Attached files
| file | filename |
|---|---|
| EX-99.3 - EX-99.3 - Enviva Partners, LP | ex993proformafinancial.htm |
| EX-99.2 - EX-99.2 - Enviva Partners, LP | ex992-63020unauditedst.htm |
| EX-23.1 - EX-23.1 - Enviva Partners, LP | ex231eyletterofconsent.htm |
| 8-K/A - 8-K/A - Enviva Partners, LP | eva-20200731.htm |
Exhibit 99.1
GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY
CONSOLIDATED ABBREVIATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2019
TOGETHER WITH
REPORT OF INDEPENDENT AUDITORS
GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY
TABLE OF CONTENTS
DECEMBER 31, 2019
| Page(s) | |||||
| REPORT OF INDEPENDENT AUDITORS | 1 | ||||
| CONSOLIDATED STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED | 2 | ||||
| CONSOLIDATED STATEMENT OF REVENUES AND DIRECT EXPENSES | 3 | ||||
| NOTES TO THE CONSOLIDATED ABBREVIATED FINANCIAL STATEMENTS | 4-15 | ||||
Report of Independent Auditors
The Board of Directors of Georgia Biomass Holding LLC and Subsidiary
We have audited the accompanying consolidated abbreviated financial statements of Georgia Biomass Holding LLC and Subsidiary, which comprise the consolidated statement of assets acquired and liabilities assumed as of December 31, 2019, and the related consolidated statement of revenue and direct expenses for the year then ended, and the related notes to the consolidated abbreviated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these abbreviated financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these abbreviated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the abbreviated financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the abbreviated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the abbreviated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the abbreviated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the abbreviated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the abbreviated financial statements referred to above present fairly, in all material respects, the consolidated statement of assets acquired and liabilities assumed as of December 31, 2019, and the related consolidated statement of revenue and direct expenses for the year then ended in conformity with U.S. generally accepted accounting principles.
Basis of Accounting
As described in Note 3, the consolidated abbreviated financial statements have been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and are not intended to be a complete presentation of Georgia Biomass Holding LLC and Subsidiary’s financial position, revenue and expenses. Our opinion is not modified with respect to this matter.
/s/Ernst & Young LLP
Tysons, Virginia
September 28, 2020
1
GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY CONSOLIDATED
STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
AS OF DECEMBER 31, 2019
(In U.S. Dollars)
| ASSETS ACQUIRED | |||||
| CURRENT ASSETS | |||||
Accounts receivable - trade | $ | 12,560,098 | |||
Accounts receivable - related parties | 453,042 | ||||
| Inventories | 9,209,143 | ||||
Prepaid expenses and other current assets | 956,141 | ||||
Total current assets | 23,178,424 | ||||
| NONCURRENT ASSETS | |||||
Property and equipment - net | 134,066,791 | ||||
| Intangible assets - net | 99,267 | ||||
Operating lease right of use assets | 11,812,772 | ||||
Total noncurrent assets | 145,978,830 | ||||
Total assets | $ | 169,157,254 | |||
| LIABILITIES ASSUMED | |||||
| CURRENT LIABILITIES | |||||
| Trade payables | $ | 2,141,930 | |||
| Finance leases | 616,906 | ||||
| Operating leases | 688,783 | ||||
Other operating liabilities | 3,882,792 | ||||
| Deferred income | 80,646 | ||||
Total current liabilities | 7,411,057 | ||||
| NONCURRENT LIABILITIES | |||||
Finance leases, net of current portion | 3,180,857 | ||||
| Operating leases, net of current portion | 11,195,741 | ||||
| Deferred income, net of current portion | 747,304 | ||||
Total noncurrent liabilities | 15,123,902 | ||||
| Total liabilities | 22,534,959 | ||||
| NET ASSETS ACQUIRED | $ | 146,622,295 | |||
The accompanying notes are an integral part of this consolidated abbreviated financial statements.
2
GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF REVENUES AND DIRECT EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 2019
(In U.S. Dollars)
| REVENUES | $ | 160,947,165 | |||
| DIRECT EXPENSES | |||||
| Cost of revenues | 57,661,068 | ||||
| Other operating costs | 46,241,380 | ||||
| Depreciation and amortization | 12,565,230 | ||||
| Personnel | 8,376,788 | ||||
| Maintenance and operations | 10,722,428 | ||||
| Sales and marketing | 225,978 | ||||
| Total direct expenses | 135,792,872 | ||||
| Revenues in excess of direct expenses | $ | 25,154,293 | |||
The accompanying notes are an integral part of this consolidated abbreviated financial statements.
