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EX-31.1 - EX-31.1 - Enviva Partners, LPeva-20180930ex311b8ee77.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to                

Commission file number: 001-37363

Enviva Partners, LP

(Exact name of registrant as specified in its charter)

Delaware

46-4097730

(State or other jurisdiction

(I.R.S. Employer

of incorporation or organization)

Identification No.)

7200 Wisconsin Ave, Suite 1000

 

Bethesda, MD

20814

(Address of principal executive offices)

(Zip code)

 

 

(301) 657-5560

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ☐

 

Accelerated filer  ☒

 

 

 

Non-accelerated filer  ☐

 

Smaller reporting company  ☐

 

 

Emerging growth company  ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒

As of October 31, 2018, 26,478,590 common units were outstanding.

 

 


 

ENVIVA PARTNERS, LP

QUARTERLY REPORT ON FORM 10‑Q

TABLE OF CONTENTS

 

Page

CAUTIONARY STATEMENT REGARDING FORWARD‑LOOKING STATEMENTS 

1

GLOSSARY OF TERMS 

3

PART I—FINANCIAL INFORMATION 

4

Item 1. 

Financial Statements (unaudited)

4

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Operations

5

 

Condensed Consolidated Statements of Comprehensive Income

6

 

Condensed Consolidated Statement of Changes in Partners’ Capital

7

 

Condensed Consolidated Statements of Cash Flows

8

 

Notes to Condensed Consolidated Financial Statements

10

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

50

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

66

Item 4. 

Controls and Procedures

67

PART II—OTHER INFORMATION 

68

Item 1. 

Legal Proceedings

68

Item 1A. 

Risk Factors

68

Item 6. 

Exhibits

69

 

 

 

i


 

CAUTIONARY STATEMENT REGARDING FORWARD‑LOOKING STATEMENTS

Certain statements and information in this Quarterly Report on Form 10‑Q (this “Quarterly Report”) may constitute “forward‑looking statements.” The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward‑looking statements, which are generally not historical in nature. These forward‑looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. Although management believes that these forward‑looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward‑looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward‑looking statements include, but are not limited to, those summarized below:

·

the volume and quality of products that we are able to produce or source and sell, which could be adversely affected by, among other things, operating or technical difficulties at our plants or deep-water marine terminals;

·

the prices at which we are able to sell our products;

·

failure of the Partnership’s customers, vendors and shipping partners to pay or perform their contractual obligations to the Partnership;

·

the creditworthiness of our contract counterparties;

·

the amount of low‑cost wood fiber that we are able to procure and process, which could be adversely affected by, among other things, operating or financial difficulties suffered by our suppliers;

·

changes in the price and availability of natural gas, coal or other sources of energy;

·

changes in prevailing economic conditions;

·

our inability to complete acquisitions, including acquisitions from our sponsor, or to realize the anticipated benefits of such acquisitions;

·

inclement or hazardous environmental conditions, including extreme precipitation, temperatures and flooding;

·

fires, explosions or other accidents;

·

the timing and extent of our ability to recover the costs associated with the fire at the Chesapeake terminal through our insurance policies and the exercise of our other contractual rights;

·

changes in domestic and foreign laws and regulations (or the interpretation thereof) related to renewable or low‑carbon energy, the forestry products industry, the international shipping industry or power generators;

·

changes in the regulatory treatment of biomass in core and emerging markets;

·

our inability to acquire or maintain necessary permits or rights for our production, transportation or terminaling operations;

·

changes in the price and availability of transportation;

·

changes in foreign currency exchange or interest rates and the failure of our hedging arrangements to effectively reduce our exposure to the risks related thereto;

·

risks related to our indebtedness;

1


 

·

our failure to maintain effective quality control systems at our production plants and deep‑water marine terminals, which could lead to the rejection of our products by our customers;

·

changes in the quality specifications for our products that are required by our customers;

·

labor disputes;

·

the effects of the anticipated exit of the United Kingdom from the European Union on our and our customers’ businesses; and

·

our ability to borrow funds and access capital markets.

Please read the risks described in our Annual Report on Form 10-K for the year ended December 31, 2017. All forward‑looking statements in this Quarterly Report are expressly qualified in their entirety by the foregoing cautionary statements.

Readers are cautioned not to place undue reliance on forward‑looking statements and we undertake no obligation to update or revise any such statements after the date they are made, whether as a result of new information, future events or otherwise.

