EVA (2020 - Q4)

Good day and welcome to the Enviva Partners, LP fourth quarter and full year 2020 earnings conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Wush Ma, Vice President and Treasurer. Please go ahead. Wush Ma:

Thank you. Good morning and welcome to the Enviva Partners, LP fourth quarter and full year 2020 financial results conference call. We appreciate your interest in Enviva Partners and thank you for participating today. On this morning's call, we have John Keppler, Chairman and CEO and Shai Even, Chief Financial Officer. Our agenda will be for John and Shai to discuss our financial results and provide an update on our current business outlook. Then we will open up the phone lines for questions. During the course of our remarks and the subsequent Q&A session, we will be making some forward-looking statements, which are subject to a variety of risks. Information concerning the risks and uncertainties that could cause our actual results to differ materially from those in our forward-looking statements can be found in our earnings release as well as in our other filings with the SEC. We assume no obligation to update any forward-looking statements to reflect new or changed events or circumstances. In addition to presenting our financial results in accordance with GAAP, we will also be discussing adjusted EBITDA and certain other non-GAAP measures pertaining to completed fiscal periods as well as our forecasts. The information concerning the reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and other relevant disclosures are included in our earnings release. I would like to now turn it over to John.

Thank you Wush. Good morning everyone and thanks for joining us today. A hallmark of Enviva's culture is keeping promises. At this time last year, we committed to achieving a certain set of operational and financial targets for the partnership. When we completed two transformative acquisitions in the middle of the year, we made additional promises and increased our guidance. As I hope you saw in our earnings release, we kept the promises we made. Against a very challenging COVID-19 backdrop that continues to persist, we are very proud to report that we had our safest year ever. We did not miss a single customer delivery. We increased the fully contracted production capacity of the partnership by more than 30%. We increased our year-over-year adjusted EBITDA by more than 30% and we kept our promise to our unitholders, distributing $3 per unit for full year 2020, extending our track record of 22 consecutive quarterly distribution increases at a compound annual growth rate of 13% since our IPO and delivered a total unitholder return of 30% in 2020. We were able to achieve this in the face of broad economic and market volatility, in large part because the fully contracted nature of our business and its durable, sustainable operating profile that together generates stable, growing cash flows. Turning to 2021. We are making new promises about what we expect to achieve, not just in terms of operating and financial performance but also to align ourselves with the global community's escalating commitments to limit global warming in order to avoid the most devastating impacts of climate change. As a result, we are proud to join with other leaders in committing ourselves to net zero emissions in our operations by 2030 by following a measured, achievable and efficient plan. At the same time, we are undertaking to deliver meaningful growth in our adjusted EBITDA in 2021 as we realize the anticipated benefits of growth initiatives we undertook over the last few years. Specifically, our guidance for 2021 is increase of 25% over 2020 at the midpoint of our range of $230 million to $250 million in adjusted EBITDA, before accounting for additional drop-downs or other acquisitions you have come to consistently expect from us. We believe the resulting cash flow profile will enable us to distribute at least $3.17 per unit for full year 2021, again before considering the benefit of additional drop-downs or other acquisitions. Moreover, I am very excited about the new expansion projects we have commenced within the partnership. Now that we have completed construction at the Northampton and Southampton expansion projects, we are turning our attention to targeted opportunities at our Sampson, Hamlet and Cottondale facilities where through innovative projects that are intended to optimize the manufacturing processes, eliminate certain costs and expand the production capacity, we expect to deliver substantial incremental margin. On the basis of approximately $50 million of investment, we believe we will generate an additional $20 million in annual run rate adjusted EBITDA as these projects are completed and fully ramped by the end of 2022. Looking ahead, despite the global pandemic, the tailwinds for our industry were remarkable. In the macro context, each member nation of the EU, United Kingdom, Japan. South Korea and other potential markets across the globe have pledged to become net zero. The U.S. itself has recommitted to the Paris Agreement. And one of the most cost-effective and immediate ways to decarbonize continues to be the conversion of existing coal and other fossil fuel fired plants to biomass. The progress to-date has been remarkable and not just in traditional applications. While customers around the world are recycling existing energy infrastructure and building new bespoke biomass fired assets, we are also increasingly seeing innovations like biomass energy generation coupled with carbon capture and sequestration, one of the few ways in the near term to achieve carbon -negative energy at scale as well as project that use biomass energy in combined heat and power applications which are key to decarbonizing the industrial energy sector. We are also seeing major manufacturers around the world looking to substitute renewable biobased carbon for fossil fuel based carbon as direct material inputs for the production of core commodity products like chemicals, cement and steel. This is exciting and has the potential to open up new markets and new customer segments. I will take some time later in the call to provide an update on how these long term market drivers are influencing our contracting activities as well as to bring you up to speed on the development and expansion projects taking place at the partnership and our sponsor. I will also elaborate on net zero commitment and its related action plans. Hopefully, as we wrap up today, we could tie all the pieces we have underway together in a way that could make you as excited as we are about 2021 and beyond. But first, I would like to turn it over to Shai to discuss our financial results for the fourth quarter and for full year 2020 and to provide more details on our guidance.

