, bankruptcy, inflationary pressures, strikes, lockouts, bottlenecks, or other events could increase our costs, temporarily impair our ability to deliver products to our customers, and might, in certain circumstances, constitute a force majeure event under our customer contracts, permitting our customers to suspend taking delivery of and paying for our products.
In addition, persistentdisruptions in our access to infrastructure may force us to halt production as we reach storage capacity at our facilities. Accordingly, if the primary transportation services we use to transport our products are disrupted, and
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we are unable to find alternative transportation providers, it could have a material adverse effect on our results of operations, business and financial position, and cash generated from our operations.
We compete with other wood pellet producers and, if growth in domestic and global demand for wood pellets meets or exceeds management’s expectations, the competition within our industry may grow significantly.
We compete with other wood pellet production companies for the customers to whom we sell our products. Other current producers of utility‑grade wood pellets include Drax Biomass Inc., AS Graanul Invest, Fram Renewable Fuels, LLC, Phu Tai Bio-Energy and Highland Pellets LLC. Competition in our industry is based on price, consistency and quality of product, site location, distribution and logistics capabilities, customer service, creditworthiness and reliability of supply. Some of our competitors may have greater financial and other resources than we do, may develop technology superior to ours, or may have production plants sited in more advantageous locations from a logistics, procurement, or other cost perspective.
In addition, demand growth in the industry may lead to a significant increase in the production levels of our existing competitors and may incentivize new, well‑capitalized competitors to enter the industry, both of which could reduce the demand for our products and the prices we are able to obtain under future off‑take contracts. Significant price decreases or reduced demand could have a material adverse effect on our results of operations, business, and financial position, and cash generated from our operations.
Financial Risks
The DIP Facility is only available if we satisfy certain conditions and imposes significant restrictions on our operations
Proceeds of the DIP Facility may be used only in connection with an approved budget (adjusted for agreed variances). The DIP Facility will be made available in up to five draws, with the first draw occurring substantially contemporaneously with entry of the Interim DIP Order and the up to four additional draws subject to entry of the Final DIP Order. Each draw is subject to the satisfaction of certain conditions under the DIP Credit Agreement, including compliance with meeting the milestones required by the RSA. Borrowings under the DIP Facility bear interest at a rate equal to, at the Company’s option, (i) the alternate base rate plus 7% per annum or (ii) the adjusted SOFR rate plus 8% per annum. The Debtors are required to pay certain other agreed fees to the DIP Creditors and the agents under the DIP Credit Agreement. The DIP Credit Agreement contains usual and customary affirmative and negative covenants and events of default for transactions of this type. In addition, the Debtors are required to maintain a minimum liquidity of $30.0 million. There can be no assurance that funding sources will continue to be available, as our ability to generate cash flows from operations and our ability to continue to access the DIP Facility may be impacted by a variety of business, economic, legislative, financial, and other factors, which may be outside of our control.
Our level of indebtedness may increase, thereby reducing our financial flexibility.
As of December 31, 2023, our total debt was $1.8 billion, which primarily consisted of $750.0 million aggregate principal amount outstanding under our 6.5% senior unsecured notes due 2026, $672.5 million aggregate principal outstanding under our senior secured credit facility (consisting of $568.5 million in revolving loans and $104.0 million in term loans), and $350.0 million aggregate principal amount of municipal notes issued in July and November 2022 to fund the construction of our plant near Epes, Alabama and our plant near Bond, Mississippi. All of this debt was stayed upon filing of the Chapter 11 Cases on March 12, 2024, and treatment of each of these claims will be addressed as part of the Plan. In the future, we may incur additional indebtedness in order to make acquisitions, develop our properties, or for general corporate purposes. Our level of indebtedness could affect our operations in several ways, including the following:
• a significant portion of our cash flows could be used to service our indebtedness;
• the covenants contained in the agreements governing our outstanding indebtedness may limit our ability to borrow additional funds, dispose of assets, pay dividends, and make certain investments;
• our debt covenants may also affect our flexibility in planning for, and reacting to, changes in the economy and in our industry;
• a high level of debt would increase our vulnerability to general adverse economic and industry conditions, including increasing interest rates and inflationary pressures;
• a high level of debt may place us at a competitive disadvantage compared to our competitors that may be less leveraged and therefore may be able to take advantage of opportunities that our indebtedness would prevent us from pursuing; and
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• a high level of debt may impair our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions, or general corporate or other purposes.
In addition, borrowings under our credit facilities we or our subsidiaries may enter into in the future may bear, interest at variable rates. If market interest rates increase, such variable-rate debt will create higher debt service requirements. Additionally, higher market interest rates can also increase borrowing costs on fixed rate debt instruments to be issued in the future, or the refinancing of existing fixed-rate debt. As such higher interest rates could adversely affect our cash flow and reduce funds available for organic growth or to return capital to investors.
In addition to our debt service obligations, our operations require substantial expenditures on a continuing basis. Our ability to make scheduled debt payments, to refinance our obligations with respect to our indebtedness, and to fund capital and non‑capital expenditures necessary to maintain the condition of our operating assets and properties, as well as to provide capacity for the growth of our business, depends on our financial and operating performance. General economic conditions and financial, business, and other factors affect our operations and our future performance. Many of these factors are beyond our control. We may not be able to generate sufficient cash flows to pay the interest on our debt, and future working capital borrowings or debt or equity financing may not be available to pay or refinance such debt.
Our exposure to risks associated with foreign currency and interest rate fluctuations, as well as any hedging arrangements we may enter into to mitigate those risks, could have an adverse effect on our financial condition and results of operations.
We may experience foreign currency exchange and interest rate volatility in our business. We may use hedging transactions with respect to certain of our off-take contracts which are, in part or in whole, denominated in foreign currencies and interest rate swaps with respect to any variable-rate debt, in an effort to achieve more predictable cash flow and to reduce our exposure to foreign currency exchange and interest rate fluctuations.
In addition, there may be instances in which costs and revenue will not be matched with respect to currency denomination. As a result, to the extent that existing and future off-take contracts are not denominated in U.S. Dollars, it is possible that increasing portions of our revenue, costs, assets, and liabilities will be subject to fluctuations in foreign currency valuations.
Such hedging transactions involve cost and risk and may not be effective at mitigating our exposure to fluctuations in foreign currency exchange and interest rates. Although the use of hedging transactions may limit our downside risk, their use may also limit future revenues. Risks inherent in our hedging transactions include the risk that counterparties to hedging contracts may be unable to perform their obligations and the risk that the terms of such contracts will not be legally enforceable. Likewise, our hedging activities may be ineffective or may not fully offset the financial impact of foreign currency exchange or interest rates fluctuations, which could have an adverse impact on our results of operations, business and financial position.
General Risk Factors
Our business may suffer if we lose, or are unable to attract and retain, key personnel, or if we are unable to successfully adapt to the new leadership team.
We depend to a large extent on the services of our senior management team and other key personnel. Members of our senior management and other key employees collectively have extensive expertise in designing, building, and operating wood pellet production plants or marine terminals, negotiating long‑term off-take contracts and managing businesses such as ours. Competition for management and key personnel is intense, and the pool of qualified candidates is limited. The loss of any of these individuals or the failure to attract additional personnel, as needed, could have a material adverse effect on our operations and could lead to higher labor costs or reliance on less qualified personnel. In addition, if any of our executives or other key employees were to join a competitor or form a competing company, we could lose customers, suppliers, know-how, and key personnel. Our success is dependent on our ability to continue to attract, employ, and retain highly skilled personnel.
Since late 2022, we have experienced a number of significant leadership transitions including key roles of Chief Executive Officer, President, Chief Financial Officer and General Counsel. In addition, certain members of management have departed or changed roles in connection with the Chapter 11 Cases and further changes may be implemented in connection with the Plan. These leadership transitions have resulted, and may result in the future, in changes to our management style, operations, and strategies. Any significant leadership change or senior management transition involves inherent risk and could hinder our strategic planning, business execution and future performance. In particular, this or any future leadership transition may result in a loss of personnel with deep institutional or technical knowledge and changes in business strategy or objectives, and has the potential to disrupt our operations and relationships with employees and customers due to added costs, operational inefficiencies, changes in strategy, decreased employee morale and productivity, and increased turnover. Failure to successfully transition to the new leadership team could affect our ability to attract and retain skilled personnel and may have an adverse effect on our results of operations, business, and financial position.