 

2


 

GLOSSARY OF TERMS

biomass:  any organic biological material derived from living organisms that stores energy from the sun.

co-fire:  the combustion of two different types of materials at the same time. For example, biomass is sometimes fired in combination with coal in existing coal plants.

cost pass‑through:  a mechanism in commercial contracts that passes costs through to the purchaser.

metric ton:  one metric ton, which is equivalent to 1,000 kilograms. One metric ton equals 1.1023 short tons.

net calorific value:  the amount of usable heat energy released when a fuel is burned completely and the heat contained in the water vapor generated by the combustion process is not recovered. The European power industry typically uses net calorific value as the means of expressing fuel energy.

off‑take contract:  an agreement between a producer of a resource and a buyer of a resource to purchase a certain volume of the producer’s future production.

stumpage:  the price paid to the underlying timber resource owner for the raw material.

utility‑grade wood pellets:  wood pellets meeting minimum requirements generally specified by industrial consumers and produced and sold in sufficient quantities to satisfy industrial‑scale consumption.

wood fiber:  cellulosic elements that are extracted from trees and used to make various materials, including paper. In North America, wood fiber is primarily extracted from hardwood (deciduous) trees and softwood (coniferous) trees.

wood pellets:  energy‑dense, low‑moisture and uniformly‑sized units of wood fuel produced from processing various wood resources or byproducts.

3


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except number of units)

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31, 

    

 

    

2018

    

2017

    

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

863

 

$

524

 

Accounts receivable, net

 

 

49,152

 

 

79,185

 

Related-party receivables

 

 

5,535

 

 

5,412

 

Inventories

 

 

34,322

 

 

23,536

 

Prepaid expenses and other current assets

 

 

1,643

 

 

1,006

 

Total current assets

 

 

91,515

 

 

109,663

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

552,456

 

 

562,330

 

Intangible assets, net

 

 

 —

 

 

109

 

Goodwill

 

 

85,615

 

 

85,615

 

Other long-term assets

 

 

4,783

 

 

2,394

 

Total assets

 

$

734,369

 

$

760,111

 

 

 

 

 

 

 

 

 

Liabilities and Partners’ Capital

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

10,730

 

$

7,554

 

Related-party payables and accrued liabilities

 

 

30,289

 

 

26,398

 

Accrued and other current liabilities

 

 

35,849

 

 

29,363

 

Current portion of interest payable

 

 

12,573

 

 

5,029

 

Current portion of long-term debt and capital lease obligations

 

 

7,070

 

 

6,186

 

Total current liabilities

 

 

96,511

 

 

74,530

 

Long-term debt and capital lease obligations

 

 

402,447

 

 

394,831

 

Related-party long-term payable

 

 

74,000

 

 

74,000

 

Long-term interest payable

 

 

980

 

 

890

 

Other long-term liabilities

 

 

4,687

 

 

5,491

 

Total liabilities

 

 

578,625

 

 

549,742

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

 

 

Limited partners:

 

 

 

 

 

 

 

Common unitholders—public (14,573,452 and 13,073,439 units issued and outstanding at September 30, 2018 and December 31, 2017, respectively)

 

 

212,539

 

 

224,027

 

Common unitholder—sponsor (11,905,138 and 1,347,161 units issued and outstanding at September 30, 2018 and December 31, 2017, respectively)

 

 

76,380

 

 

16,050

 

Subordinated unitholder—sponsor (no units issued and outstanding at September 30, 2018 and 11,905,138 units issued and outstanding at December 31, 2017)

 

 

 —

 

 

101,901

 

General partner (no outstanding units)

 

 

(133,810)

 

 

(128,569)

 

Accumulated other comprehensive income (loss)

 

 

635

 

 

(3,040)

 

Total Enviva Partners, LP partners’ capital

 

 

155,744

 

 

210,369

 

Total liabilities and partners’ capital

 

$

734,369

 

$

760,111

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per unit amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017 (Recast)

    

2018

    

2017 (Recast)

 

Product sales

 

$

142,541

 

$

125,422

 

$

398,031

 

$

366,142

 

Other revenue (1)

 

 

1,607

 

 

6,801

 

 

7,037

 

 

16,071

 

Net revenue

 

 

144,148

 

 

132,223

 

 

405,068

 

 

382,213

 

Cost of goods sold (1)

 

 

103,695

 

 

100,897

 

 

330,456

 

 

296,786

 

Loss on disposal of assets

 

 

656

 

 

1,237

 

 

900

 

 

3,242

 

Depreciation and amortization

 

 

9,678

 

 

9,707

 

 

28,800

 

 

29,104

 

Total cost of goods sold

 

 

114,029

 

 

111,841

 

 

360,156

 

 

329,132

 

Gross margin

 

 

30,119

 

 

20,382

 

 

44,912

 

 

53,081

 

General and administrative expenses (1)

 

 

7,315

 

 

7,704

 

 

21,406

 

 

23,337

 

Income from operations

 