Thank you John. For the fourth quarter of 2020, we generated net revenue of $277.3 million, an increase of $76.8 million from the corresponding quarter of 2019. The increase in net revenue was primarily driven by sales volumes that were 29.4% higher as well as an $11.2 million increase in other revenue. Included in other revenue for the fourth quarter of 2020 were $15.4 million in payment to the partnership for adjusting deliveries under our take-or-pay off-take contracts which otherwise would have been included in product sales. For the fourth quarter of 2020, gross margin was $26.6 million. That compares to gross margin of $28.2 million for the corresponding period of 2019. Adjusted gross margin was $72.8 million for the fourth quarter of 2020 as compared to $55 million for the fourth quarter of 2019, an increase of $17.8 million or 32.3%. Adjusted gross margin per metric ton was $54.02 for the fourth quarter of 2020 as compared to $52.83 for the fourth quarter of 2019. The increase in adjusted gross margin was primarily attributable to higher sales volume and higher pricing due to customer contract mix, partially offset by a corresponding increase in cost of goods sold. Net loss for the fourth quarter of 2020 was $0.4 million as compared to net income of $0.9 million for the fourth quarter of 2019. Adjusted net income was $11.1 million for the fourth quarter of 2020, as compared to adjusted net income of $17.2 million for the corresponding quarter of 2019. For the fourth quarter of 2020, the partnership generated a record quarterly adjusted EBITDA of $69.3 million, up 30.1% for the same period of 2019. The increase in adjusted EBITDA was driven primarily by the same factors that increased adjusted gross margin. Distributable cash flow prior to any distribution attributable to incentive distribution rights paid to our general partner was $54.8 million which results in a fourth quarter 2020 distribution coverage ratio of 1.5 times. For the full year 2020, net revenue was $875.1 million, an increase of $190.7 million from 2019. The increase in net revenue was primarily driven by sales volumes that were 21.5% higher as well as $34.4 million increase in other revenue. Included in other revenue for full year 2020 were $32.5 million in payments to the partnership for adjusting deliveries under our take-or-pay off-take contracts, which otherwise would have been included in product sales. Gross margin was $107.1 million for full year 2020, as compared to $81.1 million for 2019. Adjusted gross margin was $204.9 million for full year 2020, as compared to $151.6 million for 2019, an increase of $53.2 million or 35.1%. Adjusted gross margin per metric ton was $47.29 for full year 2020, as compared to $42.54 for 2019. Gross margin and adjusted gross margin increased primarily due to higher sales volumes and higher pricing due to customer contract mix, partially offset by a corresponding increase in cost of goods sold. For full year 2020, net income and adjusted net income were $17.1 million and $46 million, respectively. For full year 2019, net loss and adjusted net income were $2.9 million and $39 million, respectively. Adjusted EBITDA for full year 2020 was also a record high $190.3 million, up 34.7% from 2019. The increase in adjusted EBITDA was primarily due to the same factors that increased adjusted gross margin. Distributable cash flow, prior to any distributions attributable to incentive distribution rights paid to our general partner, was $141.6 million for full year 2020, up 43.8%, as compared to 2019. At the end of 2020, the partnership's liquidity, which includes cash on hand and availability under our $350 million revolving credit facility, was $239.7 million. Moving on to guidance. For full year 2021, the partnership expects net income to be in the range of $42.3 million to $62.3 million, adjusted EBITDA to be in the range of $230 million to $250 million and distributable cash flow to be in the range of $160 million to $180 million, prior to any distributions attributable to incentive distribution rights paid to our general partner. The partnership expects to distribute at least $3.17 per common unit for full year 2021. The guidance amounts do not include the impact of any additional acquisitions or drop-downs. Consistent with prior year, we expect the second half of 2021 to be significant step-up from the first half. Our ability to access the capital markets even amid turbulent market conditions is in part a result of our conservative financial policy, which remain unchanged. We continue to expect to fund drop-down acquisitions and major expansion using 50% equity and 50% debt. We also continue to target a conservative leverage ratio of 3.5 to four times and a distribution coverage ratio of 1.2 times on