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The international nature of our business subjects us to a number of risks, including foreign exchange risk and unfavorable political, regulatory, and tax conditions in foreign countries.
Substantially all of our current product sales are to customers that operate outside of the United States. As a result, we face certain risks inherent in maintaining international operations that include foreign exchange movements, restrictions on foreign trade and investment, including currency exchange controls imposed by or in other countries and trade barriers such as export requirements, tariffs, taxes, and other restrictions and expenses, which could increase the prices of our products and make our products less competitive in some countries.
Changes to applicable tax laws and regulations or exposure to additional tax liabilities could affect our business, cash flows, and future profitability.
We are subject to various complex and evolving U.S. federal, state, and local and non-U.S. taxes. U.S. federal, state, and local and non-U.S. tax laws, policies, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us, in each case, possibly with retroactive effect, and may have an adverse effect on our business, cash flows, and future profitability.
Labor strikes or work stoppages by our employees could harm our business.
As of December 31, 2023, none of our employees were represented by a labor union. However, unionization activities could occur among our employees. If employees strike, participate in a work stoppage or slowdown, or engage in other forms of labor strike, it could lead to disruptions in our business, increases in our operating costs, and constraints on our operating flexibility. Strikes, work stoppages, or an inability to negotiate collective bargaining agreements on commercially reasonable terms could have a material adverse effect on our business, results of operations, financial condition, and cash flows.
Our business is subject to cybersecurity risks.
As is typical of modern businesses, we are reliant on the continuous and uninterrupted operation of our information technology (“IT”) systems. User access and security of our sites and IT systems are critical elements of our operations, as are cloud security and protection against cybersecurity incidents. Any IT failure pertaining to availability, access, or system security could potentially result in disruption of our activities and personnel, and could adversely affect our reputation, operations, or financial performance. The energy industry has become increasingly dependent on digital technologies to conduct day-to-day operations, and the use of mobile communication devices has rapidly increased. Industrial control systems such as supervisory control and data acquisition (“SCADA”) systems now control large-scale processes that can include multiple sites across long distances. In addition, cybersecurity attacks are also becoming more sophisticated and include, but are not limited to, ransomware, credential stuffing, spear phishing, social engineering, use of deepfakes (e.g., highly realistic synthetic media generated by artificial intelligence) and other attempts to gainunauthorized access to data for purposes of extortion or other malfeasance. The Company’s technologies, systems, networks, including its SCADA system, and those of its business partners may become the target of cybersecurity attacks or security breaches.
We have experienced attempted cybersecurity attacks, but have not suffered any material adverse impacts to our business and operations as a result of such attempts. We have implemented security measures that are designed to detect and protect againstcyberattacks. No security measure is infallible. Despite these measures and any additional measures, we may implement or adopt in the future, our facilities and systems, and those of our third-party service providers, have been and are vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, scams, burglary, human errors, misdirected wire transfers, and other adverse events. Our efforts to improve security and protect data may also identify previously undiscovered instances of security breaches or bad actors with present access to our systems.
Potential risks to our IT systems could include unauthorized attempts to extract business-sensitive, proprietary, confidential, or personal information, unauthorized attempts to perpetratedenial of service attacks, extortion, corruption of information, or disruption of business processes. A cybersecurity incident resulting in a security breach or failure to identify a security threat could disrupt our business and could result in the loss of sensitive, confidential information or other assets, as well as litigation, including individual claims or class actions, regulatory enforcement, violation of privacy or securities laws and regulations, and remediation costs, all of which could materially impact our reputation, operations, or financial performance.
Our business is subject to privacy and data protection legislation compliance risks.
We are subject to a variety of federal, state and local laws, directives, rules, and policies relating to privacy and the collection, protection, use, retention, security, disclosure, transfer, and other processing of personal data and other data. The regulatory framework for data privacy and security worldwide is continuously evolving and developing and, as a result,
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interpretation, and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. The European Union, e.g., has enacted the General Data Protection Regulation (EU 2016/679) (the “EU GDPR”). The United Kingdom has implemented the Data Protection Act 2018 and the EU GDPR as it forms part of the laws of England and Wales, Scotland, and Northern Ireland by virtue of section 3 of the European Union (Withdrawal) Act 2018 (the “UK GDPR”), each of which (to the extent such laws apply) broadly impacts businesses that handle various types of personal data, including employee personal data.
The corporate opportunity provisions in our certificate of incorporation could enable affiliates of ours to benefit from corporate opportunities that might otherwise be available to us.
Subject to the limitations of applicable law, our certificate of incorporation, among other things; permits us to enter into transactions with entities in which one or more of our officers or directors are financially or otherwise interested; permits any of our stockholders, officers or directors to conduct business that competes with us and to make investments in any kind of property in which we may make investments; and provides that if any director or officer of one of our affiliates who is also one of our officers or directors becomes aware of a potential business opportunity, transaction, or other matter (other than one expressly offered to that director or officer in writing solely in his or her capacity as our director or officer), that director or officer will have no duty to communicate or offer that opportunity to us, and will be permitted to communicate or offer that opportunity to such affiliates and that director or officer will not be deemed to have (i) acted in a manner inconsistent with his or her fiduciary or other duties to us regarding the opportunity or (ii) acted in bad faith or in a manner inconsistent with our best interests.
These provisions create the possibility that a corporate opportunity that would otherwise be available to us may be used for the benefit of one of our affiliates.
We identified material weaknesses in our internal control over financial reporting for the fiscal years ended December 31, 2023 and 2022. If we are unable to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner.
In connection with the preparation of the Company’s audited financial statements for the years ended December 31, 2023 and 2022, management identified multiple material weaknesses in our internal control over financial reporting whereby the Company did not design and execute controls in accordance with U.S. generally accepted accounting principles. These material weaknesses and the Company’s plans to remediate those material weaknesses are described in Item 9A. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, or detected and corrected on a timely basis. Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud.
We can give no assurance that the measures we have taken and plan to take in the future will remediate the material weakness identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. Even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.
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favorable
Recent Developments
Chapter 11 Cases
On March 12, 2024 (the “Petition Date”), the Company and certain subsidiaries of the Company (collectively, the “Debtors”) filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Virginia (“Bankruptcy Court”). On March 14, 2024, the Bankruptcy Court granted motions filed by the Company seeking joint administration of the Chapter 11 Cases under the caption In re: Enviva Inc., et al ., Case No. 24-10453 (the “Chapter 11 Cases”). The Company is continuing to operate in the ordinary course throughout the Chapter 11 Cases as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
The filing of the Bankruptcy Petitions described above constitutes an event of default and acceleration under each of the following debt instruments (the “Debt Instruments”):
• Indenture, dated as of December 9, 2019, by and among the Company (as successor to Enviva Partners, LP), Enviva Partners Finance Corp., each of the guarantors party thereto, and Wilmington Savings Fund Society, FSB (as successor to Wilmington Trust, N.A.), as trustee.
• Amended and Restated Credit Agreement, dated as of October 18, 2018 (as amended, restated, amended and restated, supplemented, or otherwise modified from time to time), by and among the Company, Enviva, LP, each of the guarantors party thereto, the lenders party thereto, and Ankura Trust Company, LLC, as Administrative Agent and as Collateral Agent, and the other parties thereto;
• Indenture of Trust (as amended, restated, modified, supplemented, or replaced from time to time), dated as of July 1, 2022, by and between The Industrial Development Authority of Sumter County and Wilmington Trust, N.A., as trustee;
• Loan and Guaranty Agreement, dated effective as of July 15, 2022, by and among The Industrial Development Authority of Sumter County, the Company, and certain of its subsidiaries;
• Indenture of Trust (as amended, restated, modified, supplemented, or replaced from time to time), dated as of November 1, 2022, by and between Mississippi Business Finance Corporation and Wilmington Trust, N.A., as trustee;
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• Loan and Guaranty Agreement, dated effective as of November 22, 2022, by and among Mississippi Business Finance Corporation, the Company, and certain of its subsidiaries;
• Loan Agreement, dated as of June 27, 2022, by and among Enviva Pellets Epes, LLC, the lenders party thereto, and the Company; and
• Loan Agreement, dated as of June 27, 2022, by and between Enviva Pellets Epes Finance Company, LLC and United Bank.
