Enviva’s board probing 4Q22 transactions

: Biomass
24/03/19

US wood pellet producer Enviva's board of directors initiated an independent investigation on fourth quarter 2022 transactions in November 2023, interim chief executive officer Glenn Nunziata said in a declaration to court in support of the company's bankruptcy filing petitions last week.

An investigation is being conducted by a special committee of the board, "to review, among other things, the 4Q22 transactions, including the corporate authorisations in connection therewith," Nunziata said. He named German utility RWE's subsidiary RWE Supply & Trading (RWEST) as counterparty of these transactions.

Despite the transactions' size, they "were not disclosed to, considered, or approved" by the board when entered into by management," Nunziata said, adding that law firm Baker Botts is currently conducting an independent investigation under the direction of the board's special committee.

Enviva and RWEST entered into a series of transactions in the fourth quarter of 2022 — the so-called 4Q22 transactions — whereby Enviva agreed to sell RWEST "a large quantity of wood pellets in order to opportunistically transact on the significantly-elevated spot pellet prices experienced during late 2022". The company also agreed to purchase from RWEST in the future "an even larger quantity of wood pellets at prices that were below management's expectations for future market prices" but higher than then-historical average prices, "in order to secure future pellet volumes for sale" by Enviva to third parties.

Enviva had said in November the volumes sold under 4Q22 transactions, together with existing sales contracts, totalled approximately 2.8mn t with delivery between 2022-2026, and that it purchased around 1.8mn t of wood pellets for delivery between 2023-2025 under the same deal. Of the latter, Enviva was due to purchase around 1.7mn t as of 30 September 2023 at an average price around $377/t cif northwest Europe (NWE), data shared by the firm show. This is significantly lower than the average Argus 90-day spot price for industrial wood pellets at $200/t cif NWE in 2023.

While the sales component of the 4Q22 transactions allowed Enviva to benefit from much higher spot wood pellet prices, the "longer-dated and fixed-price purchase components of [these transactions] were unhedged", Nunziata said in his declaration last week. He added that because the price for the purchase component was well above Enviva's average sales prices under pre-existing contracts, its profitability depended on the producer's ability to resell these profitably under future short-term contracts or spot deals.

"… If completed as scheduled, [the purchase side of the 4Q22 transactions] would have put significant liquidity pressure" on Enviva, which did not execute on the scheduled purchase of "a substantial portion of the contracted volumes from RWEST," resulting in the latter claiming entitlement to an early termination fee and "RWEST therefore terminated the [2010 and 2011 agreements]," Nunziata said.

RWEST was listed as one of Enviva's top 30 creditors in the bankruptcy court filings, notably along with UK utility Drax. The US producer voluntarily filed for protection under Chapter 11 of the US Bankruptcy Code on 12 March 2024.

By Erisa Senerdem

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