Enviva Inc. (NYSE:EVA) Q3 2022 Results Conference Call November 3, 2022 10:00 AM ET
Company Participants
Kate Walsh – Vice President of Investor Relations
John Keppler – Chairman and Chief Executive Officer
Thomas Meth – President
Shai Even – Executive Vice President and Chief Financial Officer
Conference Call Participants
Jordan Levy – Truist Securities
John Mackay – Goldman Sachs
Ryan Levine – Citi
Elvira Scotto – RBC Capital Markets
Operator
Good morning. And welcome to Enviva Inc.’s Third Quarter of 2022 Earnings Conference Call [Operator Instructions]. Please note, this event is being recorded.
I would now like to turn the conference over to Kate Walsh, Vice President of Investor Relations. Please go ahead.
Kate Walsh
Thank you. Good morning, everyone, and welcome to Enviva Inc.’s Third Quarter of 2022 Earnings Conference Call. We appreciate your interest in and support of Enviva, and thank you for your participation today. On this morning’s call, we have John Keppler, Chairman and Chief Executive Officer; Thomas Meth, President; and Shai Even, Executive Vice President and Chief Financial Officer. Our agenda will be for John, Thomas and Shai to discuss our financial and operating results and to provide an update on our current business outlook and operations. Then we will open up the call for questions.
During the course of our remarks and the subsequent Q&A session, we will be making 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 SEC filings. 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 financial measures pertaining to completed reporting periods as well as our forecast. Information concerning the reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and other relevant disclosures is included in our earnings release. Our SEC reports, earnings release and most recent investor presentation, which contain reconciliations of non-GAAP financial measures we use can be found on our Web site at envivabiomass.com. It is important to note that as a result of the Simplification Transaction we announced on October 15, 2021, we were required to recast our historical financial results in accordance with GAAP to reflect that transaction. Today, we will discuss 2021 historical financial results on a recast basis or a non-recast basis, depending on the reference point. Please refer to our earnings release and Form 10-Q document for more details on our recast and non recast presentation.
I would now like to turn the call over to John.
John Keppler
Thank you, Kate. Good morning, everyone, and thank you for joining us today. As you saw in our earnings release, we delivered financial results for the third quarter of 2022, substantially in line with the expectations we outlined in early October. In particular, adjusted EBITDA was a significant step-up over last quarter, increasing by over 50% for the third quarter. We also achieved a record adjusted gross margin per metric ton, approximately $60 per metric ton, which represents roughly a 40% increase over last quarter. Based on the continued operational improvements we are seeing across our fully contracted asset base and the seasonally strong second half of the year you’ve heard us describe, we expect fourth quarter results to be strong with another significant step-up in adjusted EBITDA to approximately $113 million at the midpoint of our guidance range. This means that for full year 2022, we believe we are on track to deliver results in line with our adjusted EBITDA guidance of $240 million to $260 million. We declared a $0.915 per share dividend for the third quarter and also reaffirmed our full year 2022 dividend guidance of $3.62 per share. There are very few companies with a fully contracted business like ours, underpinned by long term take-or-pay contracts with a contracted revenue backlog of over $21 billion and a contract weighted average remaining term of 14 years. And it is because of our visible, durable, long term cash flows that we are able to be a rare combination of a high growth company and a strong stable dividend payer.
As we look into 2023, we are really starting due to our strides as a corporation, and we’re coming up on our one year anniversary of the conversion from an MLP to a regular way C Corp. We are currently forecasting adjusted EBITDA for 2023 to be in the range of $305 million to $335 million, which will cover our stable current dividend of $3.62 per share at 1.1 times at the midpoint of this range. We will come back early in the new year with fulsome 2023 guidance as we complete our budget cycle and refine our shipping schedules with our customers. What I can tell you now, however, is that our manufacturing and terminal facilities are demonstrating asset availability and production throughput rates, such that we expect to produce more than 6 million metric tons next year. This productivity and the benefit of the multi-plant expansions drives increased volume and improved fixed cost absorption. And when combined with the benefit of the constructive pricing environment and inflationary escalators within our existing and new long term contracts, we continue to be well positioned for robust cash flow growth even in an environment with potential recessionary pressures. And despite the broader energy market volatility, new customer demand for alternatives to fossil fuels and drop in decarbonization solutions continues to accelerate. The magnitude of market opportunities with high quality counterparties across a wide range of use cases from renewable energy and heat generation to the displacement of petroleum based hydrocarbons in hard to abate industries like steel, cement and sustainable aviation fuel, continues to support a remarkable level of contracting for us.