a forward-looking annual basis. As you have seen in our financial results, the partnership's distributable cash flow, net of amounts attributable to incentive distribution rights, was $114.6 million for full year 2020, which covers the distribution for full year 2019 at 1.29 times. Now I would like to turn it back to John. Thanks Shai. Five years into the Paris Agreement, the world has come to the realization that it is no longer enough to just set long term ambitions and it is no longer enough to just replace coal with renewables. To get to net zero by 2050, we must take more aggressive actions now and fully utilize everything in our toolbox. The United Kingdom, which has been at the forefront of the renewable energy transition and just raised its commitment to cut greenhouse gas emissions to at least 68% by 2030 relative to 1990 levels is again leading the charge. In a series of important energy policy announcements over the last few months, the U.K. government outlined its intention to not only support bio-energy with carbon capture and storage or BECCS, which is a key negative emission solution but also to explore bio-energy's role in hydrogen production. At the same time, across the English Channel, the European Union took another major step towards legislating the 2050 net zero target into the European climate law, when EU leaders from all 27 member states, including heavily coal-dependent countries like Poland and the Czech Republic, agreed to the target of 55% greenhouse gas emissions reductions by 2030, again, as compared to 1990 levels. Germany also continues to progress towards its legally binding 2038 coal phase-out target and we expect that the final legislative process regarding the related enabling policies will conclude over the next several months. The partnership and its sponsor remain in ongoing dialogue with multiple large utilities and power and heat generators about their plans to convert existing coal-fired assets to biomass. And we expect to enter into take-or-pay off-take contracts with these customers in the six to 12 month period following completion of that legislative process. In Japan, following Prime Minister Suga's net zero pledge in October 2020, METI quickly unveiled a green growth strategy. The strategy is set to target for renewable energy sources to make up 50% to 60% of the nation's power supply by 2050 and proposes various related tax incentives and other support. However, Japan's energy grid, which is still quite fossil fuel dependent, has variable excess capacity. Last month, power prices more than quadrupled during a period of particularly cold and bad weather when intermittent renewable energy generation became limited and when the grid was barely able to avoid blackouts even after Japanese utilities ramped thermal power generation at maximum capacity. The ability to generate baseload, dispatchable renewable power and ensure grid stability is a key reason our customers, including those in Japan, turn to Enviva for long term contract of supply. Our existing contracts with these customers are generally for power projects under the 20-year feed-in tariff. However, as the Japanese government set significantly more business climate targets, our customers have engaged us in discussions about a broader range of projects. The MoU our sponsor just executed with a major Japanese trading house is intended to provide up to one million metric tons per year of wood pellets to support decarbonization of the manufacturing sector, a brand new market segment for us in Japan. We are currently underway with test deliveries for new customers in new jurisdictions and for new applications. While these efforts will take time to mature, the macroeconomic trends towards decarbonization continues to accelerate and we believe that will lead to substantial new contract executions in current and emerging geographies. Partnership's current contract portfolio has a total weighted average remaining term of 12.8 years and a total contracted sales backlog of $14.6 billion. With the contracts just announced by our sponsor, including the new 20-year contract with a major Japanese trading house for 240,000 metric tons per year and the expansion of volumes under the existing off-take agreement, the combined contract portfolio, including all volumes under the firm and contingent off-take contracts held by the partnership and our sponsor, now have a total sales backlog of $19.9 billion with a weighted average contract maturity of 14 years. To supply this growing off-take portfolio, the partnership continues to increase its production capacity. The production ramp of the expansions at our Northampton and Southampton plants is ongoing and we expect each to reach its expanded nameplate production capacity of