3
GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY
NOTES TO THE CONSOLIDATED ABBREVIATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(In U.S. Dollars)
1. DESCRIPTION OF THE TRANSACTION
On July 31, 2020, Enviva Pellets Waycross Holdings, LLC (“Waycross Holdings”), a wholly owned subsidiary of Enviva Partners, LP (the “Partnership”), RWE Generation SE, a societas europaea formed under the laws of the Federal Republic of Germany (as assignee of innogy SE, a societas europaea formed under the laws of the Federal Republic of Germany), and innogy Renewables Beteiligungs GMBH (“Innogy”), a Gesellschaft mit beschränkter Haftung formed under the laws of the Federal Republic of Germany, consummated the transactions contemplated by the previously announced Membership Interest Purchase and Sale Agreement dated June 18, 2020, pursuant to which Waycross Holdings acquired all of the limited liability company interests in Georgia Biomass Holding LLC (the “Company”), a Georgia limited liability company and the indirect owner of a wood pellet production plant in Waycross, Georgia (the “Waycross plant”), for a purchase price of approximately $175.0 million in cash, subject to customary adjustments (the “Georgia Biomass Acquisition”).
2. ORGANIZATION AND INDUSTRY
The Company was incorporated in Georgia in November 2009 and is engaged in the business of manufacturing and distributing wood pellets, primarily used in the energy industry, to its customers in the United Kingdom and Europe. The Company operates in Waycross, Georgia.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
Pursuant to a letter dated July 6, 2020, from the staff of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (the “SEC”), the staff stated that it would not object to the filing of the Consolidated Abbreviated Financial Statements in satisfaction of Rule 3-05 of Regulation S-X. The accompanying Consolidated Statement of Assets Acquired and Liabilities Assumed as of December 31, 2019 and the related Consolidated Statement of Revenues and Direct Expenses for the year then ended (collectively, the “Statements”) have been prepared using the format permitted by the SEC. The elements of the Statements were prepared using the historical accounting records of the Company and are stated in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated abbreviated financial statements, as of and for the year ended December 31, 2019, are not intended to present a complete view of Georgia Biomass Holding LLC prior to the acquisition, and does not include a consolidated balance sheet, consolidated statement of operations, consolidated statement of changes in members’ equity, or consolidated statement of cash flows.
The Consolidated Statement of Assets Acquired and Liabilities Assumed only presents the assets acquired and liabilities assumed in accordance with the MIPSA.
The consolidated abbreviated financial statements of Georgia Biomass Holding LLC includes the accounts of Georgia Biomass Holding LLC and its wholly owned subsidiary, Georgia Biomass, LLC. The Company defines “subsidiary” as a legal entity of which more than 50% of the voting power of shares entitled (without regard to the occurrence of any contingency) to vote are owned by the Company.
All significant intercompany transactions and balances have been eliminated in consolidation.
Consolidated statement of revenues and direct expenses
The Consolidated Statement of Revenues and Direct Expenses includes the revenues and expenses directly attributable to the generation of those revenues. The Consolidated Statement of Revenues and Direct Expenses excludes the cost of general corporate activities, corporate-level overhead, interest expense, and income taxes. Cost of revenues consists primarily of production costs and fiber purchases. Other operating costs include utilities, shipping, and other miscellaneous operating costs. Depreciation and amortization expense is comprised of the depreciation and amortization of tangible and intangible assets used in production. Personnel costs are comprised of employee compensation and benefits.
Maintenance and operations expense primarily consists of the costs to maintain machinery and equipment attributable to the generation of revenue. Sales and marketing costs consist of advertising, marketing, and other administrative expenses.
Accounts receivable - trade
Accounts receivable are shown at the net amounts that the Company estimates to be collectible. The Company uses the allowance method of accounting for bad debts based on a review of accounts and evaluation of historical bad debts and current
4
GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY
NOTES TO THE CONSOLIDATED ABBREVIATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2019
(In U.S. Dollars)
accounts receivable. Sales are generally made on unsecured credit, based on the Company’s evaluation of the customers’ current financial condition and credit history. The Company did not record an allowance for doubtful accounts receivable at December 31, 2019.
Inventories
Inventories consist of raw materials, work in progress, finished goods, and spare parts. Fixed production overhead, including related depreciation expense, is allocated to inventory based on the normal production capacity of the facilities. To the extent the Company does not achieve normal production levels, such under-absorption of fixed overhead is charged to direct expense.
The Company’s inventories are stated at the lower of cost and net realizable value, with cost determined by the average cost method. Finished goods include raw material costs, direct labor costs, and an allocation of overhead charges. These costs are reflected in cost of revenues sold when inventory is sold. The Company did not record an inventory reserve at December 31, 2019.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for repairs and maintenance are charged to maintenance and operations as incurred, and additions and improvements that increase the value or significantly extend the useful lives of assets are capitalized. Upon sale or other retirement of depreciable property, cost and accumulated depreciation are removed from the related accounts, and any gain or loss is reflected in operations. Leasehold improvements are amortized over the shorter of the remaining term of the lease, or the useful life of the improvement, utilizing the straight-line method.