The Debt Instruments provide that as a result of the Bankruptcy Petitions, the principal and interest due thereunder shall be immediately due and payable. However, any efforts to enforce such payment obligations under the Debt Instruments has been automatically stayed as a result of the Bankruptcy Petitions, and the creditors’ rights of enforcement in respect of the Debt Instruments is subject to the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
The Debtors have obtained requested relief from the Bankruptcy Court that enables the Debtors to maintain business-as-usual operations and uphold their respective commitments to their stakeholders, including employees, customers, and vendors during the restructuring process, subject to the jurisdiction of the Bankruptcy Court and in accordance with then applicable provisions of the Bankruptcy Code.
Restructuring Support Agreements
On the Petition Date, the Company entered into a Restructuring Support Agreement (including any schedules and exhibits attached thereto, the “RSA”) with (i) certain subsidiaries of the Company (together with the Company, the “Company RSA Parties”), (ii) certain participating holders or beneficial holders, investment advisors, sub-advisors, or managers of funds and/or accounts that are holders or beneficial holders of the Company’s outstanding 6.5% Senior Notes due 2026 (the “2026 Notes” and the holders thereof, the “2026 Noteholders”), (iii) certain participating holders or beneficial holders, investment advisors, sub-advisors, or managers of funds and/or accounts that are holders or beneficial holders, whether as record holders or participants, of loans or commitments under the Company’s senior secured credit facility (the “Senior Secured Credit Facility” and the lenders thereunder, the “Credit Facility Lenders”), (iv) certain participating holders or beneficial holders, investment advisors, sub-advisors, or managers of funds and/or accounts that are holders or beneficial holders of Exempt Facilities Revenue Bonds (Enviva Inc. Project), Series 2022 (Green Bonds) issued by the Industrial Development Authority of Sumter County, Alabama (the “Epes Green Bonds” and the holders thereof, the “Epes Bondholders”), and (v) certain participating holders or beneficial holders, investment advisors, sub-advisors, or managers of funds and/or accounts that are holders or beneficial holders of Exempt Facilities Revenue Bonds (Enviva Inc. Project), Series 2022 (Green Bonds) issued by Mississippi Business Finance Corporation (the “Bond Green Bonds” and the holders thereof, the “Bond Bondholders,” and together with the 2026 Noteholders, the Credit Facility Lenders, and the Epes Bondholders, the “Restructuring Support Parties”).
Under the terms of the RSA, the Restructuring Support Parties have agreed to support a restructuring of the Company RSA Parties under a Chapter 11 plan of reorganization (the “Plan”) to be proposed in accordance with the terms set forth in the RSA. The Restructuring Support Parties and the Company RSA Parties have entered into certain amendments to the RSA, including to extend certain milestones and deadlines thereunder.
The Company RSA Parties also entered into a Restructuring Support Agreement (including any schedules and exhibits attached thereto, the “Bond MS RSA”) with certain Bond Bondholders comprising a majority of Bond Green Bonds outstanding and the Bond Green Bonds Trustee (as defined in the Bond MS RSA). Under the Bond MS RSA, the Company agreed, among other obligations described in the term sheet attached as Exhibit A thereto (the “Bond MS Term Sheet”), to promptly seek court approval of a settlement with the Bond Bondholders party thereto and the Bond Green Bonds Trustee, whereby the Company RSA Parties will consent to the partial redemption of the Bond Green Bonds via the release of certain funds currently held by the Bond Green Bonds Trustee (the “Construction Funds”). In exchange, the Bond Green Bondholders and the Bond Green Bonds Trustee both agree, among other obligations described in the Bond MS Term Sheet, and subject to any rights granted by the Bond MS RSA, to support the Plan. On May 8, 2024, the Bankruptcy Court entered an order approving the settlement in the Bond MS Term Sheet (the “Bond MS Settlement Order”). Pursuant to the Bond MS Settlement Order, the Bond Green Bonds Trustee transferred the Construction Funds to the Settlement Fund (as defined in the Bond MS RSA) for further distribution by the Bond Green Bonds Trustee to the Bond Bondholders.
DIP Facility
On March 15, 2024, the Debtors entered into a Debtor-in-Possession Credit and Note Purchase Agreement (the “DIP Credit Agreement”) by and among the Company, as borrower, and the other Debtors, as guarantors, the various lenders from time to time party thereto (the “Lenders”), and Acquiom Agency Services LLC (“Acquiom”) and Seaport Loan Products LLC, as co-administrative agents, and Acquiom, as collateral agent providing for a debtor-in-possession term loan and notes facility (the
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“DIP Financing”) in an amount not to exceed $500.0 million. On March 14, 2024, the Bankruptcy Court granted interim approval of the motion to approve the DIP Financing (the “Interim DIP Order”) and borrowing of up to $150.0 million of the loans and notes thereunder. Following the issuance of the Interim DIP Order, the Company offered certain eligible holders of the Company’s common stock (the “Common Stock”) the opportunity to subscribe to participate in the syndication of up to $100.0 million aggregate principal amount of DIP Financing (the “Syndication”) pursuant to certain procedures (the “Syndication Procedures”). On May 3, 2024, the Bankruptcy Court entered a final order approving the full amount of the DIP Financing and the Syndication (the “Final DIP Order”). As authorized by the Final DIP Order, participants in the Syndication became Lenders under the DIP Credit Agreement as of May 6, 2024. An appeal from the Final DIP Order seeking to strike the Syndication was filed by the Official Committee of Unsecured Creditors and remains pending in the U.S. District Court for the Eastern District of Virginia.
The proceeds of the loans and notes under the DIP Credit Agreement are designated to pay the Debtors’ operating expenses, help fund the completion of the Epes plant, and pay other fees, expenses, and other expenditures of the Debtors to be set forth in rolling budgets prepared in connection with the Chapter 11 Cases, which are subject to approval by the DIP Creditors. The Lenders and the Company together have entered into several technical amendments to the DIP Credit Agreement, either to clarify defined terms or extend deadlines related to reporting by the Company. The Lenders and the Company together have entered into several technical amendments to the DIP Credit Agreement, either to clarify defined terms or extend deadlines related to reporting by the Company.
Stock Procedures
On March 13, 2024, the Debtors filed a motion (“NOL Motion”) seeking entry of an interim and final order establishing certain procedures and restrictions with respect to the direct or indirect purchase, disposition, or other transfer of the Common Stock (and declarations of worthlessness with respect to such Common Stock) (such procedures, “Stock Procedures”), and seeking related relief, in order to preserve and protect the potential value of the Debtors’ net operating losses (“NOLs”) and certain other tax attributes of the Debtors (together with the NOLs, “Tax Attributes”). On March 14, 2024, the Bankruptcy Court entered an order granting the NOL Motion and approving the Stock Procedures on an interim basis. On April 12, 2024, the Bankruptcy Court entered an order granting the NOL Motion and approving the Stock Procedures on a final basis.
