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Enviva Partners LPÂ (EVA)
Q3Â 2019 Earnings Call
Oct 31, 2019, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to the Enviva Partners Third Quarter 2019 Earnings Conference Call. [Operator Instructions]
I would now like to turn the conference over to Ray Kaszuba, Treasurer. Please go ahead.
Ray Kaszuba -- Senior Vice President, Finance and Treasurer
Thank you. Good morning and welcome to Enviva Partners, LP third quarter 2019 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 released yesterday and provide an update on our current business outlook. Then we will open up the lines for questions.
Before we get started a few housekeeping items. 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 issued yesterday in the IR section of our website, as well as in our most recent 10-K and 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. Information concerning the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures and other relevant disclosures are included in our press release issued yesterday.
I would now like to turn it over to John.
John Keppler -- President and Chief Executive Officer
Thank you, Ray. Good morning, everyone and thanks for joining us today.
As you can see from our earnings release published yesterday, we had a strong quarter and delivered results exactly as expected. The third quarter was a step up from the second and we reported our highest ever quarterly adjusted EBITDA on solid distribution coverage. With visibility into customer deliveries in the fourth quarter and continued ramp-up of production at our Hamlet facility, we expect the fourth quarter to be a step up from the third, and to close the year out strong.
Given our confidence in the underlying business and our expectations for full-year 2019 and beyond, our Board declared a quarterly distribution of $0.67 per unit for the third quarter of 2019, representing the Partnership's 17th consecutive distribution increase and the continuation of a mid-teens distribution CAGR since our IPO. I will also note that the Partnership continues to expect to distribute at least $2.65 per unit for full-year 2019, which we expect to increase to between $2.87 and $2.97 per unit for full year 2020.
While we are focused on the strong close of the year, the Partnership and our sponsor are also driving toward the additional production and terminaling capacity needed over the next few years to fulfill the significant volume increases from the offtake contracts that we and our sponsor have signed. In the Partnership, we continue to ramp the Hamlet plant, and the Northampton and Southampton expansion projects are well under way.
I'll spend some time later in the call to provide additional details. But our sponsor's existing long-term offtake contracts underwrite a visible dropdown inventory that includes a new terminal plus four contracted production assets. The new capacity includes not only the expanded production of the sponsor's currently operating Greenwood plant but also at least three additional build and copy plants around our sponsor's deepwater marine terminal under development at the Port of Pascagoula.
I hope you've seen some of the very positive media coverage that has occurred recently, highlighting just how excited so many people are in Alabama and Mississippi to have a world-class industrial facility become a long-term good Neighbor and key contributor to their community. It is our expectation that each of these assets, together with the associated offtake contracts will be made available to the Partnership for acquisition.
With the preponderance of our growth coming from these accretive acquisitions from our sponsor, complemented by organic growth and expansions within the Partnership, there is a clear path to stably and sustainably double the Partnership's 2019 adjusted EBITDA in just a few years. And with our robust offtake contract pipeline around the world, we expect that's just the start.
Market demand for wood pellets is expected to grow significantly, as the global commitment to phase out coal and combat the impact of climate change continues to strengthen. As evidenced by the pledge made by countries around the world at the recently concluded UN Climate Action Summit to reduce greenhouse gas emissions to net-zero by 2050. The UNIPCC which is the international scientific authority made up of thousands of experts from around the world who advise global governments on climate change solutions, in its recently published special report on Climate Change and Land concluded that a sustainable future depends on managing forest store carbon and to produce an annual yield of sawtimber, pulpwood and importantly, bioenergy.
The IPCC holds a long-standing view that biomass plays a fundamental role in the global response to climate change. And includes bioenergy as a requirement in every single one of their recommended pathways to achieve the goal of limiting climate change to 1.5 degrees Celsius. Recently, more than 100 domestic and international scientists and university professors each an expert in forest science issued a letter to policymakers around the world, stating the imperative that there Climate Change policy decisions be informed by current consensus peer-reviewed science on the carbon impacts of woody biomass as an energy source. These scientists go onto remind policymakers that the consensus view is that there really is no debate among experts concerning the fundamental long term carbon benefits of sustainable forest biomass energy.