The Company provides for depreciation of property and equipment using the straight-line method designed to amortize costs over estimated useful lives as follows:
| Machinery and equipment | 2-20 years | ||||
| Buildings and improvements | 10-20 years | ||||
| Plant fixtures | 5-20 years | ||||
| Computers and technical equipment | 3-5 years | ||||
| Vehicles | 3-5 years | ||||
| Office furniture and equipment | 3-11 years | ||||
The Company capitalizes interest cost incurred on borrowings during the active construction period of major capital projects. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. The Company did not capitalize any interest cost during 2019.
Intangible assets
The cost of software and licenses is capitalized and amortized to operations over their estimated useful lives or statutory lives, whichever is shorter. Amortization is computed on the straight-line basis over 3 years.
Impairment of long-lived assets
Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability is performed. If it is determined that the carrying value of an asset is not recoverable based on expected undiscounted future cash flows, an impairment loss equal to the excess of the carrying amount of the asset over its fair value is recorded. The Company did not record an impairment loss for the year ended December 31, 2019.
Revenue recognition
Revenue is measured based on a consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer.
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GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY
NOTES TO THE CONSOLIDATED ABBREVIATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2019
(In U.S. Dollars)
Taxes imposed by governmental authorities, which are collected and remitted by the Company for identifiable, revenue-producing transactions, are excluded from revenue. The Company did not collect any such taxes for the year ended December 31, 2019.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in other operating costs.
The Company generates revenue from one principle segment: direct sales of wood pellets to customers. Sales to customers primarily are made through off-take contracts, which are long-term in nature. Each of the Company’s contracts defines the annual volume of wood pellets that a customer is required to purchase, and the Company is required to sell, the fixed price per metric ton (“MT”) of wood pellets sold, satisfying a base net calorific value and other technical specifications. These 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. Each individual shipment’s volume and timing is directed and initiated by the customer within the terms of the related off-take contract. Each of these individual shipment requests is considered a stand-alone contract with a single performance obligation, the delivery of wood pellets.
The Company recognizes revenue at a point in time on the sale of wood pellets when a customer takes possession of the product at the time the loading of wood pellets onto a vessel is complete. The timing of customer possession is outlined in each off-take contract. Each off-take contract includes Cost and Freight (“CFR”) shipping terms. Under CFR terms, the Company is responsible for bringing the product to the port of export and procuring and paying shipping costs, including insurance and relevant charges, up to the port of destination for the customer. The arrangement of shipping and handling activities is not considered a separate performance obligation because it is fulfillment of the promise to transfer goods and is performed by the Company prior to the customer taking possession. Payment, equal to the transaction price identified in each contract, is typically due within five days after invoicing. The Company has no obligation for returns, refunds, warranties, or related obligations on sales of products.
Fees charged to the Company for changes requested by the customer, primarily demurrage fees, are invoiced to the customer, net against the expense incurred, and are not recorded in revenues. 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 revenues. The Company does not have any contract assets or liabilities for the year ended December 31, 2019.
Leases
The Company has operating and finance leases related to real estate, machinery, equipment, and other assets where the Company operates as the lessee.
The Company determines a contract contains a lease if it contains the right to control the use of an identified asset for a period of time in exchange for consideration.
The Company has determined that short-term lease expense, consisting of charges for operating leases with an initial term of twelve months or less, reasonably reflects the Company’s short-term lease commitments. As such, short-term lease commitments are not recorded on the Consolidated Statement of Assets Acquired and Liabilities Assumed but are recognized as a lease expense on a straight-line basis over the applicable lease terms. Short-term lease expense, which is recognized in other operating costs in the Consolidated Statement of Revenues and Direct Expenses, for the year ended December 31, 2019 totaled $402,189.
Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company’s leases do not contain material residual value guarantees, restrictive covenants, or subleases. In addition to fixed lease payments, the Company’s contracts incur variable lease charges.
Variable payments, which are not dependent on an index or rate, are not included in the consideration at lease commencement for initial measurement and are charged to operating expenses when variability is eliminated by known payment amount.
Non-lease components such as wharf access, repairs and maintenance on the leased asset, security services, and management services are deemed to be a delivery of a separate service and are not considered in the cost of securing the leased property.
6
GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY
NOTES TO THE CONSOLIDATED ABBREVIATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2019
(In U.S. Dollars)
The Company’s leases have a maximum remaining term of eleven years. Some of the lease agreements include options to extend the lease up to ten years. The Company’s leases are noncancelable. Certain leases include the option to purchase the leased property at the end of the lease term. The depreciable lives of assets and leasehold improvements are limited by the expected lease term unless there is a transfer of title or purchase option that the Company is reasonably certain of exercising.