Chapter 11 Plan and Equity Rights Offering
On August 30, 2024, the Debtors filed a proposed Joint Chapter 11 Plan of Reorganization of Enviva Inc. and its Debtor Affiliates (the “Proposed Plan”) and a related proposed form of Disclosure Statement (the “Proposed Disclosure Statement”) with the Bankruptcy Court. Capitalized terms used but not otherwise defined in this section shall the meanings set forth in the Proposed Plan. The Proposed Plan and the related Proposed Disclosure Statement describe, among other things, the Proposed Plan; the restructuring of the Debtors set forth therein; the events leading to the Chapter 11 Cases; and certain events that have occurred or are anticipated to occur during the Chapter 11 Cases, including the anticipated solicitation of votes to approve the Proposed Plan from certain of the Debtors’ creditors and existing equity holders, as well as the risks related to, among other things, the Chapter 11 Cases. The Proposed Plan provides for, among other things:
• The sale of our interests following a reorganization (the “Reorganized Enviva Inc. Interests”) pursuant to a rights offering (the “Equity Rights Offering”) to raise proceeds in an aggregate amount equal to (i) $250 million plus (ii) the principal amount of any DIP Tranche A Loans under the DIP Facility to the extent the Holders of such Loans do not elect to participate in the DIP Tranche A Equity Participation, which Rights Offering is expected to be fully backstopped;
• Entry into a $1 billion first lien senior secured exit facility, which certain commitment parties are expected to backstop; provided that the Company may seek proposals for alternative debt financing for all or part of the Company’s debt capital structure in consultation with an ad hoc group of the Company’s previous creditors;
• The DIP Tranche A Equity Participation, subject to certain conditions in the DIP Credit Agreement;
• Repayment of the DIP Tranche A Loans (to the extent the Holders of which do not elect to participate in the DIP Tranche A Equity Participation) and the DIP Tranche B Loans under the DIP Facility in cash;
• Repayment of our senior secured credit facility in cash;
• Distribution of Reorganized Enviva Inc. Interests and rights to participate in the Equity Rights Offering to holders of certain unsecured claims;
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• Distribution of cash in an aggregate amount equal to either $18 million or $13 million, depending on whether certain conditions are met, to holders of certain unsecured claims;
• Subject to certain conditions outside of the Company’s control, including classes of certain unsecured claims voting to accept the Proposed Plan, distribution to each holder of an Existing Equity Interest of its pro rata share of either (i) cash in an amount equal to $1 million or (ii) the Reorganized Enviva Inc. Interests Existing Equity Interests Equity Pool and the New Warrants, and with respect to (ii), solely to the extent a holder of an Existing Equity Interest affirmatively elects to receive such treatment in lieu of cash on a timely and properly submitted ballot and the value of the Reorganized Enviva Inc. Interests Existing Equity Interests Equity Pool and the New Warrants is greater than 0% following dilution by the transactions contemplated by the Proposed Plan; and
• An overbid process, consistent with the terms of the Final DIP Order and certain overbid procedures, to solicit bids for a value-maximizing alternative transaction.
In addition, the Company filed motions (i) for entry of an order approving the adequacy of the Proposed Disclosure Statement, approving the solicitation of votes in favor of the Plan, and establishing procedures from the proposed Equity Rights Offering, described in the Proposed Plan and the Proposed Disclosure Statement and (ii) for entry of an order authorizing the Company entry into a backstop agreement related to the proposed equity rights offering (the “Disclosure Statement Motions”).
Backstop Agreement
On August 30, 2024, the Debtors entered into a Backstop Commitment Agreement (as amended, the “Backstop Agreement”) with certain Equity Commitment Parties pursuant to which each of the Equity Commitment Parties has agreed to backstop, severally and not jointly and subject to the terms and conditions in the Backstop Agreement, the Equity Rights Offering. The Debtors’ obligations under the Backstop Agreement, including the payment of certain premiums set forth therein, remain subject to approval by the Bankruptcy Court.
Exit Facilities Commitment Letter
On August 30, 2024, the Debtors entered into a commitment letter (as amended, the “Commitment Letter”) with the certain commitment parties pursuant to which the commitment parties have committed to provide to the Debtors a first lien senior secured facility in an aggregate principal amount of $1 billion upon emergence from Chapter 11 Cases. The Debtors’ obligations under the Commitment Letter, including the payment of certain premiums set forth therein, remain subject to approval by the Bankruptcy Court.
Basis of Presentation and Factors Impacting Comparability of Our Financial Results
Simplification Transaction
On December 31, 2021, Enviva Partners, LP (the “Partnership”) converted from a Delaware limited partnership to a Delaware corporation (the “Conversion”) named “Enviva Inc.” Prior to the Conversion, on October 14, 2021, the Partnership acquired our former sponsor and Enviva Partners GP, LLC (our former general partner), and the incentive distribution rights held by our former sponsor were cancelled and eliminated (collectively, the “Simplification Transaction”) in exchange for 16.0 million common units of the Partnership, which were distributed to the owners of our former sponsor. In connection with the Simplification Transaction, the Partnership acquired certain assets under development, as well as off-take contracts in varying stages of negotiation. Additionally, the Partnership’s existing management services fee waivers and other support agreements with our former sponsor were consolidated, fixed, and novated to certain owners of our former sponsor. Under the consolidated support agreement, we are entitled to receive quarterly payments (the “Support Payments”) in an aggregate amount of $55.5 million with respect to periods from the fourth quarter of 2021 through the first quarter of 2024. The owners of our former sponsor agreed to reinvest in our common stock all dividends from 9.0 million of the 16.0 million common units issued in connection with the Simplification Transaction during the period beginning with the distribution for the third quarter of 2021 through the fourth quarter of 2024. Support Payments were suspended in 2023 as a result of the Company suspending the payment of dividends.
Enviva Wilmington Holdings, LLC
Our wholly owned subsidiary Enviva, LP owns all of the Class B units of Enviva Wilmington Holdings, LLC (the “Hamlet JV”). The Hamlet JV owns a wood pellet production plant in Hamlet, North Carolina (the “Hamlet plant”). Enviva, LP is the managing member of the Hamlet JV, which is a consolidated subsidiary partially owned by a third party. The Hamlet JV is not a Debtor in the Chapter 11 cases. For more information regarding Enviva, LP’s rights and obligations with respect to the Hamlet JV, see Note 17 in the Notes to our Consolidated Financial Statements, Equity — Hamlet JV .
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Restructuring Inclusive of Related Severance Expenses
During the second quarter of 2023, we implemented a restructuring plan, separate and apart from our restructuring efforts in connection with the RSA and Bond MS RSA, to optimize production and growth. The primary components of the restructuring were reductions in our workforce and corporate and other expenses.
During the second quarter of 2023, we had an initial reduction in force of certain leadership employees, accelerated depreciation of leasehold improvements at our principal executive offices, and a reduction of our office lease expenses. We completed a broader reduction in force during the third quarter of 2023.
The following table summarizes our pre-tax restructuring expenses for the year ended December 31, 2023:
Cash-based employee severance expenses
Non-cash equity-based compensation
Accelerated leasehold improvement depreciation
Impairment of right-of-use asset
Total
Accounting for Wood Pellets Sale Contracts as a Financing Arrangement ( “ Q4 2022 Transactions ” )
In the fourth quarter of 2022, we entered into agreements with a customer to purchase approximately 1.8 million MT of wood pellets between 2023 and 2025 (the “new purchase agreements”). At that time, we also entered into additional wood pellet sales contracts (together with the new purchase agreements, the “Q4 2022 Transactions”) that together with our existing sales contracts with the customer, totaled approximately 2.8 million MT, with deliveries to take place between 2022 and 2026. Under the Q4 2022 Transactions, the quantities we agreed to purchase exceeded the quantities we agreed to sell. Although the new purchase agreements were priced at market prices in effect at the time the new purchase agreements were entered into, the 1.8 million MT of wood pellet purchases were not hedged with contracted sales at similar pricing or volume.
Under the revenue accounting principles generally accepted in the United States (“GAAP”), the Q4 2022 Transactions constituted a contract modification. Because the scope of the modification resulted in a net decrease in future sales volumes to the customer, in 2022 we accounted for the modification as if we had terminated the existing sale contracts and created a new, single contract. In addition, the new purchase agreements constitute a repurchase agreement under GAAP and were required to be accounted for as a financing arrangement.
During year ended December 31, 2023, gross proceeds of $37.2 million were received from the sales of 0.2 million MT of wood pellets delivered to the customer. During the year ended December 31, 2023, interest expense of $79.3 million was recorded to financing liabilities based on the difference between the blended sales price and the future purchase price per MT of the pellets subject to repurchase.
During the year ended December 31, 2023, we repurchased an insignificant volume of wood pellets for $11.1 million under the Q4 2022 Transactions and sold those volumes to a different customer.
During the year ended December 31, 2023, we included in net cash provided by financing activities, instead of in net cash provided by operating activities, cash received of $37.2 million on transfers to the customer and cash paid of $8.9 million for purchases from the customer and a settlement payment.