As the world moves toward more renewables, biomass remains the only scalable solution that can complement the intermittency of solar and wind by producing renewable baseload and dispatchable electricity and heat, as well as drive a reduction in carbon and benefit for us. I will take some time at the end of the call to provide a more detailed update on how this positively impacts the long-term market drivers and activities taking place at the Partnership and our sponsor to meet the significant opportunities ahead of us.
But I would like to now hand it over to Shai to discuss our third quarter financial results.
Shai Even -- Executive Vice President and Chief Financial Officer
Thank you, John. For the third quarter of 2019, net revenue was $157.4 million, representing an increase of 9.2% over the third quarter of 2018, while the sales revenue was $155.2 million as compared to product sales revenue of $142.5 million for the third quarter of last year. For the quarter, we sold 811,000 metric tons of wood pellets as compared to 762,000 metric ton in the third quarter of 2018.
Gross margin was $26.5 million for the third quarter of 2019 as compared to gross margin of $30.1 million for the same period in 2018, a decrease of approximately $3.7 million. Gross margin for the third quarter of 2018 included $12.1 million of insurance recoveries, net of expenses incurred related to the Chesapeake Incident. Excluding such amounts, gross margin for the third quarter of 2019 would have been $8.4 million higher than -- for the third quarter of 2018.
Adjusted gross margin was $41 million for the third quarter of 2019, as compared to $35.6 million for the third quarter of 2018. Adjusted gross margin per metric ton was $50.56 for the third quarter of 2019 as compared to $46.73 for the third quarter of 2018. The increase in adjusted gross margin per metric ton was principally due to greater fixed cost absorption resulting in lower average cost per metric ton due to the Partnership's higher production volume and partially due to the MSA Fee Waiver.
Net income for the third quarter of 2019 was $8.9 million as compared to net income of $13.4 million for the third quarter of 2018. Adjusted net income, which excludes the full financial impact of the Chesapeake Incident and the Hurricane Events, and includes the impact of the MSA Fee Waivers was $17.4 million for the third quarter of 2019 as compared to adjusted net income of $7.9 million for the third quarter of 2018.
For the third quarter of 2019, the Partnership generated record adjusted EBITDA of $39.4 million as compared to $30.2 million for the third quarter of 2018. The increase was primarily due to higher sales volume and MSA Fee Waivers for general and administrative expenses associated with the Hamlet Transaction.
Distributable cash flow prior to any distributions attributable to incentive distribution rights paid to the general partners was $13 million, which results in the third quarter of 2019 distribution coverage ratio of 1.2 times. Similar to previous years and as discussed on our last call, the Partnership expects adjusted EBITDA and distributable cash flow for the fourth quarter to be higher than the third quarter
In addition, we have greater visibility into our shipping schedule for the rest of the year, and the Partnership is therefore narrowed the ranges of our 2019 guidance, and now expects full-year 2019 net income to be in the range of $15.3 million to $20.3 million, and adjusted EBITDA in the range of $140.7 million to $145.7 million, and distributable cash in the range of $94 million to $99 million, prior to any distribution attributable to incentive distribution rights paid to our general partner. For the full year 2019, the Partnership continues to expect to distribute at least $2.65 per common unit. The Partnership also continues to expect to distribute between $2.87 and $2.97 per common unit for full year 2020.
From a liquidity perspective, at the end of the third quarter of 2019, we had approximately $2.4 million of cash on hand, with $185 million drawn under our $250 million revolving credit facility. This anticipated increase in revolving borrowings is due primarily to funding of capital expenditures associated with the completion of construction of the Hamlet Plant and the Northampton and Southampton expansion projects.