An incremental borrowing rate is applied to the Company’s leases for balance sheet measurement. As most of the Company’s leases do not provide an implicit rate, the Company generally uses an incremental borrowing rate based on the estimated rate of interest for a collateralized borrowing over a similar term of the lease payments as of their respective commencement dates.
Minimum lease payments and other obligations that would be required by an election to exercise available renewal options are not recognized as part of the Company’s ROU asset and lease liabilities if, at the time of lease commencement, the Company is not reasonably certain to exercise such renewal options.
Use of estimates
The preparation of consolidated abbreviated financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated abbreviated financial statements. Actual results could differ from these estimates.
Concentration of risk and significant customers
For financial disclosure purposes, the Company defines significant customers as those equaling or exceeding 10% of sales or purchases for any year, and/or 10% of year-end trade receivables or payables.
For the year ended December 31, 2019, two customers accounted for 87% of total sales and two customers accounted for 96% of trade receivables at December 31, 2019.
For the year ended December 31, 2019, no vendor from whom the Company purchased raw materials represented more than 10% of the Company’s total purchases and one vendor represented 10% of trade payables at December 31, 2019. The Company uses one third-party vendor for shipping logistics services.
Most of the Company’s revenue is from sales of wood pellets to customers located in Europe. As a result, any changes in the economy or demand for wood pellets in that region would affect the Company.
Trading derivatives
Commencing in January 2014, the Company entered into various contracts for the purpose of reducing the fluctuation of fuel costs related to shipping and railway transportation of goods. The Company has elected to treat these contracts as trading derivatives, which do not qualify as hedging instruments, and has included fair value adjustments of gains and losses as a component of direct expenses for the year ended December 31, 2019.
Fair value of financial instruments
The Company adheres to the provisions of FASB ASC 820, Fair Value Measurements. FASB ASC 820 defines fair value for financial reporting purposes as the price that would be received to sell an asset or paid to transfer a liability in an orderly market transaction between market participants at the measurement date (reporting date). Under FASB ASC 820, fair value is based on an exit price in the principal market or the most advantageous market in which the reporting entity could transact. FASB ASC 820 does not require new fair value measurements but does apply under other accounting pronouncements where fair value is required or permitted.
For each asset and liability required to be reported at fair value, the Company has identified the unit of account and valuation premise to be applied for purposes of measuring fair value. The unit of account is the level at which an asset or liability is aggregated or disaggregated for purposes of applying FASB ASC 820.
The valuation premise is a concept that determines whether an asset is measured on a stand-alone basis or in combination with other assets. For purposes of applying the provisions of FASB ASC 820, the Company measures its assets and liabilities on a stand-alone basis and then aggregates assets and liabilities with similar characteristics for disclosure purposes.
FASB ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs
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GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY
NOTES TO THE CONSOLIDATED ABBREVIATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2019
(In U.S. Dollars)
are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2 - Valuations based on observable inputs, including quoted prices (other than Level 1) in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, such as interest rates, yield curves, volatilities, and default rates, and inputs that are derived principally from or corroborated by observable market data.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
If the determination of fair value measurement for a particular asset or liability is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the asset or liability measured.
The Company does not have any instruments that are measured at fair value on a nonrecurring basis as of 2019. The Company had two fixed price commodity trade agreements that expired as of December 31, 2019. There were no other transfers between Levels 1, 2, or 3 during the year ended December 31, 2019.
The amounts reported in the Consolidated Statement of Assets Acquired and Liabilities Assumed as accounts receivable, prepaid expenses and other current assets, accounts payable, and other operating liabilities approximate fair value because of the short-term nature of these instruments.
Recently Adopted Accounting Standards
Revenue recognition
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“Topic 606”). The change in the standard introduces a comprehensive, principles-based framework for accounting for revenue. The new guidance supersedes the revenue recognition requirements previously in effect. The change in the standard is intended to improve generally accepted accounting principles by providing a framework to address revenue recognition issues, creating more consistency and comparability of revenue recognition practices across entities and industries, and improving the usefulness of information provided to consolidated abbreviated financial statements users through more robust disclosure requirements. The Company adopted Topic 606, effective January 1, 2019, using the modified retrospective approach.
The Company’s revenue is recognized at a point in time, based on transfer of control. The Company defines transfer of control as the point when the title and risk of ownership of the goods has transferred to the customer. Additionally, the Company’s contracts do not include variable consideration and contract modifications are generally minimal. For these reasons, there is no significant impact on the consolidated abbreviated financial statements or the Company’s standard accounting practices as a result of adopting Topic 606.
Based on the Company’s evaluation of the requirements under Topic 606 and analysis of the Company’s contracts with customers, the timing and amount of revenue recognized previously is consistent with how revenue is recognized under the new standard. No changes to opening balances were required as a result of the adoption and no additional assets or liabilities were required to be recognized for returns or other obligations.