 

22,804

 

 

12,678

 

 

23,506

 

 

29,744

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(9,445)

 

 

(7,653)

 

 

(27,137)

 

 

(23,070)

 

Other income (expense)

 

 

(3)

 

 

(2)

 

 

1,196

 

 

(199)

 

Total other expense, net

 

 

(9,448)

 

 

(7,655)

 

 

(25,941)

 

 

(23,269)

 

Net income (loss)

 

 

13,356

 

 

5,023

 

 

(2,435)

 

 

6,475

 

Less net loss attributable to noncontrolling partners’ interests

 

 

 —

 

 

665

 

 

 —

 

 

3,180

 

Net income (loss) attributable to Enviva Partners, LP

 

$

13,356

 

$

5,688

 

$

(2,435)

 

$

9,655

 

Less: Pre-acquisition loss from operations of Enviva Port of Wilmington, LLC Drop-Down allocated to General Partner

 

 

 —

 

 

(651)

 

 

 —

 

 

(3,081)

 

Enviva Partners, LP limited partners’ interest in net income (loss)

 

$

13,356

 

$

6,339

 

$

(2,435)

 

$

12,736

 

Net income (loss) income per limited partner common unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.45

 

$

0.20

 

$

(0.25)

 

$

0.40

 

Diluted

 

$

0.43

 

$

0.19

 

$

(0.25)

 

$

0.37

 

Net income (loss) per limited partner subordinated unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

 —

 

$

0.20

 

$

(0.25)

 

$

0.40

 

Diluted

 

$

 —

 

$

0.20

 

$

(0.25)

 

$

0.40

 

Weighted-average number of limited partner units outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Common—basic

 

 

26,477

 

 

14,412

 

 

19,866

 

 

14,400

 

Common—diluted

 

 

27,478

 

 

15,385

 

 

19,866

 

 

15,343

 

Subordinated—basic and diluted

 

 

 —

 

 

11,905

 

 

6,541

 

 

11,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) See Note 12, Related-Party Transactions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


 

ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income 

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

September 30,

 

September 30,

    

 

 

2018

    

2017 (Recast)

    

2018

    

2017 (Recast)

 

Net income (loss)

    

$

13,356

    

$

5,023

 

$

(2,435)

 

$

6,475

 

Other comprehensive income (loss):

 

 

 

 

 

  

 

 

 

 

 

  

 

Net unrealized gains (losses) on cash flow hedges

 

 

2,713

 

 

(1,788)

 

 

5,750

 

 

(4,641)

 

Reclassification of net gains realized into net income (loss)

 

 

(2,013)

 

 

55

 

 

(2,076)

 

 

161

 

Currency translation adjustment

 

 

 1

 

 

 —

 

 

 1

 

 

 —

 

Total other comprehensive income (loss)

 

 

701

 

 

(1,733)

 

 

3,675

 

 

(4,480)

 

Total comprehensive income

 

 

14,057

 

 

3,290

 

 

1,240

 

 

1,995

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-acquisition loss from operations of Enviva Port of Wilmington, LLC Drop-Down allocated to General Partner

 

 

 —

 

 

(651)

 

 

 —

 

 

(3,081)

 

Total comprehensive income subsequent to Enviva Port of Wilmington, LLC Drop-Down

 

 

14,057

 

 

3,941

 

 

1,240

 

 

5,076

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to noncontrolling partners’ interests

 

 

 —

 

 

(665)

 

 

 —

 

 

(3,180)

 

Comprehensive income attributable to Enviva Partners, LP partners

 

$

14,057

 

$

4,606

 

$

1,240

 

$

8,256

 

 

See accompanying notes to condensed consolidated financial statements.

6


 

ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Partners’ Capital

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited Partners’ Capital

 

 

 

 

 

 

 

 

 

 

 

Common

 

Common

 

Subordinated

 

Accumulated

 

 

 

 

 

General

 

Units—

 

Units—

 

Units—

 

Other

 

Total

 

 

 

Partner

 

Public

 

Sponsor

 

Sponsor

 

Comprehensive

 

Partners'

 

    

    

Interest

    

Units

    

Amount

    

Units

    

Amount

    

Units

    

Amount

    

(Loss) Income

    

Capital

Partners’ capital, December 31, 2017

 

 

 

(128,569)

 

13,073

 

 

224,027

 

1,347

 

 

16,050

 

11,905

 

 

101,901

 

 

(3,040)

 

 

210,369

Distributions to unitholders, distribution equivalent and incentive distribution rights

 

 

 

(3,794)

 

 —

 

 

(28,367)

 

 —

 

 

(8,285)

 

 —

 

 

(14,822)

 

 

 —

 

 

(55,268)