approximately 750,000 metric tons per year by the end of 2021. The Greenwood expansion is also on track for completion by the end of this year. In addition, the partnership has begun expansion projects at our Sampson, Hamlet and Cottondale plants and expects to complete these project by the end of 2022. Moreover, the construction of the fully contracted Lucedale plant and Pascagoula terminal is progressing as expected and our sponsor expects these assets to be completed mid-year 2021. Our sponsor has also completed the purchase of the project site and commenced preconstruction activities at its fully contracted Epes plant. With the newly executed contracts, complemented by material contract volumes and negotiation with utilities and power generators in current and evolving markets around the globe, we expect our sponsor to continue to develop incremental production internal capacity in and around our and our sponsors existing footprints. To maintain its fully financed growth profile, our sponsor recently closed a $325 million green term loan and used a portion of the proceeds to buyout its development joint venture partner, further reducing its cost of capital. With the balance of the green term loan and the $300 million in undrawn equity capital raised during our sponsor's recapitalization transaction announced last year, our sponsor remains extremely well positioned to deliver a large and growing pipeline of development projects which, by design, the partnership expects to have the opportunity to acquire along with the associated off-take contracts. Our sponsor has consistently recycled proceeds from drop-down transactions into the development and construction of new plants and terminal assets. Our scale is large and growing and unmatched anywhere in the industry. The existing assets in operations and under expansion of the partnership, together with the sponsor's Lucedale plant, Pascagoula terminal and Epes plant, we will have a combined production capacity of more than seven million metric tons per year with total terminal throughput capacity of about 11 million metric tons per year. For reference, that is more than double the size of the partnership's production capacity just one year ago. But with this scale also comes obligation. And consistent with the global communities' commitments and our own mission to displace coal and limit the impact of climate change, we and our sponsor have committed ourselves to become carbon neutral or net zero in our operations by 2030. This is an ambitious but attainable goal backed by detailed plan to tackle Scope 1, 2 and 3 emissions. It will take time. But like any journey, it begins with the first step. For us, this means we will immediately start to mitigate 100% of direct emissions from assets owned and controlled by us or our Scope 1 emission. We are already underway with continuous improvement efforts to minimize the use of fossil fuels, adopt lower carbon processes and improve the efficiency of our operations. And while permanent reductions and process submissions may take time, in the interim we will also look to create emissions reductions with high-quality assets. To address the emissions arising from electricity purchases in our operations or our Scope 2 emissions, we have pledge to source 100% of the energy needed for our operations from renewable sources by 2030 with an interim goal of 50% by 2025. To address emissions generated by our upstream and downstream supply chain or our $scope 3 emissions, we are actively engaging with commercial partners and other key stakeholders to accelerate the development and adoption of new clean energy solutions to our supply chain. Finally, consistent with our current sustainability practices, we pledge to be transparent and track and publish our progress through annual reporting. As I often mention to my team, although Enviva is an organization that does a great job setting high standards and delivering good results, we are not very good with taking the time to celebrate success. Looking back at 2020, I do want to pause and thank the tremendous team we have at Enviva. They have a lot to be proud of. 2020 was a remarkable year where we not only operated our business uninterrupted and produced financial results as expected, but we laid a solid foundation for tremendous growth in 2021 and beyond and made an essential commitment about how we will do so in the next phase of our sustainability journey by becoming net zero on our operations by 2030. Making good on our promises takes diligent execution in any environment, but in the global pandemic, it requires unwavering dedication. We had a strong and durable business model, made stronger by the people at Enviva. Thank you. Operator, can you please open the line for questions?