Year-to-date, we have announced close to 3.5 million metric tons per year of new agreements with both new and existing customers. And we believe we are on track to announce an additional 2 million metric tons per year of new incremental long term contracted demand. This demonstrates how serious our counterparties are ensuring up renewable energy feedstocks from secure, sustainable and trusted sources. We have built strong, longstanding relationships with our customers who understand our ESG based purpose driven business and value the quality, dependability and sustainability of the products we’re delivering worldwide. I want to spend a few moments on sustainability now as it is the core of our value proposition. And we’ve recently updated our Web site content with important information on harvesting and merchandising practices in the US Southeast. Thomas Meth, Enviva’s President and a Co-Founder of Enviva with me, has been a critical thought leader on sustainability since our founding almost 20 years ago. We have built what is now the world’s largest supplier of sustainably produced wood pellets in the US Southeast because of the region’s thriving, healthy and abundant forest stocks. The forests here are large and growing with only a small percentage harvested each year and even more growing back every single year in areas where we have sided our plants. This healthy circular forest economy, where landowners grow trees, care for them, harvest their timber for both high value permanent carbon storage products like sawtimber, building products and furniture, as well as for lower value paper, pulp and bioenergy and then regrow their timberlands to begin the cycle again, is why forest inventory in Enviva sourcing area has grown by 21% since 2011.
There is such a strong sustainability story to be told here in the US Southeast. And to help investors and stakeholders truly understand the important dynamics at work, we’re in the process of planning a number of site tours and forest tours, along with an Investor Day to help unpack where and how we source our fiber supply as well as how we execute our responsible sourcing policy. I look forward to seeing many of you at these upcoming events and continuing our discussion about Enviva’s leading sustainability practices and about how we are providing industry leading transparency about exactly how we contribute to healthy forest management, growing forest stocks and climate change benefits. I’ll come back to round out our discussion and kick off our Q&A session. But before that, I’d like to turn it over to Thomas to discuss incremental details on our sustainability priorities, as well as to give some important color on our market and contractual developments, and then have Shai to discuss our financial highlights and priorities.
Thomas Meth
Thank you, John, and good morning, everyone. I’d like to start by picking up where John left off on sustainability. Forests are critical to mitigating climate change and how we use forests as a critical pathway to net zero is of paramount importance. 550 scientists from around the world recently issued a public letter to the President of the European Commission, Parliament and Counsel, clearly stating that working forest and the products generated from them, particularly in light of improved forest health and displacement of fossil life carbon provide a much better carbon balance than untouched forests. The scientists were united in stating, wood from sustainably managed forest is CO2 neutral and highlighted the critical role that woody biomass from sustainably managed forests can play in climate change mitigation. This is right in line with the leading authority on climate science, the United Nations Intergovernmental Panel and Climate Change, the IPCC notes a sustainable forest management strategy aimed at maintaining or increasing forest carbon stocks, while producing an annual sustained yield of timber, fiber energy from the forest will generate the largest sustained mitigation benefit for climate change.
At Enviva, we go above and beyond and developed our Track & Trace program to provide leading transparency into the sustainability of our wood sourcing practices and to align our practices and tracking with the IPCC’s objectives and the leading scientific views. For the second half of 2021, our Track & Trace data tells us that when we procured wood fiber from a final harvest Enviva’s merchandising percentage was on average 35% across our procurement areas. Meaning that on average, we take approximately 35% of the wood procured from a harvested site. Given that we typically provide the lowest revenue per ton to the landowner, this means the majority of the harvest was sold into applications like building products, furniture and pulp and paper. Our Track & Trace data will also tell you that we took 30% or less of the wood procured from 59% of the acres where we procured wood. We also described that in the case of 12.4% of harvested acres, we took more than 70% of the merchandised wood. There are good ecological and economic reasons for a higher-than-average percentage in those cases, such as sourcing wood from hurricane damage, multistage harvesting or when a harvest was predominantly pulpwood because of soil and market conditions. As we’ve said before, markets for forest products are the best defense against conversion to nonforest land, and that is a critical reason why forest inventory continues to grow in our procurement regions.