Issuance of units through Long-Term Incentive Plan

 

 

 

(5,675)

 

227

 

 

511

 

(82)

 

 

(1,301)

 

 —

 

 

 —

 

 

 —

 

 

(6,465)

Issuance of common units, net

 

 

 

 —

 

 8

 

 

241

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

241

Sale of common units

 

 

 

 —

 

1,265

 

 

13,335

 

(1,265)

 

 

(13,335)

 

 —

 

 

 —

 

 

 —

 

 

 —

Conversion of subordinated units to common units

 

 

 

 —

 

 —

 

 

 —

 

11,905

 

 

78,504

 

(11,905)

 

 

(78,504)

 

 

 —

 

 

 —

Non-cash Management Services Agreement expenses

 

 

 

434

 

 

 

 

5,193

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

5,627

Other comprehensive income

 

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

3,675

 

 

3,675

Net income (loss)

 

 

 

3,794

 

 —

 

 

(2,401)

 

 —

 

 

4,747

 

 —

 

 

(8,575)

 

 

 —

 

 

(2,435)

Partners’ capital, September 30, 2018

 

 

$

(133,810)

 

14,573

 

$

212,539

 

11,905

 

$

76,380

 

 —

 

$

 —

 

$

635

 

$

155,744

 

See accompanying notes to condensed consolidated financial statements.

 

 

7


 

ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

 

2018

    

 

2017 (Recast)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,435)

 

$

6,475

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

29,240

 

 

29,115

 

Amortization of debt issuance costs, debt premium and original issue discounts

 

 

828

 

 

1,161

 

General and administrative expense incurred by the First Hancock JV prior to Enviva Port of Wilmington, LLC Drop-Down

 

 

 —

 

 

1,338

 

Loss on disposal of assets

 

 

900

 

 

3,242

 

Unit-based compensation

 

 

5,604

 

 

5,113

 

De-designation of foreign currency forwards and options

 

 

(1,947)

 

 

 —

 

Fair value changes in derivatives

 

 

(4,465)

 

 

(13)

 

Unrealized loss on foreign currency transactions

 

 

32

 

 

 —

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

30,004

 

 

28,026

 

Related-party receivables

 

 

(123)

 

 

(3,312)

 

Prepaid expenses and other assets

 

 

(160)

 

 

76

 

Assets held for sale

 

 

 —

 

 

(310)

 

Inventories

 

 

(9,735)

 

 

(4,433)

 

Other long-term assets

 

 

 —

 

 

86

 

Derivatives

 

 

5,080

 

 

(1,442)

 

Accounts payable, accrued liabilities and other current liabilities

 

 

5,475

 

 

(6,845)

 

Related-party payables and accrued liabilities

 

 

3,317

 

 

8,832

 

Accrued interest

 

 

7,634

 

 

6,301

 

Other current liabilities

 

 

234

 

 

 —

 

Other long-term liabilities

 

 

648

 

 

621

 

Net cash provided by operating activities

 

 

70,131

 

 

74,031

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(16,034)

 

 

(21,916)

 

Insurance proceeds from property loss

 

 

1,130

 

 

 —

 

Net cash used in investing activities

 

 

(14,904)

 

 

(21,916)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Principal payments on debt and capital lease obligations

 

 

(4,745)

 

 

(3,428)

 

Cash paid related to debt issuance costs

 

 

 —

 

 

(209)

 

Proceeds from common unit issuance under the At-the-Market Offering Program, net

 

 

241

 

 

1,715

 

Distributions to unitholders, distribution equivalent rights and incentive distribution rights holder

 

 

(55,163)

 

 

(46,323)

 

Payment to General Partner to purchase affiliate common units for Long-Term Incentive Plan vesting

 

 

(2,341)

 

 

 —

 

Payment for withholding tax associated with Long-Term Incentive Plan vesting

 

 

(4,380)

 

 

 —

 

Proceeds and payments on revolving credit commitments, net

 

 

11,500

 

 

(6,500)

 

Contributions from sponsor related to Enviva Pellets Sampson, LLC Drop-Down

 

 

 —

 

 

1,652

 

Proceeds from contributions from the First Hancock JV prior to Enviva Port of Wilmington, LLC Drop-Down

 

 

 —

 

 

9,965

 

Net cash used in financing activities

 

 

(54,888)

 

 

(43,128)

 

Net increase in cash, cash equivalents and restricted cash

 

 

339

 

 

8,987

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

524

 

 

466

 

Cash, cash equivalents and restricted cash, end of period

 

$

863

 

$

9,453

 

 

See accompanying notes to condensed consolidated financial statements.