The 3 million metric tons period of executed contracts with Japanese customers, we and our sponsor have signed recently will not only greatly diversify our customer base, but also serves to significantly expand our scale as the Partnership expects to have the opportunity to acquire full contracted production plant and the Pascagoula terminal facility from our sponsor over the next few years.
As we position the Partnership to finance these activities, maintaining a balanced capital structure and conservative financial policy will remain a key focus. Therefore we continue to target a 50-50 equity debt split to these activities and a distribution coverage ratio of 1.2 times on a forward-looking annual basis, taking into account expectation for distributable cash flow for the next four quarters.
Finally, as you may have seen, on Tuesday, Moody's upgraded our corporate rating to Ba3, and also upgraded the rating on our bonds to B1. It is nice to see our continued growth in scale, diversification of our customer base and track record since our IPO in 2015 recognized by the rating agencies and the rest of the financial community.
Now, I would like to turn it back to John.
John Keppler -- President and Chief Executive Officer
Thanks, Shai. Our sales strategy remains to fully contract the Partnership, and our current book is well balanced through at least 2025. As of October 1, the weighted average remaining term of the Partnership's offtake contracts now stands at 10.4 years, and our revenue backlog is $9.5 billion. Including volumes under the firm and contingent contracts held by our sponsor and its development joint venture, which we would expect to be made available to the Partnership, our weighted average remaining contract term, and product sales backlog would extend to 13.3 years and almost $18 billion, respectively.
The scale of our expanding offtake book is yet another proof point that biomass is regarded by policymakers and customers around the world as indispensable to the global solution to phase-out coal and combat climate change. This view and emerging incremental international policy developments continue to underpin demand growth in the industry. For instance, in Poland, the government recently announced dedicated funds for the conversion of coalfired municipal heating plants to biomass fuel to support the country's efforts to reduce carbon emissions.
Local experts have estimated that up to one-third of the more than 400 municipal heating plants will either fully convert to or co-fire biomass, driving more than 3.5 million metric tons per year. In July 2019, the lower house of the Netherlands passed the draft law to implement the government's previously announced goal to phase-out coal-fired power generation by 2030.
Under the phase-out law, four coal-fired power plants, with the total generation capacity of approximately 4 gigawatts was either switched to an alternative fuel or face shutdowns by no later than 2030. To avoid the shutdowns, these power plants are developing or commissioning biomass cofiring, which we expect to drive a significant increase in demand for industrial wood pellets in the Netherlands, from just 350,000 metric tons in 2018 to over 3 million metric tons per year in 2021.
Across the border in Germany, the government recently committed to achieve carbon neutrality by 2050. And in September released a new climate change action plan with an estimated $60 billion package of climate policy support. In addition, the German government continues to progress toward implementing the Coal Commissions' recommendations and the laws regarding the coal phase-out and the shutdown of coal-fired power generation assets are expected to be drafted in 2019, and come into force by early 2020. All of these developments could drive 5 billion to 10 billion metric tons per year of incremental wood pellet demand in Germany. And we expect to see significant contracted demand emerge over the next 18 to 24 months.
Shifting to Asia, while we continue to negotiate additional substantial offtake contracts in Japan, South Korea is also developing, as the government announced at the 2019 UN Climate Summit that it will shut down 10 coal-fired power plants by 2022, which may drive a significant increase in the country's demand for biomass.
We expect our contract backlog to continue to extend and diversify with continued growth in existing markets in Japan, Europe, and the United Kingdom. And for substantial new potential contract volumes to commence in the early to mid-2020s from the Netherlands, Germany and island nations, as well as further volumes from countries like Ireland, Poland, South Korea, and Taiwan. You may have seen the media coverage of the governor of Mississippi and Enviva's head of sales, meeting with the Taiwanese President and her delegation. This highlights the potential benefits of wood pellets, a key renewable energy export commodity from the United States to an import-dependent energy consumer like Taiwan.