Let’s turn now to a few notable updates on the market and our contracting. As many of you know, the European Union is in the process of updating the Renewable Energy Directive legislation. Currently, bioenergy accounts for almost 60% of the renewable energy used in Europe, and we are encouraged with the direction in which the legislative process is headed. We believe that the final legislation will ultimately continue to support the essential role of sustainable bioenergy as a key climate change solution and will remain compatible with Enviva’s practices. European demand remains unabated. And in addition to our continuous long term contracting activities, the same tailwinds that drive the longer term contracts are driving new highly accretive near term opportunities with existing and new customers. And although the near term opportunities don’t reflect the same tenor of our long term contracts, they and other transactions where we are managing dislocations within our customers’ demand profile are a durable component of our business and will continue to drive value over the long term. We also continue to see positive momentum in Taiwan and Japan and are very encouraged with the direction and pace of our discussions there. In terms of global supply for industrial wood pellets, we’re seeing the Pacific Rim continue to grow as an important supply basin, which is expected to provide profitable third party purchase and sales opportunities for us.
Enviva has a demonstrated track record of procuring volumes from different suppliers and geographies and selling them profitably into spot market opportunities in our long term contracts. Market data suggests that volumes can be purchased on an FOB basis in the Pacific Rim for less than $200 per metric ton. Market data also points to trading prices currently north of $400 per metric ton in European markets. For companies like Enviva, with large scale portfolios of customers and shipping partners, these types of market dislocations can provide an opportunity to drive incremental value while meeting the needs of our customers. This is a market tailwind that we may talk more frequently about in the future. And to round out our market discussions, I’ll bring us back home to the US, where the Inflation Reduction Act is strengthening the momentum behind our conversations with sustainable aviation fuel and biofuel producers. The IRA also enhanced its support for bioenergy with carbon capture using storage, which is emerging as a large scale negative [emission] solution that has the power to truly move the needle in decarbonizing many sectors of our economy. And with that, I’ll turn it over to Shai.
Shai Even
Thank you, Thomas, and good morning, everyone. We generated net revenue of $326 million for the third quarter of 2022 as compared to approximately $237 million for the third quarter of 2021 on a record and nonrecord basis. Net revenue increased by 37% year-over-year, driven primarily by an increase in our average sales price per turn as a result of a number of factors, including addressing dislocation in our customers and other producers’ supply chains, which enable incremental deliveries at elevated spot price. Pricing escalators and cost pass throughs mechanism inclusive of bunker fuel adjustments in our existing contracts, repricing several existing contracts and entering into new contracts at higher prices compared to historical prices. Recent biomass spot market prices as well as the forward curve pricing of certain European biomass indices have exceeded $400 per metric ton, which represents a substantial premium to the current long term contracted pricing across Enviva’s weighted average portfolio, and we were able to capture some of that differential during the third quarter of 2022. Even with biomass spot market prices more than double now versus this time last year, biomass is the cheapest form of thermal energy generation in Europe with biomass being more affordable than coal, natural gas and crude plus EU-ETS carbon pricing. This is true not only in today’s market but all along the forward pricing curve.
[Reverting] back to our quarterly results, we did exit the quarter with higher than average finished product inventory, simply due to the timing of pre-shipment delays caused by Hurricane Ian. This increased our finished gross inventory by $20 million compared to where we exited 2021. Adjusted gross margin for the third quarter of 2022 was $75 million, which represents an increase of approximately 120% as compared to $34 million for the third quarter of 2021 on a recast basis, and an increase of 33% as compared to the nonrecast basis for the third quarter of 2021. Adjusted gross margin per metric ton was approximately $60 per metric ton, as John mentioned, which represents an increase of 104% as compared to $29.36 for the third quarter of 2021 on a recast basis and an increase of 24% as compared to the nonrecast basis of $48.38 per metric ton. The increase in adjusted gross margin and adjusted gross margin per metric ton was driven primarily by contract price escalators that are tight inflation indices coupled with the repricing of the legacy volume and our ability to deliver a few shipments at market prices. We are securing a material durable pricing uplift from our contract structure in addition to being in a very favorable contracting environment.