On November 11, 2023, we entered into a standstill agreement (the “Standstill Agreement”) with the counterparty to the Q4 2022 Transactions and later amended it on December 8, 2023. The amended Standstill Agreement expired on December 31, 2023. Upon expiration, the counterparty became entitled to issue termination notices in respect of outstanding purchase and supply agreements and to invoice us for termination fees equal to $350.0 million in aggregate. The expiration of the Standstill Agreement also decreased adjusted gross margin for the year ended December 31, 2023 by $177.8 million, consisting of a $111.6 million charge, exclusive of depreciation and amortization expense of $11.7 million, to eliminate finished goods inventory subject to repurchase that are no longer recoverable and a $66.2 million charge to increase the liability due to the counterparty of the Q4 2022 Transactions to the $350.0 million termination fees and to eliminate the contract asset to the same counterparty following the termination of the associated agreements.
Increased Borrowing under Senior Secured Credit Facility and Higher Interest Rate
During 2023 compared to 2022, we had higher average amounts borrowed and higher interest rates on our Senior Secured Credit Facility.
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Omicron Variant of Novel Coronavirus
During the three months ended March 31, 2022, the Omicron variant of COVID-19 significantly impacted our operations and resulted in $15.2 million of incremental costs. Our contractors and supply chain partners experienced labor-related and other challenges associated with COVID-19 that had a more pronounced than anticipated impact on our operations and project execution schedule. In addition, the prevalence of the Omicron variant of COVID-19 and increased rates of infection across areas in which we operate affected the availability of healthy workers from time to time at our facilities, and we experienced increased rates of absence in our hourly workforce as workers who contracted COVID-19 quarantined at home. These absences contributed to reduced facility availability and, in some cases, reduced aggregate production levels. For more information about the effects of COVID-19 on the year ended December 31, 2022, please see below under “Results of Operations.”
War in Ukraine
The war in Ukraine impacted our operations and resulted in $5.1 million of incremental costs during the year ended December 31, 2022, all of which were incurred during the first quarter of 2022. Our third-party shipping partners’ operations experienced severe dislocations which incrementally impacted our distribution costs related to demurrage and to loading, transporting, and unloading our wood pellets. In addition, the immediate spike in energy prices negatively impacted the cost of our operations, including incremental costs to support continued services from our third-party fiber suppliers and trucking service providers.
How We Generate Revenue
Overview
We earn revenue by supplying wood pellets to our customers under off‑take contracts, the majority of which are long-term in nature. Our off-take contracts are considered “take-or-pay” because they include a firm obligation of the customer to take a fixed quantity of product at a stated price and provisions that require that we be compensated in the case of a customer’s failure to accept all or a part of the contracted volumes or termination of a contract by a customer. Each of our long-term off-take contracts defines the annual volume of wood pellets that a customer is required to purchase, and we are required to sell, the fixed price per MT for product satisfying a base net calorific value, and other technical specifications. These prices are fixed for the entire term and are subject to adjustments, which may include annual inflation-based adjustments or price escalators, price adjustments for product specifications, as well as, in some instances, price adjustments due to changes in underlying indices. Additionally, the majority of our long-term off-take contracts include cost pass-through mechanisms for bunker fuel adjustments and certain handling costs, including demurrage costs, in our long-term shipping contracts. Some of our product volumes are sold under off-take contracts that include cost pass-through mechanisms to mitigate increases in raw material and distribution costs.
Depending on the specific off-take contract, shipping terms under our long-term contracts are either Cost, Insurance and Freight (“CIF”), Cost and Freight (“CFR”), or Free On Board (“FOB”). Most of our long-term contracts are a CIF contract where we procure and pay for shipping costs, which include insurance and all other charges, up to the port of destination for the customer. Under a CFR contract, we procure and pay for shipping costs, which include insurance (excluding marine cargo insurance) and all other charges, up to the port of destination for the customer. Shipping under CIF and CFR contracts after control has passed to the customer is considered a fulfillment activity, rather than a performance obligation, and associated expenses are accrued and included in the price to the customer. Under FOB contracts, the customer is directly responsible for shipping costs.
In some cases, we may purchase shipments of product from third-party suppliers and resell them in back-to-back transactions (“purchase and sale transactions”). We typically are the principal in such transactions because we control the wood pellets prior to transferring them to the customer and therefore recognize related revenue on a gross basis.
Net revenue also includes fees from customers related to cancellations, deferrals, or accelerations of shipments and certain sales and marketing, scheduling, sustainability, consultation, shipping, and risk management services.
Costs of Conducting Our Business
Cost of Goods Sold
Cost of goods sold includes the costs to produce and deliver our wood pellets to customers, reimbursable shipping-related costs associated with specific off-take contracts with CIF or CFR shipping terms, and costs associated with purchase and sale transactions. The primary expenses incurred to produce and deliver our wood pellets consist of raw material, production, and distribution costs.
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We have strategically located our plants in the Mid-Atlantic and Gulf Coast regions of the United States, geographic areas in which wood fiber sources are plentiful and readily available. We have short-term and long-term contracts to manage the supply of raw materials into our plants. Delivered wood fiber costs include stumpage, as well as harvesting, transportation, and in some cases, size-reduction services provided by our suppliers.
Production costs at our production plants consist of labor, energy, tooling, repairs and maintenance, and plant overhead costs. Production costs also include depreciation expense associated with the use of our plants and equipment. Cost of goods sold includes any gain or loss on disposal of associated assets, which is separately presented in our consolidated statements of operations. Some of our off-take contracts include price escalators that mitigate inflationary pressure on certain components of our production costs. In addition to the wood pellets that we produce at our owned and operated production plants, we selectively purchase additional quantities of wood pellets from other wood pellet producers. Costs associated with purchase and sale transactions are included in cost of goods sold.
Distribution costs include all transportation costs from our plants to our port locations, any storage or handling costs while the product remains at port, and shipping costs related to the delivery of our product from our port locations to our customers. Both the strategic location of our plants and our ownership or control of our deep-water terminals have allowed for the efficient and cost-effective transportation of our wood pellets. We seek to mitigate shipping risk by entering into long-term, fixed-price shipping contracts with reputable shippers matching the terms and volumes of our off-take contracts pursuant to which we are responsible for arranging shipping. Certain of our off-take contracts include pricing adjustments for volatility in fuel prices, which allow us to pass the majority of the fuel-price risk associated with shipping through to our customers.
Raw material, production, and distribution costs associated with delivering our wood pellets to our owned and leased marine terminals and third-party wood pellet purchase costs are capitalized as a component of inventory. Fixed production overhead, including the related depreciation expense, is allocated to inventory based on the normal capacity of the production plants. When the inventory is sold, the depreciation allocated to it is reflected as depreciation and amortization expense in our consolidated statements of operations, while the other fixed production overhead allocated to inventory is reflected in cost of goods sold, excluding depreciation and amortization. Distribution costs associated with shipping our wood pellets to our customers are expensed as incurred. Our inventory is recorded using the first-in, first-out method (“FIFO”). Given the nature of our inventory, the calculation of cost of goods sold is based on estimates used in the valuation of the FIFO inventory and in determining the specific composition of inventory that is sold to each customer.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported revenues and expenses during the reporting periods. We evaluate these estimates and assumptions on an ongoing basis and base our estimates on historical experience, current conditions, and various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities, as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates.
For accounting policies and estimates that we believe are critical to our consolidated financial statements due to the degree of uncertainty regarding the estimates or assumptions involved, please see the following disclosures within the Notes to our Consolidated Financial Statements included in Part II, Item 8. of this Annual Report on Form 10-K: Note 4, Significant Accounting Policies , specifically about Inventories , Revenue Recognition , Cost of Goods Sold , and Property, Plant and Equipment .
Recently Issued Accounting Pronouncements
See Part II, Item 8. “Financial Statements and Supplementary Data” — Note 4, Significant Accounting Policies—Recently Adopted Accounting Standards and Recently Issued Accounting Standards not yet Adopted , in the Notes to our Consolidated Financial Statements for a description of recently issued and adopted accounting pronouncements.