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Continued)

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

 

2018

    

 

2017 (Recast)

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

The Partnership acquired property, plant and equipment in non-cash transactions as follows:

 

 

 

 

 

 

 

Property, plant and equipment acquired included in accounts payable and accrued liabilities

 

$

7,539

 

$

6,649

 

Property, plant and equipment acquired under capital lease obligations

 

 

949

 

 

1,124

 

Property, plant and equipment transferred from inventories

 

 

 2

 

 

279

 

Distributions included in liabilities

 

 

1,047

 

 

937

 

Withholding tax payable associated with Long-Term Incentive Plan vesting

 

 

156

 

 

 —

 

Conversion of subordinated units to common units

 

 

78,504

 

 

 —

 

Application of short-term deposit to fixed assets

 

 

 —

 

 

258

 

Depreciation capitalized to inventories

 

 

1,508

 

 

483

 

Supplemental information:

 

 

 

 

 

 

 

Interest paid

 

$

18,802

 

$

15,516

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

9


 

ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands, except number of units, per unit amounts and unless otherwise noted)

(Unaudited)

 

(1)  Description of Business and Basis of Presentation

Description of Business

Enviva Partners, LP, together with its subsidiaries (“we,” “us,” “our,” or the “Partnership”), supplies utility-grade wood pellets primarily to major power generators under long-term, take-or-pay off-take contracts. We procure wood fiber and process it into utility-grade wood pellets and load the finished wood pellets into railcars, trucks and barges for transportation to deep-water marine terminals, where they are received, stored and ultimately loaded onto oceangoing vessels for delivery to the Partnership’s principally European customers.

We own and operate six industrial-scale wood pellet production plants located in the Mid-Atlantic and Gulf Coast regions of the United States. Wood pellets are exported from our wholly owned dry-bulk, deep-water marine terminal in Chesapeake, Virginia (the “Chesapeake terminal”) and terminal assets in Wilmington, North Carolina (the “Wilmington terminal”), and from third-party deep-water marine terminals in Mobile, Alabama and Panama City, Florida, under a short-term and a long-term contract, respectively.

Basis of Presentation

The unaudited financial statements and notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.

In the opinion of management, all adjustments and accruals necessary for a fair presentation have been included. All such adjustments and accruals are of a normal and recurring nature unless disclosed otherwise. All significant intercompany balances and transactions have been eliminated in consolidation. The results reported in the financial statements are not necessarily indicative of the results that may be reported for the entire year.

The unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Enviva Port of Wilmington, LLC

In October 2017, we acquired from Enviva Wilmington Holdings, LLC (the “First Hancock JV”), a joint venture between a wholly owned subsidiary of Enviva Holdings, LP (the “sponsor”) and certain affiliates of John Hancock Life Insurance Company (U.S.A.) (“John Hancock”), all of the issued and outstanding limited liability company interests in Enviva Port of Wilmington, LLC (“Wilmington”), which owns the Wilmington terminal assets.

The purchase price for Wilmington was $130.0 million, which included an initial payment of $54.6 million, net of an approximate purchase price adjustment of $1.4 million, and deferred consideration of $74.0 million. The acquisition (the “Wilmington Drop-Down”) included the Wilmington terminal assets and a long-term terminal services agreement with the sponsor (the “Holdings TSA”) to handle throughput volumes sourced by the sponsor from Enviva Pellets Greenwood, LLC (“Greenwood”), a wholly owned subsidiary of Enviva JV Development Company, LLC (the “Second Hancock JV”), a joint venture between a wholly owned subsidiary of the sponsor and certain affiliates of John Hancock. Greenwood owns a wood pellet production plant in Greenwood, South Carolina (the “Greenwood plant”). See Note 12, Related-Party Transactions.

The Wilmington Drop-Down was accounted for as a combination of entities under common control at historical cost in a manner similar to a pooling of interests. Accordingly, the unaudited financial statements for the periods prior to the

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands, except number of units, per unit amounts and unless otherwise noted)

(Unaudited)

three and nine months ended September 30, 2017 were retrospectively recast to reflect the acquisition of Wilmington as if it had occurred on May 15, 2013, the date Wilmington was originally organized (see Note 4, Transactions Between Entities Under Common Control).

(2)  Significant Accounting Policies

During interim periods, we follow the accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017 except for our adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018. The adoption changed our accounting policies for revenue recognition and cost of goods sold.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the amounts reported in our unaudited financial statements and accompanying notes. Actual results could differ materially from those estimates.