Net loss for the third quarter of 2022 was $18.3 million as compared to a net loss of $35.8 million for the third quarter of ’21 on a recast basis. Adjusted EBITDA for the third quarter of 2022 was $60.6 million compared to $14.2 million on a recast basis and $62.9 million on a nonrecast basis for the third quarter 2021, respectively. In October, we shared with the market that we expected that adjusted EBITDA for the third quarter of 2022 to be in the range of $60 million to $65 million, and we are pleased to be in line with that guidance range even with a slight deferral of about $3 million in adjusted EBITDA due to Hurricane Ian. Distributable cash flow was $36.3 million for the third quarter of 2022 as compared to negative DCF of $3.6 million and positive DCF of $49.5 million for the corresponding quarter in 2021 on a recast and nonrecast basis, respectively. Our liquidity as of September 30, 2022, which included cash on hand, cash earmarked for the financing of our Epes plan and availability under our revolving credit facility was $328 million. Stepping back to look at full year 2022, we reaffirmed our adjusted EBITDA guidance range in yesterday’s press release and expect a strong fourth quarter to generate over 40% of our 2022 adjusted EBITDA. For our capital expenditure guidance range, we narrowed that range slightly, dropping the high end of the range by $10 million to now be $255 million to $265 million from a previous range of $255 million to $275 million.
Our commitment to conservatively managing Enviva’s balance sheet remains unchanged, and we continue to target a leverage ratio of 3.5 times to 4 times based on our credit facility. Although, as we execute our growth plan, we may exceed that range for a particular quarter or so, we expect to manage back to that trend. And for full year 2022, we expect to exit the year at or below 4 times. From a dividend coverage perspective, over the long term, we are targeting a robust dividend coverage ratio of 1.5 times, and we focus achieving that target in 2025. As we execute our growth plan of building six plants over the next four to five years, we’ll continuously evaluate financing alternatives available to us. Although capital markets remain volatile, we have a number of alternatives available to us to finance the debt portion of our growth strategy. One option is the municipal bond market, which we believe could continue to provide attractive financing. For example, the Mississippi Business Finance Corporation is already approved an endorsement resolution, which provides us with the opportunity to consider financing a portion of our next plant built in Bond, Mississippi with tax exempt green bonds. Given our evaluation of EPC construction alternatives in addition to our proven self execution model. Traditional energy infrastructure project finance presents another potentially attractive financing alternative for fully contracted new [Indiscernible] [plant] and [Indiscernible]. With that, I would like now to turn it back to John.
John Keppler
Thanks, Shai. Building on Shai’s last point about our capacity growth plans, because our industry is persistently structurally short [supply], signing new contracts means new capacity must get built. And thus, this remarkable pace of contracting is, in turn, underwriting our large scale fully contracted capacity expansions. As we’ve discussed, we are underway with construction of our plant in Epes, Alabama. Epes is designed and permitted to produce 1.1 million metric tons per year and will be the largest industrial wood pellet production plant in the world. We’re also making progress on our plans to start construction of our plant in Bond, Mississippi. Bond is designed to be similar in size to our Epes facility, and we expect to begin construction in early 2023, subject to the receipt of necessary permits with the completion date planned for the middle of 2024. Epes and Bond are the second and third plants in our growing Pascagoula cluster, and plans are underway for the cluster’s fourth plant. One of the very attractive aspects to building out the Pascagoula cluster is the operational leverage we have at our deepwater marine terminal and the enhanced returns we expect to generate as we add new plants and increase terminal throughput. We expect to make a decision on the site for our forth Pascagoula cluster plant around the end of this year. We continue to expect to add six new plants over the next four to five years with the likelihood that we’ll add more after that. Epes, Bond and the fourth plant in our Pascagoula cluster, [Indiscernible] in our series of six. And next on our growth path is the addition of three new plants across our Savannah, Wilmington and Chesapeake clusters.
Before we open up the call for questions, I’ll give a quick recap of what we’ve discussed this morning. First, Enviva delivered results in line with our expectations for the third quarter of 2022, and we’re on track to deliver a strong fourth quarter. Second, we reaffirmed our 2022 adjusted EBITDA guidance range and expect to generate between $240 million and $260 million for full year 2022. Third, we declared a $0.915 per share dividend for the third quarter and reaffirmed full year 2020 dividend guidance of $3.62 per share. And finally and most importantly, we described how we continue to be a critical part of the thriving sustainability story of the forests in the US Southeast. I want to take a moment before we open up the call for Q&A., to acknowledge the effort our Enviva team is putting in day in, day out, helping the company deliver on the tremendous opportunities we have ahead. I’m very proud to see that our team continue to focus without distraction on [Indiscernible] Enviva, ensuring our continued, safe, reliable and sustainable operations that deliver climate change benefits today. A lot of work ahead of us but a lot to look forward to. And as many of you know, I’m quite fond of saying, we’re just getting started. Now let’s open up the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Today’s first question comes from Jordan Levy with Truist Securities.