We expect those market drivers to drive incremental long term off-take contracts beyond what we and our sponsor have already signed. Based on our existing contracts, as I mentioned earlier on the call, we in our sponsor will have the opportunity to invest in new production and terminaling capacity in order to fulfill the long-term contracted demand, the growth to approximately 6.5 million metric tons per year by 2025.
While the Hamlet Plant continues to ramp up production capacity, as expected, the Partnership is progressing the expansion projects at our existing Northampton and Southampton production facilities and expects to complete the construction of the expansion activities in the first half of 2020 subject to receiving our final permits. Projects like these are expected to be highly accretive and our operations and development teams continue to evaluate new opportunities to drive organic growth and capacity expansions.
With respect to sponsor level development where the preponderance of our capacity growth is a stirred historically, last week, our sponsor broke ground on the Lucedale plant. The first production facility in our sponsored plant Pascagoula cluster. Construction is also under way at the Pascagoula terminal and our sponsor recently executed a project agreement with the State of Alabama and applied for an air permit to construct a potential wood pellet production plant in Epes, Alabama. Our sponsor expects to be ready to commence construction of the Epes plant in the first half of 2020, subject to receiving necessary permits. Production from the Epes plant, a build and copy replica of our Lucedale facility is expected to be transported by barge via the Tennessee, Tombigbee River to the Pascagoula terminal.
Our sponsor continues to evaluate additional sites in Alabama and Mississippi for 2 similar bills and copy wood pellet production plants, so an export wood pellets to Pascagoula terminal. This development, of course, is complemented by additional activities the sponsors undertaking to evaluate potential production sites around the Partnership's existing terminal facilities in Wilmington, North Carolina and Chesapeake, Virginia.
By design, the expectation is that all of these assets developed by our sponsor and its joint venture, as well as their related contract backlog will be made available to the Partnership for dropdown acquisitions. As we continue to grow, we remain focused on expanding our export capacity and manufacturing footprint in the Southeast U.S., a robust fiber basket that provides about one-fifth of the world's wood products. The low-grade wood fiber we procure is a byproduct of sustainable forestry operations and traditional sawtimber harvest and gives us consistent and stable access to a growing natural resource without any dependency on sawmilling, sawdust or other industrial residuals.
We are continuing to invest here because it is one of, if not the most sustainable forest resources in the world. One, that grows more each year than is harvested, one that demonstrates increasing carbon stocks year-after-year, all the while producing a steady and sustained yield of timber, fiber, and energy from the forest
If that language sounds familiar, it is because it describes verbatim what the UNIPCC special report on Climate and Land described as the role of forest and forest products that will generate the largest sustained climate change mitigation benefit. As a result, our industry leadership is not defined solely by the scale and reliability of our global operations, but also by the critical role we play in delivering a sustainable solution to our customers' efforts to mitigate climate change.
In sum, we delivered our strongest quarter yet, with more than $39 million in adjusted EBITDA. We expect the fourth quarter to be even better. We expect to distribute at least $2.65 per unit for 2019 and to grow that to between $2.87 and $2.97 in 2020. Longer-term, we expect our executed contract backlog, robust contract pipeline, strong balance sheet capacity and supportive sponsor to enable us to double 2019 adjusted EBITDA and continued to drive durable and sustainable increases in distributable cash flow per unit over time.
To close, I'd like to thank all the great people at Enviva for their hard work and dedication, building a business dedicated to solving the difficult equation of energy and the environment. Thank you.
Operator, can you please open the line for questions?
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Brian Maguire of Goldman Sachs. Please go ahead
Derrick Laton -- Goldman Sachs -- Analyst
Hey, good morning, everyone. It's Derrick Laton on for Brian.
John Keppler -- President and Chief Executive Officer
Hey, good morning, Derrick.