Leases
In March 2016, the FASB issued ASU 2016-02, Leases ("Topic 842") to increase transparency and comparability among organizations by requiring companies to recognize lease assets and lease liabilities and to disclose key information about leasing arrangements. The leasing standard will be effective for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022; however, early adoption is permitted. The Company adopted Topic 842 as of January 1, 2019. A modified retrospective approach is required for adoption for all leases that exist at or commence after the date of initial application with an option to use certain practical expedients.
8
GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY
NOTES TO THE CONSOLIDATED ABBREVIATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2019
(In U.S. Dollars)
As part of the adoption of Topic 842, the Company did not elect the following package of practical expedients that allows the Company to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. For the Company’s terminal lease, the Company did not elect the practical expedient that allows lessees to treat leases and non-lease components thereof as a single lease component. The Company elected this practical expedient for all other lease categories.
The Company determines if an arrangement is a lease at inception. Under Topic 842, operating and finance leases result in the recognition of ROU assets and lease liabilities on the Consolidated Statement of Assets Acquired and Liabilities Assumed. A ROU asset represents the Company’s right to use its leased asset for the lease term and ROU lease liabilities represent the Company’s obligation to make lease payments. Under the guidance of Topic 842, finance lease ROU assets and liabilities are recognized at the adoption date based on the present value of lease payments over the lease term. When provided in the lease agreement, the Company uses the implicit rate to calculate the present value of lease payments. If an implicit rate is not provided in the lease agreement, the Company uses its estimated incremental borrowing rate at the adoption date to determine the present value of lease payments.
Derivative Instruments
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (“Topic 815”), to simplify the accounting treatment of derivatives and hedging activities. The new standard reduces the complexity that existed under the previous guidance and provides companies with an opportunity to address their current accounting practices and improve consistency with their approach to risk management. The derivative standard will be effective for fiscal years beginning after December 15, 2020 however, early adoption is permitted. The Company adopted Topic 815, effective January 1, 2019.
The Company has adopted the disclosure requirements under Topic 815. Due to the nature of the derivative activity, no changes to opening balances were required as a result of this adoption.
Recently Issued Accounting Standards not yet Adopted
On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (“Topic 326”), which changes how entities measure credit losses for most financial assets. The Company will adopt the standard as of January 1, 2020. The Company does not expect that the adoption of Topic 326 will have a material impact on the consolidated abbreviated financial statements.
4. INVENTORIES
Inventories consisted of the following at December 31, 2019:
Raw materials | $ | 1,040,414 | |||
Work in progress | 566,057 | ||||
Finished goods | 5,805,057 | ||||
Spare parts | 1,797,615 | ||||
| $ | 9,209,143 | ||||
5. OTHER CURRENT ASSETS
Other current assets consisted of the following at December 31, 2019:
| Prepaid expenses | $ | 463,329 | |||
| Other current assets | 492,812 | ||||
| $ | 956,141 | ||||
9
GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY
NOTES TO THE CONSOLIDATED ABBREVIATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2019
(In U.S. Dollars)
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2019:
| Machinery and equipment | $ | 113,276,651 | |||
| Buildings and improvements | 105,902,800 | ||||
| Plant fixtures | 342,784 | ||||
| Computer and technical equipment | 285,619 | ||||
| Vehicles | 178,487 | ||||
| Office furniture and equipment | 126,838 | ||||
| 220,113,179 | |||||
| Less: Accumulated depreciation | (88,004,046) | ||||
| Net depreciable property and equipment | 132,109,133 | ||||
| Non depreciable assets | |||||
| Land | 1,500,000 | ||||
| Construction in progress | 457,658 | ||||
| $ | 134,066,791 | ||||
Construction in progress as of December 31, 2019, is mainly comprised of expenditures for machinery and equipment at the Waycross, Georgia location that have not yet been placed in service.
For the year ended December 31, 2019, depreciation expense totaled $12,492,058.
7. OTHER OPERATING LIABILITIES
Other operating liabilities consisted of the following at December 31, 2019:
| Compensation | $ | 1,139,263 | |||
| Shipping | 1,083,244 | ||||
| Other operating liabilities | 1,660,285 | ||||
| $ | 3,882,792 | ||||
8. DERIVATIVE INSTRUMENTS
The Company uses trading derivative instruments to partially offset its exposure to fluctuation in oil prices. The Company’s trading derivative instruments expose it to credit risk to the extent that counterparties may be unable to meet the terms of the applicable derivative instrument. The Company seeks to mitigate such risks by limiting its counterparties to major financial institutions. In addition, the Company monitors the potential risk of loss with any one counterparty resulting from credit risk. The Company has not experienced and does not expect material losses due to defaults by counterparties. The Company uses trading derivative instruments to manage cash flow and does not engage derivative instruments for speculative purposes.