Jordan Levy
Thanks for the update. First, I want to see if we could try and reconcile some of the volumes for the quarter. I recognize that there’s some hurricane related shipment delays as well as some spot market opportunities that you discussed. So it just seems like, if I’m running the numbers, I would have expected some growth in volumes even with the delay. So just seeing if we could get some additional color there.
John Keppler
As I think we described in our October release that we expected in the neighborhood of 1.3 million, 1.35 million tons for the quarter, and we actually came just a little bit shy of that, I think about 90,000 tons short with 80,000 tons left on the dock due to Hurricane Ian. So I think that pencils out [Indiscernible].
Jordan Levy
And then on a somewhat related note, and I know Shai talked to this in his prepared remarks, the working capital has built. Maybe if we could just talk to historic levels there and then kind of the impact of the delays and how we should expect working cap to trend over the coming quarters?
Shai Even
Kind of like if I’m thinking about the question on working capital and cash flow activities, maybe I’ll try — I’ll unpack this. So for the third quarter, we have adjusted EBITDA of about $61 million. Then as you know, during the third quarter, we are making the coupon payment on Bond, so we have timing of higher interest cash paid, which is about $25 million for the quarter. The inventories that we mentioned in our prepared remarks are affected — the timing effect on our cash flow from operating activities about $10 million. And when you take into account also the support payments that are part of the simplification structure and used to be before the simplification — used to be part of the MSA fee waivers included in cash flow from operating activities, you’re adding about $6 million. And then there is some of the acquisition integration cost included, which is about $4 million and that’s how we get to cash flow from operating activities of about $17 million for the third quarter.
Operator
The next question comes from John Mackay with Goldman Sachs.
John Mackay
Let’s start on the contracting side. So nothing new this quarter, but John, you alluded to, I guess, 2 million tons of contracts potentially under flight. Could you just maybe clarify some timing, when you expect those to come in? And maybe give us an update more broadly on the set of MOUs you guys have talked about the last couple of quarters?
John Keppler
I’m sorry, I missed you in the field a couple of weeks ago. I would point out that actually, in the quarter, we executed an agreement with Alder Fuels for up to 750,000 metric tons per year for sustainable aviation fuel production here in the US, a critical segment for us as we continue to look at the total addressable market there. So I think we actually made some pretty important progress in the quarter. As you look at sort of the full year impact, we’re sitting at about 3.5 million metric tons per year of new agreements that we penciled out, new long term contracts. And in our prepared remarks, we did point to about 2 million metric tons per year across a broad range of segments that we expect to burn across the line over about the next six months. And let me actually ask Thomas to lean in on sort of where those segments are, let’s talk some geographies, let’s talk some segments and use cases.
Thomas Meth
The contracting momentum that we have has not slowed down at all, and the 2 million tons that John talked about are really across the board in many geographies. We’re seeing discussions and negotiations of contracts in European countries like Germany, like Poland, in the UK, other places in Europe, both on the power and heat side as well as the hard to abate industry side. We’ve also talked about Taiwan. We’re seeing substantial momentum there. And of course, Japan continues to be big growth market for us. I would also point out that some of the volumes that we’re now asked for are really for post 2027 volumes, that is a key criteria where you see that generators are thinking about the next 10 or 15 years of what they have contracted so far, and we’re really excited about that part of the momentum that we’re seeing really materialize strongly now.
John Mackay
Maybe let’s turn to another part of the market, I guess, maybe — so pricing was really good this quarter. You guys talked about spot benefits. You also introduced this idea of maybe doing more spot or more kind of optimization cargoes going forward. Can you talk about just how much of the quarter that benefit was, and how much — maybe if we into ’23 or maybe long term EBITDA, what you expect kind of spot benefits could look like and overall EBITDA mix?
John Keppler
And I think as we started out the year, as we commented on the implications of the war in Ukraine that had the effect of dampening third party volume availability, which given that we’re a quite large participant in the market, a very large book of both production assets as well as long term outtakes across a range of geographies, that has been a part of our business, and you’ve seen that kind of consistently reported historically. For 2022, we expected to see a dampening of that given the product availability and some of the challenges in Europe. What’s kind of happened in the meantime, of course, is that markets have begun to emerge in places like the Pacific Rim. This is an area from which we have procured historically. I think as we’ve described in our 10-K, we have structured long term contracts with a partner in British Columbia for volumes there. And increasingly, what we’re seeing is our ability to begin to access new production out of places in Southeast Asia and elsewhere, Australia included, where we’re able to move some of those volumes into our Japanese contracts because of our portfolio of both shipping contracts and long term agreements into the Asian marketplace.