Derrick Laton -- Goldman Sachs -- Analyst
Good morning. And thanks for taking my questions. Just -- maybe looking at the volumes in the third quarter, coming in a little bit lighter than what we had expected, given some of your prior commentary. My assumption is that maybe some of this just is going to get pushed into the fourth quarter because you guys had mentioned it before expect about 2 million tons delivered in the back half of the year. Is it still sort of the right way to think about the cadence for 2020 volume -- or 2019 volumes? And then could -- maybe some of this get pushed into the first quarter of '20?
Shai Even -- Executive Vice President and Chief Financial Officer
Derrick, thank you for the question. As we said before, we expected Q3 to be better from Q2, and we're expecting Q4 to be another major step up above Q3. Q3 turn out as we expected, and now with the visibility into our shipping schedule and volumes for the fourth quarter, and the ships that will be in the first quarter of 2020, we feel confident about finishing the year. We do not narrow the guidance range.
Derrick Laton -- Goldman Sachs -- Analyst
Okay. That's helpful. Thank you. And then maybe just one more on, just looking at the AGM per ton in the third quarter came in pretty good. I know you guys saw some benefits from improved operating leverage and some cost savings initiatives. Maybe in some easing in the wood fiber basket. But is there anything else that I might be missing within that number that you call out? And then is that may be a good run rate number to think about into the fourth quarter, and looking into next year?
Shai Even -- Executive Vice President and Chief Financial Officer
Yes. I think that I agree with what you said, adjusted EBITDA for the quarter was mainly as a result of improved AGM per ton. We had a strong quarter with the AGM of the $50.56 per metric ton.
And then with the weather impacted discussion of second quarter call behind us fiber and production costs are back to the normal levels for this time of the year, while sales volume was lower than Q2 due to timing of customer delivery, production volume was higher, which led to better-fixed cost absorption. You will note higher ending inventory that effect this -- reflect this.
Derrick Laton -- Goldman Sachs -- Analyst
Okay. There also just some improved sort of customer contract mix in the third quarter as I'm bridging from 2Q to 3Q. And then is that also a similar impact you might see in the fourth quarter?
Shai Even -- Executive Vice President and Chief Financial Officer
Yes. We do expect that we continue into Q4 with higher contract mix -- pricing mix.
Derrick Laton -- Goldman Sachs -- Analyst
Okay, great. Thanks. I'll turn it over. Appreciate it, guys.
John Keppler -- President and Chief Executive Officer
Thanks, Derrick.
Operator
Our next question comes from Ryan Levine of Citi. Please go ahead.
Ryan Levine -- Citigroup -- Analyst
Good morning. Curious what was the driver of lowering the top end of the '19 EBITDA guidance?
Shai Even -- Executive Vice President and Chief Financial Officer
Hey, Ryan, thank you -- thank you for the question. So now, as we mentioned, we have better visibility into the shipping -- the timing of the shipping contracts into Q4, we decided to narrow the guiding range for adjusted EBITDA for -- nil the guiding range for adjusted EBITDA to $140.7 million to $145.7 million for 2019.
Ryan Levine -- Citigroup -- Analyst
[Indecipherable] lower the drivers. The -- I mean, was this lower volumes or a weaker margin expectation versus original guidance? Or is there some other factor?
Shai Even -- Executive Vice President and Chief Financial Officer
It's, it's really greater visibility into Q4, as we know more about the shipping of -- timing of shipping contracts into Q4 and how much of shipping contracts will be moved into Q1 2020.
Ryan Levine -- Citigroup -- Analyst
Okay. So lower guidance for the back half of the year, around volume, mostly. So it's driving the reduction in outlook? Is that right?
John Keppler -- President and Chief Executive Officer
No. I think -- Ryan, it's John. I think the -- I think what you're hearing from us is that we now have highly specific ship timing matching specific contracts with specific volumes and specific time periods. And, as you'd expect us to come through nine months through the year, you would expect us to narrow the guidance range, as we have greater visibility in the 9 months, we've just completed and what we expect for the balance of the year, which is, right inside the guidance range we started with.
