US industrial wood pellet producer Enviva has, through its affiliate Enviva Wilmington Holdings (EWH), lent a $23mn working capital loan to UK utility MGT Teesside (MGT), with which it has a "strategic" sales contract, to enable the UK firm to continue purchasing pellets under the deal while it addresses its own liquidity challenges.
EWH signed an offtake agreement with MGT in January 2016 for the sale of about 1mn t/yr of wood pellets, which expires on 31 December 2034, unless earlier terminated. But MGT delayed the start of commercial operations by multiple years, and has experienced outages because of technical issues after the start-up of the 285MW dedicated pellet-fired plant on 30 September.
MGT's liquidity constraints, operational challenges — "including difficulties converting and consistently keeping on line the plant" — and financial headwinds resulted in the utility not fully meeting its contractual obligations with Enviva, and the UK firm has an unpaid accounts receivable balance owed to EWH, Enviva chief executive Glenn Nunziata said in a declaration to court in support of the company's bankruptcy filing petitions last week.
MGT undertook some restructuring efforts under the UK law in 2023. And it requested and received more favourable payment terms from EWH, in return for an "elevated account receivable in favour of EWH", Nunziata said, adding that MGT paid that receivable over time and as of 1 March owed EWH about $13mn.
But MGT has performed its obligations on a "pay-as-burn" basis, only paying EWH for delivered pellets when it actually consumed them as fuel, but unused wood pellets stored at the MGT site remained property of EWH. The latter approved this course of action in a series of deals with MGT in August 2022, but the utility continued paying on the same "pays-as-burn" basis after these deals expired in September 2023, according to Nunziata's statement.
MGT said it would be unable to move away from this form of payment unless it addressed its accounts receivable balance and certain working capital needs. And on 7 March, it entered into a deal with Enviva whereupon the latter would provide MGT with a $23mn working capital loan. In return, MGT entered into a "standstill agreement", agreeing not to take any action to terminate the long-term offtake deal with Enviva, including as a result of the latter's Chapter 11 filings, during the standstill period which lasts until the effective date of any Chapter 11 plan or by 15 May 2025 — whichever is earlier, Nunziata said.
"The MGT agreement is a large highly profitable supply contract … the MGT standstill [agreement] is intended to assure that the MGT [long-term deal with EWH] is insulated from Enviva's bankruptcy," Nunziata said, adding that MGT was a "material customer relationship" for EWH, and the deal with MGT is "a key strategic contract" in Enviva's portfolio.
Under the terms of the working capital loan, Enviva will provide MGT with $13mn in cash, which the utility can use to pay off its balance with EWH, and the remaining $10mn for a shipment of wood pellets from Enviva's inventory, not EWH's, according to the same statement.
MGT ramps up generation
MGT gradually ramped up generation since it started up commercial operations on 30 September.
Its output was 72MW on an average hourly basis in October-November, dropping to 29MW in December because of unplanned outages for technical issues, but ramped up to 183MW and 167MW in January and February, respectively.
The plant has been on a planned outage since 26 February, which is scheduled to last until the end of March. And it has another planned maintenance scheduled on 7 June-27 July.