And so this is a part of our business. It’s a part of our business that is enabled because of our long term contracted position and the agreements that we have both with our customers and shipping partners that enable that logistical flow, right? This is still a very, very physical business. And you have to be able to access cargo — access the product as well as move it quite efficiently into markets where we have contracted demand. From a pricing perspective, I think what we’re seeing right now is certainly the seasonal benefit, as we look historically across the company’s financial performance year-over-year. The second half of the year is generally our strongest period of the year with the fourth quarter typically being our strong next quarter, that’s been a consistent pattern for us and we would expect that to continue. So we’ve got a seasonal benefit in the second half of the year, a large uptick in pricing generally in the fourth quarter for a number of underlying factors. Obviously, the margin expansion is really the way we operate the business. So we’re able to operate in an environment where our costs are generally lower in the second half of the year, and we’re able to sell into generally higher price conditions given the sort of winter season and where some of our deliveries fall.
What I’d say on the durable pricing increases, and we’ve talked a little bit about this in the past. But the inflationary conditions and escalators in our contracts are providing a very significant uplift in pricing, that has continued. And certainly, the recent sort of Eurozone prints of 11% and the UK print, a similar number, that hasn’t actually been factored into our escalators in those contracts. So we would expect that 2023 number to be appropriately reflective of the increases in that with the contracts that are existing within the firm. We’ve also talked a bit about the repricing of certain existing contracts and sort of win-win situations with our customers for incremental volume. And of course, the entry into new contracts at a much higher price than what you would have seen certainly several years ago in our overall contract portfolio. That, combined with what we see is some of the dislocations that we’re able to monetize. And again, it’s been relatively modest, as Shai described, a few vessels in the quarter. The dislocations and the opportunity to sell into some of the high priced spot market, I think, will provide important value for us potentially in Q4 and certainly is part of our earlier 2023 guide, which we’ll come back in early in the year and give a more fulsome perspective on it.
Operator
The next question comes from Ryan Levine with Citi.
Ryan Levine
Appreciate the update on your Track & Trace disclosures on your Web site. I think it would be helpful if you could speak to how that’s material to your contracts to the extent that any of your customers have ability to change terms, or have any ounce if the data were to be different than they were to have expected? Or if there’s any rule law change provisions in any of your contracts?
Thomas Meth
So first of all, we have robust third party audits through [HPV]. They build on audits on PFC and FSC. And of course, we’re in compliance with all these audits, and that’s the basis for our contractual compliance with our customers. Our Track & Trace system goes way above and beyond all that, and it creates incredible transparency that our customers like. Regulators like because it just shows that we’re front footed where we’re trying to take this industry to an entirely different level of what’s possible through our transparency. From a contractual basis, from a regulatory basis, there are no issues whatsoever. And so again, I’m glad we have the opportunity to explain Track & Trace and lien, and it’s going to continue to be a core part of our discussions with our customers and regulators, but we go above and beyond.
John Keppler
And Ryan, specific to your question. As we’ve talked about previously, our contracts generally provide for the [Indiscernible] [admitted closure] any to Enviva for change [Indiscernible].
Ryan Levine
So the contracts are based on audited disclosure that you’re providing to the market and your customers. Am I hearing that correctly?
John Keppler
Yes, that’s correct. So when we enter into an agreement, we have a specified sustainability standard that is in effect at the time of the entry into the contract and all of our deliveries have complied with any of our required contractual provisions. To the extent that any of the laws change, the value is generally borne by our customer.
Ryan Levine
And then shifting gears, you mentioned several times Pacific Rim market developments. How does that impact your longer term strategy, both on third party volumes and ability to operate within your existing contract structures?
John Keppler
Well, so the base of our business and our core value proposition is to deliver volumes under long term contracts for our customers, the ability to do so with new or smaller producers that enter the market, we’ve done that from a domestic basis, too, as you would have seen in sort of our earlier stage of growth. And so third party volumes are a part of this business, but they’re enabled by the fact that we have the long term contracted volume position and these contracts with our customers around the globe. That enables us in a very physical commodity, as we described a moment ago, in a very physical delivery model that enables us to capture basic differentials between where volumes can be procured and the shipping differential between certain of those procurement basis and where the volumes are ultimately delivered. Again, the base model for us has been to produce on the very favorable and incredibly sustainable resources in the Southeast US, deliver those volumes ratably and durably into our European and Asian customer set. And the fact that volumes can be produced in other regions means that to the extent you can capture a logistics differential, we seek to do so. And the value that can be created there should generally accrue to the largest supplier and ultimately deliver on this product around the world.