Ryan Levine -- Citigroup -- Analyst
Okay. Thank you.
Operator
Our next question comes from Pavel Molchanov of Raymond James. Please go ahead.
Pavel Molchanov -- Raymond James -- Analyst
Thanks for taking the question. We've been looking at Germany for better part of a year now. Are you getting a sense that maybe the German utilities are not as pro-active or kind of quick moving on the coal phase-out commission recommendations as perhaps we would have thought a year ago?
John Keppler -- President and Chief Executive Officer
Not at all, Pavel. In fact, we remain as bullish on the German market as we had when the Coal Commission announced the commencement of its work. I mean, what you're seeing is -- and perhaps you've heard me describe this before. But what you're seeing is the replication of the process that we saw kind of broadly speaking, in the U.K., as they really began to reshape their energy mix and a focus on the full phase-out of coal. And so you begin to see a number of major utilities beginning to understand exactly the current plants that are expected to be rationalized over what period of time. And work at both -- at the very local level, sort of the short work approach to how they're going to undertake new heat and electricity energy generation on a localized basis. And then, of course, you've got the major -- quite large facilities that are really important long-term job preservation ones. And the regulatory framework around all of this is currently evolving, right. So you've got an expectation from the German government about the carbon floor and the carbon price somewhere between $35 and I think $60 per ton. That provides for a remarkable ability to pay for many of the major utilities and those are the folks with whom we're directly engaged. Many of these utilities as you heard me talk about before are both power generations and thermal generation, the combined heat, and power aspects. And you may be aware that the CHP law is currently under review to specifically address how effectively many of these facilities can be converted from coal to biomass.
And so you've got some pretty significant tailwinds and utilities that I would say are actually moving a much more aggressively than perhaps is visible in the newspapers. Although there have been some pretty aggressive media coverage points about hey, this is what we're going to go, we got to go and figure it out, and let's get after it. And for us, that -- as we look out, we see sort of a 5 million to 10 million metric ton per year market for us with potentially test deliveries beginning in the next, call it 12 months to 18 months. And then probably, as you think about the sort of our Japanese equivalent sort of 18 month to 24 month timeframe for announcements of major long-term structured contracts with deliveries beginning thereafter.
Pavel Molchanov -- Raymond James -- Analyst
Understood. Yes, that's useful. I've noticed that on this call, I think maybe more so the -- than the last few quarters, you kind of highlighted the environmental sustainability aspect of biopower. Are you seeing any change in the push-backs from the environmental activist community to this, and if so in what geographies?
John Keppler -- President and Chief Executive Officer
No. It's actually quite the opposite. What we see is, as so much of the work that the UNIPCC has done is really again come out so strongly in favor of the role of biomass, the role of bioenergy, the importance of healthy working for us. There's just been a lot of talk in the UN on this and so we think it's really important, mostly because the policymakers around the world, you come out of [Indecipherable] at the end of last year, again firmly affirming role of biomass 60% of renewable energy generation in Europe today, incredibly important for it to continue. UNIPCC describes it as essential to every single pathway to addressing the ever more urgent need of mitigating the 1.5 degree Celsius climate change mitigation. And then you got, of course, folks like the 100 scientists letter continue to reinforce. This is a story that is so important to how we're going to mitigate climate change on a long-term basis. The scientists have been there for years. The questions have been asked and answered, and let's use it even more aggressively.
Pavel Molchanov -- Raymond James -- Analyst
All right. Appreciate it, guys.
John Keppler -- President and Chief Executive Officer
Absolutely, Pavel. Good to talk to you.
Operator
Our next question comes from Elvira Scotto of RBC Capital Markets. Please go ahead .
Elvira Scotto -- RBC Capital Markets -- Analyst
Hey, good morning, everyone. Can you talk a little bit about -- on the 2020 distribution guidance of $2.87 to $2.97? The drivers of the low-end versus the high-end? And how you're thinking about dropdowns baked into that number?