The Company is exposed to fluctuations in the oil prices on exports of its product. The Company entered into two fixed price commodity trade agreements, both of which expired in December 2019. As such, the Company did not record an unrealized effect in the Consolidated Statement of Revenues and Direct Expenses. The commodity trade agreements were designated as trading derivatives. The net realized gain related to the settlement of the contracts was approximately $400,000 for the year ended December 31, 2019.
9. RELATED PARTY TRANSACTIONS
The Company has various transactions with related parties. All related parties are under common ownership. In September 2019, the Company’s former ultimate owner, RWE AG, sold 100% of its outstanding stock to E.ON SE.
Accounts receivable – related parties are summarized as follows at December 31, 2019:
10
GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY
NOTES TO THE CONSOLIDATED ABBREVIATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2019
(In U.S. Dollars)
| RWE Supply and Trading GmbH, Swindon | $ | 245,956 | |||
| Innogy Renewables US LLC | 207,086 | ||||
| $ | 453,042 | ||||
Transactions with related parties are summarized as follows for the year ended December 31, 2019:
| Sales to and other operating income | |||||
| RWE Supply and Trading GmbH, Swindon | $ | 74,166,974 | |||
| Pass-through charges under trading derivative agreement | |||||
| RWE Supply and Trading GmbH, Swindon | $ | 1,986,714 | |||
10. COMMITMENTS AND CONTINGENCIES
In December 2019, the Company entered into an agreement with a supplier to purchase a minimum quantity of 80,000 tons of pine fiber on a proportionate monthly basis throughout the year 2020. The agreement provides for variance in the minimum purchase quantity of plus or minus 5%. The price per ton of pine fiber begins at $33.29 per short green ton and is set to be adjusted on a quarterly basis to reflect the applicable percentage changes in the supplier’s average delivered price. The approximate purchase commitment for the year 2020 is expected to be approximately $2,500,000.
In December 2009, the Company entered into an agreement with a supplier to purchase a minimum quantity of 279,522 tons of pine pulpwood over a ten-year period beginning on January 1, 2011 and expiring on December 31, 2020. Total purchases under this agreement during 2019 totaled approximately $300,000. At December 31, 2019, the Company had a remaining commitment on the minimum quantity of 38,584 tons. The purchase commitment for the year 2020 is expected to be approximately $660,000.
In December 2009, the Company entered into two agreements with a supplier to purchase an aggregate minimum quantity of 549,559 tons of pine pulpwood over a ten-year period beginning on January 1, 2011 and expiring on December 31, 2020. Total purchases under these agreements during 2019 amounted to approximately $850,000. At December 31, 2019, the Company had a remaining commitment on the minimum quantity of 38,316 tons. The purchase commitment for the year 2020 is expected to be approximately $590,000.
In December 2009, the Company entered into an agreement with a supplier to purchase services of wharfage stevedoring, and receiving related to the shipping of wood pellets from the Company’s marine terminal located in Savannah, Georgia. The agreement requires a minimum shipment of 500,000 metric tons of wood pellets on a proportionate yearly basis. The agreement commenced in April 2011 and, including renewal period options which are expected to be utilized, expires in April 2031. The service charge per metric ton of wood pellets is set to be adjusted on a yearly basis to reflect the annual change in the Consumer Price Index. No negative adjustments will be made and positive adjustments in the rate are limited to no more than 2% per year. At December 31, 2019, the applicable rate is $3.94 per metric ton. The purchase commitment for each of the next five years is expected to be approximately $1,900,000 and $12,400,000, thereafter.
In the ordinary course of business, the Company is subject to various claims and pending actions arising out of the conduct of its business, the outcome of which cannot presently be determined. In the opinion of the Company, the resolution of these claims and pending actions does not represent any material unrecorded liabilities and will not have a material adverse impact on the consolidated financial position or the results of operations of the Company.
11. GEORGIA BUSINESS INCENTIVES AND DEFERRED INCOME
As an inducement to locate its wood pellet production plant in Waycross, Georgia, the Waycross and Ware County Economic Development Authority granted certain incentives to the Company. The incentives included a grant of a 315-acre industrial site, located within two separate tracts of land in Ware County, Georgia and an abatement and reduction of county property taxes for a twenty year period beginning in 2009. See Note 13.
The land was valued at $1,500,000 and was recognized as deferred income by the Company to be amortized over approximately nineteen years, which approximates the useful life of the attached building.
Deferred income at December 31, 2019 is as follows:
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GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY
NOTES TO THE CONSOLIDATED ABBREVIATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2019
(In U.S. Dollars)
Land value | $ 1,500,000 | ||||
Accumulated income recognized | (672,050) | ||||
| 827,950 | |||||
Less: current portion | 80,646 | ||||
Deferred income, noncurrent | $ | 747,304 | |||
Amortization of deferred income related to the land grant, for the current year and each of the next five years, is expected to be $80,646.