Ryan Levine
And last question for me. How did the movement in diesel costs impact the quarter and your outlook?
John Keppler
So I think, again, diesel, we’ve seen that in our cost [tower], obviously, as we’ve described earlier, when diesel was particularly volatile earlier in the year, you did see that impact our delivered cost of fiber. It has generally modulated, that doesn’t mean it’s gone away entirely, but we have been able to operationalize a number of changes in both the way that we procure fiber as well as the way that we process fiber. And for instance, eliminating diesel in a chipper by replacing it with an electric chipper, where we do some of that chipping mitigates our exposure to that. But certainly, it is something that our loggers and some of our truckers experience, and we have to work to help them mitigate that.
Operator
[Operator Instructions] Our next question comes from Elvira Scotto with RBC Capital Markets.
Elvira Scotto
You talked a little bit about some of your potential financing plans. As you look out across these different alternatives, what types of cost financing do you expect, I mean, given that we’re in this rising rate environment? And then just more broadly, I mean you have a lot of growth ahead of you. So can you just talk more broadly about your capital allocation plans in light of this growth that you have ahead of you and all of the plants that you need to finance over the coming years?
John Keppler
I’m going to let Shai lean in on the financing structures and markets, and provide probably a little more visibility into how we’re thinking about project finance and some of the muni things that even we’ve done quite recently. But I do think it’s important to start with a little bit of a reminder that for where we sit today, we’re not even a year into conversion from master limited partnership to a regular way C-Corp. And one of the underlying drivers of that rationale was the preservation of capital that we were going to achieve on the basis of the elimination of the IDRs and the internalization of the construction activity as opposed to the acquisition of fully contracted assets from our sponsor. And the combination of those things on a forecast basis, reserves about $1 billion in cash over the first five years of that. Of course, that’s mitigated by the incremental SG&A burden that we assumed as part of the acquisition of our sponsor. But from an internal funding basis, we should be laying approximately $1 billion better than the prior case.
And so 2022, clearly a transition year as we articulated, as we’re growing our way into that self funding model. And as we look forward, certainly, debt capital is an important part of our growth plans, because as we look to continue to conservatively [balance] the balance sheet, there will be a debt component to that. We recently raised a particular tranche of debt associated with our Epes facility. We accessed the muni market. It was an attractive financing. It was an avenue that had historically been available to us even as a master limited partnership. But given that, that particular type of instrument doesn’t travel very well between entities, we have not really approached that market. But boy, what a great opportunity we were able to tackle earlier this year, and we certainly think that that’s replicable for us given that the Mississippi equivalent has already awarded an inducement agreement for the Bond facility and one that we think is replicable going forward. It’s not the only structure that’s available for us. And Shai, perhaps you want to lean in a little bit on where we’re seeing some particular opportunities and how we think about this both near term and long term.
Shai Even
No question that the debt capital markets are volatile. But when we’re looking at our growth profile, we are developing plans at 5 times EBITDA multiple, approximately 5 times EBITDA multiple. So our investments are very, very accretive, very accretive to cash flows and earnings. When you’re thinking about the muni market still open, not as volatile as the high yield taxable market. Also, when you’re thinking about what we mentioned earlier about our ability to participate in the project financing market, not as volatile as our other debt capital markets. So all in, there is an increase in cost, but it’s not meaningful in a way that should impact our ability to continue to grow and build, as we mentioned earlier, six plants over the next four to five years.
Elvira Scotto
And then I know you touched on this throughout some of the other questions in your prepared remarks, but hoping to maybe get a little bit more quantification. Your adjusted gross margin per metric ton of $75 in the fourth quarter, can you quantify what the biggest drivers are of that increase to $75? I mean, is it the fact that you have inflation escalators, what is the biggest driver? And then as we look out into 2023, how should we see that trending? I mean I know there’s some — there’s seasonal element to this, but just generally speaking, like if we’re exiting 2023, should we still be in that kind of $75 range, say, in the fourth quarter of 2023? Do you expect it to be higher or do you expect that to moderate a little bit?