[Operator Instructions]. The first question is from Moses Sutton with Barclays. Please go ahead.

Hi John and Shai. It's great catching up here. On the next expansions, so $20 million adjusted EBITDA from $50 million investment, obviously these expansions are at much higher IRRs than the Mid-Atlantic expansions. Or maybe I am misreading that on the basic cash-on-cash calculations. What would that be a testament to? Is it something you could have sort of maybe figured out before? But maybe you can give any color there, maybe prospective scale? Any low hanging fruit opportunities on some of those?

Yes. Moses, thank you. Really great to catch up with you as well. The multiplant expansions that we just announced are a little bit different than what we did in Northampton and Southampton. The Northampton and Southampton expansions were principally about capacity expansions. And so you had a higher component of equipment purchases and large scale installation of new assets, whereas in what we’ve just announced, while there is a modest capacity expansion, we should be thinking about 100,000 to 150,000 metric tons per year, what these are really about is process improvements, cost efficiencies and reductions in things like the intensity of energy required for pellet production. That means we are driving margin to the bottomline on cost improvements. And what's really great about this of course is that because it's a build and copy approach, we do think that there are opportunities to continue to replicate investments like this as we continue to roll it out through the fleet. A couple of those particular investments that we are making as part of this, we learned and are driving directly from the Waycross acquisition that we just completed, part of the attractiveness about it was that they were doing a particular process step even a bit better than we are. And we are now incorporating that into our broader fleet.

That's very helpful actually. So that 100,000 metric tons per day is for Hamlet. So 50,000 comes from which of the other plants? If it was Cottondale?

No. It's actually about 150,000 metric tons per year spread across all three of those plants, Cottondale, Sampson and Hamlet with perhaps the biggest portion of that coming from our Cottondale facility.

Okay. Great. And you mentioned in the release that subject to permitting, I couldn't tell if it's specifically Cottondale that needs more permitting or it's also North Carolina for Hamlet and Sampson?

So we have expanded permits on file and have received across a number of those facilities. I think that Cottondale one is still under review.

Got it, Great. Shifting gears a bit to inflation. Can you sort of remind us the effect of inflation on the enterprise, let's say, if we head into a massive inflation increase, hypothetically? Indexing on contracts, expected effect on cost profile, just anything there would be helpful.

Yes, absolutely. As you may recall, all of our agreements have in place escalators. Most of them are in fact tied to inflationary indices. So you would see an uplift in the off-take pricing associated with that. As a practical matter on our cost position, we tend to fix our costs. So things like shipping and else are on a U.S. dollar denominated basis. So it gives us a significant amount of cost protection against that and obviously with the continued scale and cost efficiency improvements that we target year-on-year, what we have demonstrated historically and we would expect to continue is a stable cost position, if not declining over time providing for durable margin expansion.

Great. And if commodity prices rise? I mean, they are rising. So you usually contract out, you hedge out the diesel. Is that the case as well? I know it's a small part of the COGS stack. But just wondering if there is any effect there to lookout for?

Yes. Where you would see the quantity increase is on our shipping components, obviously, the bunker fuel component of that. But that is under our shipping and commercial agreements. We pass any volatility or variability in bunker fuel directly to our customers.

Great. And last one, I will take the rest offline. It's a great update on Japan continuing to contract at the sponsor level. At the EVA level, 2025 off-take is already set to be around 50% from Japan. If we thought even longer term and we extrapolated for future drop-downs and so on, how might Japan comprise the percentage of total mix? I know that there are other initiatives in another country that can be tailwinds too. But could we see Japan go well above 50% at any, call it, 2025 to 2030 time frame?

What I would say is that I think that we will be relatively well balanced between Europe and Asia, roughly 50-50 on a long term go forward basis. Because some of the jurisdictions emerge at different times, you may see one year where you see some imbalance but that's more temporal, just about how regulations and how conversions happen that given we are still a modest size industry, an increase in demand, for instance, in Germany will skew it for perhaps a year. But I think that on a longitudinal basis, you are about 50% Asia, 50% to Europe with of course Japan being our largest customer in Asia.