Shai Even -- Executive Vice President and Chief Financial Officer
Yes. On the distribution guidance, -- thank you for the question, Elvira. Distribution guidance we discussed this before, we do expect to make distribution per unit for 2020 of between -- as you mentioned between $2.87 to $2.97 per unit. We also discussed before to provide additional -- more information we discussed that actually we're expecting to get out of 2020 with run-rate EBITDA in excess of -- well excess of $200 million. We do expect to get benefit from a full ramp-up of Hamlet with $26 million to $27 million. We do expect to get the contribution from the Northampton and Southampton expansion project that we're expecting to bring at least $30 million starting from next year.
We are expecting to provide more fulsome guidance on 2020 by the time that we have the next earnings call.
John Keppler -- President and Chief Executive Officer
Hey, Elvira, the $2.87 to $2.97 was consistent with when we undertook the Hamlet dropdown transaction, and also undertook the pre-funding of the expansions for Northampton and Southampton that Shai just mentioned.
So with regard to that guidance, it doesn't include any further drops. And so as we described in our prepared remarks, upstairs at the sponsor, there's five assets. There is an existing operating plant in Greenwood, South Carolina. There is now a terminal asset under construction in Pascagoula, Mississippi; a plant under construction in Lucedale, Mississippi. We've signed -- our sponsor signed an agreement with the State of Alabama with respect to the development of a plant in Epes, Alabama. And then there's one additional one that we will -- we expect to announce in relatively short order that our contracted assets under the long-term backlog that we've profiled. And so as you've seen us historically undertake, we've grown as a corporates and certainly have given some view to our expectation that we will drop-in one or two assets in 2020 with the other support there -- out there. [Phonetic]
Elvira Scotto -- RBC Capital Markets -- Analyst
Okay, great, perfect. And then on the credit rating, great to see that upgrade. Can you just remind us what your target leverage is? And then, is there any rating that you're aspiring to get to?
Shai Even -- Executive Vice President and Chief Financial Officer
Yes. That's a very good question. So to remind you all, we believe that we have conservative financial policies, so we continue to target -- as we mentioned just a few minutes ago, target for acquisition or dropdowns. We continued target to finance them with 50% equity, 50% debt. Based on our previous dropdown acquisitions, we're expecting to acquire the assets at the EBITDA range of 7 to 7.5 times. And that leads to actually target leverage of 3.5 to 4 times. We believe this is appropriate conservative for the type of fully contracted business that we have, long-term take or payor offtake contracts with escalation clauses in our contracts.
We do expect, as we continue to scale and grow. We do expect to see a further recognition by the rating agencies. So we believe that this is just the start. We now -- we recognize that there is some level of scale that we expected to have before we'll see another improvement in the credit ratings. We're expecting that to be a -- probably relatively soon to come. And we believe that with a further improvement in our credit rating, we'll be able to reduce the cost of capital for entity, and we are very hopeful that with the improvement in the credit rating, we'll see a reduction in the yield as well.
Elvira Scotto -- RBC Capital Markets -- Analyst
Great. Thank you very much.
John Keppler -- President and Chief Executive Officer
Elvira, always good to talk to you.
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 -- President and Chief Executive Officer
Thank you. Thank you, all for taking the time for joining us today. As folks who have gotten to know me a bit, they know I'm quite fond of saying, we're just getting started. And given all we talked about today, that's certainly never been truer. We look forward to catching up again next quarter. And thank you all.
Operator
[Operator Closing Remarks]
Duration: 38 minutes
Call participants:
Ray Kaszuba -- Senior Vice President, Finance and Treasurer
John Keppler -- President and Chief Executive Officer
Shai Even -- Executive Vice President and Chief Financial Officer
Derrick Laton -- Goldman Sachs -- Analyst
Ryan Levine -- Citigroup -- Analyst
Pavel Molchanov -- Raymond James -- Analyst
Elvira Scotto -- RBC Capital Markets -- Analyst