How We Evaluate Our Operations
Adjusted Gross Margin and Adjusted Gross Margin per Metric Ton
We define adjusted gross margin as gross margin excluding impairment of assets and loss on disposal of assets, non-cash equity-based compensation and other expense, depreciation and amortization, changes in unrealized derivative instruments
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related to hedged items, acquisition and integration costs and other, effects of COVID-19 and the war in Ukraine, and Support Payments. We define adjusted gross margin per metric ton as adjusted gross margin per metric ton of wood pellets sold. We believe adjusted gross margin and adjusted gross margin per metric ton are meaningful measures because they compare our revenue-generating activities to our cost of goods sold for a view of profitability and performance on a total-dollar and a per-metric ton basis. Adjusted gross margin and adjusted gross margin per metric ton primarily will be affected by our ability to meet targeted production volumes and to control direct and indirect costs associated with procurement and delivery of wood fiber to our wood pellet production plants and our production and distribution of wood pellets.
Adjusted EBITDA
We define adjusted EBITDA as net income (loss) excluding depreciation and amortization, interest expense, income tax expense (benefit), early retirement of debt obligation, non-cash equity-based compensation and other expense, impairment of assets and loss on disposal of assets, changes in unrealized derivative instruments related to hedged items, cash-based restructuring inclusive of severance expense, acquisition and integration costs and other, effects of COVID-19 and the war in Ukraine, Support Payments, and Executive separation. Adjusted EBITDA is a supplemental measure used by our management and other users of our financial statements, such as investors, commercial banks, and research analysts to assess the financial performance of our assets without regard to financing methods or capital structure.
Limitations of Non-GAAP Financial Measures
Adjusted gross margin, adjusted gross margin per metric ton, and adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures provides useful information to investors in assessing our financial condition and results of operations. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measures. Each of these non-GAAP financial measures has important limitations as an analytical tool because they exclude some, but not all, items that affect the most directly comparable GAAP financial measures. You should not consider adjusted gross margin, adjusted gross margin per metric ton, or adjusted EBITDA in isolation or as substitutes for analysis of our results as reported in accordance with GAAP.
Our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. Please see below for a reconciliation of each of adjusted gross margin and adjusted gross margin per metric ton, and adjusted EBITDA to the most directly comparable GAAP financial measure.
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Results of Operations
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Year Ended December 31,
Change
(in thousands)
Net revenue
Operating costs and expenses:
Cost of goods sold, excluding items below
Goodwill impairment
Impairment of assets
Loss on disposal of assets
Selling, general, administrative, and development expenses
Restructuring inclusive of related severance expenses
Executive separation
Depreciation and amortization
Total operating costs and expenses
Loss from operations
Other (expense) income:
Interest expense
Interest expense on repurchase accounting
Total interest expense
Other income, net
Net loss before income taxes
Income tax (benefit) expense
Net loss
Net revenue
Net revenue consisted of the following:
Year Ended December 31,
Change
(in thousands)
Product sales
Breakage revenue
Termination of all contracts with customer for the Q4 2022 Transactions
Impairment of customer assets
Other revenue
Net revenue
Revenue related to product sales for wood pellets produced or procured by us increased to $1,217.7 million in 2023, from $1,079.8 million in 2022. The $137.9 million, or 13%, increase was primarily attributable to a 14% increase in product sales volumes.
During the year ended December 31, 2023, the average sales price per MT was significantly lower than the year ended December 31, 2022, primarily driven by a less favorable pricing environment for wood pellets. During the year ended December 31, 2022, wood pellet spot market prices, as well as the forward curve pricing of certain European indices, exceeded $400 per MT, representing a substantial premium to the current long-term contracted pricing of roughly $200 to $220 per MT across Enviva’s weighed average portfolio, and we captured some of the differential during the year ended December 31, 2022. The significant decrease in average sales price per MT was partially offset by incremental product sales revenue of
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$67.6 million recoverable from our customers related to handling costs incurred at discharge ports for our wood pellet shipments. Although these revenues are primarily a pass-through of incurred costs to our customers, our accounting policy is to account for the recovery of these handling costs as a fulfillment activity which requires such reimbursements to be recognized as product sales revenue and the costs to be recognized in cost of goods sold.
For the year ended December 31, 2023, we recorded a reduction for the termination of all contracts with customer for the Q4 2022 Transactions of $65.2 million to increase the liability to this counterparty to the $350.0 million termination fees after the expiration of the Standstill Agreement on December 31, 2023. Under the Standstill Agreement, we agreed to reimburse the customer for certain costs that it incurred during the standstill period, which resulted in $2.0 million being recognized as a reduction to net revenue during t he year ended December 31, 2023.
Breakage revenue increased to $44.1 million in 2023, from $6.4 million in 2022. Breakage revenue includes payments to us for adjusting deliveries under our take-or-pay off-take contracts, which is recognized under a breakage model based on when the wood pellets would have been loaded onto ships for delivery to those customers.
Impairment of customer assets represents a reduction in net revenue by the amount of customer assets (with customers other than the customer for the Q4 2022 Transactions) that was not expected to be recoverable as the expected costs exceeded the contract cash flows. During the year ended December 31, 2023, $26.5 million of impairments of customer assets were recorded as a reduction to net revenue as the amount was not expected to be recoverable.
Cost of goods sold
Cost of goods sold increased to $1,218.1 million for the year ended December 31, 2023, from $927.5 million for the year ended December 31, 2022, an increase of $290.7 million, or 31%. Cost of goods sold for the year ended December 31, 2023, includes a charge of $123.3 million related to the elimination of finished goods inventory subject to repurchase that is no longer recoverable following the expiration of the Standstill Agreement with the counterparty to the Q4 2022 Transactions. Excluding the $123.3 million charge, cost of goods sold for the year ended December 31, 2023 would have been $1,094.8 million, an increase of $167.3 million , or 18.0%, compared to the year ended December 31, 2022. The increase in cost of goods sold was primarily a result of a 14% increase in product sales volumes, as well as increased fiber procurement, plant operating and shipping and handling costs during the first and second quarters of 2023.
Cost of goods sold during the year ended December 31, 2023, also includes $48.1 million of handling costs incurred at discharge ports for our wood pellet shipments. Although these handling costs are recoverable from our customers, our accounting policy is to account for the recovery of these handling costs as a fulfillment activity, which requires such reimbursements to be recognized as product sales revenue and the costs to be recognized in cost of goods sold.
During the year ended December 31, 2022, cost of goods sold excludes $95.3 million inclusive of depreciation and amortization of approximately $9.3 million, which was reflected as inventory in connection with the Q4 2022 Transactions (see above, “ Accounting for Wood Pellets Sale Contracts as a Financing Arrangement ( “ Q4 2022 Transactions ” ) ”). During the three months ended March 31, 2022, the Omicron variant of COVID-19 significantly impacted our operations and resulted in $13.9 million of incremental costs and the war in Ukraine impacted our operations and resulted in $5.1 million of incremental costs. Furthermore, during the year ended December 31, 2022, we incurred incremental cost of goods sold from the ramp of the Lucedale plant and the commencement of operations of the Pascagoula terminal.
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Adjusted gross margin and adjusted gross margin per metric ton
Year Ended December 31,
Change
(in thousands, except per metric ton)
Reconciliation of gross margin to adjusted gross margin and adjusted gross margin per metric ton:
Gross margin (1)
Impairment of assets and loss on disposal of assets
Non-cash, equity-based compensation and other expense
Depreciation and amortization
Changes in unrealized derivative instruments
Support Payments
Acquisition and integration costs and other
Effects of COVID-19
Effects of the war in Ukraine
Adjusted gross margin
Metric tons sold
Gross margin per metric ton
Adjusted gross margin per metric ton
(1) Gross margin is defined as net revenue less cost of goods sold (including related depreciation and amortization and loss on disposal of assets).
We earned negative adjusted gross margin of $34.5 million, or negative $6.47 per MT, for the year ended December 31, 2023, compared to positive adjusted gross margin of $217.1 million, or positive $46.65 per MT, for the year ended December 31, 2022. The $251.6 million decrease in adjusted gross margin was primarily attributable to the following:
• A $177.8 million decrease due to the expiration of the Standstill Agreement resulting in a $111.6 million charge, exclusive of depreciation and amortization expense of $11.7 million, to eliminate finished goods inventory subject to repurchases that are no longer recoverable and a $65.2 million charge to increase the liability due to the counterparty of the Q4 2022 Transactions to the $350.0 million termination fees and to eliminate the customer asset to the same counterparty following the termination of the associated agreements.