Great. Very helpful. Thank you.

Moses, always good to connect. Thank you so much.

The next question is from Ryan Levine with Citi. Please go ahead.

Good morning. What's your Drax exposure through 2026? And what would be the impact to Enviva if they cancel their contracts and supply volumes from other sources?

As I think we have articulated, the partnership is fully contracted through 2026. Drax has a series of agreements with us as do most of other obviously European and Asian utilities. As a practical matter, our recontracting experience has been that at every point in time that a contract has come up for renewal, our customer has renewed, typically at larger volumes and longer tenure. But to the extent that Drax elected to pursue a different approach, we of course have very significant contracted backlog and we would not see a degrade in terms of the overall contracted position of the enterprise, given the pipeline that exist behind the existing contracts today.

Is there a way to quantify what the exposure is today and how the contracts work with regard to, say, have a change in procurement strategy?

Well, so I think the way to look at that is to address the overall partnership contract backlog, right. A year ago, the partnership's contract backlog was $9.5 billion with a weighted average remaining term of 10.4 years. And over the last 12 months, we have grown that backlog by 50%. So the partnership's backlog today is $14.6 billion and extended the weighted average remaining terms to just shy of 13 years. So the backlog is growing. And it's a the question of whether or not we would seek to build incremental new capacity or whether we would use the existing backlog to stand in place of a contract, to the extent that a customer, which would be unique and has not ever happened, to the extent a customer chose not to renew with us.

And as you know, Ryan, based on our firm contract backlog by 2025 our largest customer will drop under 15%.

Okay. Yes. I mean is that information disclosed in terms of the contractual break up fee or any type of terms?

Well, to the extent that any customer chose to terminate an agreement with us, there is a makewhole fee associated with price times quantity times remaining term of delivery.

Okay, they just won’t…

Yes. It's the nature of a take-or-pay agreement with us. Of course, someone could terminate an agreement but there is also a very significant take-or-pay makewhole fee.

Okay. I appreciate that. Switching gears, what has been the recent trend around fiber timber costs within your supply territory? And have you seen any uptick there? And can you remind us how you are exposed to that, given some of the baskets that your contracts are structured at?

Yes, absolutely. So as you may recall, our procurement strategy is a residuals based procurement strategy where we are aggregating the byproducts of a traditional soft time harvest. And so the underlying commodity price of lumber or timber really doesn't have a direct impact on the price of fiber that we are buying. What we are obviously picking up is the leftovers behind that. And what we have noticed is, a very significant uptick in harvesting activity. And so over time, of course that should generate an incremental residual stream and we would hope to benefit from a greater availability of supply with very few buyers which should put downward pressure on pricing over a longer period of time. Naturally Q1 is what is our seasonally soft quarter. It's colder. It's wetter weather. So I don't think we necessarily see a read through that in Q1, but over time we expect to see fiber prices continue to decline.

I appreciate that. And then the last question, in terms of the new Japanese MoU, is there a contract duration that's being discussed or anticipated that you would look to share? Or you can give clarity on only the volume that's hat's spelled out in the MoU?

So we would obviously look at substantial duration consistent with the broader contracting profile that we have. So you would be looking at 10-plus years of duration. What I think is particularly interesting around on this particular market segment for us is that it's very consistent with what the world's commitment to net zero really means is that so much of the early greenhouse gas emissions reduction climate change effort has been on the energy sector. And what I think the world has really concluded is, given the urgency of action, sectors like the manufacturing sector, large scale industrials, substitution for fossil feels and other commodity products is going to be essential to meeting that net zero commitment. It's going to be much beyond just traditional energy. And so with a company like Enviva who's built a global scalable supply chain for delivery of biomass into all sorts of different applications around the world, this is one of the first really interesting large scale market opportunities for us that we are pretty excited to talk about. Hopefully, as technologists and other innovations occur around the world, we will continue to be a large scale enabler of move to net zero across a lot of different industries.

