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One of the world’s biggest producers of wood pellets sold to power utilities has filed for US bankruptcy, a downfall for a business seen by investors as a promising source of green energy.
Enviva was flying high only two years ago as power plants from the UK to Japan started converting from coal to wood pellets as a source of fuel. Investors gave the company a market capitalisation of $6bn at its peak.
But to expand production, the US company issued a large amount of debt as the cost of running its wood pellet processing plants increased. Additionally, a commodity trade Enviva entered into backfired when energy prices started to drop in the winter of 2022 to 2023, said Pavel Molchanov, an analyst at Raymond James.
“This company made a bet essentially that the price of wood pellets would stay high for quite a while,” he said, adding that last year’s mild winter hurt energy prices, including Enviva’s wood pellets.
The bankruptcy filing described the trade as wood pellet purchases Enviva promised to make from a division of German utilities giant RWE. RWE said Enviva still owes $348.7mn for the transaction, according to the filing.
Enviva said in the filing that it did not tell its board about this deal and that the company has hired a law firm to conduct an internal investigation.
A bankruptcy filing by Enviva had long been expected after it failed to make an interest payment earlier this year. The Maryland-based company said in its filing on Wednesday that it had $1.8bn of debt outstanding.
Shares of the company closed at 39 cents on Wednesday after it filed its bankruptcy petition in Virginia, down more than 99 per cent from a year ago.
Current shareholders are expected to retain at least 5 per cent of the post-bankruptcy company and possibly more, Raymond James said in a research note on Wednesday. “This means the stock is not worthless, though it is premature at this stage to quantify what fair value will be.”
In 2020, activist investor Jeff Ubben joined the company’s board. Ubben would later become one of Enviva’s biggest shareholders when he started Inclusive Capital, a sustainability-focused investment fund.
“There are few companies better positioned than Enviva to innovate and deliver practical solutions to the environmental challenges we face as a society,” Ubben said in 2020. He left Enviva’s board in November and Inclusive has sold most of its stake in the group.
Environmentalists have questioned the green attributes of wood pellets. While burning wood has been cheered as a renewable energy source, as trees can be replanted, it contributes carbon emissions and is not considered as clean as wind or solar power.
Last year the UK’s energy regulator launched a formal investigation of Drax, a UK-based power producer, into whether the energy company had complied with the country’s biomass sustainability rules. Drax’s North Yorkshire power station is the biggest in the country, supplying about 4 per cent of the Britain’s electricity. It started converting from coal to wood pellets in 2013.
Drax, which buys wood pellets from Enviva and is listed as a creditor, said it was not expecting any interruption due to Enviva’s bankruptcy filing. It will have “no material impact” on Drax, the company said in a statement to the Financial Times.
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