12. LEASES
Savannah lease
During 2009, the Company entered into two noncancelable lease agreements for the construction and location of its marine terminal in Savannah, Georgia. The agreements, considered a single combined contract (collectively, the “Savannah Lease”), were structured as a lease contract in which the Company operated as the lessee of the terminal and the tract of land on which the terminal is located. The Savannah Lease comprises two lease components, a facility lease and a land lease.
The facility lease required the Company and the lessor to execute a mutually-agreed plan to construct the Company’s storage domes on the leased land. Pursuant to the facility lease, the dome construction project and all subsequent construction and improvements located on the leased land were the property of the lessor. The construction of the domes was financed by both the Company and the lessor and completed in 2011 at a total cost of $12,496,362. Of this amount, $11,379,362 was funded directly by the Company. The remaining $1,117,000 was financed by the lessor over a fifteen-year term during the term of the lease agreement. The land lease provides the Company with the right to use the land on which the terminal is located.
The Savannah Lease commenced in April 2011 and provides the Company with the right to use a warehouse and certain fixtures and equipment constructed pursuant to the lease agreement, that are capable of accommodating a minimum of 1,500,000 MT of wood pellets per year. The lease extends through April 2031. The Savannah Lease includes an optional renewal period of three years, which has been included in the term of the lease, for the purposes of disclosure and calculation of net present value as the Company is reasonably certain of its exercise. The lease payments, due monthly, are fixed.
Under the Savannah Lease, the Company incurs separate variable payments to the lessor based on the lessor’s property and casualty insurance costs, the property taxes assessed on property, security charges, facility fees and additional rent.
The Savannah Lease is guaranteed by innogy SE. The Savannah Lease does not contain residual value guarantees, restrictions, or other covenants related to dividends or additional debt.
Other lease commitments
The Company has additional noncancelable lease agreements for the use of machinery and equipment at its wood pellet production plant in Waycross, Georgia. These leases provide the Company with the right to use the related machinery and equipment covered under the respective lease agreements for the production of wood pellets. The respective lease terms expire at various dates through 2031. Certain leases include optional renewal periods which have been included in the terms of the leases for purposes of disclosure and calculation of net present value, as the Company is reasonably certain of their exercise.
The lease payments, due monthly, are fixed.
Under the lease agreements, the Company incurs separate variable payments to the lessors based on the lessor’s property and casualty insurance costs, the property taxes assessed on property, maintenance, and usage of equipment based on mileage, hours, or units of output.
The machinery and equipment leases do not contain residual value guarantees, restrictions, or other covenants related to dividends or additional debt.
ROU assets and lease liabilities related to finance leases, included in property and equipment, were as follows at December 31, 2019:
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GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY
NOTES TO THE CONSOLIDATED ABBREVIATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2019
(In U.S. Dollars)
| Finance lease right-of-use assets: | |||||
| Buildings, improvements, and leasehold improvements | $ | 12,618,222 | |||
| Machinery and equipment | 2,700,119 | ||||
| 15,318,341 | |||||
| Less: accumulated depreciation | (5,184,301) | ||||
| Current portion of finance lease obligations | $ | 10,134,040 | |||
| Finance lease liabilities: | |||||
| Current portion of finance lease obligations | $ | 616,906 | |||
| Noncurrent portion of finance lease obligations | 3,180,857 | ||||
| $ | 3,797,763 | ||||
Costs associated with operating and finance leases, included in other operating costs in the Consolidated Statement Revenues of Direct Expenses, for the year ended December 31, 2019 totaled:
| Operating lease cost | |||||
| Fixed rent expense | $ | 1,544,530 | |||
| Variable rent expense | 3,572,409 | ||||
| Finance lease cost | |||||
| Amortization of right-of-use assets | $ | 694,770 | |||
| Variable lease cost | 495,065 | ||||
| Interest expense | 100,301 | ||||
Operating and finance lease cash flow information is as follows for the year ended December 31, 2019:
| Cash paid for amounts included in the measurement of lease liabilities: | |||||
| Operating cash flows from operating leases | $ | 5,045,186 | |||
| Operating cash flows from finance leases | 595,366 | ||||
| Finance cash flows from finance leases | 694,772 | ||||
| Assets obtained in exchange for lease obligations: | |||||
| Operating leases | $ | 398,310 | |||
| Finance leases | 2,700,118 | ||||
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GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY
NOTES TO THE CONSOLIDATED ABBREVIATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2019
(In U.S. Dollars)
Future payments due under operating and finance leases as of December 31, 2019 are as follows:
| Operating | Finance | |||||||
| 2021 | $ | 1,501,932 | $ | 777,065 | ||||
| 2022 | 1,543,455 | 777,065 | ||||||
| 2023 | 1,519,400 | 777,065 | ||||||
| 2024 | 1,519,400 | 679,918 | ||||||
| 2025 | 1,519,400 | 167,510 | ||||||
| Thereafter | 9,668,017 | 1,431,016 | ||||||
| Total minimum lease payments | 17,271,604 | 4,609,639 | ||||||
| Less: amounts representing interest | (5,387,080) | (811,876) | ||||||
| Present value of minimum lease payments | 11,884,524 | 3,797,763 | ||||||
| Current portion | 688,783 | 616,906 | ||||||
| Noncurrent portion | $ | 11,195,741 | $ | 3,180,857 | ||||
For most of the leases, the implicit rates are not readily determinable. Therefore, the Company primarily uses its incremental borrowing rate, which reflects the fixed rate at which Company could borrow an amount equal to the lease payments for the same term on a collateralized basis.