Okay. Great. Thank you.

Thanks Ryan.

The next question is from Pavel Molchanov with Raymond James. Please go ahead.

Thanks for taking the question. First to follow up on one of the earlier points about inflation rearing its head. The price of coal is, spot price at least, about as high as it's been, I think, two or three years now. Does that make any difference vis-à-vis your margins under any of your supply contracts?

Not at all. The pricing of our supply under our long term take-or-pay agreements is not influenced by commodity prices like coal or otherwise.

Okay. So commensurately, if it were to come back down, there would be no impact either.

That's right.

And going back to what you said a minute ago about decarbonizing outside of the electric power sector. If you were to get an opportunity to sign a contract with a non-utility customer, I know you have been very careful about evaluating utility customers from a kind of credit worthiness, bankability perspective, how would you do that given the very different regulatory and economic dynamics if you are dealing with commercial or industrial enterprise?

It's a great question, Pavel. And I would answer it the same way we do the credit workups on any of our utility counterparties, which is we are really not taking the regulatory risk associated with the jurisdictions in which they operate. What we are taking is the balance sheet risk. The change in law is not a risk that we will accept under the terms of our off-take agreements. And so the analysis that we would undertake for entry into a long term take-or-pay off-take agreement with a major industrial is the same credit workup we would say, what is the balance sheet, what is the strength, what is the overall security package and their underlying cost position. And as you and I have shared in some of our conversations we have had, we get to unit level economics for the power plants we are evaluating on to whom we ultimately sell because we want to be highly convicted that across a broad range of economic circumstances that they remain just as capable of paying. And so these are the folks that we will be talking with are the blue chip companies. They are the ones who would be the market leaders that want to ensure that their margin profile remains as durable and strong on a go forward basis across a broad range of commodity cycles and have the credit worthiness to stand behind that long term obligation.

Understood. And lastly about net zero. In the announcement from last week about that target for 2030, you mentioned that forestry would naturally play a role in the road map. Would you consider providing direct funding for reforestation? And if so, would that be on a non-profit basis? Or would you actually want to own some forestry assets as a company?

Well, I don't think that our business strategy, certainly from a procurement basis, would be to own timber or fiber resources. But what I would say is that, the idea of providing direct additionality in terms of reforestation, conversions of perhaps marginal agricultural land into forestry can be a really important part of how we mitigate our Scope 1 and Scope 2 emissions. Fortunately, as I think you have studied our profile in the past, fortunately our Scope 1 emissions are relatively modest. We are a fraction of a similarly sized industrial. And so we do believe and our most recently announced expansion is part of that expansion profiles is going to be reducing the greenhouse gas emissions intensity of the electricity purchases and the electricity load of pellet production of these assets. And so on the one hand, there's some low hanging fruit that's easy to access. By the same token, given our energy load generally for our Scope 2, there's some really interesting opportunities for us to think about, just solar on our sites to combined heat and power on our sites. Again, we are utilizing biomass as a resource for thermal generation today. A bunch of this begins to pencil out. And so I wouldn't look at necessarily our investment in a net zero commitment as a nonprofit investment. I would look at this as something entirely consistent with our business strategy where we are delivering to our customers a low-carbon alternatives. To the extent that we can make that even lower carbon, our margins should ultimately expand because that's ultimately what our customers are buying from us around the world.

Good to hear. Thank you guys.

Thanks Pavel.

The next question is from Elvira Scotto with RBC Capital Markets. Please go ahead.

Hi. Good morning everyone. A couple of follow-up questions. So can you provide some more detail on that new $50 million expansion and the EBITDA contributions specifically around the cadence of CapEx spend and then the timing of EBITDA contributions? I know you said that you will conclude by the end of 2022. Do those EBITDA contributions come on all at once? Are they phased in? And I will leave it at that for now.

Elvira, thanks. Always good to connect with you as well. I think we can think about the spend curve as roughly linear over the next two years. You can look at spend curve as roughly linear and you can think about the margin profile to sort of be back-half weighted. So you would see an uptick in 2022 and then the balance in 2023.