• A 1.5% decrease in average sales price per MT, decreased adjusted gross margin by $86.9 million during the year ended December 31, 2023, compared to the year ended December 31, 2022.
• A $21.9 million decrease in Support Payments during 2023 resulting from our suspension of paying dividends.
• A $20.6 million decrease due to payments received from a wood pellet supplier for the cancellation of contracted volumes during the year ended December 31, 2022.
The decrease in adjusted gross margin during the year ended December 31, 2023, was partially offset by the following:
• A $42.5 million increase in adjusted gross margin due to a decrease in plant and port operating costs as well as fiber procurement costs. The decrease in plant and port operating costs was primarily attributable to improved operational reliability, driving greater absorption of fixed costs while reducing spend on repairs and maintenance and contract labor. Lower energy costs, including electricity, natural gas, and diesel, also contributed to the decrease in operating costs.
• A $25.2 million increase in adjusted gross margin due to a 14% increase in sales volumes. The increase in sales volumes is attributable primarily to wood pellets produced from our manufacturing plants.
Goodwill impairment
During the fourth quarter of 2023, the Company performed an interim goodwill impairment test, which indicated that the carrying value of its sole reporting unit was above its fair value. Consistent with the Company’s historical approach for impairment tests, the Company estimated the fair value of its sole reporting unit using the market approach by evaluating the market capitalization of its common stock and an estimated control premium. The Company determined that the carrying value
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of the Company’s sole reporting unit exceeded its fair value and recorded a material non-cash pretax impairment charge related to goodwill of $103.9 million in the fourth quarter of 2023.
Impairment of assets
Impairment of assets includes $44.5 million, related to new plant development costs that were deemed no longer recoverable as of December 31, 2023. We intend to revisit our development of future plants when sufficient contracted customer demand materializes to support the investment. This includes an impairment related to construction in progress at our plant near Bond, Mississippi (“Bond plant”). We ceased development of the Bond plant, which was in the early stages of development, as of December 31, 2023. Therefore, we performed a recoverability analysis using undiscounted cash flows of the Bond plant and compared this to its carrying amount. Under this analysis the undiscounted cash flows of the Bond plant were less than the carrying amount. Accordingly, we recognized a pre-tax impairment of assets expense of $41.5 million, which is the amount the carrying value of the Bond plant exceeded its estimated fair value, which was determined as the estimated proceeds from the sale of the underlying land.
In connection with a broader effort to eliminate operational inefficiencies, during the third quarter of 2023, we determined that the Southampton, Virginia plant (the “Southampton plant”) operated most cost effectively with a single dryer line. Therefore, we permanently shut down the second, underperforming dryer line, and as a result, we recognized an impairment expense of $21.7 million during the year ended December 31, 2023.
Loss on disposal of assets
During the years ended December 31, 2023 and 2022, loss on disposal of assets was $15.1 million and $8.6 million, respectively.
Selling, general, administrative, and development expenses
Selling, general, administrative, and development expenses were $117.2 million for the year ended December 31, 2023, and $119.7 million for the year ended December 31, 2022. Selling, general, administrative, and development expenses include corporate and other overhead expenses, costs to develop new markets, and costs of developing new plants or ports (for those that have not yet met the capitalization threshold or costs that are not eligible for capitalization). Once a significant component of the plant or port is placed in service, the associated expense component is classified as cost of goods sold.
The $2.5 million decrease in total selling, general, administrative, and development expenses is primarily associated with a $21.7 million decrease in acquisition and integration costs and other primarily associated with the Simplification Transaction and Conversion and the construction of the Lucedale plant and Pascagoula terminal, and a $6.7 million decrease in non-cash, equity-based compensation expense. The decrease is partially offset by a $24.3 million increase in expenses related to legal and financial advisors associated with our strategic review of liquidity and operations incurred in the second half of 2023.
Restructuring inclusive of related severance expenses
During the year ended December 31, 2023, total restructuring and related expenses, separate and apart from our restructuring efforts in connection with the RSA and Bond MS RSA, were $19.8 million and consisted of $6.6 million of cash-based employee severance expenses, $11.8 million of non-cash equity-based compensation, $1.2 million of accelerated leasehold improvement depreciation, and $0.2 million impairment of right-of-use assets related to an office lease. These amounts do not include expenses incurred in connection with our strategic review of liquidity and operations.
Executive separation
In November 2022, John Keppler, our former Chief Executive Officer and Chairman of the board of directors of the Company (the “Board”), stepped down from his responsibilities for medical reasons. Mr. Keppler’s separation agreement included: (i) the bonus he would have been entitled to for the year ended December 31, 2022, pro-rated based on 2022 service through November 14, 2022, and paid with respect to targeted individual performance of Mr. Keppler and actual performance of the Company at the same time bonuses are paid to executives generally during the first quarter of 2023, (ii) a severance payment of $3.8 million, paid in 36 equal installments, (iii) accelerated vesting of unvested time-based restricted stock units under the Enviva Inc. Long-Term-Incentive Plan (“LTIP”), occurring during the first quarter of 2023, and (iv) vesting of unvested performance-based restricted stock units under the LTIPs, occurring during the first quarter of 2023. Mr. Keppler rejoined the Board in March 2023.
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Depreciation and amortization
Depreciation and amortization expense increased to $145.4 million for the year ended December 31, 2023, from $113.2 million for the year ended December 31, 2022, an increase of $32.3 million or 29%, primarily due to the Lucedale plant, Pascagoula terminal, and expansion assets placed in service during the year ended December 31, 2022.
Depreciation and amortization expense during the year ended December 31, 2023, includes $11.7 million to eliminate depreciation and amortization costs included in finished goods inventory subject to repurchase that are no longer recoverable following the expiration of the Standstill Agreement with the counterparty to the Q4 2022 Transactions. Depreciation and amortization expense during the year ended December 31, 2023, excludes $1.2 million of accelerated leasehold improvement depreciation recorded in restructuring inclusive of related severance expenses.
Total interest expense
We incurred $182.0 million of interest expense during the year ended December 31, 2023, and $71.6 million during the year ended December 31, 2022. The increase in interest expense of $110.4 million from the prior year was attributable to the $69.7 million increase of non-cash interest recognized prior to the expiration of the Standstill Agreement with the counterparty to the Q4 2022 Transactions. The timing of the interest expense was based on the estimated timing of when the future purchases under the existing purchase agreements were expected to occur.
Interest expense also increased by $40.7 million related to higher outstanding borrowings and higher floating interest rate under our Senior Secured Credit Facility during the year ended December 31, 2023, compared to the year ended December 31, 2022.
Income tax
The $42.0 thousand of income tax benefit during the year ended December 31, 2023, and the income tax expense of $2.5 million for the year ended December 31, 2022, were primarily due to changes in valuation allowance for deferred tax assets.
Adjusted EBITDA
Year Ended December 31,
Change
(in thousands)
Reconciliation of net loss to adjusted EBITDA:
Net loss
Add:
Depreciation and amortization (1)
Interest expense
Income tax expense (benefit)
Non-cash, equity-based compensation and other expense (2)
Impairment of assets and loss on disposal of assets (3)
Changes in unrealized derivative instruments
Cash-based restructuring inclusive of related severance expense
Support Payments
Acquisition and integration costs and other
Effects of COVID-19
Effects of the war in Ukraine
Executive separation
Adjusted EBITDA
(1) 2023 includes $1.2 million of accelerated leasehold improvement depreciation in connection with the restructuring expenses.
(2) 2023 includes $11.8 million of non-cash equity-based compensation in connection with the restructuring expenses.
(3) 2023 includes $103.9 million of goodwill impairment, $44.5 million of pre-tax impairment of assets expense related to previously capitalized costs for wood pellet production plants in development that were no longer probable of being completed, $21.7 million of impairment related to the permanent shut down of an underperforming dryer line at the Southampton plant and $0.2 million of impairment of right-of-use assets related to an office lease in connection with the restructuring expenses.
