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IPO Preview: Enviva Partners

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Many investors may not think that wood pellets for power generation would be regarded as qualified income for the purposes of MLP ownership, but the IRS issued a Private Letter Ruling in 2011 confirming that such assets would indeed qualify, setting in motion the path for the IPO of Enviva Partners LP (EVA), expected to price on 4/29.

 

Enviva will offer investors the opportunity to buy units in the largest producer of wood pellets for power generation with a target yield of 8.25% at midpoint pricing of $20 and target distribution coverage of 1.15x. Only 20% of the distributions will be subject to federal income tax, if held through 2018. The company has been the pioneer in developing an enterprise logistics system which aggregates wood from the 75 mile radius around four plants, enabling foreign buyers to enter into long term take or pay contracts, which guarantee supply. Such contracts are critical for the investment necessary by power generation owners to switch from coal to pellets. Although there are over 170 pellet manufactures just in the US, none have the scale and logistics infrastructure to export large volumes of pellets. Demand for such pellets are being driven by two factors; (1) the EU's 2020 regeneration targets, which call for an increase in power generated from renewable sources; (2) the significant relative cost advantage wood pellets has over wind and solar

 

Similar to the value chain associated with oil and gas, Enviva has developed their own analogous diagram to help investors understand and appreciate the competitive barriers the company has developed over the past 5 Years

 

 

The Assets

 

Enviva owns five production plants which produce 1.7MM metric tons per year of wood pellets, which are contracted to EU power generation companies under, Dollar denominated, take or pay contracts, for 100% of their current production capacity through 2017. The Partnership will also own a dry bulk deep water terminal at the Port of Chesapeake, which reduces their shipping costs and controls their inventory flow.

 


 

Growth

 

The Sponsor, Riverstone Fund, has created a JV with the Hancock Natural Resources Group, to develop new plant capacity which can be dropped down to Enviva. Presently, the Sponsor and the JV are in development of three new plants which are expected to create $58MM of incremental annualized EBITDA within the next three years. The drop downs are expected to be valued at 7-8x EBITDA once the cash flows are established.

 

The top IDR split is roughly 50% higher than the MQD of $0.4125, which implies that LP investors will receive $2.57 (vs the $1.65 MQD) if the company reaches this split as a result of the $58MM in drop down EBITDA and other growth initiatives outlined below.

 

 

Conclusion

 

Enviva will offer investors unique access to a potentially high growth asset class with no commodity price risk. However there are unique risks related to the relatively short take or pay contacts and alternative regional suppliers. The company disclosed that only 50% of the current total production capacity is presently contracted after 2017, which roughly equates to their MQD distribution rate. Growth is predicated upon the completion of new assets and the ability to realize the forecasted EBITDA, for which the company has a strong record of delivering projects within budget.

 

Income investors should add Enviva to their portfolio for 3 year holding period and realize the 80% tax shield on an 8.25% yield with a target total return of 18% per annum.

 

 

 

 

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