Revenue Recognition

We primarily earn revenue by supplying wood pellets to customers under off-take contracts, the majority of the commitments under which are long-term in nature. We refer to the structure of our off-take contracts as “take-or-pay” because they include a firm obligation of the customer to take a fixed quantity of product at a stated price and provisions that ensure we will be compensated in the case of a customer’s failure to accept all or a part of the contracted volumes or termination of a contract. Our long-term off-take contracts define the annual volume of wood pellets that a customer is required to purchase and we are required to sell, the fixed price per metric ton (“MT”) for product satisfying a base net calorific value and other technical specifications. The prices are fixed for the entire term, and are subject to adjustments which may include annual inflation-based adjustments or price escalators, price adjustments for product specifications, as well as, in some instances, price adjustments due to changes in underlying indices. In addition to sales of our product under these long-term off-take contracts, we routinely sell wood pellets under shorter-term contracts, which range in volume and tenor and, in some cases, may include only one specific shipment. Because each of our off-take contracts is a bilaterally negotiated agreement, our revenue over the duration of such contracts does not generally follow observable current market pricing trends. Our performance obligations under these contracts, which we aggregate into metric tons, include the delivery of wood pellets. We account for each MT as a single performance obligation. Our revenue from the sales of wood pellets we produce is recognized as product sales upon satisfaction of our performance obligation when control transfers to the customer at the time of loading wood pellets onto a ship.

Depending on the specific off‑take contract, shipping terms are either Cost, Insurance and Freight (“CIF”), Cost and Freight (“CFR”) or Free on Board (“FOB”). Under a CIF contract, we procure and pay for shipping costs, which include insurance and all other charges, up to the port of destination for the customer. Under a CFR contract, we procure and pay for shipping costs, which include insurance (excluding marine cargo insurance) and all other charges, up to the port of destination for the customer. Shipping under CIF and CFR contracts after control has passed to the customer is considered a fulfillment activity rather than a performance obligation and associated expenses are included in the price to the customer. Under FOB contracts, the customer is directly responsible for shipping costs.

In some cases, we may purchase shipments of product from third-party suppliers and resell them in back-to-back transactions (“purchase and sale transactions”). We determined that we are the principal in such transactions because we control the pellets prior to transferring them to the customer and therefore we recognize the related revenue on a gross basis in product sales.

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands, except number of units, per unit amounts and unless otherwise noted)

(Unaudited)

In instances in which a customer requests the cancellation, deferral or acceleration of a shipment, the customer may pay a fee, which is included in other revenue.

We recognize third- and related-party terminal services revenue ratably over the related contract term, which is included in other revenue. Terminal services are performance obligations that are satisfied over time, as customers simultaneously receive and consume the benefits of the terminal services we perform. The consideration is generally fixed for minimum quantities and any above the minimum are generally billed based on a per-ton rate.

Variable consideration from off-take contracts arises from several pricing features outlined in our off-take contracts, pursuant to which such contract pricing may be adjusted in respect of particular shipments to reflect differences between certain contractual quality specifications of the wood pellets as measured both when the wood pellets are loaded onto ships and unloaded at the discharge port as well as certain other contractual adjustments.

Variable consideration from terminal services contracts arises from price increases based on agreed inflation indices and from above-minimum throughput quantities or services.

We allocate variable consideration under our off-take and terminal services contracts entirely to each performance obligation to which variable consideration relates. The estimate of variable consideration represents the amount that is probable of not being reversed.

Under our off-take contracts, customers are obligated to pay the majority of the purchase price prior to the arrival of the ship at the customers’ discharge port. The remaining portion is paid after the wood pellets are unloaded at the discharge port. We generally recognize revenue prior to the issuance of an invoice to the customer.

Cost of Goods Sold

Cost of goods sold includes the cost to produce and deliver wood pellets to customers, reimbursable shipping-related costs associated with specific off-take contracts with CIF and CFR shipping terms and costs associated with purchase and sale transactions. Raw material, production and distribution costs associated with delivering wood pellets to marine terminals and third‑ and related-party wood pellet purchase costs are capitalized as a component of inventory. Fixed production overhead, including the related depreciation expense, is allocated to inventory based on the normal capacity of our production plants. These costs are reflected in cost of goods sold when inventory is sold. Distribution costs associated with shipping wood pellets to customers and amortization of favorable acquired customer contracts are expensed as incurred. Inventory is recorded using the first-in, first-out method (“FIFO”), which requires the use of judgment and estimates. Given the nature of the inventory, the calculation of cost of goods sold is based on estimates used in the valuation of the FIFO inventory and in determining the specific composition of inventory that is sold to each customer.

Recently Adopted Accounting Standards

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which subsequently was issued as ASC 606. ASC 606 requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

We recognize revenue under ASC 606 and related amendments, which we adopted as of January 1, 2018, using the modified retrospective transition method.