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We generated negative adjusted EBITDA of $119.1 million for the year ended December 31, 2023, compared to positive adjusted EBITDA of $155.2 million for the year ended December 31, 2022. The $274.3 million decrease was primarily attributable to the $251.6 million decrease in adjusted gross margin described under the heading “Adjusted gross margin and adjusted gross margin per metric ton” and the $24.3 million of expense related to legal and financial advisors in connection with our strategic review described under the heading “Selling, general, administrative, and development expenses.”
Liquidity and Capital Resources
Overview
Since the filing of the Chapter 11 Cases on March 12, 2024, our primary sources of liquidity include cash balances, cash generated from operations, and availability under the DIP Credit Facility described above in Recent Developments – DIP Facility and in Note 13 in the Notes to our Consolidated Financial Statements, Short-Term Borrowings, Long-Term Debt and Finance Lease Obligations . Our primary liquidity needs are to fund working capital, to service our debt, to invest in capital expenditures for the maintenance, expansion, and optimization of our existing plant and terminal assets, and to complete the construction of a wood pellet production plant in Epes, Alabama (“Epes or the Epes plant”).
Excluding cash restricted for certain construction projects, our liquidity as of December 31, 2023, was $177.1 million. As of July 31, 2024 our liquidity was $358.7 million, which includes $208.7 million of cash and $150.0 million available under the DIP Facility.
Proceeds of the DIP Facility may be used only in connection with an approved budget (adjusted for agreed variances). The DIP Facility will be made available in up to five draws. The first draw of $150.0 million occurred on March 15, 2024, and an additional $100.0 million was drawn on June 3, 2024 and July 22, 2024. Each draw is subject to the satisfaction of certain conditions under the DIP Credit Agreement, including compliance with the milestones set forth in the RSA.
Borrowings under the DIP Facility bear interest at a rate equal to, at the Company’s option, (i) the alternate base rate plus 7% per annum or (ii) the adjusted SOFR rate plus 8% per annum. The Debtors are required to pay certain other agreed fees to the DIP Creditors and the agents under the DIP Credit Agreement.
The DIP Credit Agreement contains usual and customary affirmative and negative covenants and events of default for transactions of this type. In addition, the Debtors are required to maintain a minimum liquidity of $30.0 million.
There can be no assurance that funding sources will continue to be available, as our ability to generate cash flows from operations and our ability to continue to access the DIP Facility may be impacted by a variety of business, economic, legislative, financial, and other factors, which may be outside of our control.
Our consolidated financial statements have been prepared assuming that we will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors in possession under Chapter 11, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted by the Bankruptcy Code, for amounts other than those reflected in the accompanying consolidated financial statements. Further, the Plan could materially change the amounts and classifications of assets and liabilities reported in the consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern or as a consequence of the Chapter 11 Cases.
As a result of our financial condition, the defaults under our debt agreements, and the risks and uncertainties surrounding the Chapter 11 Cases, substantial doubt exists regarding our ability to continue as a going concern. We believe that, if we receive the approval of the Plan by the Bankruptcy Court and are able to successfully implement the Plan, among other factors, substantial doubt regarding our ability to continue as a going concern could be alleviated.
Cash Dividends
During the three months ended March 31, 2023, we declared dividends of $0.905 per common share totaling $60.9 million. The Board evaluated the Company’s business strategy and opportunities and determined on May 2, 2023 to suspend dividend payments indefinitely.
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Capital Requirements
We operate in a capital-intensive industry, which requires significant investments to develop and construct new production and terminal facilities and maintain and upgrade our existing facilities. Our capital requirements primarily have consisted, and we anticipate will continue to primarily consist, of the following:
• Maintenance capital expenditures, which are cash expenditures incurred to maintain our long-term operating income or operating capacity. These expenditures typically include certain system integrity, compliance, and safety improvements; and
• Growth capital expenditures, which are cash expenditures we expect will increase our operating income or operating capacity over the long term. Growth capital expenditures include acquisitions or construction of new capital assets, including new plants and ports, or capital improvements such as expansions to or improvements on our existing capital assets, as well as projects intended to extend the useful life of assets.
The classification of capital expenditures as either maintenance or growth is made at the individual asset level during our budgeting process and as we approve, execute, and monitor our capital spending.
During the year ended December 31, 2023, we invested $301.3 million in capital expenditures. Included in our capital expenditures during 2023 is spend associated with the development and construction of the Epes plant as well as capital improvements and maintenance capital spend across our portfolio of plant and port assets. In connection with our in-court restructuring process, we ceased development of the Bond plant. We intend to revisit our potential development of future plants, including the Bond plant, when sufficient contracted customer demand materializes to support the investment. We are being vigilant with cash management while we navigate through our leverage and liquidity headwinds. We remain focused on completing the construction of the Epes plant, as well as maintaining the asset health of our current fleet of plants for optimal production. We intend to maintain momentum in a disciplined way; however, we will continue to re-evaluate all material capital expenditures as our situation evolves.
Debt
As of December 31, 2023, our total debt was $1.8 billion and primarily consisted of the debt facilities described in Note 13, in the Notes to our Consolidated Financial Statements, Short-Term Borrowings, Long-Term Debt and Finance Lease Obligations (the “Debt Instruments”). Our filing of the Chapter 11 Cases constituted an event of default and acceleration under each of the Debt Instruments, which provide that as a result of the filing of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable and as of December 31, 2023, substantially all debt has been reclassified to current. However, any efforts to enforce such payment obligations under the Debt Instruments were automatically stayed as a result of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
As of July 31, 2024, our primary debt facility is the $500.0 million DIP Facility, of which $150.0 million was undrawn.
Except where otherwise authorized by the Final DIP Order, collection or enforcement in respect of the Debt Instruments was stayed upon filing of the Chapter 11 Cases on March 12, 2024, and treatment of the claims arising therefrom will be addressed as part of the Plan.
Cash Flows
The following table sets forth a summary of our net cash flows from operating, investing, and financing activities for the years ended December 31, 2023 and 2022:
Year Ended December 31,
(in thousands)
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase in cash, cash equivalents and restricted cash
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Cash Used in Operating Activities
Net cash used in operating activities was $65.8 million and $88.8 million for the years ended December 31, 2023 and 2022, respectively, a $23.0 million favorable change. Excluding a $189.5 million loss recorded following the expiration of the Standstill Agreement (see above, “ Accounting for Wood Pellets Sale Contracts as a Financing Arrangement ( “ Q4 2022 Transactions ” ) ”), there was a $33.2 million favorable change in working capital during the year ended December 31, 2023, compared to the year ended December 31, 2022. The favorable change in working capital was primarily due to an increase in deferred revenue partially offset by higher inventory on hand as of December 31, 2023, compared to December 31, 2022. Offsetting the favorable change in working capital, excluding the $189.5 million loss recorded following the expiration of the Standstill Agreement, was an unfavorable change of $10.3 million in net loss excluding non-cash items during the year ended December 31, 2023, compared to the year ended December 31, 2022.
Cash Used in Investing Activities
Net cash used in investing activities was $301.3 million and $222.8 million for the years ended December 31, 2023 and 2022, respectively. The $78.5 million increase in cash used in investing activities during the year ended December 31, 2023, compared to the year ended December 31, 2022 was primarily due to the construction of the Epes plant.
Cash Provided by Financing Activities
Net cash provided by financing activities was $420.2 million and $544.2 million for the years ended December 31, 2023 and 2022, respectively. The $123.9 million decrease in net cash provided by financing activities in 2023, as compared to 2022, was primarily attributable to a decrease of $105.1 million in proceeds from debt issuance net of repayment of debt, a $84.8 million decrease in proceeds from the issuance of equity, a decrease in proceeds from the sale of wood pellets sold in connection with the Q4 2022 Transactions (see above, “ Accounting for Wood Pellets Sale Contracts as a Financing Arrangement ( “ Q4 2022 Transactions ” ) ”) of $74.1 million, a decrease of Support Payments of $14.0 million. Offsetting the above was a favorable change in cash provided by financing activities due to a decrease in cash dividends or distributions equivalent rights of $154.0 million.
Off‑Balance Sheet Arrangements
As of December 31, 2023, we did not have any off‑balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S‑K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or a variable interest in unconsolidated entities.