John Keppler
I mean as we’ve consistently demonstrated historically, Q4 is generally our strongest quarter. So you’d actually expect to see an increase, and I think we’ve guided to a pretty significant step up even for Q4 of this year. Certainly, on a margin basis, that reflects the seasonal benefit that we get in the second half of the year. So you would expect that to replicate on that seasonal component second half over first half in 2023 and probably again in 2024. The headline price increases, obviously, headline price increases margin and it’s an all of the above impact, right? The fact that the inflationary provisions within each of our contracts are providing meaningful, durable pricing increases and increased margin and frankly, faster rate than we’re seeing some of the impact in the cost [tower]. But that’s why the business model work so well, right? I mean when you think about where — think about something like natural gas where we have some exposure because of our RTOs in our operating fleet and then sort of the derivative impact on power, well, what that’s doing is, obviously, that’s driving inflationary pressures that are increasing our headline pricing. So in an environment like that, you are seeing margin expansion on the basis of headline price increases, even while you have some impact on the cost tower.
What do we see in 2023? Well, obviously, we’re going to come back and [Indiscernible] in the year and give more fulsome guide. But we’ve tried to be quite specific about — we are seeing specific headline price increases within our existing contracted book of business because of the contractual provisions that bring in that escalation in price based on whether it’s UK CPI, Eurozone CPI, US CPI, depending on this particular contract, inflating the headline price, which inflates the margin, of course. Similarly, Thomas and the team has done a very, very good job of looking and working with our customers on repricing certain of our legacy contracts in consideration for things like additional volume and others to create a pricing environment much more consistent with the current long term environment than what we would have executed five or seven years ago. And finally, of course, the new contracts that we’re entering into and are now coming to life are at a much higher price than what we would have seen historically. And so we do think it is both durable. And then, of course, there’s the seasonality impact to that, which [Indiscernible] back again, second half next year, be very strong, and Q4 of this year to be a quite remarkable print if we deliver what we think is possible.
Elvira Scotto
And then just a last question for me, looking at your cash flow from operations. It looks like this quarter cash flow from operations was a positive $17 million, you’re still running at a negative year-to-date. When do you think you could be at a point where your cash flow from operations kind of on an annual basis is positive?
Shai Even
So what we mentioned like in our press release is that you should expect to see from us dividend coverage ratio in 2023 of approximately 1.1 time. The way we are calculating it, we are taking into account our projected EBITDA. So we use kind of like the midpoint of between $305 million to $335 million, let’s say, $320 million. And then you are subtracting from that, the interest cash paid, expense paid in 2023 and you are subtracting the moderate maintenance capital expenditures in 2023. And that’s over — the dividend should give you a sense about how strong is that you should expect to see the cash flow from operating activities. Obviously, 2022 was a transition year, as we mentioned, as we move from a partnership to C-Corp, so there were like few adjustments to adjusted EBITDA. The most notable, I can mention is support payments that you expected coming out of the Simplification. We said $25 million of payments in 2021, then $24 million in 2022 and in 2023, only about $6 million. So that’s kind of like a winding down. And then we’re also — like in 2022, there were acquisition integration costs that also were part of — mainly because of the Simplification and then conversion that all these are winding down to a de minimis number in Q4 of 2022, and you shouldn’t expect them to reoccur in 2023. So bottom line is [Technical Difficulty] very strong cash flow from operating activities in 2023.
Elvira Scotto
But you’re using distributable cash flow as a proxy for cash flow from operations, if you’re taking EBITDA minus interest expense minus maintenance CapEx, right? So you’re using DCF as the proxy for cash flow from operations?
Shai Even
No. But also you should expect, like on a full year basis, you should expect moderate changes in accounts receivable inventories and payables from us. And recall that we have a very quick cycle — cash cycle, collection cycle on our inventories over the course of the year, it should be relatively stable. So you shouldn’t see cash consuming inventory. We mentioned on AR that about 90% of the AR has been collected five days from completion, certificate of completion. Then the other 10% is collected about 30 days later. So very small uses of cash on an ongoing basis in working capital.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to John Keppler for any closing remarks.
John Keppler
Thank you very much, and thanks, everyone, for taking the time to join again today. We do continue to be incredibly privileged, the opportunity to build this company and the unique platform that it is where we deliver exactly what the world wants, less carbon, more quickly and more cost effectively from secure sources. We look forward to continuing to offer that to deliver that sustainably, and we look forward to connecting in just a few short months. Thank you.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Be the first to comment