We determined that, upon adoption of ASC 606, our off-take contracts will continue to be classified as product sales. Revenue is recognized at the point in time at which control of the wood pellets passes to the customer as the wood

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands, except number of units, per unit amounts and unless otherwise noted)

(Unaudited)

pellets are loaded onto shipping vessels, which is consistent with the timing of revenue recognition under our legacy accounting policy. However, the adoption of ASC 606 impacted the basis of presentation for purchase and sale transactions. Prior to the adoption of ASC 606, we reported revenue from purchase and sale transactions net of costs paid to third-party suppliers, which was classified as other revenue. Subsequent to the adoption of ASC 606, we recognize revenue on a gross basis in products sales when we determine that we act as a principal and control the wood pellets before they are transferred to the customer. The decision as to whether to recognize revenue on a gross or net basis requires significant judgment.

Recoveries from customers for certain costs we incurred at the discharge port under our off-take contracts were reported in product sales prior to the adoption of ASC 606. Under ASC 606, these recoveries are not considered a part of the transaction price, and therefore are excluded from product sales and included as an offset to cost of goods sold.

We disaggregate our revenue into two categories: product sales and other revenue. These categories best reflect the nature, amount, timing and uncertainty of our revenue and cash flows.

Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, whereas prior comparative reporting periods have not been adjusted and continue to be reported under the accounting standards in effect for such periods. We did not have a transition adjustment as a result of adopting ASC 606.

The table below indicates the impact of the adoption of ASC 606 on revenue and cost of goods sold:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

Nine Months Ended September 30, 2018

 

    

As Reported

    

Adoption of ASC 606

 

Without Adoption of ASC 606

 

As Reported

    

Adoption of ASC 606

 

Without Adoption of ASC 606

Product sales

 

$

142,541

 

$

(571)

 

$

141,970

 

$

398,031

 

$

(6,178)

 

$

391,853

Other revenue

 

 

1,607

 

 

351

 

 

1,958

 

 

7,037

 

 

337

 

 

7,374

Cost of goods sold

 

 

114,029

 

 

(220)

 

 

113,809

 

 

360,156

 

 

(5,841)

 

 

354,315

Gross margin

 

$

30,119

 

$

 —

 

$

30,119

 

$

44,912

 

$

 —

 

$

44,912

 

In January 2017, the FASB issued ASU 2017‑01, Business Combinations (Topic 805): Clarifying the Definition of a Business, to provide guidance to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the assets acquired (or disposed of) are not considered a business. We adopted ASU 2017-01 as of January 1, 2018 and will apply the ASU prospectively.

In November 2016, the FASB issued ASU 2016‑18, Statement of Cash Flows (Topic 230)—Restricted Cash: A Consensus of the FASB Emerging Issues Task Force, which requires changes in restricted cash that result from transfers between cash, cash equivalents and restricted cash to not be presented as cash flow activities in the statements of cash flows. We adopted ASU 2016-18 as of January 1, 2018. As of September 30, 2018 and 2017, we had no amounts held as restricted cash.

In August 2016, the FASB issued ASU 2016‑15, Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments, which reduces diversity in practice of how certain cash receipts and cash payments are classified in the statement of cash flows. The ASU includes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. We adopted ASU 2016-15 as of January 1, 2018, which had no material effect on how we present and classify cash receipts and cash payments in the condensed consolidated statements of cash flows.

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands, except number of units, per unit amounts and unless otherwise noted)

(Unaudited)

Recently Issued Accounting Standards not yet Adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820)-Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, modifies and adds disclosure requirements for fair value measurements. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted, and is to be applied on a modified retrospective basis. We do not anticipate the adoption of ASU 2018-13 will have a material impact on our presentation of disclosures included in our consolidated statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (Topic 815)-Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. ASU 2017-12 requires a modified retrospective transition method which requires the recognition of the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We are in the process of evaluating the impact of the adoption of ASU 2017-12 on our consolidated statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other. ASU 2017-04 simplifies the testing for goodwill impairment by eliminating Step 2 of the current goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the new guidance, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and will recognize an impairment charge equal to the amount by which the carrying amount exceeds the reporting unit’s fair value. The new guidance should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. We will early adopt this ASU in connection with our December 2018 annual impairment test.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires an entity that leases assets to recognize on the balance sheet a right-of-use asset and a lease liability for the rights and obligations created by those leases with terms of greater than twelve months. Leases will be classified as either financing or operating, similar to current accounting requirements, with such classification determining the pattern of expense recognition in the statement of operations. ASU 2016-02, as amended by subsequent ASUs, replaces the current definition of a lease and requires that an arrangement be recognized as a lease when a customer has the right to obtain substantially all of the economic benefits from the use of an asset, as well as the right to direct the use of the asset. The guidance also requires enhanced disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018, with early adoption permitted. We will adopt the ASU on January 1, 2019 using a modified retrospective approach as of the beginning of the period, which will require us to recognize and measure all leases within the scope of the ASU. We are continuing to evaluate the impact of the ASU and expect to recognize right-of-use assets and liabilities related to real estate, machinery, equipment and other operating leases, which could have a material impact on our consolidated balance sheet. We are assessing whether other business supply arrangements contain leases under the new standard. In addition to additional assets and liabilities, the interest component of financial leases may be accelerated. We do not expect a significant change in leasing activity prior to adoption of the ASU. The status of our implementation is as follows:

·

We have formed an implementation team that meets to discuss implementation challenges, technical interpretations and project status.

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ENVIVA PARTNERS, LP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands, except number of units, per unit amounts and unless otherwise noted)

(Unaudited)

·

We continue to gather data and review contracts in order to finalize the inventory of leases.

·

We have purchased system software and are in the process of system implementation.

 

(3) Revenue

Performance Obligations

As of October 1, 2018, we expect to recognize approximately $7.3 billion in revenue from our remaining performance obligations with fixed consideration and a weighted‑average remaining term of 9.4 years. Our off-take contracts expire at various times through 2037 and our terminal services contracts extend into 2026. The following table includes our estimated revenue associated with remaining performance obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

Period from October 1, 2018 to December 31, 2018

 

2019

 

Thereafter

 

Total

Product sales

 

$

165,859

 

$

651,725

 

$

6,505,876

 

$

7,323,460

Other revenue

 

 

177

 

 

708

 

 

1,180

 

 

2,065

Total revenue

 

$

166,036

 

$

652,433

 

$

6,507,056

 

$

7,325,525

 

Variable Consideration

Variable consideration from off-take contracts arises from several pricing features outlined in our off-take contracts, pursuant to which such contract pricing may be adjusted in respect of particular shipments to reflect differences between certain contractual quality specifications of the wood pellets as measured both when the wood pellets are loaded onto ships and unloaded at the discharge port as well as certain other contractual adjustments.

Variable consideration from terminal services contracts, which was not material for the three and nine months ended September 30, 2018, arises from price increases based on agreed inflation indices and from above-minimum throughput quantities or services.

We allocate variable consideration under our off-take and terminal services contracts entirely to each performance obligation to which variable consideration relates. The estimate of variable consideration represents the amount that is not more likely than not to be reversed. For the three and nine months ended September 30, 2018, we recognized an insignificant amount of revenue related to performance obligations satisfied in previous periods.

Contract Balances

Accounts receivable related to product sales as of September 30, 2018 and December 31, 2017 were $47.1 million and $78.0 million, respectively. We had an insignificant amount of deferred revenue as of September 30, 2018 and no deferred revenue as of December 31, 2017 for future performance obligations associated with off-take contracts.

(4)  Transactions Between Entities Under Common Control

The financial statements for the three and nine months ended September 30, 2017 have been recast to reflect the Wilmington Drop-Down as if had occurred on May 15, 2013, the date Wilmington was originally organized. The

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Notes to Condensed Consolidated Financial Statements

(In thousands, except number of units, per unit amounts and unless otherwise noted)

(Unaudited)

historical net equity amounts of Wilmington prior to the date of the Wilmington Drop-Down were attributed to Enviva Partners GP, LLC, the general partner of the Partnership (the “General Partner”) and any non-controlling interest.

The following table presents the changes to previously reported amounts in the unaudited condensed consolidated balance sheet as of September 30, 2017 included in our quarterly report on Form 10-Q for the quarter ended September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2017

 

 

    

As

    

Enviva Port of

    

 

    

 

 

Reported

 

Wilmington, LLC

 

Total (Recast)

 

Cash and cash equivalents

 

$

9,453

 

$

 —

 

$

9,453

 

Accounts receivable, net

 

 

49,855

 

 

 —

 

 

49,855

 

Related-party receivables

 

 

7,748

 

 

968

 

 

8,716

 

Inventories

 

 

34,477

 

 

96

 

 

34,573

 

Prepaid expenses and other current assets

 

 

4,540

 

 

42

 

 

4,582

 

Total current assets

 

 

106,073

 

 

1,106

 

 

107,179

 

Property, plant and equipment, net of accumulated depreciation

 

 

495,366

 

 

75,485

 

 

570,851

 

Goodwill

 

 

85,615

 

 

 —

 

 

85,615

 

Other long-term assets

 

 

2,180

 

 

52

 

 

2,232

 

Total assets

 

$

689,234

 

$

76,643

 

$

765,877

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,122

 

$

188

 

$

3,310

 

Related-party payables