Okay. Great. That's helpful. And then as you mentioned, though a number of actions, your sponsor has lowered its cost of capital with renewable energy infrastructure development. So how do you think that lower cost of capital can benefit EVA or trickle down to the partnership? I mean is it through increased investment opportunities or any other ways?

No. I think again it's a really important part of maintaining what has been a very beneficial relationship and enabled us to grow as a partnership quite rapidly. Given the opportunities that we see ahead and certainly as the world moves and it continues its efforts not only on coal displacement and renewable energy generation but new markets, new segments, new opportunities, we tend to think that the growth curve has the opportunity to accelerate and at the sponsor level will go across the capital which should pull that to the firm. So faster upstreams.

That's great. And then recently we saw the acquisition of a publicly traded wood pellet producer and EVA has recently completed an acquisition. Can you give us your latest thoughts on the opportunity set for third-party M&A and how you see Enviva participating?

Yes. We are obviously very proud of the acquisitions we have done. The Waycross, from a third-party perspective, the Waycross asset being particularly interesting and robust one for us. But it has continued to meet or exceed all of our expectations. And again the replication of some of their process aspects into our broader fleet is a good reflection of that. What I would say is, third-party acquisitions have been a part of our growth story. They have not been preponderance and that's because the build and copy approach that we have means that we have a high degree of conviction around the cost of development as well as the margin profile on every asset we build. And so we kind of know what we are getting. And that is not as perhaps available third-party acquisitions. So we are much more opportunistic there. As a practical matter, we are obviously open minded but we have tended to focus on what we are best at which is building, owning and operating things that we built ourselves.

Yes. Great. That makes a lot of sense. And then just the last one from me. Can you see any opportunity for Enviva in the U. S. now under the new administration and the push for more green energy?

Well, look the Biden administration's first action is really to rejoin the Paris Agreement are really important from our global positioning. It brings the U.S. closer to the rest of the world in thinking about net zero and the importance of climate change. Obviously, the incident last week of taxes raised questions around dispatch of renewable energy and base load which is, gosh, what our customers are so good at on the basis of [indiscernible]. I don't know that that's necessarily going to be a robust segment. What I will say is, it would be industrial segment around the world, whether it's cement or some of the other commodities we talked about, decarbonization in that sector is really, really hard to do. And so to the extent that biomass can play a role for it, while you have got a scalable world leader in biomass supply, what I will say is, obviously that needs to get bid away from long term robust margin opportunity. We have just got to see how that unfolds here.

Got it. Great connecting with you guys.

Elvira, always good. Thanks so much.

[Operator Instructions]. The next question is from Marshall Carver with Heikkinen Energy Advisors. Please go ahead.

Yes. Thank you. I had a question about the EBITDA or earnings as we go through the year. You talked about it being back-half weighted. And I know you have some capacity expansions as we go through the year. But any color on how back-half weighted it would be? I mean is it like a third, two-thirds or 40/60? I know there's always some seasonality but any color you could have on the expected change between first half and second half would be helpful?

Marshall, thank you for the question. I think that you should expect to see similarly to previous years. You should expect to see the second half stronger compared to the first half of the year. And our expectation is that the same kind of ratio between the first half and second half as you have seen in previous years and during 2020, we will see the same in 2021.

All right. That's it for me. Thank you.

Marshall, thanks. Good to talk to you.

This concludes our question-and-answer session. I would now like to turn the conference back over to John Keppler for any closing remarks.

Well, thanks everybody again for taking the time to join us today. We are very privileged to be in the position we are in. And as we have discussed in our prepared remarks on everything from net zero to the activities we have in work for growth, we do believe we have an opportunity and a responsibility to keep that up. Given all that we covered today and the opportunities ahead, I think that the statement that you guys know I am fond of saying is that we are really just getting started. Nothing could be more true. And we are pretty excited about that. I am looking forward to connecting again with everyone next quarter and in the meantime please stay safe, please stay healthy. We are all in this together and that's how we are getting through it. So thanks, everyone.

The conference has now concluded. Thank for attending today's presentation. You may now disconnect.