The weighted-average remaining lease terms and discount rates for the Company’s operating and finance leases were weighted using the undiscounted future minimum lease payments and are as follows as of December 31, 2019:
| Weighted-average remaining lease term (years) | |||||
| Operating leases | 11 | ||||
| Finance leases | 7 | ||||
| Weighted-average discount rate | |||||
| Operating leases | 7 | % | |||
| Finance leases | 5 | % | |||
13. WAYCROSS AND WARE COUNTY DEVELOPMENT AUTHORITY ABATEMENT FOR TITLE ARRANGEMENT
The Waycross and Ware County Development Authority, (the “County”), entered into a Memorandum of Understanding (“MOU”) with the Company in December 2009, whereby the parties agreed to provide certain inducements, including property tax abatement, to the Company to locate its wood pellet production operation (the “Project”) in Ware County.
Under the terms of the MOU, the Company agreed to construct a manufacturing facility and office complex, including related improvements and production equipment, for commercial use. Upon completion of the Project, the Company agreed to transfer title of the Project to the County, in exchange for abatement on the property taxes associated with the transferred property. The agreement includes the facility and production equipment and extends for a period of twenty years. From the commencement date, April 8, 2011, through the remaining term of the agreement, all subsequent additions of equipment for use at the Project are included in the original agreement. At the expiration of the agreement, the County has granted the Company an irrevocable option to purchase the facility and equipment for $10.
Payments in lieu of taxes (“PILOT”) amount to $1.00 per year for the first ten years. Beginning in the eleventh year of the agreement, the PILOT will be equal to 10% of the ad valorem tax that would have otherwise been owed by the Company if this agreement were not in effect. The percentage of ad valorem tax due as a PILOT will increase in 10% increments from the eleventh year through the twentieth (final) year of the agreement.
PILOT’s are a non-cash incentive as the ad valorem taxes are not assessed against the Company for payment and no cash reimbursements are received from the County. Therefore, no financial liability is recorded for the future PILOT’s.
In accordance with the applicable guidance under Topic 842, the Company has not recognized the transactions under this agreement as a sale-leaseback arrangement. As stipulated by Topic 842 regarding transactions that do not qualify for sale-
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GEORGIA BIOMASS HOLDING LLC AND SUBSIDIARY
NOTES TO THE CONSOLIDATED ABBREVIATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2019
(In U.S. Dollars)
leaseback accounting, assets transferred to the County are not derecognized by the Company on transfer and instead are accounted for in accordance with ASC 360, Property, Plant, and Equipment.
The following is a summary of the assets acquired, included in property and equipment, under the abatement for title agreements at December 31, 2019:
| Technical plant and machinery | $ | 205,203,329 | |||
| Less: accumulated depreciation | (82,798,715) | ||||
| Net depreciable technical plant and machinery | $ | 122,404,614 | |||
| Land | 1,500,000 | ||||
| $ | 123,904,614 | ||||
The MOU requires the Company to make an investment of no less than $120,000,000 and to create, and maintain for the duration of the agreement, no less than 50 new full-time jobs within 36 months of the commencement of operations at the Project. As of December 31, 2019, the Company has fulfilled all commitment under the MOU to maintain 50 full-time jobs and has made an investment of $120,000,000. As of December 31, 2019, the Company expects to continue to fulfill its commitment to maintain 50 full-time jobs for the remainder of the agreement.
14. SUBSEQUENT EVENTS
The Company has evaluated subsequent events for the period December 31, 2019 through September 28, 2020, the date these consolidated abbreviated financial statements were issued and, other than as disclosed below, there have been no subsequent events for which disclosure is required.
Subsequent to December 31, 2019, the outbreak and spread of COVID-19 has adversely impacted global commercial activity and contributed to significant declines and volatility in the financial markets. The Company is currently not expecting that the impact of COVID-19 would be material to its business.
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