US wood pellet producer Enviva has filed a US court motion seeking to reject a term wood pellet offtake agreement with Japanese trading house Sumitomo.
The 2 April motion, filed with the US Bankruptcy Court for the Eastern District of Virginia, seeks to enable Enviva to submit an order to reject the 2018 cfr Iwakuni biomass fuel supply agreement with Sumitomo. This 2018 agreement, also known as the Sumitomo Kaita contract, is one of the term pellet offtake agreements within Enviva's Japanese trading portfolio. Sumitomo acts as an intermediary broker, buying wood pellets for Kaita Biomass Power, court documents stated. Sumitomo has acted in similar brokering capacities for several other consumers.
The Sumitomo Kaita contract is the first term deal rejected, after Enviva last month filed for Chapter 11 bankruptcy protection and released a restructuring plan. Rejection of an agreement under US bankruptcy proceedings does not imply the termination of that agreement but "is treated as a breach of contract, and any damage claim arising from that breach is treated as if it arose immediately before the bankruptcy was filed", according to US legal firm Troutman Pepper.
Enviva has set up a group comprising a subset of its management and advisors, known as the RTB team, to review and renegotiate existing term contracts. The review was possibly among a series of measures laid out and considered by Enviva late last year, when concerns regarding its liquidity first emerged.
Lead-up
The RTB team carried out due diligence measures on the Sumitomo Kaita contract and "determined that the existing contractual pricing will yield negative operating margins over the life of the contract with a negative net present value on the operating margin", based on statements made in court filings by Alvarez and Marsal North America (A&M), Enviva's financial adviser in the Chapter 11 proceedings.
Attempts by the RTB team at contacting Kaita since late November last year — to renegotiate contractual terms such as pricing, volume and pellet origin — have been unsuccessful, according to A&M. The Japanese consumer appears to be neither keen on amending the Sumitomo Kaita contract nor engaging directly with Enviva and its RTB team, court filings by A&M revealed.
A&M said the rejection of the Sumitomo Kaita contract will be appropriate in the commercial interest of Enviva and its stakeholders.
Kaita's boiler plants could possibly be operating on soft wood, commonly found in US sources, as opposed to Asian hard wood pellets, according to a market participant. Kaita could possibly trial Asian hard wood as an alternative biomass feedstock, if similar soft wood is unable to be secured.
Enviva is required under the restructuring support agreement to submit a draft on its long-term business plan by 10 June and a finalised version by 5 July. Some considerations in this business plan includes rejecting certain contracts that do not help in the company's reorganisation efforts and documenting contracts that are renegotiated.
